Do you ever find yourself watching the 9PM news and once they announce that its business news after the commercial break your mind instantly switches off and you change the channel?
Well one way to incentivise yourself to watch that business news is to own some stocks. You know, those little icons with the green and red arrows which show the day’s top gainers and losers? Yes, those are shares that they are talking about. Let’s have a deeper look into what they are.
What are shares?
Shares are units of ownership in a company that give you access to its profits and assets. In simpler terms, by buying shares, you are buying a part (a share) of a company and in return are entitled to a part of what it owns as well as any dividends it generates.
Imagine, for example, that your cousin owned an avocado processing plant in Nakuru and wanted to expand by buying the plot next door and putting up more machinery. Assume that the assets of the current factory (i.e. land the factory is on, the machinery and the stock of avocados) is worth Ksh 10 million and he needs another KSh10 million to finance the expansion. He approaches you and other investors and you decide to give KS 2 million. By giving this money, you now own a KSh 2 million stake in a KSh 20million valued business. About a 10% share of the business.
This means that then the business grows and makes a profit, you will be given 10% of the profit generated as reward for investing.
The same applies to large companies that are traded on the Nairobi Securities Exchange (NSE) like Safaricom, Equity Bank and KCB. By buying shares, you are giving the company money to expand their operations in exchange for ownership of part of the firm and when they declare profits, you are also eligible to enjoy in the dividends.
Why invest in shares on the NSE
The benefits of investing in shares are many:
- There is the chance for you to not just own a piece of the company, but gain value from it. Over time, stocks usually tend to increase in value and by buying shares of a company that does well, your portfolio will increase in value. This is known as CAPITAL GAIN and if you find yourself looking to exit your position, or needing cash, you can sell the shares and make a healthy profit.
- They are regulated by the Capital Markets Authority. This means that your money is invested in public companies which are accountable. Of course it does not mean you won’t suffer losses, but they have to report audited accounts at least once a year, as compared to you investing in a personal business where someone can manipulate figures or ‘run away’ with your capital investment!
- Liquidity- compared to real estate or mutual funds, you can sell your position immediately as they are sold on an exchange platform. It also has lower transaction costs and you can sell a percentage of your stake as compared to a house which you have to sell the whole thing.
- Source of income. This is arguably one of the best benefits. Shares give you access to the company’s profits in the form of DIVIDENDS. The more of a company you own, the more dividends you make.
What are there drawbacks of investing in equities?
- Risk- As an asset class, shares are seen as higher risk as you are usually the last to be paid in the event the company goes broke. This means you might not get your money back if your investment goes sour. But remember, no risk, no reward!
- Time- Investing in stocks needs someone with patience and ability to undertake research. Returns are usually the highest amongst all asset classes, but these returns are only realised after long periods of time. You need to learn about financial statements in order to find profitable companies and also dedicate some time to monitor the stock market. Yes, that means watching business news!
At the end of the day, you want exposure to shares to boost returns in your portfolio, but should complement this with other less-risky investments. There are also different types of stocks and you can invest in stocks of other countries, but that’s another topic for another day. In the meanwhile, let’s get started with how to invest on the NSE
How to get started investing in shares
- Contact a broker and set up a CDSC account. This is the account that lets you hold shares electronically and each investor has a unique number. This will be different from the one you use for bonds as discussed in the Bonds article but the process is pretty much similar.
What you’ll need is
- Fill out an application form with the broker
- Copy of your ID card or Passport
- Proof of address- lease agreement, water bill or bank statement with your address
- Provide your next of kin details
These are known as ‘Know Your Client’ or KYC documentation and are required for compliance with regulations and anti-money laundering law.
- After you’ve filled out your KYC documentation, you will need to fund your account. Some brokers will also have opening fees, but you can always consult and shop around before picking a broker.
- You can now buy and sell shares on the trading platform provided by your broker which is usually in the form of an OST (Online Share Trading) account with a login address and password, similar to one of your Facebook or Twitter page that enables you to make trades online. Otherwise you can also give them call to place trades on your behalf.
Here is a list of some CMA regulated equity brokers in Kenya:
- Dyer and Blair Investment Bank
- Sterling Investment Bank
- SBG Securities
- ABC Capital
- Kingdom Securities Ltd.
- AIB Capital Ltd.
- Faida Investment Bank
- NIC Securities
- Equity Investment Bank Ltd.
- KCB Capital
Remember to always do due diligence on every aspect when investing, starting with the broker, the company you want to invest in and everything in between. So I hope you’ve learned a lot about shares and why they are so vital to include in your portfolio.
Next post will be the last asset class where we’ll talk about crypto-currencies as an investment tool then we’ll wrap it up by talking about how to set up your portfolio to balance the different asset classes in your portfolio.
Thanks for reading and as always, happy investing!