The stock market is an attractive investment for many people because it provides a way to invest in companies that have the potential to grow in value. When you buy shares in a company, you are buying a share of the company’s earnings and profits.
However, many people are hesitant to invest in shares because of the risk associated with investing and the complex lingo in the stock market. In fact, investing is not without risk.
But not to worry! We will look at the complex lingo you will find in the stock market and simplify the share-buying process. In this article, we will take you through the highs and lows of dealing in shares and, ultimately, the process of how to buy shares today.
- 23 Terms you should know before investing in shares
- 1. Dividends
- 2. Initial Public Offering IPO
- 3. Index
- 5. Bid
- 6. Stock market
- 7. Bear market
- 8. Blue chip
- 9. Annual report
- 11. Beta
- 12. Day Trading
- 13. Execution
- 14. Spread
- 15. Yield
- 16. Capital gains
- 17. Going long
- 18. Going short
- 19. Exchange-traded funds (ETFs)
- 20. Inflation
- 21. Moving average
- 22. Liquidity
- 23. Trading volume
- Tips to follow when picking stocks
- Determine your investment objectives.
- Invest in companies whose business you understand.
- Look for companies with a competitive edge.
- Invest in a strong past performer.
- Focus on dividend-paying companies
- Always be up to date with market changes.
- Research on shares to buy
- Have a diversified portfolio.
- Acquire stocks that have a margin of safety.
- How to choose the shares to buy
- How to buy shares in Kenya
- The best stockbrokers in Kenya
23 Terms you should know before investing in shares
Although there are a lot of terms that one should learn, there are repetitive terms that come up often. They include:
Dividend is money paid at the end of a financial period from profits a company makes. It’s usually paid annually to shareholders by a company based on their shares. During any dividend payments, three dates are essential to note. They are:
· Dividend declaration date
It is the date that any company sends its financials to the shareholders and announces the amount to be paid out as a dividend.
· Book closure date
It is the deadline by which you must have purchased shares before that date to qualify for a dividend. For example, if the book closure date is May 5, 2022, anyone who would have bought shares by the said date is eligible for the dividend.
· Payment date
The dividend declared is paid out on this day.
2. Initial Public Offering IPO
It refers to offering shares of a private company to the public for the first time.
It is a baseline, or a group of shares used to indicate a sector for traders.
This is a person who trades shares on behalf of an investor for a commission.
This is the amount one is willing to pay for a share.
6. Stock market
This is the market that allows individuals to trade shares of companies that are listed.
7. Bear market
This is a period where share prices are plummeting.
8. Blue chip
This refers to big companies that offer dividends.
9. Annual report
This is a report sent to shareholders at the end of every financial year. It contains the company’s progress throughout the year.
10. Bull market
This is a period of continuously increasing stock prices.
Beta is the measure of a stock’s volatility compared to the market. For instance, if a market has a beta of 1 and a stock has a beta of 1.5, it means for every 1-point move in the market, the stock moves 1.5. This means the stock is more volatile than the market.
12. Day Trading
This entails purchasing and selling stock on the same day.
Execution is the completion of a sell or buys order in the market.
The spread is the difference between a stock’s bid and the ask price. For instance, if a trader is willing to buy a stock at Ksh 30 but the buyer is willing to pay Ksh 28, the spread is Ksh 2.
It’s the measure of return on a stock. To get the yield, divide the annual dividend by the price paid for the stock.
16. Capital gains
This is the profit you make after selling an investment at a higher price than when you bought it.
17. Going long
This is buying stocks, hoping they will rise in price and result in a profit.
18. Going short
Selling stocks when you expect prices to fall
19. Exchange-traded funds (ETFs)
This is the increase in the price of goods and services.
21. Moving average
The moving average is the average price of stocks or other assets over a specific period.
This is how easy it is to sell your portfolio and get your money.
23. Trading volume
The number of shares traded at one time.
Tips to follow when picking stocks
As an investor, you must be smart. You need to be able to review the company and select the best stocks. Here is how you pick stocks.
Determine your investment objectives.
Every investor has a different goal when they invest in stocks. Most young investors are looking to grow their portfolios, while older investors are looking to preserve their capital. Other investors are looking at generating regular income from their income.
Start by determining your investment goals.
Invest in companies whose business you understand.
If you understand or have knowledge of a specific industry and come across a company that checks all your boxes, it may be worth investigating.
Look for companies with a competitive edge.
The best companies to invest in, are those that have a sustainable competitive edge. Companies that have products or services with a sustainable competitive edge will deliver returns to the investor.
Invest in a strong past performer.
Although past performances do not guarantee better future performances, it is crucial to consider this. Buy shares in companies that have shown positive results consistently.
Focus on dividend-paying companies
This is not mandatory. Just ensure that most of your portfolio encompasses companies that pay out dividends.
Always be up to date with market changes.
The economy and the market change all the time. It is essential to stay up-to-date so as not to make unwise financial decisions.
Research on shares to buy
Although you might be in a hurry to buy shares, you must do your due diligence before deciding which stocks to buy.
Have a diversified portfolio.
To protect yourself, you should buy shares in different industries. This ensures you are protected if one company does not have a good year.
Acquire stocks that have a margin of safety.
