On the 28th November 2019, 45 second-year Strathmore Institute of Mathematical Sciences students had the opportunity to visit the Nairobi Securities Exchange for an Introduction to Investment training session.
Stock trading in Kenya for Beginners
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. Currently listed on the NSE are 64 stocks from companies across 11 sectors of the Kenyan economy; banking, investment, investment services, agricultural, telecommunications and technology, manufacturing and allied, automobiles and accessories, construction and allied, commercial and services, the insurance sector and energy and petroleum.
Owing to the digitalization of trading services by the NSE (Nairobi Securities Exchange), all one needs to begin stock trading is a computer, decent financial market knowledge, some money and, of course, the internet. The trading mechanism of the NSE was automated in the late 2000s and has enabled ease in trading since then and more trades can be executed per minute.
Why trade stocks? Stock trading allows one to make a profit against buying and selling securities. Profitability in stock trading relies on timing the market, other risk factors, and stock mispricing. The timing of the market is a predictive trading strategy that involves buying or selling assets in anticipation of the fluctuation of asset prices. If one can accurately predict the price movement of an asset – whether the price will go up or down, then one can make a trade to turn this expectation into profit. However, keep in mind that losses are equally probable. Mispricing, on the other hand, is a difference in the current price of a security and its fundamental value. This can be caused by an event in the economy, a macroeconomic issue, or a specific characteristic of the asset at a microeconomic level.
In addition, having long (buy) positions in stocks and bonds is advantageous because some co-operative societies and banks will allow loans with the securities currently owned as collateral.
In contrast to other forms of investments, stocks are highly liquid (can easily be sold), because of the high amount of buyers and sellers present in the market. If ever you wished to cash out, it will be easy to find a buyer, and sell. It would normally take months to find a buyer for the property in case of need for cash.
A great advantage of stock trading is that taxes are paid on gains only when one sells the stock. Losses on trades can also help reduce the taxes paid on gains. In bonds investment, however, taxes are paid annually.
( Nairobi Securities Exchange’s Market Watch.)
Before you begin, you need to understand that the market moves in either direction, up or down, because of market forces, the performance of the specific company and various economic conditions. All these cause market volatility, and to understand this is very important. Misjudgment, greed, bad timing and bad luck have driven many investors into bankruptcy.
Here are a few steps one can follow to begin trading securities at the NSE.
Step 1: Figure which assets to invest in
There are two analysis methods by which one can select assets appropriately, the technical and fundamental analysis methods. Fundamental analysis involves analysing factors that could influence a stock’s future price, based on the company’s management, financial statements, and the company’s market and industry position. Through fundamental analysis, we can find out if a stock is overpriced or under-priced – mispricing. Technical analysis, on the other hand, is analyzing the stock’s price movement through charts, patterns, and graphs, in anticipation of price movements. This analysis method can be advantageous in short term trading, for profits.
Stock prices are volatile and thus you should be keen to estimate the prices using fundamental and technical analysis of the stock to make sound investment decisions.
Step 2: Choose your securities wisely
NSE is among the few trading houses in Africa offering a wide variety of assets, among them stocks, bonds, derivatives, Exchange Traded Funds(ETFs) and Real Estate Investment Trusts(REITs). These provide good candidates for a less risky portfolio.
A derivative is a financial instrument that derives its value from an underlying asset or security, such as a commodity, stock, stock index, precious metals, bonds, etc. Derivatives are helpful in reducing risk in one’s portfolio because they involve transferring risk from those who want to avoid it to those who want it.
An ETF is an investment fund traded on the stock exchange, much like stocks. It holds assets such as bonds, commodities or stocks. Most ETFs track an index – a stock or bond index, with some allowing slight deviations from the index. They are attractive investment options for investors because of their tax efficiencies and their stock-like features. ETFs are exempt from capital gains tax upon the sale of the ETF. Just like stock owners, ETF holders are eligible to receive dividends.
A REIT is a regulated investment vehicle that allows persons to collect money or money’s worth, with the intention of earning profits or income from real estate as beneficiaries from the trust. REITs derive their revenue from income in rentals – IREIT, or from development and construction for sale and/or rental – DREIT.
Many beginners rush to pick big stocks just because of their big names or because they heard a thing or two making headlines about the company (Don’t get me wrong, this approach is advised for beginners and as one’s investing knowledge and experience expands, one can deal into more sophisticated trading [employing investment strategies and market timing techniques to beat the market]). When narrowing down research on these firms, however, we find that the movement in their stock prices is quite small and gives minimal, if any, profit. For maximum profit, narrow down to top gainers as well as losers and make sound investment decisions.
Step 3: Choose a broker
Stockbrokers are involved in in-depth research of the market and as professionals, may advise their clients in trading issues. When choosing a broker, a few pointers to look out for are the services they provide, the expertise of the brokerage, and, most importantly the trading fees charged. As a beginner, some brokers may seem unattractive because of the various fees charged, but this should not reduce the standard or quality sought when choosing a broker.
A list of all brokers (NSE trading partners) can be found by clicking on the link provided, https://www.nse.co.ke/member-firms/firms.html
Step 4: A trading account.
For one to trade securities at the NSE, one needs to open a CDS (Central Depository System) account – a trading account. The account is unique to each investor and can be opened on an individual or joint basis. This account, by the Central Depository and Settlement Corporation, acts as a bank account for the stock and securities market, and the body, CDSC, ensures all settlements have been paid out.
Opening of the CDS account can be made at the central bank, or at local central depository agents, and will need filling of a CDS 1 form and submission of a few personal documents, i.e.
- Two color passport-sized photographs
- KRA pin
- National ID or passport
- Evidence of residence and
- Evidence of income. (payslip or bank statement)
https://www.cdsckenya.com/faqs(Frequently asked questions on CDS accounts).
However, if one fills the CDS 1 form at a bank in which one is a member, one will only need the passport-sized photos and an original copy of the national ID/passport.
Step 5: Choosing the stocks
Once logged in to your trading account, the next step is to transfer funds to the account and pick stocks and a market position on the stock in a manner such as to expect gains. A market position means that one can either buy or sell a stock. In buying (long), one expects the market to move up and in selling(short), one expects the market to move down. In addition, there is the concept of short-selling, which allows investors to borrow assets not previously owned, sell them and later buy them back at a lower price, and so bring in profit from an asset not owned by the investor.
Dividends are another way to gain money from stocks. Dividends are a distribution of company profits to its shareholders and are paid semi-annually (most common).
These few steps can guide a beginner to understand the financial market, choose a broker, register a live trading account and make the first trade.
How much money is needed? The amount of money differs from broker to broker and from asset to asset. Some brokers charge monthly maintenance fees and account opening fees, while some do not. (This is why comparison of brokers is important) Brokers charge an average of 1.78% of the trading value on every trade made and this should be taken into account when setting the desired trading amount.
In every trade transaction, you must purchase at least 100 shares. As I wrote the article, Centum Investment Co. traded at KES 31.00. This means that one has to pay a minimum of KES 3155.18 (Brokerage fee-1.78% + price of 100 respective shares) to purchase minimum of 100 shares of Centum Investment Co.
Investing in stocks does not guarantee returns/profits, and most likely will lead to having less money than you initially had. For beginners, my advice is that invest an amount of money you can afford to lose and as your investment expertise and knowledge grows over time, you can now trade larger amounts with confidence.
This article was written by Ondieki Joseph Ongaki