A Beginner’s Guide On How To Invest In The Kenyan Stock Market

By Steve Biko Wafula / Published March 11, 2021 | 4:13 pm


A broker is a member of a stock exchange, who is permitted to do equity trades in there.  The broker is an enrolled member of the exchange and is registered with the NSE and recognized by the Capital Markets Authority.

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The COVID-19 pandemic has gotten everyone asking how they can make some extra money. We have people, brands, and firms, slashing spending as they look for creative ways to invest the little they have to make some extra money.

Economies world over are battered and facing a myriad of challenges catalyzed by the pandemic, making it difficult to know where and when to invest.

For me, I find the stock market the easiest place to invest and make good returns without having to break your heart over other financial scams and schemes. The stock market of any nation or country is normally the heartbeat of the economy. It gives you an indication of how the economy of the country is doing and how the future is. It is data-driven and this is the essence as to why it’s the best place to invest and make some genuine and honest wealth.

The stock market can help you make a lot of money, but you can lose all your money if you are tempted to invest randomly without knowing the nitty-gritty of the market. Lack of information is what screws people up and picking information from the club, WhatsApp groups, and social media. One needs professional help and genuine research to be able to understand the market and make considerable returns.

If you are thinking of investments that could beat inflation and also give you good returns, one option might be to start investing in the stock market. If you have decided to do the same and go for it all by yourself, it’s not a bad idea. The stock market, when properly understood, can help you make a lot of money, but you can also lose all your money if you are tempted to invest randomly without knowing the nitty-gritty of the market. Research should always be your backbone.

Read More: Kenyan Investors Invited to Snap Stock as MTN Uganda’s IPO Goes for 200 UGX Per Share

It might surprise you to learn that a KES 100,000 investment in the 20 Share index 10 years ago says Safaricom PLC would be worth nearly KES 1.2 million today. Stock investing, when done well, is among the most effective ways to build long-term wealth. We at www.sokodirectory.com are here to teach you how.

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There’s quite a bit you should know before you dive in. But before we give you the issues that should guide you, your character as an investor is critical to understand. The following should form the basis of your investment character and through this, your investment advisor can guide you better, knowing how far he or she can push it:

  1. Understanding your RISK tolerance; is critical because it’s the gauge that defines everything. How would you react if you lost say, KES 1,000,000? Will you cry foul? Will you commit suicide? Will understand and buckle up? This is where the red flags as an investor come from.

  2. Access to Information; It’s important to understand that flow of information has changed everything. How we deal, how we engage, how we move from place to place. It’s critical to know how access to the right information will be for you because the markets are influenced every day by current news from diverse sources and it’s paramount to understand these.

  3. Liquidity or Cash flow aspect; It’s important to understand your cash flow as an investor. Understand the pattern of how you access money and how you apportion it because this will define how you take advantage of opportunities that will present themselves to you on your journey as an investor. Cash flow is everything. Failure to have a beat on it will make you hate your journey and believe that the markets are the worst place to be in. Know when to have ready money to get in, at the right time and moment.

  4. Your Emotional Intelligence; This is the most important aspect of all. Your emotional intelligence, which couples up to your emotional stability, your emotional understanding and most of all, how you hold up under intense pressure is what every trader assesses in their client.

Once the above are understood, then we are now ready to know what needs to guide us going forward. It’s the same way when you visit a hospital. They first take you through triage to know your vitals. Like pressure, symptoms, height, etc. before they send you to your doctor. In this regard, our doctor is the trader at your local brokerage firm.

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Here’s a step-by-step guide to investing money in the stock market to help ensure you’re doing it the right way.

If you’ve never invested in the stock market before, it can be an intimidating process. Stocks are not like savings accounts, money market funds, or certificates of deposit, in that their principal value can both rise and fall. It’s a mad market with blood on the streets every day. My principle is always to get in when everyone is leaving. Make a profit when the streets are red.

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If you don’t have sufficient knowledge of investing — or emotional control — you can lose most or even all of your investment capital. That’s why learning the basics of how to invest in stocks is so important. This is something most of us ignore. We assume we already know. Here we go:

  1. Understanding the Process First on how to invest;

Before you can do anything, it’s clear to understand the process and the first thing is to read up on what is required and how to go about it. The first step is to identify a brokerage firm to invest with. Read up on several of them, interview a few and select the one that suits and meets your needs as an investor. Once you pick one. The journey starts. My advice is always to pick two brokerage firms. One that is good at short-term trading and turnover and one that is good at long-term investments. Then open the needed accounts. They are called the CDS accounts and deposit your funds in them.

