W4_OKIEMUTE ODUDU_ INVESTING MY $10,000 SPECIAL RECOGNITION BONUS

Problem Definition

My team successfully delivered a challenging project that was ranked top quartile by my organisation, and I was subsequently given a $10,000 special recognition bonus. I have decided to invest the money but I don’t know the best investment scheme to select, that would give the best return in 5yrs form today, knowing that numerous schemes exist.

Alternatives
I decided to select an option from the below listed alternatives.
Alternative1: Bonds
Alternative 2: Stocks
Alternative 3: Fixed deposit

Outcome of the Alternatives

Alternative1: Bonds
This is known as fixed income securities and they are safer and stable than any other form of investment with long term maturity. The expected outcome of this type is as follows.

-can be used as collateral
- 8% P/A interest or coupon rate for 5years on invested amount
-expected return: $3,500 or 35% at maturity
-guarantee regular inflow of cash payable quarterly on investment
- investment can only be called off after some days notice.

Alternative 2: Stocks
These are very risky form of investment with the highest prospect of returns at the shortest possible time. However it also has the highest risk profile with high volatility.

- cannot be easily used as collateral because not all company shares are valued or accepted
-the expected returns can be more than 100%, i.e. equal or more than the $10,000
- Stocks are very liquid and can be trade after only 5 days of investment
- investment can easily be called off, i.e. within a week after investing in stocks on the secondary market

Alternative 3: Fixed Deposit
This involves placement of funds with any bank or financial organisation for a fixed period of time at an agreed interest. They are safer means of investment than stocks and are easily used as collateral. The investment data are as follows.

-10% annual interest on investment
-interest is usually paid at the end of the tenure.
-expected return on investment: 50% on investment or $5,000
-investment can only be called off after some days notice.

Selection Criteria for the Various Alternatives
The following are the key criteria in order of decreasing weighting or importance for choosing the best alternative.

1. Net return on investment> 50%
2. Safety of funds
3. Use as collateral
4. Ease of withdrawal or recall of investment

Analysis and Comparison of the Alternativesa.

a. Stocks have the highest possible return on investment than bonds and fixed deposit scheme, i.e. Stocks>Fixed Deposit>Bonds
b. Bonds and fixed deposit are safer than stock investment
c. Stocks is more risky than both bonds and fixed deposit respectively
d. An investor can easily withdraw or recall his investment in stocks i.e. within a week, but not all types of companies shares are accepted as collateral.

Selection of Preferred Alternative
Based on the selection criteria and analysis of the alternative above, I would prefer to invest my $10,000 bonus money on stocks because I stand the chance of gaining more returns on my investment, with some risks.

Performance Monitoring
I would undergo a consistent tracking of my stock performance and withdraw or recall my investment if there is an unusual drop in the value of the initial amount, so as to guard against loses.

References

1. “Trading in Bond as an Investment Window”, Meristem Securities Limited
2. Proshare (www.proshareng.com)
3. Stockmarketnigeria.com