You can now do day trading in stocks. What this means and how to benefit

On Monday, November 22, 2021, the Nairobi Securities Exchange made history when it introduced day trading at the local securities market for the first time in history. According to economic analyst Ephraim Njega, this new feature now means that investors at the NSE can buy a stock and sell it the same day. They can do this several times during the day. Day trading is usually driven by small price movements, through which investors seek to increase their profit margins.

In an earlier statement announcing the introduction of day trading, NSE chief executive officer Geoffrey Odundo said that day trading would spur positive market performance in which investors who have taken position on discounted counters would reap benefits. “Day trading is a welcome move for local investors who have previously lobbied for its activation, as they seek to increase their profit margins,” said Odundo. Apart from appearing to benefit investors, day trading will also be a boon for the NSE as the company will start realising increased revenue from commissions charged on transactions.

What won’t make it work?

According to economic analyst Ephraim Njega, the brokers’ commission and other charges at the local bourse can be as high as 2.4 per cent. “Since they are charged on buying and selling, this means the price has to rise by at least 4.8 per cent for you to break even,” he says. “If you want to make say 5 per cent gain, the price would need to rise to 9.8 per cent which rarely happens on the same day unless there is a material announcement on a particular stock.” For example, on the second day of day trading, the Sameer Africa stock moved up by 9.96 per cent to settle at Sh2.87 from Sh2.61 per share. During its intraday trading, this stock remained at the same constant price with only 100 shares changing hands. 

Rhina Namsia echoes Njega’s take. Namsia, the CEO and founder of Acemt Consulting points out that at the current costs, it may not be very effective to trade daily. “Assuming you are an active trader and have negotiated a brokerage rate of 0.50 per cent plus VAT plus statutory costs, each leg of trade will cost you 0.92 per cent. To break-even, you will need a price movement of 2 per cent. That’s a lot even on a very active counter,” she says. “The offered discount is not so lucrative. So, unless there’s a collective substantial reduction in transaction charges, both statutory and brokerage, the common investor may not benefit from day trading.

In a bid to encourage uptake, the NSE has announced that it will offer day traders a five percent discount on the commission due to it per trade on the second leg of a transaction. This means that the commission due to the NSE will be levied at 0.114 per cent compared to normal trades which are levied at 0.12 percent.

According to Njega, the commission charges are currently as follows:

The gambling effect

According to Namsia, once the day trading gets the necessary publicity, there is the risk of green horn investors taking it as part of gambling. “For rookie investors who don’t understand strategic investment, day trading may be more of gambling,” she cautions.

Namsia says that with day trading, you may need to enroll yourself with a stockbroker who has a platform that can allow you to trade on your own. However, you will need to be very careful as you will be going up against professionals whose careers revolve around trading and stock influence. “These people have access to the best technology and connections in the industry, so even if they fail, they're set up to succeed. Don’t buy or sell simply because the crowd is selling and buying,” she cautions.

The stocks to watch out for

With day trading, there are certain stocks that will do well and others that will just stay dormant as if nothing happened. “Look out for stocks that are known to be liquid. These include the telco and bank stocks that have been common trading counters,” says Namsia. You will also need to avoid penny stocks. If you’re a rookie investor, focus on a maximum of one to two stocks during a day’s trading session. This will help you research, track and notice opportunities easier due to your limited resources and access to market.

Rush hours’ vs Days

In the securities market, the morning and afternoon hours are likely to have more price volatility due to the high number of transactions. However, George Mangs, an investment expert and the founder of investment firm MarketCap, says that apart from just looking at the rush hours, new investors should consider trading midweek on Wednesdays and Thursdays. “The market is highly volatile at the beginning of the week as it seeks its weekly projection. It calms in the middle before picking up the steam towards Friday. Wednesdays and Thursdays are the safe trading days for new investors when the market is settled,” he says.

[email protected]

For feedback to the editor write to [email protected]