You should not pick companies that are trading below your estimated fair value. This prevents you from going into massive losses if the valuation you made was wrong.
How to choose the shares to buy
Before you buy shares, you must analyze the qualitative and quantitative factors of the economy, industries, and individual companies.
These are some of the qualitative factors you should consider.
News about a company can cause the stock price to increase or tumble.
Personnel changes such as restructuring can affect the price of a stock. Personnel changes can have an impact on the reputation of the company, which will affect the share price.
Financial events such as a scheduled management change or a change in interest rates may affect the price of a stock. It’s important to take note of such events.
Take note of the changes in earnings for a company. If the earnings drop and there is no movement in the share price, then it does not indicate the true value of the company.
Look at the company’s balance sheet. It will show you the assets and liabilities a company holds. A strong balance sheet indicates a strong share price.
This is the portion of the company’s net profit that it chooses to give back to the investors. Dividends indicate the profitability of a company.
Qualitative factors can be measured using various ratios. The ratios include the following:
- Price-to-earnings ratio
This is a company stock price compared to the earnings issued per share.
It is calculated by dividing any company’s stock price by its earnings per share. If the ratio falls below its usual average, you can find the stock at a reasonable price.
- Price-to-sale ratio
This is achieved by dividing a company’s market capitalization by its previous 12-month revenue.
- Dividend yield
If the yield is above the average for a stock, it could be a good indicator that it is reading at a great price.
- Debt-equity ratio
This is a measure of a company’s debt against its assets. It gives you an idea of how well the company is doing in comparison to others in the same industry.
- Return on equity
This measures a company’s profitability against its equity. It’s expressed as a percentage and measures the returns from shareholders’ investments.
Before you narrow down the stock you want to buy, you should look at the strategies and decide which one applies to you. They are:
- Value Investing
This is where you invest in undervalued stocks compared to the other companies to generate profit.
- Growth investing
This is investing in companies that are on an upward trend with the hopes that the stocks will continue to generate profits.
- Income investing
This is when you invest in companies that pay dividends to reinvest the profits and generate more income.
How to buy shares in Kenya
1. Open a stock-buying account CDS
Before you can trade, you must have a Central Depository System (CDS) account. You can open one at the central bank or with a local central depository agent.
- A filled-out CDS form.
- KRA pin certificate
- National ID or a valid passport.
- Proof of income.
- Two colored passport-sized photos
- Proof of residence
2. Research what stocks you want to buy.
There are a lot of different companies available on the market. That makes it even more confusing to decide where to put your money.
You can use any analysis method or all of them to make an informed choice. They include
Here, you analyze the share price movement by reviewing graphs that show how the prices move.
This considers factors that might influence future crises, such as their financial statements, their company’s management, etc.
3. Decide on the number of shares you want to buy.
Depending on what risks you are willing to take, you need to choose the right stocks.
4. Select a stockbroker
Since you cannot buy or sell shares directly on the Nairobi stock exchange, you will need a stockbroker to assist you with the trade.
When choosing a stockbroker, it is essential to look at the following:
- Their fees
- Services they provide.
- Their Licenses.
- Their regulatory status.
- Their expertise.
- Trading platforms they provide. Technology advancement
If you are a beginner, it is imperative to choose a broker that will provide the necessary education and training in trading stocks.
5. Buy shares
After putting everything in order, you can start buying shares. However, if you do not feel ready, you can use a demo account to use virtual money until you feel ready to go for the real thing.
The best stockbrokers in Kenya
If you are in the market for an experienced and reliable stockbroker, you can’t go wrong with this list.
I. KCB Capital Group
It is a subsidiary of KCB that offers a wide range of financial services that include stockbroking. It is fully licensed by the capital market authority.
II. Suntra Investment Bank
This is one of Kenya’s oldest stockbrokers, with over 30 years in the industry. It is a licensed investment advisor and stockbroker that provides a variety of services such as research, stock broking, portfolio management, and so on.
III. Standard Investment Bank
This is a private company that specializes in trading, investment banking, and management. It is a member of the NSE and is fully licensed as an investment bank by the CMA.
IV. ABC Bank Limited
This is among Kenya’s leading banks and has an established stock brokerage department. It provides services such as trading in bonds, mutual funds, and shares.
V. Genghis Capital Limited
It is a customer-based investment provider that has a capital market authority. It is also a member of the Nairobi Securities Exchange, or NSE.
VI. Faida Investment Bank
Faida is fully licensed by the CMA as a dealer in securities and stock brokerage. It offers asset management, brokerage services, share trading, etc.
VII. Dyer and Blair Investment Bank
Formed in 1954, it is among Kenya’s oldest stock brokers. It is a founding member of the Nairobi Security Exchange.
VIII. Kingdom Security Limited
It specializes in brokerage, online stock trading, advisory services, etc. It is a member of the NSE and licensed by the CMA.
Owning shares is a great way to make a living and diversify your income or portfolio. With so many processes, it can be challenging to know where to start or what to look out for when buying shares in Kenya. Our tips will help you navigate the stock market and help you narrow down your choices on what shares to buy today and how to go about it. Whether you are looking to invest long-term or short-term, we’ve got you covered.