Standard deviation

Standard deviation is like the spread of a football match's scores. If you're a fan, you know that sometimes matches end with a wide margin, while others are close. In finance, it helps us understand how much the returns of an investment might vary. For example, if you're investing in a company listed on the Nigerian Exchange (NGX), standard deviation can show you how much the stock's price might fluctuate over time. If a stock has a high standard deviation, it means its price can swing significantly, just like how a high-scoring football match can have big score gaps between teams.

Imagine you're putting your money into Treasury bills (T-bills) issued by the Central Bank of Nigeria (CBN). These bills usually have a low standard deviation because they're considered very safe investments. The returns are predictable and stable, much like how a local bus follows a fixed route. On the other hand, if you invest in a tech start-up, the standard deviation might be much higher. The potential returns could be very high, but they could also be very low, similar to how unpredictable a new football team's performance might be in their first season.

Standard deviation helps you understand the risk involved in an investment. If you're putting your money into fixed deposits at a bank, you might know exactly what interest you'll get, so the standard deviation is low. But if you're investing in the stock market, the returns can vary a lot, making the standard deviation higher. This means you need to be prepared for more ups and downs. A high standard deviation might scare some investors, but it can also mean higher potential returns.

When it comes to dividends, remember that a 10% Withholding Tax (WHT) applies, and a 10% Capital Gains Tax (CGT) on any profits you make. These taxes can affect how much you actually take home, so it's important to consider them when evaluating the returns of your investments. For instance, if you're buying shares and selling them for a profit, you'll need to account for the CGT. The standard deviation of your investment's returns can also impact how much tax you'll pay, as higher returns can lead to higher taxable income.

Why it matters: Understanding standard deviation can help you make more informed decisions about where to put your money. It tells you how much risk you're taking on with an investment. For example, if you're saving for a house, you might want to avoid high-risk investments with a high standard deviation. Instead, you might opt for safer options like fixed deposits or government bonds. This way, you can ensure your savings grow steadily, much like how a careful football coach plans their game strategy to avoid unexpected losses.