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NSE is one of the most profitable stock markets in Africa
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2016 EDITORâ€™S NOTE Contents: The contents of this guide have been deliberately focused on the local investor - the Kenyan micro, small and medium entrepreneur. Our belief is that individually and in groups such as cooperatives and self-help groups, the local entrepreneur can help counties create wealth. Often however, they are unaware of the opportunities available and the contributions they can make as investors. Our purpose is to provide them with the information and encouragement they need. We will continue to encourage cooperative as the best way for the average investor to pull together as well as access funds for their businesses. Acknowledgement: The Editor acknowledges with grateful thanks, the help of a very large number of information sources who have cooperated in the compilation of this guide. The sponsors have helped in facilitating the gathering of the information and the publication of the guide. I wish to thank particularly the officials of Nairobi Securities Exchange who volunteered to cooperate and help in a variety of ways whenever we needed their help. It is due to the constant help that we now have this guide. The Guide is written by Nguli Muli email: email@example.com
Guide to Trading at the Nairobi Securities Exchange Copyright 2016 Investment News P.O. Box 20257-00100 Nairobi, Kenya. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic photocopying, mechanical recording or otherwise without the prior permission of the copyright owner
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Here is how to make money at the NSE Since its establishment in the late colonial years, the Nairobi Securities Exchange has experienced steady growth to become a top performing market in Africa. In 1994, it recorded
its highest ever performance with an index of 5030. It is still the only licensed securities exchange in the country. The stock market is a place where business itself is sold.
Generally markets are made whenever and wherever uncommitted buyers pay –usually with money, sometimes with goods – for something
But First Learn the Language of the Stock Market Liquidity: Liquidity is the ease by which an investment can be changed back to cash with no major changes in value. Liquidity is determined by how close the ask and bid prices are. The ask price is the lowest amount a seller is ready to take for a security while the bid price is the
highest amount a buyer is ready to give for a certain security. The closer these two prices are, the easier it is to convert your investment to cash when need arises. Shares bought and sold at the Nairobi Securities Exchange are fairly liquid and can be cashed quite easily. With the introduction of the Central Depository and Set-
tlement Corporation, transactions take 5 days to reflect in your account. It is always advisable to not trade in money that you would need urgently as the investment is always a risk. If you need money on short notice, you may sometimes have to sell at a loss as you won’t have time to patiently wait for a stock to appreci-
4 INVESTMENT NEWS provided by uncommitted sellers. The exchange takes place at a price each party cannot better under the circumstances. There are markets for many goods and services â€“ the oldest being the labour market. In the stock market, the value of business is assessed through the price of its shares. A drop in share prices signifies a drop in the value of business while stagnant share prices signify lack of progress for the business concerned. It is also in the stock market that the state tests its support in the broader business community when it tries to raise funds through the sale of its shares or
bonds at a given price. Lack of support is expressed by a reluctance to buy while support is expressed by an eagerness to buy. It is of course, important to remember that stock markets do not reflect the size of their domestic markets. In some countries such as Germany, much of the money for investment flows directly from banks to other businesses without the mediation of the stock market. In others such as the United States, much of the finance comes from retained profits. It is also important to remember that stock markets are affected by international trends in busi-
ness. They are becoming increasingly international. Generally, the individual or private investors in losing out in this trend as more and more institutions such as pension funds and insurance companies have become buyers. What this means is that these institutions are increasingly becoming more powerful and the stock markets are becoming more volatile. Professional managers of the funds, all too aware that they are judged by their performance, follow each other in stampede so as not to be left behind in the market. Volatility is increased by
Speak the Language of the Stock Market formance of a representative 20 companies from a number Indexing: The stock market of industries. On the other index is a measure of change hand, NASI measures the of the market over time. Dif- performance of the market ferent indexing methods are based on the performance of used in different markets all all the listed companies. over the world. The local equities market uses the NSE20 A 2% increase in the market Shares Index and The NSE index means that the total value of the stocks which All Share Index (NASI). make up that index has apThe NSE20 Shares Index preciated by 2%. The figures measures the performance of on their own have little meanthe market based on the per- ing and have to be compared to previous values to make ate in value.
any sense. With this information, you need to interpret the index. The index will drop when many investors sell and thus make the stock prices go down. The reasons behind their selling of stocks should guide your next move. Foreign investors (who make up a large number of traders at NSE) may choose to sell their stocks at a certain time when insecurity in the coun-
INVESTMENT NEWS 5 the growing importance of professional traders who operate on a very short term basis and are similarly given to a herd instinct. The Kenyan stock market is growing and changing as it grows. With new technology and modern methods of communication, more and more individual traders and business people are trading at the stock Launching the new building for NSE market and making wealth can make money trading at the while at it. This special stock market. Guide shows you how you
Speak the Language of the Stock Market try is exaggerated on international media, when there is a drought, political uncertainty or for whatever reasons; and thus make the market index drop. From your own research, you should be able to make a wise move. The index is also important for comparison purposes. If the stock you invest in is consistently behind the index, you might probably need to come up with a new investment strategy. For example, if the index consistently goes up by 2%, your investment should also appreciate regularly by 2%.
to make money off of capital gains. On the other hand, investing in debt securities allows one to gain interest and keep the initial principal.
reduce your risk levels by selecting a less risky mutual fund.
