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Weekly Insights: Grow Your Money by Investing in Commercial Papers

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As most savvy investors will tell you, it is important to put your money to work in order to grow your wealth. In this report, we will show you how you can achieve this goal through investing in Commercial Papers (CPs).

If you have ever bought an item from a discount shop, then you have a basic understanding of how you can invest in a commercial paper to grow your wealth. Investing in a CP may be likened to buying items from a discount shop or buying items that are on sale in a supermarket. Usually, a discount shop gives you an opportunity to pay a price that is lower than the price tag on the item. For instance, if the price tag on perfume is N20 but the shop places a 10% discount (i.e. N2) on the perfume, it means that you will pay N18 (i.e. N20 less N2) for it. The only difference between this simple calculation and a case of CP investment is that you must take into account the number of days the investment will run, so as to determine the actual discount you will receive on the investment. So when you invest in a CP, you pay an amount that is lower than the amount you will receive on the day the investment is ripe for harvest (matures).

CPs are notes of promise that large companies use to borrow money from people or companies. The company issuing the CP usually borrows the money for a short period of time, always less than one year. CPs are issued in tenors ranging between a minimum of 15 days and a maximum of 270 days. Companies typically use the money they borrow to finance their operations in order to generate more income.

The Securities and Exchange Commission (SEC) regulates the CP market in Nigeria. The primary duty of SEC in Nigeria is to formulate rules and guidelines that protect investors’ interests and ensure the orderly development of the investment market.

Usually, the investment window in CPs opens for a short period of time – in most cases, one week. The issuing company determines the minimum amount that investors can invest, which is typically N5million but may be lower in some cases.

Investment in CPs is similar to an investment in Nigerian Treasury Bills (NTBs) in that both instruments are discounted instruments. However, the main difference is that while NTBs are used by the Federal Government of Nigeria (FGN) to borrow money, CPs are used for the same purpose by companies. FSDH Research notes,
however, that despite being relatively low-risk because of their short maturity period, the risks inherent in investing in CPs are still higher than the risks inherent in investing in NTBs. FSDH Research believes that a number of companies may issue CPs this year to raise funds to finance their operations, as against using Bonds to raise long-term funds. This is based on our view that interest rates will increase because of an expected increase in the inflation rate. This will create more investment opportunities for investors in the CP market, especially given that the yields on CPs are usually higher than those on NTBs.

In addition to higher yields, another advantage of CPs is that the income investors earn from them is not subject to taxes. This is an incentive from the FGN to encourage the development of the CP market in Nigeria. Investment banks or investment management companies regularly introduce available CPs in the market to their clients whenever the offer is open for subscription. The FMDQ OTC Securities Exchange provides a platform for trading in CPs in Nigeria. As such, CP investments are relatively liquid as they can be traded in the secondary market if investors wish to sell before maturity. Now that you have a full understanding of the potential of CPs for wealth creation, we know you would not want to miss any opportunity to invest in CPs.

 

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