  1. Understanding Which Investment path to take;

Stocks are a popular avenue for investment, but it’s far from the only option. Depending on your needs, income, and when you’ll need to access the money, you can take advantage of a variety of different investment strategies. These include splitting your funds into. Pick a strategy that focuses on the short term and identify the best stocks for this and be ready for the roller coaster and then pick another strategy that focuses on long-term engagement and look at the stocks best for this. Your brokerage firm should be able to help you with this especially with research and all.

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  1. Investing in stocks comes with substantial risk, especially in the short term;

While stocks are often viewed as a safe investment strategy in the long term, nothing is guaranteed. The stock market is volatile, especially in the short term, and can swing wildly in between extremes. If you’re looking to invest your money in the short term, there are usually much more reliable, low-risk investment strategies available. Your trader should be able to guide you on this and ensure that you understand so that you don’t lose it when things go south.

The stock market has historically grown at an average rate of about 7 percent per year. From year to year, however, the stock market can experience dramatic highs and lows. Even over a long period, a return on an investment in the stock market is never guaranteed. Investors should be cautious when it comes to investing in the stock market, and understand that nothing is a sure bet. Politics, government policies, influential businessmen and women with critical voices on markets, regional stability, inflation, etc. are core issues that affect the performance of the market.

  1. Different brokerages have different strengths and weaknesses.

Not all brokerages are the same. Depending on your investing needs, you may want to pursue brokerages with different strengths and weaknesses. Some might have especially robust customer service, while others may offer low (or even no) fees. Which brokerage is right for you will depend on your investing goals and how much guidance you need when it comes to investing. There’s no one-size-fits-all in investing, so you should explore the best stock broker for you. This is why I said it’s important to have at least two firms working for you so that you can always have a better experience in terms of the information that you receive.

  1. Investing all of your money in the stock of a single corporation is very risky.

It can be tempting to go “all in” on a promising listed company that you think might turn into the next Safaricom PLC or Equity Bank. However, investing all of your money in a single company is a risky proposition. There’s no way of reliably predicting which companies will be an overnight success. If you guess wrong, you may lose some or all of your investment. Hence the need for constant research and constant engagement with your broker to ensure that you have a pulse on what’s happening across the various listed sectors.

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  1. A good strategy for reducing risk is to spread out your investments.

A common investment strategy is to invest in many different listed firms to reduce risk. This spreads out your investment and protects it in the case that one company’s stock plummets. This is why I said earlier on that one needs to work with at least two firms to ensure that your investments are well executed and protected

  1. Most stocks pay your dividends, which provide a stream of income for you without having to sell the shares.

Dividends are small payments that companies distribute to shareholders, usually quarterly. If you own shares in a company, you’ll usually be eligible for dividends. While dividends generally represent a small percentage of your overall investment, they can add up, especially if you’ve invested a lot of money in the stock market. Companies can raise, lower, or eliminate dividends depending on their financial health. Having up to speed research is more than critical for this.

  1. A mutual fund is just a collection of investments, often stocks.

Mutual funds are collections of investments. These funds can be composed entirely of stocks, but can also include other types of investments, such as bonds, precious metals like gold, and foreign currency. It’s important to grow your portfolio to this level where diversity is the denominator.

Once you have the above going, then it’s easy to grow and make money. Remember that research is your guide. Whatever you are told, always verify by researching. Be willing to spend a little to ensure your wealth grows and it’s protected.

Before I end this, it’s important to answer some frequently asked questions that am always asked on social media. It’s important that you understand some of the terms used so that you are not left behind or caught unawares.

Frequently Asked Questions (FAQs) on STOCK MARKET INVESTMENTS;-

  1. Who is a broker?

 A broker is a member of a stock exchange, who is permitted to do equity trades in there.  The broker is an enrolled member of the exchange and is registered with the NSE and recognized by the Capital Markets Authority.

In other words, a broker is an intermediate person (or a company) between an investor and a stock exchange. They buy & sell shares and other securities for investors in the stock market. Please note that an investor cannot directly deal with the stock exchange.

  1. What is Securities Transaction Tax (STT)

 Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges.

Securities Transaction Tax is applicable on the purchase or sale of equity shares, derivatives, equity-oriented funds, and equity-oriented Mutual Funds.

  1. I have lost the share certificates I was holding for XYZ Company. How do I get duplicate share certificates?

 Registrar of the company usually helps in resolving this kind of issue. Your broker can help you identify the registrar of the company. If you know the registrar of the company, contact them with your queries.

If you do not know the registrar of the company, visit the ‘Investor Relations’ section of the company’s website or contact the company and ask them about the registrar handing their share.

  1. What is Earnings Per Share EPS?

EPS is the post-tax profits of the company divided by the number of shares issued by the company.

