As more Kenyans search for ways to diversify their income and others look for long-term investments, stock market investing is a name that keeps on popping up. But lack of knowledge and understanding of the ins and outs of stock market investing keeps on pushing people away from it.
Investing in the stock market comes with both risks and rewards. Although there are stories of people losing money, there are also thousands of people who have made profits by investing in stocks. Before deciding to invest, it is important to consider both the risks and rewards involved.
This article is for you if you have ever been interested in the Kenyan Stock market. We will walk you through the basic knowledge of the Kenyan stock market, the terms used, and how to find your first stock.
Let’s start with the key player you should know, the Nairobi Stock Exchange.
First things first – What is the NSE?
The Nairobi Securities Exchange (NSE) is a dealer market that provides an organized trading platform for the buying and selling of financial instruments of publicly listed companies. In simple terms, NSE is like a big virtual market where buyers and sellers meet to trade.
To become a buyer or seller you will need to open a Central Depository System (CDS) account with a registered stockbroker. A stockbroker will execute your buy or sell orders on your behalf. A CDS account is more like a bank account, but in this case, this is where your shares will be held.
What you need to get started In Stock Market Investing
Getting started in the stock market in Kenya isn’t as sophisticated as it sounds. 15 years ago, investing in the stock market involved a ton of paperwork and plenty of back and forth. With the adoption of technology, becoming a stock investor has gotten simpler. It begins with setting up a (CDS account.
- To open a CDS account you will need to provide the following
- Two passport photos
- A copy of your identification card or Passport
- Bank details
Please note unlike a bank account, you are limited to only one CDS account. You can only trade between Monday and Friday from 9 am to 3 pm excluding public holidays. The least number of shares you can buy is 100.
Becoming a stock trader requires an investment of capital and time. You need to also to research and have analytical skills in the markets and how the economy affects them.
Lingo in the stock market every new investor should know
If you’ve come this far, you are very interested in the Kenyan stock market. So, it’s time to make you an insider by sharing some of the common terminologies you’ll hear from experts and fellow investors.
Stock Trader: A person who attempts to profit from the purchase and sale of securities such as stock shares.
Stockbroker: An agent or firm that charges a fee or commission for executing buy and sell orders for an investor. A stockbroker creates an account for a trader where they can monitor the shares they are holding.
Buy: To take a position by buying shares of a company. As a trader, you generally buy shares when you think a stock’s price will rise.
Sell: To sell the shares you currently own.
Traders generally sell shares when they see an opportunity to take profits, or they think the stock’s rise is ending.
Bid: When a trader in the market makes an offer to buy shares.
Traders will bid for stock at a certain price.
Ask: When a trader offers their shares for sale at a certain price.
Bid-Ask Spread: The difference between the highest price at which someone is willing to buy shares and the lowest price someone is willing to sell shares.
Bull Market: A market condition where stock prices are continually rising.
Bear Market: A bear market is a market in which prices continually fall.
Market Order: Instruction to buy or sell as quickly as possible, at whatever price is currently available.
Limit Order: A type of stock market order that provides instruction to only execute at a certain price.
For example, a trader could place a limit buy order to purchase 100 shares of a KQ at KES 3.40. The broker will attempt to buy 100 shares for KES 3.40 or less.
Good Till Canceled Order (GTC): This market order remains open until you complete the trade or cancel the order.
Volatility: The statistical measure of how much a price moves up or down.
Stocks that move up and down wildly are known as volatile stocks. They can provide great profit opportunities, but also come with greater risk.
Trading Volume: The number of shares being traded at any time.
Going Long: When going long, you purchase stock shares hoping to profit from an increase in the stock price.
Going Short: When a trader tries to profit from a stock’s dropping price.
Blue-Chip Stock: Large, stable, well-known companies are often household names.
Dividend: This is when a company pays a portion of its earnings to its shareholders.
Stock Portfolio: An investor’s collection of stocks.
Share Splitting: This happens when a company increases the number of its shares to boost the stock’s liquidity. The most common split ratios are 2:1 or 3:1. This means for every share you own you will get two times or three times more respectively.
