The secret to becoming rich is having money work for you, instead of you working for it. And you can do so by investing your cash, no matter small you think it is. For example, you can venture into stock (shares, or equity) trading through NSE in Kenya.
But before I introduce you to equity trading and investment, do you know what shares are? They simply refer to units of equity ownership in a company.
So, when you buy shares from Company A, you own part of it. And this means that you can participate in making strategic decisions like choosing directors and deciding whether the company should merge or be sold, depending on the type of stock you buy.
So, shares trading in general terms refers to buying and selling of corporate stocks (or derivative products) aiming to make a profit.
There are four main types of shares including;
Ordinary shares are the most common and carry one vote per share, and you can participate in the distribution of profits through dividends.
Nonvoting ordinary shares carry no voting right and no right to attend general meetings as well. Companies mostly give such shares to employees to pay their remuneration as dividends.
Preference shares owners are entitled to a fixed amount of dividend every year, as a percentage of the nominal value (value stated when they were being issued). Such shareholders receive their dividends before the ordinary shareholders.
Redeemable Shares are issued on the term that the company can buy them back at a future date – at a fixed rate or as the directors will seem fit. For instance, if an employee with non-voting shares leaves, the company can buy the back at nominal value.
Why should you buy them in the first place?
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Reasons for Trading in Stock in Kenya?
There are two main reasons why people venture into equity or stocks investment.
The first one is to hold the stocks as a long-term investment. And one can earn money through capital appreciation (stocks increasing in value) and get dividends. The good thing with this approach is that some cooperatives and banks can allow loans with such securities as collateral.
The second reason is to make a profit through buying and selling these securities. So, when you’re trading, your profitability will depend on how accurate you can predict the market behavior, among other risks like stock under or overpricing.
If you can predict price fluctuations (movement) in the market, then you’d manage to make well-informed buy or sell decisions.
For instance, if you expect the price to increase in the future, due to company growth or expansion, then you can buy the shares when the prices are low and sell them when the prices are high.
However, if you expect the stock prices to fall, for instance, if the market feels they are overpriced, then you may opt to sell them to avoid making more losses. But please know that losses are equally probable.
Unlike other forms of investments like real estate, stocks are highly liquid, meaning that they can easily be sold for there are many buyers and sellers in the market. So, you can cash out at any time, through your shares broker.
But before you start trading in the stock, whether you’re in Kenya or any other country, make sure you understand how the market works. Misjudgment, greed, and bad timing can drive you to bankruptcy.
Stock Trading Brokers in Kenya
Now, you already understand why you need to venture into stock investments. But where do you buy shares from? And how do you know if a seller is legit or not?
Well, the Nairobi Securities Exchange (NSE) is the dealer in Kenya, which provides an organized trading platform for the buying and selling of financial instruments of publicly listed companies.
For instance, currently, NSE has listed 64 public stocks across 13 sectors of the Kenyan economy; agriculture (7), banking (12), commercial and services (11), construction and allied (5), energy and petroleum (4), insurance (6), and manufacturing and allied (9) among others.
NSE has also listed 22 trading participants. But before I introduce them to you, what do I mean by market participants?
“Market Participant” refers to a Trading Participant, Clearing Member, Trading Member, Market Maker, Nominated Advisor or any other person admitted by the Exchange in accordance With the NSE Rules.According to NSE Kenya.
And with the current diversification of technology, trading services have been digitalized. All you need to start trading in Kenyan stocks is a computer and basic knowledge of how the financial market works. And of course, a reliable internet connection.
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.
Let’s now dive into the process of buying and selling (trading) stock in Kenya.
How to Trade Shares at NSE
To get started with stock trading in Kenya the right way, just follow these five steps:
1. Find Share Broker
Before deciding which stock you want to buy, it’s nice to find a broker since you can’t buy and sell shares listed on NSE in Kenya without one.
Sharebrokers are involved in in-depth research of the stock market, and as professionals, they can advise their clients on trading issues.
Although NSE, as earlier mentioned, lists authorized brokers in the market, before you chose a broker, check a few things like:
- The services they offer
- Their expertise in the market
- Trading charges or fees
- Mode of trading – online, mobile, e.t.c.
According to the NSE website, the authorized market participants through which you can trade in stocks or shares, bonds, and other securities in Kenya include:
So, as seen from the image above, some of the participants have online trading while others have mobile apps that facilitate stock brokerage.
Now, check the entire list for the 22 trading participants at NSE and chose the best of the best.
