Shares or stocks are a sure way to increase your wealth and financial stability. The best part is that this is passive income meaning that your money will work for you as opposed to you working for money.
What is a shares?
Shares are units of ownership in a company or institution that allows the owner make decision and receive some profit. We have 2 main types of shares, ordinary (common) and preferred shares.
Preferred vs. Ordinary Shares
There are many differences between preferred and ordinary (common) shares. The main difference is that preferred shares have no voting rights. This means that the owner doesn’t participate in the AGM. However, ordinary shares have voting rights, usually at one vote per share owned. Most investors know a lot about ordinary shares but very little knowledge about the preferred shares.
Preferred shareholders have priority over their counterparts in terms of dividends payout. This means that the preferred shares will be paid first then the ordinary shares. Moreover, Ordinary shareholders make decisions for the company there for they are last in company assets, this means that they will get there share only after creditors, bondholders, and preferred shareholders have been paid.
Before a company can list its stocks in the market the company should be registered by the Nairobi Stock Exchange (NSE) and licensed by the Capital Markets Authority (CMA).
How to buy and sell shares in Kenya.
First you will need to open a Central Depository System (CDS) Account and then you will need a broker. A CDS Account allows you to trade (buy & sell) shares at the Nairobi Stock Exchange (NSE). You can open a CDS account from the Central Deposits and settlements Corporation (CDSC) limited. The CDSC is a parastatal (Government Corporation) established under the Central Depository Act of 2000. Therefore, the CDSC holds all shares electronically, therefore, removing the need for a physical share certificates.
In Kenya we have over 20 listed brokers. There are 3 main types of brokerage:-
- Stock brokers.
- Online stock brokers.
- Investment advisor or financial managers.
I personally prefer the online trading platforms due to the control that they give you. The best thing is that nowadays you can even trade when the market is closed though it will still take you 2 working days for the certificate to appear in your CDS account.
Below are some of the online stock brokers.
- AIB Capital
- Dyer & Blair
- Faida Investment Bank
- Genghis Capital
- Kingdom Securities
- NIC Securities
- SBG Securities
- Suntra Investment Bank
Most of this brokers are banks and they will require you to own a bank account with them. Opening the CDS account is free but you will need to deposit money in order to start trading. The minimum number of shares that you can buy is 100 units. For example: Right now the price of Safaricom is kes 30 and you can buy a minimum of 100 shares. Therefore, you will need a minimum of kes 3000 to purchase this stock. If the stock is trading at kes 450, you will need a minimum of kes 45,000 to purchase this stock. So you are only limited according to how much you want to spend.
When should you buy a stock?
Shares should be part of your long term goal. If you are into get rich quick schemes, this is not the place for you. Investing in your portfolio should be for future long term financial freedom. Some investors will tell you to time the market and buy when the price is low. The only problem with this is that you might buy the stock and its value continues decreasing.
Some tips on buying shares
- Do your homework.
Research, research and research some more. Before you decide on which stocks you want to buy you should look at its financials. This are their books of accounts (Profit and loss statement, balance sheet and cash flows) this will inform you where they get their money from, their assets and liabilities and its abilities to pay its debts. In addition, also look at the management of the company. Check how much the stock has been trading at and how much dividend it pays.
- When the stock is undervalued.
There are so many ways of computing how much a share should be priced at. One of the best way to determine is a stock is undervalued or overvalued is through discounted cash flow analysis. This analysis tries to figure out the value of a company today based on its abilities to generate future income. Therefore if the current share price is below this then it’s a good buy.
- When it’s on sale
When it comes to buying. Consumers are always looking for deals. As I right this article we are approaching Christmas holiday and this means that vacation or overspending. It’s very easy to find an investor selling his shares under the market rate, it’s a perfect time to invest. However, the herd mentality kicks in and investor tend to avoid a stock if it’s low.
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The best thing is to do your homework. In other words, you can’t time the market and buy when low and sell when high. If you have done your research and followed the tips, it’s now time to wait. Anybody who will guarantee you that you will make a profit next month or next quarter is an outlier. Stocks are long term. If you ask me what a stock will be from a year from now, the truth is I don’t know but what I know is that it will be higher with time. The perfect time to start investing is now.
Enjoy your trading.