Money market mutual funds are by far the safest you can Debt securities are usually get. Generally, your returns issued for a certain period of would be about twice what you time, after which the investor would get in a bank. As the can get back their money. investment goes into debt seEquities give the shareholder curities such as treasury bills, certain rights and some pow- you donâ€™t have to worry about er in influencing the running losing any of your money. of a company. Bond funds or income funds Mutual Funds: Investors offer higher rates though not with a limited level of investi- exactly risk free. These funds ble income can put their mon- are basically invested in govey in a mutual fund. This will ernment and corporate debt. allow you to enjoy a level of The level of risk depends on diversification you would oth- where the money is invested. erwise be incapable of afford- For example, investing in goving. In this way, mutual funds ernment bonds will attract have a lower risk level com- much lower risk than investing pared to directly investing in in companies. The risk level
Securities: Securities may be in form of debt (bonds, debentures, rights) or actual ownership of a company (equities/ shares). Investing in equities equities. Depending on your means that one can be able risk tolerance, you can further
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‘Can I Invest at the NSE?’ The question that bothers most people is the very basic: Who can invest at the stock market? And the answer is very simple: Anyone... Stock markets such as the Nairobi Securities Exchange are open and cater for everyone. Individuals, companies and organizations can make money at the stock exchange. It doesn't also mater whether you are a Kenyan or not. All it takes is for you to sign up with a broker and follow the steps we shall outline. The limitations are those that you place on yourself. For example, you should
consider a few thing before you jump into the world of stocks and bonds. One of the biggest considerations for an investor with little money is not only what to invest in but also how to go about investing. Not long after you start investing that you may find yourself bombarded with minimum deposits restrictions, commissions and the need for diversification, among a myriad other considerations. In this case, it is better to learn to maximize your profits by minimizing your
costs. Start with the broker first. We said all you need is to go to a broker and open an account and start trading. However all financial institutions require certain minimum deposits. So they will not accept your account unless you reach certain minimums. Before you start your hunt for brokers, remember there are two types— brokers that offer you full service and others who offer commission-based service. Those who offer full service will do everything for you, but the problem is that they will not accept the investor with little money. This means that your best option, if you are a small investor, is the commission or discount broker. Commission brokers can be very low in terms of fees, but you should remember that they are that low because they leave
Deputy President William Ruto (left) opens new NSE building
INVESTMENT NEWS 7 everything to you. They may not give you investment advice if you need it.
Trading at the NSE
You can, of course, avoid brokers all together and buy shares directly from a company through direct stock purchase plans (DSPPs).. You should remember that many of these plans have minimums also. Most companies that have placed shares at the NSE have required a minimum of Shs,5,000 purchase..
Trading is a very simple process. Just follow these simple steps: 1. Locate a suitable broker. All stockbrokers are listed on the official NSE website. 2. Open a CDS account (Central ). This is where all tradable shares are held electronically. Your broker may or may not charge a fee for this service. 3. Identify a stock you In countries where online wish to buy. trading in shares and stocks 4. Inform your broker and has taken off, it is easier to the transaction will be get commission brokers at effected. Transactions take 5 days to reflect in much lower rates. In Kenya, your account. however online trading has 5. Know when to sell. yet to pick sufficiently to make a difference. Opening a CDS Account
Information on how to open a CDS account is available on many platforms, including your chosen broker. Simply, you will: Fill a securities account opening and maintenance form with your CDA (Central Depository Agent) and sign. Attach/ provide two passport photos. Attach/ provide original and copies of your national identification card or passport. Sometimes, a copy of your certified driving license will do. This can be done physically or on the CDA’s websites. Central Depository Agents’ websites will have CDS account opening
What does it mean to own a company’s share? Once you buy a company’s shares, you are a shareholder in that company. In this position, you have a right to attend the company’s Annual General Meeting and, depending on your voting power, influence the company’s direction by tak-
ing part in making major decisions. Generally, as a major shareholder, you have a louder voice when it comes to running the company. However, in practice, this doesn’t happen often, especially in regards to voting out directors; unless a company is
performing poorly or is threatened with a takeover bid. All public companies are required by law to hold Annual General Meetings. Of course, selling your share is done whenever you see fit.
8 INVESTMENT NEWS forms available. In this case, you can scan and send the required documentation.
Markets Authority regulation. You should look into a specific broker to find out if they have lower or negotiable commissions.
Once the CDA receives all your details, they will give you a CDS number.
