NSE is one of the

most profitable stock

markets in

Africa

AN INVESTMENT NEWS PUBLICATION

Investment News Guides to Business

Opportunities in Counties and Business Sectors

February 2016

2 INVESTMENT NEWS

2016

EDITOR’S NOTE

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 publica-

tion may be reproduced, stored in a retrieval system or

transmitted in any form or by any means, electronic photo-

copying, mechanical recording or otherwise without the pri-

or permission of the copyright owner

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 coun-

ties 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 in-

formation 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 publica-

tion 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: nguli@investmentnews.co.ke

INVESTMENT NEWS 3

Liquidity: Liquidity is the ease by which an investment can be changed back to cash with no major changes in val-ue.

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 Ex-change are fairly liquid and can be cashed quite easily. With the introduction of the Central Depository and Set-

tlement Corporation, trans-actions take 5 days to re-flect 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-

Here is how to make money at the NSE Since its establishment in the late colonial years, the Nairobi Securities Ex-change 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 securi-ties exchange in the coun-try. 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

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 –

the oldest being the labour

market.

In the stock market, the val-

ue 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 signi-

fy lack of progress for the

business concerned.

It is also in the stock mar-

ket that the state tests its

support in the broader busi-

ness community when it

tries to raise funds through

the sale of its shares or

bonds at a given price.

Lack of support is ex-

pressed by a reluctance to

buy while support is ex-

pressed by an eagerness

to buy.

It is of course, important to

remember that stock mar-

kets 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 with-

out 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 re-

member that stock mar-

kets are affected by inter-

national trends in busi-

ness. They are becoming

increasingly international.

Generally, the individual

or private investors in los-

ing out in this trend as

more and more institu-

tions such as pension

funds and insurance com-

panies have become buy-

ers.

What this means is that

these institutions are in-

creasingly becoming

more powerful and the

stock markets are becom-

ing more volatile. Profes-

sional 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

ate in value.

Indexing: The stock market index is a measure of change of the market over time. Dif-ferent indexing methods are used in different markets all over the world. The local eq-uities market uses the NSE20 Shares Index and The NSE All Share Index (NASI).

The NSE20 Shares Index measures the performance of the market based on the per-

formance of a representative 20 companies from a number of industries. On the other hand, NASI measures the performance of the market based on the performance of all the listed companies.

A 2% increase in the market index means that the total value of the stocks which make up that index has ap-preciated by 2%. The figures on their own have little mean-ing and have to be compared to previous values to make

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. For-eign 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-

Speak the Language of the Stock Market

INVESTMENT NEWS 5

the growing importance of

professional traders who

operate on a very short

term basis and are similar-

ly given to a herd instinct.

The Kenyan stock market

is growing and changing

as it grows. With new tech-

nology and modern meth-

ods of communication,

more and more individual

traders and business peo-

ple are trading at the stock

market and making wealth

while at it. This special

Guide shows you how you

Launching the new building for NSE

can make money trading at the

stock market.

try is exaggerated on interna-tional media, when there is a drought, political uncertainty or for whatever reasons; and thus make the market index drop. From your own re-search, you should be able to make a wise move.

The index is also important for comparison purposes. If the stock you invest in is consist-ently 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%.

Securities: Securities may be in form of debt (bonds, deben-tures, rights) or actual owner-ship of a company (equities/ shares). Investing in equities means that one can be able

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.

Debt securities are usually issued for a certain period of time, after which the investor can get back their money. Equities give the shareholder certain rights and some pow-er in influencing the running of a company.

Mutual Funds: Investors with a limited level of investi-ble income can put their mon-ey in a mutual fund. This will allow you to enjoy a level of diversification you would oth-erwise be incapable of afford-ing. In this way, mutual funds have a lower risk level com-pared to directly investing in equities. Depending on your risk tolerance, you can further

reduce your risk levels by se-lecting a less risky mutual fund.

Money market mutual funds are by far the safest you can get. Generally, your returns would be about twice what you would get in a bank. As the investment goes into debt se-curities such as treasury bills, you don’t have to worry about losing any of your money.

Bond funds or income funds offer higher rates though not exactly risk free. These funds are basically invested in gov-ernment and corporate debt. The level of risk depends on where the money is invested. For example, investing in gov-ernment bonds will attract much lower risk than investing in companies. The risk level

Speak the Language of the Stock Market

TURN TO PAGE 19

6 INVESTMENT NEWS

‘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: Any-

one...

Stock markets such as the

Nairobi Securities Ex-

change are open and cater

for everyone. Individuals,

companies and organiza-

tions 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 be-

fore you jump into the

world of stocks and

bonds.

One of the biggest consid-

erations for an investor

with little money is not on-

ly what to invest in but al-

so how to go about invest-

ing.

Not long after you start

investing that you may

find yourself bombarded

with minimum deposits

restrictions, commissions

and the need for diversifi-

cation, 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 insti-

tutions require certain mini-

mum 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 of-

fer commission-based ser-

vice.

Those who offer full ser-

vice will do everything for

you, but the problem is that

they will not accept the in-

vestor with little money.

This means that your best

option, if you are a small

investor, is the commis-

sion or discount broker.

Commission brokers can

be very low in terms of

fees, but you should re-

member 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 ad-

vice if you need it.

You can, of course, avoid

brokers all together and buy

shares directly from a com-

pany through direct stock

purchase plans (DSPPs)..

