Contrary to common belief, investing in the stock market is not complicated as long as you understand your objectives as an investor and how the market works.
Stocks are believed to offer a higher return than investing in bonds, although they have a higher risk. However, if you are looking to diversify your portfolio, having a few shares in your investment basket is one of the best ways to do it.
Equities offer an excellent way to grow your wealth thanks to the earning potential through dividends and selling the shares at a profit if the prices go up. Third, stock markets are very liquid, allowing you to sell your stock easily than other financial assets. Still, the stock market is pretty volatile, with prices moving up or down that can affect the performance of your shares.
In Kenya, stocks trade on the Nairobi Securities Exchange (NSE), listing about 64 companies in different industries. To diversify your portfolio, I’d advise you to pick stocks from different sectors.
Without further ado, here’s your beginner’s guide to investing in the Kenyan stock market:
Figure Out Your Investment Strategy
The first step to making any investment is figuring out the kind of investor you are. Are you looking to manage your portfolio actively by buying and selling the shares to make a profit, or do you want to take the passive route where you buy and hold the shares for a long time?
Understanding your investment strategy will also help you understand your risk willingness and tolerance levels. Individuals that take the buy and hold method are usually more risk-averse, opting to hold their securities despite the short-term variations in the market.
Those who take the active management of their portfolio tend to buy and sell their shares, often depending on the market movements to make a high profit. The goal is usually to beat the returns of a market index. For instance, if the market index, which acts as a benchmark, has a return of 9%, an active manager or investor would be looking to have a return of maybe 12%.
Related post: What is Asset Allocation? A Beginners’ Guide
Do Your Due Diligence & Pick Investment Assets
The next step is to pick the company or companies to invest in from the ones listed on the NSE. Here’s where it gets tricky.
You need to do your due diligence and dig through a lot of data to ensure you invest in a solid company. While companies might fail over time depending on the market forces and other factors, what matters is the data you can gather about the company at the moment to help you gauge its performance. You need to know whether the company is paying dividends, how much, and whether it is a going concern.
There are two ways to go about this, fundamental and technical analysis. Fundamental analysis is where you analyze factors that might affect a company’s share prices based on its financial statements, management, and position in the market and industry. It can help you determine whether the shares of the company are mispriced (over or underpriced). It also enables you to understand the company you are investing in better, from its industry to management and operations.
With technical analysis, you analyze the movement of the company’s shares over the years. The available charts and trends in price movements are believed to help forecast future movements and prices of the shares. Technical analysis is also believed to help in making quick profits through short-term trading.
Choose a Broker
You can trade online or through your mobile phone. The NSE has a list of all the approved brokers for both trading systems. All you have to do is pick your preferred broker.
To choose the best broker, take into consideration factors like management fees or commission fees for transactions. Of course, the higher the costs, the lower your net profit will be. Other issues to consider include:
- The experience of the brokerage
- Registration with the relevant regulatory bodies
- Other services like their customer service and accessibility
Among many advantages, a broker might come in handy when it comes to trading tips, especially for beginners. With their extensive research, knowledge, and experience, you can have a deeper understanding of how the stock markets work through your broker. I’d still recommend that you do your research to stay on top of your investments.
Open a CDS Account
To start trading, you will need to open a Central Depository System (CDS ) account, which acts as your banking account for settling all trading transactions. You can visit the CBK, its branches, or cash collection offices around the country to open a CDS account or at an agent (CDA), usually stockbrokers, custodian banks or investment banks with authorization from the CDSC (Central Depository & Settlement Corporation).
After filling the CDS 1 form, you will also need to attach the below documents during submission:
- 2 colour passport-size pictures
- Passport or National ID
- KRA pin
- Evidence of your residence
- Evidence of your income (bank statement or a payslip)
But if you are opening a CDS account through your bank, you will only need the passport-size photos and original copies of your ID or passport. You can use many CDAs, but your CDS account number will remain the same. Also, if you are opening a CDS from the diaspora, ensure you have a bank account with a local commercial bank.
It takes about 7 working days to have your CDS account up and running, after which you can transfer funds to your CDS account and start trading on the NSE.
Remember the research you did earlier on the best asset to buy? This is where you can now start buying and selling the shares or holding them for as long as you want.
The NSE has different asset classes, from bonds to equities, REITs (Real Estate Investment Trusts) and ETFs (Exchange Traded Funds) and derivatives. Instead of buying shares from single companies, you can pick an ETF, some bonds or a REIT just to ensure your portfolio is diversified. If you want to stick to equities only, I recommend you buy shares from different companies in different industries for diversification.
How Much do You Need?
There is no minimum amount for investing in NSE. However, you need to buy a minimum of 100 shares at any given time plus the transaction fee.
For instance, say Company A has a share price of Ksh. 2.00 and a brokers commission of 1.78%, you will need a Ksh. 203.56 (2*100+1.78% fee). See, if the company pays dividends and has growth potential, and you can afford to buy its shares, there’s no reason why you should not start now.
The NSE has a market capitalization of Kshs. 2,599.79 Billion (as of the publication of this article). That means there are many opportunities for investors to get a share of the pie. Sweet as this sounds, do not rush to buy any share that catches your attention. Ensure you do your research and, most importantly, invest in companies you understand. Also, stay up to date with the happenings in the market. Speaking of learning, I found an excellent video from the NSEs YouTube Channel, listen and take notes.