Identifying a stock to buy Once youâ€™re done with this, look into a specific compaCosts Involved ny and do some backOpening a CDSC account ground research on how may be free or cost a small the company has been peramount of money; never forming in the past and above Ksh. 200/-. The other what it is currently plancost you will incur is a ning. Does it seem hopetransaction fee of 1.85% for ful? Do you find that it has trades worth more than the capacity to grow in fuKsh. 100,000 and 2.1% for ture? lower volume trades. However, this is only the Capital Your broker may offer
Introductions and discussion at the NSE
some advice when it comes to buying and selling stocks. Making profits in trading equities is basically about knowing when to buy and when to sell stocks. Common knowledge dictates that one should invest in sectors that they are knowledgeable about. There are about 11 sectors listed at the stock market. Buying ought to be done in companies whose stocks you believe are underpriced and hence believe you can bank on its future.
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Language of the Stock Market From Page 15 also depends on the interest rate risk; if it goes up, the value of the bond fund goes down. The final category of mutual funds is the equity fund, which carries the highest risk and highest possible returns. Unit Trusts: Just like mutual funds, unit trusts are collective investment schemes. Unit trusts are invested in a wide variety of securities and can afford to guarantee a certain yield at the end of a period as they are managed by professional investors. At Britam, for example, unit trusts investments can have a yield of 10% at the end of the year. Being open ended funds, an investor can choose to redeem their investment at any given time and liquidate their initial investment plus the yield that far. This feature is common to both mutual funds and unit trusts. Dividends: Shareholders may get a portion of the company’s profits, quoted in shillings per share. The annual dividend divided by the cost of a share gives you your yield. The dividend is declared and approved in the company’s AGM and are deposited in an investor’s bank account. However, it is important to
note that the law does not require public companies listed on the stock market to pay out dividends to investors.
sion is thought to have been derived from blue gambling chips, which is the highest denomination of chips used in casinos.
Private vs Public Companies: Private companies are those with less than 50 shareholders and whose shares are not available for purchase by the public. Private companies can also be subsidiary companies that are wholly or majorly owned by a larger company. As such, private companies are not required to publish their accounts.
Bull Market: This is when the stock market as a whole is in a prolonged period of increasing stock prices.
Public companies, on the other hand, are companies whose shares are publicly traded. Some may not be listed at the Nairobi Stock Exchange but can be traded Over The Counter (OTC) through broker agreements. Averaging Down: This is when an investor buys more of a stock as the price goes down. This makes it so your average purchase price decreases.
Broker: A person who buys or sells an investment for you in exchange for a fee (a commission). Day Trading: The practice of buying and selling within the same trading day, before the close of the markets on that day. Traders that participate in day trading are often called ―active traders‖ or ―day traders.‖ The Kenyan market has not advanced enough to enable day trading as transactions are completed after 5 days.
Hedge: This is used to limit your losses. You can do this by taking an offsetting position. For example, if you hold 100 shares of XYZ, you could short the stock or futures poBear Market: This is trading sitions on the stock. talk for the stock market being in a down trend, or a peri- Initial Public Offering (IPO): od of falling stock prices. The first sale or offering of a stock by a company to the Blue Chip Stocks: These public, rather than just being are the large, industry leading owned by private or inside companies. They offer a stainvestors. ble record of significant dividend payments and have a reputation of sound fiscal management. The expres-
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STOCK MARKET FRAUD Just like anything else involving money, the stock market has the capacity to attract fraudulent behavior. Here are some of those you should guard against. 1. Broker Fraud Based on the fact that the more you trade, the more the broker makes, cheap brokers may aim to get you to make as many transactions as possible. This is up to you to see through and make your final decision on what action to take at any given time. As much as a broker may try to advice you based on his experience, never take their word for it; go out and do your further research and decide what to do. Broker fraud also occurs when a broker transacts without getting instructions from a broker. This can be settled by reporting to relevant authorities. 2. Front running Brokers, mutual fund companies and other trading institutions may also engage in front running. This is where a broker buys or sells for their own accounts while taking advantage of pending orders from custom-
ers. This is illegal as the broker would be making a profit while making the clients lose money. An example of this is when a broker has, say, 200 000 shares of orders to buy for a client. Before executing this order, they buy 10 000 shares for their own account at the current price of maybe Ksh. 50. After this is done, the clientâ€™s orders are made and this drives the price up to maybe Ksh. 56. The broker makes Ksh 60,000 in just a short while by taking advantage of his fore knowledge of the state of demand and supply. 3. Manipulation of values and artificial fluctuation of values An investor can buy up shares while posting fake bids to make it appear that there is demand for a certain stock. In this way, real demand can be created and thus push the prices up. The investor then sells up their remaining stock at the elevated
price and in a short while, the stockâ€™s price readjusts to its real cost. This form of fraud will generally just affect short term traders. You can avoid it by focusing on the long term. The values of stocks can also be manipulated through spreading of false information on the internet or even in print. 4. Trading based on Information that is yet to be made public In the trading world, this is referred to as gun jumping or illegal insider trading. Insider trading is illegal unless done on information that is already out for the public.
In 1995, the CMA established the Investor Compensation Fund whose function was to compensate investors for losses resulting from broker and dealer fraud. This fund is generated from every transaction at NSE. A small percentage of each equity transaction goes into financing the ICF. Broker companies involved in such practices are usually suspended after complaints are filed by clients.
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Guide to MSE Trading in the NSE