How professionals approach stock market investing
Now that you know some of the terms that will make you look like an expert in the stock market, let’s talk about the approach that professionals take while looking to invest in shares.
1. Never invest in a business you don’t understand.
“Investment must be rational; if you can’t understand it, don’t do it.” Warren Buffet. Don’t pick a stock based on hype and fear of missing out (FOMO), this is the quickest way to get burned.
2. Understand financial ratios.
Every year companies publish financial documents that consist of – the balance sheet, profit and loss statement, and cash flow statement.
These documents help calculate financial ratios which help investors understand a company’s management, growth, profitability, and stability. Investors go ahead to compare these ratios between different years and also between peers of a similar niche.
3. Watch out for value traps.
A value trap is where the company isn’t actually undervalued but is rather suffering financial distress and low future growth potential. To avoid value traps, always consider a company’s qualitative factors, such as its competitive advantage, management effectiveness, and whether or not it has the potential to grow.
4. Avoid chasing high yields.
As good as going for stocks with high dividends yield might sound, this approach can lead to holding potentially unprofitable and stagnant companies.
Find the payout ratio (annual dividend payout rate divided by earnings) to check if a company is a yield trap. If it’s over 100%, the company might not be sustainable, as it means the company isn’t profitable enough to pay its dividend using only retained earnings and may be taking on debt.
5. Monitor the market.
Be in the know on business and economic news. Stockbrokers produce weekly reports on different stocks. The reports are usually detailed and provide comprehensive stock information to focus on a particular week.
6. Assess the economic moat.
The term “economic moat,” popularized by Warren Buffett, refers to a business’s ability to maintain competitive advantages over its competitors to protect its long-term profits and market share.
7. Understand market risk.
Market risk is the risk of a stock losing value due to stock market fluctuations. This can happen no matter how solid a stock pick is, even if the company’s fundamentals have not changed. This is because the stock market is a function of supply and demand.
Advantages and disadvantages
Like any other investment or business, stock investing comes with its fair share of advantages and disadvantages.
Advantages.
- Diversification
Diversification reduces risk by investing in various financial instruments, industries, etc. that would each react differently to the same event, thereby minimizing losses - Dividend benefits.
A dividend is a reward given to investors on a yearly basis by a company. It is an additional income for investors that is paid out annually. It does not matter if the stock has lost its value or not. - Investment gains
One of the main benefits of investing in the stock market is that investors can earn more money. Over time, the stock market may rise or fall in value, which can increase or decrease the value of a particular stock.
When you invest in stable companies, you profit. And if you have your money in different stocks, you can make more money when different sectors grow. - Liquidity
Stocks compared to other assets like property, can easily be converted to cash that consist of several buyers at any given point in time. - Higher returns over a short time
The primary advantage of investing in stocks is that it has the potential to generate high returns in a short period of time compared to other investment roads like property and bonds. - Start small
Depending on the stock you want to purchase, in the NSE you are required to buy a minimum of 100 shares of a company to start. This means you can purchase stocks of small-cap or mid-cap companies but in smaller units.
Disadvantages
- Risk
The greater the return, the greater the risk of loss. Stock market prices are linked to the issuing company’s earnings. When a company is experiencing financial difficulties, the price of the stock can decline rapidly. - Time
If you want to make money in the stock market, it’s not enough to just buy some shares and hope for the best. You need to do your research and analysis to find stocks that are likely to be profitable. For a lot of people, this is a time-consuming and complicated process. - Emotional roller coaster
Stock prices are always in flux, and it can be easy to get caught up in the moment and buy when they’re high out of greed or sell when they’re low out of fear. However, it’s best to not watch the prices too closely and just check in every once in a while.
Key takeaway
Although it might sound foreign to a newbie, it’s not rocket science. Keep in mind to do research, follow closely business and economic news, read local stockbrokers’ analyses and be patient, it’s a long-term game. You might be on, your way to becoming the next “Warren Buffet”.
