Kenya: East African Industries Ltd., Debenture stock certificate, 1918, black. VF Formed to acquire the agricultural property of the Industrial Mission Aid Society. Sold to Wundanyi Limited in 1916. Source: https://veissid.com/product/kenya-east african-industries-ltd-debenture-stock certificate-1918/
Nowadays, owners of Shares or simply Shareholders have digital accounts where the shares are deposited in electronic format. This digital account for buying and selling shares is referred to as a Central Deposit and Settlement (CDS) Account offered by the State Agency called Central Deposit and Settlement Corporation (CDSC), which is authorized by the Capital Markets Authority to handle clearing and settlement of securities.
Who provides the market platform for people to come and trade?
The Stock Exchange’s infrastructure is owned and controlled by the Nairobi Securities Exchange (NSE). They provide the platform, and they have the power to dictate the stocks that can be sold and to license buyers and sellers in the market. Can all 50 million Kenyans go and buy stocks at the NSE on any given trading day? No. It would not only be chaotic but also overwhelming on the infrastructure, causing it to collapse. Just like any market, there is a limit of how many traders it can hold. Instead, the NSE allows representatives of buyers and sellers to trade on their behalf, and they are referred to as Brokers. The ordinary process would be to visit the NSE website and go through the list of Licensed Brokers, pick one, then contact them. Tell them that you would like them to act as your Broker and they will guide you on the next steps on how to become a Client. As part of their application process, they will open a CDS account for you, and thereafter, you will be able to channel your buy and sell requests (orders) through them. All this work is not for free, the Broker charges a fee called a brokerage fee to compensate them for 1) representing your buy or sell interests in the market and 2) managing your CDS account by ensuring that shares are deposited if you’re buying and cash is remitted if you’re selling.
Who sets the rules of the marketplace?
The Capital Markets Authority (CMA), they are the Rule-Setting body, Judge, and Executioner. They are mandated by the Capital Markets Act to act as the regulator of Capital Markets of Kenya. Capital is money used to fund the operations of a business. They are 2 main forms of Capital, Debt or Equity. Debt can be Private Debt or publicly listed Debt.
Private Debt is Loans, Mortgages issued to borrowers (individuals and companies), and they fall under the regulation of the Central Bank of Kenya (CBK).
Publicly listed Debt comprises: 1) Debt issued by Companies for the general public to lend money (subscribe), it is referred to as Corporate Bonds. The Lender is referred to as the Bondholder and in the old days you used to receive a Corporate Bond Certificate but nowadays, your CDS account is credited with the Digital Bond Certificate, an acknowledgement of the right to be paid the fixed income called coupons by the Company on promised dates. The second is Debt issued by the Government for the general public to lend money and is referred to as Public Debt (since money owed by the Government is money owed by the Citizens since they ultimately pay with their taxes). They borrow by issuing securities called Treasury Securities originating from the Ministry of Treasury, e.g., Treasury Bills (Maturity is less than 1 year), Treasury Notes (Maturity ranges from 1 to 9 years), Treasury Bonds (10 years and above). There are Special Government Bonds called Infrastructure Bonds which have a Tax-free incentive with a maturity of over 10 years whose proceeds are meant to finance a major infrastructure project. The Ministry of Treasury appoints the Central Bank of Kenya as their Principal Broker (to buy and sell bonds on their behalf) in the Debt Market which is a separate market from the Stock Market. The Debt Market is where buyers and sellers of Corporate Bonds and Treasury Bonds meet to trade.
All publicly listed Debt securities have one thing in common they promise to pay fixed amounts at pre-determined dates. These payments are referred to as Coupons.
Finally, let’s talk about Equity, similarly, Equity can be Private or Public. Private Equity is share ownership in a Private Limited Company. The shares are not accessible to the general public for trading of shares. Private Equity is generally not regulated by CMA, but Private Equity funds that raise capital from public sources (like pension funds) are licensed by CMA. Publicly listed Equity is share ownership in a publicly listed Company and is accessible to the general public for trading in the Stock Exchange. This is fully regulated by the CMA, and they have full oversight of what occurs in the Stock Market.
What attracts people to buy or sell shares?
Shares have 2 potential streams of income: Dividends and Capital Gains, together we refer to them as the Investor’s Holding Period Return (HPR). Capital Gains is the return from price appreciation of the stock and Dividends is the return from a portion of the company’s profit after tax. The reason stocks are deemed high-risk, high-return investment is due to the fact the possibility of making a Capital Gain or Loss is equally likely. A stock can go up or down at any given moment and its depreciation or appreciation can be of any magnitude. This potential for very high returns attracts risk-seeking investors. The risk is mitigated by dividends paid by the company, provided it has a stable dividend policy, which means it consistently pays a percentage of its net earnings as dividends every year. The best way to mitigate risk is through diversification by investing in stocks that are in different sectors, i.e., their price movements are uncorrelated. An example would be investing in an Automobile stock and a Pharmaceutical since a negative policy change in the Pharmaceutical sector would have no impact on the Automobile stock. This is referred to as Portfolio Diversification.
Why is the Stock Exchange significant in the growth of the Economy?
The Public-listed Equity Market or simply the Stock Market, is significantly larger than the Debt Market than most countries. Why? The normal life cycle of a Business is that it begins as an idea of the Daring Entrepreneur who combines the Factors of Production to make a profit. The idea may be solving a pertinent problem, but it takes time to break even. The Entrepreneur needs patient partners who invest because they believe in his/her model and understand that most Businesses are loss-making at the start before they break even. This patient capital, provided by the patient partners, is called Equity, and they are referred to as
Equity Investors or Shareholders. Debt, on the other hand, as sweet as it is, (since it offers tax advantages in that interest reduces your tax liability as a borrower), it is impatient. It requires the business to have the ability to pay from the onset, they must have sufficient positive cash flows to make the promised payments on the promised dates. Therefore, naturally, most businesses tend to look for Equity investors who are patient and believe in the business they are building and understand the risk and rewards that comes with it. Where do these businesses go in search of patient capital? It is either the Private Equity Market or Stock Market.
Equity capital is what fuels the economy because as more companies raise Equity in the Stock Market, the faster they can grow, resulting in more goods and services that they can offer. This, in turn, results in higher Gross Domestic Product and higher Taxes collected. A thriving Equity Market inevitably improves the standard of living of a citizenry. In Kenya, the Stock Market is larger than the Private Equity Market, owing to at least 4 companies whose market capitalization is above US$100 billion, namely, Safaricom, EABL, KCB, and Equity Bank. The combined market capitalization of the 61 listed companies is just over 2.5 trillion shillings (US$ 19Billion).
Closing Thoughts
The stock market is more than a trading platform; it is a national asset. It channels individual and institutional capital into productive enterprises, enabling shared prosperity. For the average Kenyan, understanding how the stock market works is a gateway to personal financial empowerment. For the country, it’s a foundation for long-term economic resilience.
Whether you’re a first-time investor or a policymaker seeking to deepen capital markets, one thing is clear: a thriving stock market is a cornerstone of inclusive growth.
