Wallace Kantai Simplifies How Investing At NSE Works Through An Amazing Thread

Shares. Stock. Equities. Bourse. Terms to confuse, or enlighten. How does it work? How do you make (or lose) money? Should you pay attention to the end of business news every night, or those confusing pages at the back of the paper?

First, my usual rules. This is a primer. An introduction to the subject. So it will be quite simple, and if you are looking for strategies for short-selling, or want to wow everyone with your knowledge of fractional trading and seeking alpha, start your own ka-uzi.

All companies are owned by someone. From the kinyozi and the kiosk, to Lockheed Martin, to the Nation Media Group, to Mama Oliech’s – each has an owner, or a set of owners. They take the profits or bear the losses, and are responsible for the business.

So, let’s take the barbershop. Karis is a very good barber, and an even better businessman. He builds his barbershop, and even starts expanding. He soon has a chain. People call him ‘dongera’ (that is old sheng’ for a rich dude), which is OK, but he is cash-poor.

He soon realises that he has three needs:

1. Cash for expansion
2. To realise the value of his biashara, so that the ‘dongera’ tag is accurate
3. To expand ownership of the ‘Nywele za Karis’ chain.

It doesn’t hurt that he can now make Otis, his best barber, a co-owner

He then ‘goes public’, by launching an ‘Initial Public Offering’ (or IPO. Without being too complicated, a(n investment) bank will value his business, market the shares, and help co-ordinate with a stock exchange for listing.

Worry not, we’ll define each of these terms.

Say his biashara is valued at KSh 10m. He decides to issue 1m shares valued at 10 bob each. He needs a place to sell those shares. In comes a market (or a ‘bourse’) such as the Nairobi Securities (formerly Stock) Exchange – NSE, where the shares can be bought and sold.

When the IPO is complete (and Karis will probably be invited to ring a bell at NSE), the company has ‘floated’. His shares then start trading. Meaning you or I can go to the NSE, through a middleman known as a ‘brokerage’, and buy pieces of Nywele za Karis, now NzK plc.

Remember Otis, Karis’s best barber? ‘Oti wewe ni mtu wangu, siwezi kuacha nyuma. Shika hizi share option – nikiumĩra, utaumĩra’. He had given Oti some shares before the IPO. Maybe 10,000 of them. Karis kept 490,000 shares.

Now they start trading. And they are a hit.

Day 1, the shares climb to 17 bob per. It now means that the biz is worth 17 million bob. Karis already made 5.1 million bob (he sold 1m-490k shares, times 10 bob). Otis could have made 100k, or held on for the ‘bounce’ and made 170k if he sold all his shares.

Where do *you* come in? Unless you’re Karis or Otis, this is your grand entrance. You can now talk to your broker, and buy shares in NzK. You can decide to buy at whatever price; you may decide that 17 bob is too expensive, or too cheap, and behave accordingly.

What are the factors? Now we’re getting to the meat of it. You may look around and decide that barbershops are the shiznit. Demand like crazy, which will only grow. So you buy at 17 bob, and hope that the value keeps climbing.

You may also look at corona, and realise that some barbershops may not survive the shutdown, especially with customers like these below, and decide to scale down or sell off your shares altogether. Or decide that the true value is 14bob/ share, and act accordingly.

The shares are traded, and the price moves, every day, affected by many, many factors. Some of it is even just supply and demand. Maybe NzK is being eyed by a larger chain, and it’s buying all shares available. If there are few willing to sell, then they go up in price.

One more thing. After corona, every man (and a few women) rush to NzK to get a haircut and start looking human again. NzK’s 2021 profits are through the roof. He then declares a ‘dividend’. This means that part of the profits are paid to shareholders, proportionally.

Say profits are 3m bob. He retains 1m bob to buy new barber chairs and these tu-things that make you feel thithi. The 2m is declared as dividend. Remember the 1m shares? Each is then paid 2 bob. Some is paid mid-year (interim dividend) and some end-year (final dividend)

So there you go. Anything else about shares, and stocks, falls within these broad explanations. Everything thing you hear on the news, can be understood simply. It is only that people like talking complicated so that they can impress girls (or boys).

The NSE index? They simply take NzK, KQ, Safaricom and other listed companies, create what’s called an index (again, oversimplifying) by saying that all the prices of these shares totalled 100 on 1/1/2010. Then track them with mazmatics, to see whether value is up or down.

(The 1/1/2010 date there is an eksambo, by the way). The Dow Jones Industrial Average? An index of the 30 stocks on the New York Stock Exchange, originally developed in the 1800s and sponsored by the Dow Jones newspaper company (publishers of the Wall Street Journal).

The NSE-20? Launched in 1964 for the Nairobi Stock Exchange. All indexes are weighted (Safaricom counts for more than NzK). Some also only take the largest companies (like the DJIA or NSE-20). Some are more comprehensive (such as the NASI and the S&P500 in Amreeka).

Final details. Karis is now a minority shareholder in NzK (he owns 49%, remember?). It is quite possible that someone can buy 500k shares and become majority shareholder. Also, listing means that NzK has to have more stringent management, and more disclosure.

Karis can’t simply wake up, raid the cash till and give Mwikali the wielder of this ka thithi device money. It will be considered fraud (and Karis is a good businessman anyway). He now has a board of directors chosen by shareholders at an ‘annual general meeting who keep him ritho kabisa. He also has to publish his audited accounts at least once a year. Shareholders can be quite noisy, demanding that he starts dyeing services, or that he includes manikyuwas or pedikyuwas at NzK. Which is all part of the fun of listed companies.

So there you go. Make money (or lose money) by buying shares (or stock – same thing) in NzK plc. Gain when share price goes up (but you have to sell, or it’s just ‘paper wealth’), lose when it goes down (but no actual loss if you don’t sell). Look for a good dividend.

Now you can watch the business news, read serious-looking newspapers, or even call up a broker and speak like you know what you’re saying.

Because you do. It is all about Karis’s barbershop, and NzK plc.

(This story is 100 percent Twitter thread from Wallace Kantai)