I suggest you visit them, call or email them, or even check their website to understand how they operate, their charges, and their expertise in the market.
2. Open a Trading Account
To get started with investing in the Nairobi Securities Exchange, you’ll need a CDS (Central Depository System) account, which you’ll use as a trading account.
According to Dyer and Blair, “this account is opened with the Central Depository and Settlement Corporation (CDSC) which is the provider of clearing and settlement services in the Kenya Capital Markets.”
And for you to open a CDS account with Dyer & Blair Investment Bank, either as an individual or corporate, you’ll need the following documents;
The originals of the above documents must be certified by a commissioner of oaths/advocate, and if they are foreign, they should be notarized by a notary public.
However, the requirements for opening a CDS account can vary depending on the broker you chose. For instance, to open an account with Equity Bank Holdings, you’ll need:
- An Equity Bank Account.
- A copy of your Kenyan ID/Passport, a passport size photo, and your K.R.A PIN.
- A fully executed and signed CDS 1 Form.
So, check the requirements of your broker on their website or visit them.
And after opening the CDS account, all you need is to top it up using the methods given and then proceed to step 3.
3. Research the Stocks to Buy
Generally, two methods can help you select the most appropriate securities to buy, the fundamental and technical analysis.
a). Fundamental Analysis
According to Investopedia, “fundamental analysis is a method of determining a stock’s real or “fair market” value. Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value.”
It involved the analysis of factors that could influence a stock’s future price, based on a company’s market and industry position, financial statements, and management.
And one advantage of this method is that it helps the investor to gauge whether a stock is overpriced or underpriced (mispriced), thus making a reliable decision.
b). Technical Analysis
Technical analysis of stocks and trends refers to the study of historical market data, including price movement through charts, patterns and graphs, and volume, to predict future market behavior. The method is most appropriate 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.
While creating your stock portfolio, don’t rush to buy shares from big companies, but do your thorough research and understand how the company is fairing.
However, you’ll note that majority of the firms have very minimal stock price changes, thus lower profits.
But you can increase your chances by targeting big losers and gainers in the market, using the two analysis methods.
4. Decide the Number of Stocks to Buy
By now, you already have selected a trading blocker, and decided on the stocks to buy.
And now, the number of stocks to buy will depend on your budget and goal (whether you want to hold stocks as a long-term investment or trade them for a profit).
Some brokers will require you to purchase at least 100 stocks, while others could ask for more or less.
Just login into your trading account, and transfer some funds using the payment methods given. And then start buying your stock.
If you intend to buy (long-term), you expect the stock prices to move up, because one way you’ll make money is through capital appreciation (shares increasing in value or price).
Remember not to be quick about it, and do your research to understand how the market works, and gain expertise.
How much money is needed?
As earlier mentioned, the amount of money you need to get started with share trading varies depending on your broker. More so, please note that while some brokers charge monthly fees and account opening fees, others do not.
For instance, at the time of writing this article, Equity Bank shares (EQTY) were trading at Ks 49.40. This means that to buy 100 shares, you’ll need at least Ksh 4,940.00 plus a brokerage fee (depending on your broker).
But at the same time, Safaricom shares (SCOM) were trading at Ksh 35.15, so you’ll need at least Ksh 3,515.00 (plus brokerage fee) to get started.
Therefore, the amount you need to get started depends on the types of stocks you chose and the broker.
5. Decide wisely when to Hold or Sell
Stock prices are subject to fluctuations since the market is largely influenced by emotions. More so, demand and supply have a major role in influencing prices.
So, you can take advantage of the fluctuations by purchasing the stocks when prices are low and selling them when the prices start increasing. You can predict the possibility of fluctuations using the fundamental and technical analysis we discussed earlier.
As an investor, “you should also consider the time horizon for how long you want to hold stock since a long-term holding that’s returning very little can be an opportunity cost.”
So, do not hesitate to venture into stock trading, and have your money start making money for you.
Stocks or shares refer to units of equity ownership in a company, and they can be categorized mainly into ordinary, preference, redeemable, and non-controlling shares.
You can make money as a shareholder through capital appreciation and dividends. And also, though buying and selling them to make a profit.
Either way, you’ll need to follow these five steps;
- Find a shares broker
- Open a CDS trading account
- Decide the types of stocks to buy
- Decide the number of stocks to buy
- Know when to buy and when to sell
Disclaimer: investing in stocks or shares does not guarantee returns, and you may end up having less money than you invested. So, as a bigger, it’s referred you start with the money you can afford to lose, and not let greed and misjudgment control your trading.