Investing in the Stock Market 101

Investment should be at the top of your financial to-do list. While it might be good not to be wasteful with your hard-earned income and to save for the proverbial rainy day, it is also good to let your money work for you. In fact, if done well, investments are better than savings. Savings do earn interest but considering the bank charges in Kenya, chances are you will not even get that interest. You might even end up paying the banks for helping you save. It’s a cruel world out there.

Investing comes in different shapes and sizes. All this depends on the amount of risk you are willing to assume. The good thing is that there are many avenues that are risk free. Treasury bonds in particular are risk free. Today, we will give you are lowdown on how to invest in stocks popularly known as shares.

Stocks are units of ownership of a public limited company. Basically, a company is offering you part of ownership in exchange of capital. On purchase of stocks of a company, you automatically become a shareholder. You own a piece of that company. That’s right, you can own Safaricom too. That way you won’t mind it if they make millions out of you, will you?

Companies that go down this road look to raise capital without having to worry about paying the money back. Unlike loans and bonds, the company issuing out stocks will not pay you back your money. This does not mean that you will not get your money back.

Company pays back shareholders by paying them dividends and/or increasing their wealth. Dividends, usually paid annually, are company profits dividend up among the stockholders. Alternatively, a company might opt to plough back their profits into the business. Do not begrudge the board for doing that. It is in fact the best decision. Investing the profits back into the company means that the company will grow further and its shares prices will go up. This means your value and wealth in the company will also grow. You can decide to cash in on the price rise and get capital gains (profit from selling).

Investing in stocks is however for the patient only. While it’s true that you can make money, good money, by having a short-term view in the market, the stock market is very volatile and can be unforgiving to those who do not have the courage to hold their securities. Research has shown that the stocks offer good return in the long-term compared to other financial assets across the same period.

Just because the stocks present good returns in the future does not mean you can go to the bourse and pick any share on offer and expect to be a paper millionaire in 10 years. The role of research in the stock market cannot be overstated. Due diligence must be carried out before buying shares. Research can be either technical analysis or fundamental analysis. The latter examines the aspects of an organization that influence its value while the former relies on past prices to predict the future. We will talk about this in detail over the course of the month. The good thing about research is that you do not have to carry it yourself. If you have a good broker, they can do it for you. Alternatively, you can hire someone, like us.

So, what are you supposed to do if you want to buy stocks at the NSE today? Just follow these easy steps.

1. Locate a broker.
2. Conduct research.
3. Place a buy order with your broker.
4. Your broker will do the rest. That’s why you pay them.

Don’t think that it is as simple as the steps above indicate. There are many things involved in between like opening a Central Depository and Settlement Corporation (CDSC) account, identifying the market segment to invest in, creating the best portfolio to suit your objectives Etc. Having a good broker will guide you through all this with considerable ease.

Go forth and make money in the bourse like a boss.