You should remember that

many of these plans have

minimums also. Most com-

panies that have placed

shares at the NSE have re-

quired a minimum of

Shs,5,000 purchase..

In countries where online

trading in shares and stocks

has taken off, it is easier to

get commission brokers at

much lower rates. In Kenya,

however online trading has

yet to pick sufficiently to

make a difference.

Trading is a very simple process. Just follow these simple steps: 1. Locate a suitable bro-

ker. All stockbrokers are listed on the official NSE website.

2. Open a CDS account (Central ). This is where all tradable shares are held elec-tronically. Your broker may or may not charge a fee for this service.

3. Identify a stock you wish to buy.

4. Inform your broker and the transaction will be effected. Transactions take 5 days to reflect in your account.

5. Know when to sell. Opening a CDS Account

Trading at the NSE Information on how to open a CDS account is available on many platforms, includ-ing your chosen broker. Simply, you will: Fill a securities account

opening and mainte-nance form with your CDA (Central Deposito-ry Agent) and sign.

Attach/ provide two passport photos.

Attach/ provide original and copies of your na-tional identification card or passport. Some-times, a copy of your certified driving license will do.

This can be done physical-ly or on the CDA’s web-sites. Central Depository Agents’ websites will have CDS account opening

Once you buy a company’s

shares, you are a share-

holder in that company. In

this position, you have a

right to attend the compa-

ny’s Annual General Meet-

ing and, depending on your

voting power, influence the

company’s direction by tak-

What does it mean to own a company’s share? 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 hap-

pen often, especially in re-

gards to voting out direc-

tors; unless a company is

performing poorly or is

threatened with a take-

over bid. All public compa-

nies are required by law to

hold Annual General Meet-

ings.

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 docu-mentation. Once the CDA receives all your details, they will give you a CDS number. Costs Involved Opening a CDSC account may be free or cost a small amount of money; never above Ksh. 200/-. The other cost you will incur is a transaction fee of 1.85% for trades worth more than Ksh. 100,000 and 2.1% for lower volume trades. How-ever, this is only the Capital

Markets Authority regula-tion. You should look into a specific broker to find out if they have lower or negotia-ble commissions. Identifying a stock to buy Once you’re done with this, look into a specific compa-ny and do some back-ground research on how the company has been per-forming in the past and what it is currently plan-ning. Does it seem hope-ful? Do you find that it has the capacity to grow in fu-ture? Your broker may offer

some advice when it comes to buying and sell-ing stocks. Making profits in trading equities is basi-cally about knowing when to buy and when to sell stocks. Common knowledge dic-tates that one should in-vest 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 under-priced and hence believe you can bank on its future.

Introductions and discussion at the NSE

INVESTMENT NEWS 9

Language of the Stock Market

also depends on the interest rate risk; if it goes up, the val-ue 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 collec-tive investment schemes. Unit trusts are invested in a wide variety of securities and can afford to guarantee a cer-tain yield at the end of a peri-od 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 re-deem 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 com-pany’s profits, quoted in shil-lings per share. The annual dividend divided by the cost of a share gives you your yield. The dividend is de-clared and approved in the company’s AGM and are de-posited 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 inves-tors.

Private vs Public Compa-nies: Private companies are those with less than 50 shareholders and whose shares are not available for purchase by the public. Pri-vate 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.

Public companies, on the oth-er 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 de-creases.

Bear Market: This is trading talk for the stock market be-ing in a down trend, or a peri-od of falling stock prices.

Blue Chip Stocks: These are the large, industry leading companies. They offer a sta-ble record of significant divi-dend payments and have a reputation of sound fiscal management. The expres-

sion is thought to have been derived from blue gambling chips, which is the highest denomination of chips used in casinos.

Bull Market: This is when the stock market as a whole is in a prolonged period of in-creasing stock prices.

Broker: A person who buys or sells an investment for you in exchange for a fee (a com-mission).

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 trad-ers.‖ The Kenyan market has not advanced enough to ena-ble day trading as transac-tions are completed after 5 days.

Hedge: This is used to limit your losses. You can do this by taking an offsetting posi-tion. For example, if you hold 100 shares of XYZ, you could short the stock or futures po-sitions on the stock.

Initial Public Offering (IPO): The first sale or offering of a stock by a company to the public, rather than just being owned by private or inside investors.

From Page 15

10 INVESTMENT NEWS

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 compa-

nies and other trading institu-

tions may also engage in front

running. This is where a broker

buys or sells for their own ac-

counts while taking advantage

of pending orders from custom-

STOCK MARKET FRAUD Just like anything else involving money, the

stock market has the capacity to attract fraud-

ulent behavior. Here are some of those you

should guard against.

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 client’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 ad-

vantage of his fore knowledge

of the state of demand and sup-

ply.

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 re-

maining stock at the elevated

price and in a short while, the

stock’s price readjusts to its real

cost. This form of fraud will gen-

erally just affect short term

traders. You can avoid it by fo-

cusing on the long term.

The values of stocks can also be

manipulated through spreading

of false information on the in-

ternet or even in print.

4. Trading based on Infor-

mation that is yet to be made

public

In the trading world, this is re-

ferred to as gun jumping or ille-

gal insider trading. Insider trad-

ing is illegal unless done on in-

formation 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 in-

volved in such practices are usu-

ally suspended after complaints

are filed by clients.

INVESTMENT NEWS 11

12 INVESTMENT NEWS