Factors to consider before investing in shares

shares

Start by defining which shares or indeed any other asset that will be in your portfolio at the point of developing a financial plan.

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 Q. When a company is in financial problems, for instance Kenya Power, Kenya Airways and Mumias Sugar, is it a good time to buy its shares? If not, why not? When is it advisable to buy shares in a company and what would you look for?   

Thank you, Mercy, for asking the cardinal question regarding the right time to buy shares and what to look for in a company before investing your money. Shares represent ownership in a company. When you buy shares, you are not a passing cloud. You begin to share the risks, just as you share the benefits of the business you have invested into.

Starting from the moment you become a shareholder, you must take interest in the affairs that affect that company and its shares value. Key among the issues you must keep your eyes on is the quality of board of directors and senior management, such as the Chief Executive Officer and senior managers such as business segment directors and the finance manager.

This includes their professional profiles. Experience and deep understanding of the sector besides their technical skills and experiences are very important.

Whenever you invest in a company, you are buying its future (the prospects), but basing part of the decision on the past performance, connected by its long-term (strategic) plan. The CEO and senior managers implement the strategic plan and thus are more relevant in terms of the value to expect in the future. When a company is doing well or poorly, it is the plan that has either worked or not worked well, usually because it was poorly implemented, or the environment changed too fast and significantly for the plan to deliver the proposed results. Changes in management, especially the CEO, some critical senior managers and or critical board can take the future fortunes you purchased in the price.

Management needs to have sufficient experience to deal with the issues experienced in the industry and markets, whether expected or unexpected. For example, Kenya Airways operations get impacted by any global factor affecting people or goods movement such as disease and terrorism, leading to a drop in demand for travel. It also gets affected by fuel prices, which is subject to global demand trends for the commodity. These factors can quickly raise the cost of doing business, leading to drops in income where the market cannot absorb further price increases.

Mumias Sugar prospects is affected by all factors that impact on the global sugar prices such as efficiency in production of the cane. For example, sugar produced in Brazil can arrive in Nairobi cheaper than a similar quantity from Mumias town which less than 600km away. This results from the differences in efficiency in Brazil’s sugar value chain compared to Kenya.

For example, Mumias sugar cane takes six months longer to mature, has lower sucrose and is produced manually in small holdings, however, most of the cane production in Brazil is mechanised, while their variety matures faster. Management is responsible for making choices that create parity, otherwise a local business would be uncompetitive as is the case in Mumias Sugar. You, the investor, should be able to either believe in their ability based on their past records or altogether move your investment elsewhere.

Share valuation at the point of purchase had considered the expected prospects, for example future increases in sales and profits given some assumptions. Where these prospects falter, it immediately reflects on the share price collapse. Having said that, there is no right time to buy shares. Ideally, you should buy shares continuously so that your portfolio can reflect the average price of all the different purchase prices.

More importantly, there are three categories of shares in the market. You should know which category suits your situation before you engage in a purchase. Shares are either growth shares, growing company shares, or mature company shares. Each of these different company categories have risk and return profiles suitable for different investor risk profiles and their respective financial plans.

Start by defining which shares or indeed any other asset that will be in your portfolio at the point of developing a financial plan. By the time you arrive at the front office of a stockbroker or investment bank, you will be meeting people who are order takers, not advisers. You should already have known what you want and your ability to buy. You should also have had a good feel of what drives the prices of the shares in the companies you have chosen.

The familiar saying that ignorance is no defense applies in this situation.

Patrick Wameyo is a financial literacy coach at Financial Academy & Technologies, and an entrepreneurship coach at the Entrepreneurship Center EA. [email protected] 

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