  1. What is the P/E ratio?

In terms of an IPO, P/E is the issue price divided by the most recent Earning Per Share EPS. This ratio tells you if the issue is underpriced or over-priced vis-à-vis the industry P/E. All other things being equal, if the P/E of the company is less than the industry P/E then the issue is underpriced. If the P/E of the company is higher, then the issue is over-priced.

  1. What is ISIN Number?

ISIN (International Securities Identification Number) is a unique identification number for a security across the universe.

  1. Can I transfer funds directly from my equity account to a commodity account and vice versa?

None of the brokers allows transferring fund between equity and commodity account as its being prohibited by NSE and CMA Regulations.

  1. How is the 20 Share Index decided?

The NSE 20 Share Index is a price-weighted index calculated as a mean of the top 20 best-performing counters. The constituent companies are selected based on a weighted market performance during the period under review based on the following criteria: … Must have a minimum market capitalization of Kshs. 20 million.

  1. What is MID CAP?

According to the current market, companies are categories in large-cap, mid-cap and small-cap companies. The company’s capitalization is calculated on the basis of the total number of its outstanding shares in the market multiplied by the current price per share.

For the mid-cap companies market capitalization lies between Rs 5,000 – 20,000cr. Mid-cap companies are considerably smaller than large-cap companies in comparison to revenue, profitability, employees, client base, etc.

  1. What is Future and Option?
  • Futures…

Future Contracts are a type of derivatives deriving value from an underlying instrument. In future contracts, the buyers and seller must be agreeable on a specific future date for trading before the expiration date. Buy and sell at an acceptable future price. Helpful for institutional investors to trade in big quantities. Futures are comparatively riskier than Options. Can provide unlimited loss and profit to the buyers.

  • Options…

Options are a type of derivatives deriving value from an underlying instrument. Gives rights, not the obligation to the investor to buy or sell before the contract expires. Only buyer or seller has obligation to buy or sell. Buy and sell at the strike price. Helpful for retail investors to trade in a certain quantity. Options are less Risky than Futures. Can provide unlimited profit but limited loss contract to buyers.

11. What is bonus share and its record date?

Bonus shares are free shares issued by the company to its existing shareholders. Bonus shares are issued in a ratio of the shares an investor hold. For example, when a company offers 1:5 bonus shares, it means a shareholder will get 1 free share for 5 shares. So if an investor holds 100 shares at the time of bonus then they will become 120 shares.

Bonus shares are usually announced by the company with a record date, the date which is considered for the bonus shares. All the investors holding the shares on the record date are eligible for bonus shares.

The company usually gives bonus shares as a substitute for dividend payouts. The face value of the share doesn’t get change after the bonus. This is unlike stock split.

Bonus shares increase the number of shares in the market which changes the Earning Per Share EPS (companies net profit/number of shares). As net profit still remains the same and the numbers of shares are higher, shares EPS goes down after the bonus shares are issued.

Ideally, it should reduce the share price but it doesn’t happen in the ratio of shares are offered as bonus shares thus it usually in the profit of the shareholders. This happens because of the increase in the liquidity of the share and signal of the company’s promise to share its profit with its investors.

  1. What is face value?

Face value is an arbitrary value of the securities determined by the issuer to analyze the growth and needs in real numbers on the balance sheets.

  1. Why do share prices move up and down?

The answer in two words is “Demand & Supply”. Simply if there is more demand for a company shares and fewer people are willing to sell them, the share will move upwards. If there is a huge supply but nobody is interested in buying shares at the current price, the share will move downwards.

Now the major question is how does demand or additional supply come into the market and the answer is, there are many factors involve in this including the company’s financial result, overall economic situations, sector performance, government rules & regulations, major political & natural events, future of the company, upcoming products & services, company management changes, stock market frauds, etc.

Any of the above and many more factors affect the demand & supply of a company stock and ultimately move it prices to go up & down.

It’s very hard to predict stock movement and requires lots of research and expertise.

  1. What is the difference between Private Limited and Public Limited Companies?

Private Limited Company

A private limited company is owned privately by a small group of people such as a family. They are not allowed to offer shares (in the company) to the general public and can operate through just one director. A private limited company can not trade its shares on the stock market.

Private companies have several advantages over public companies. A private company has no requirement to publicly disclose much if any financial information; such information could be useful to competitors. Private companies also have far fewer government regulations than public limited companies.

 Public Limited Company

Public limited company is owned publicly by a large number of investors. Public Limited companies are listed in the stock market and their shares are actively traded among their investors.

Public limited companies can raise capital easily by the sale of their securities.

I believe the above is enough to start you on your investment journey and all the best. If you have a query, email me at; biko@sokodirectory.com

And leave a comment in the comment section.

About Steve Biko Wafula

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters.He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com

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