What you need to know:
- An investor in the stock market must invest for the long-term if they are to realise full potential gains.
- According to the Capital Markets Authority, the first step one should take when buying shares is to establish which companies are experiencing a robust performance.
- There is no formula that guides an investor’s entry or exit from the bourse. This will depend on an individual investor’s situation, especially with regard to risks and returns.
Nairobi-based marketer, Kennedy Waweru, 21, began investing in shares in 2008.
He was still at the university then but was inspired by the countless stories of how investors such as Warren Buffet made wealth from stocks.
While in school, Mr Waweru used to see his mother and grandmother earn dividend from the shares they held in a number of companies.
“I started investing in the stock market out of curiosity and interest of how other people made money,” he told Money.
While pursuing his degree, he researched about stock brokers as well as how to invest in shares. And in 2008, he settled on a stock broker, with whom he deposited Sh1,000 every month.
He would make an order on the stocks he wanted to buy after every two months. His first bet was Equity Bank where he bought shares soon after the lender’s initial public offering (IPO) in 2008. Each share, then, was going for about Sh10.
He later invested in Sameer Africa, Express Kenya, Safaricom, Barclays Bank, Co-operative Bank, Mumias, Britam, KenGen and Liberty Kenya Holdings.
He purchased Safaricom shares in the post-IPO period when it was trading at about Sh3.
The stock is currently trading at over Sh13.9 apiece, having appreciated by more than 300 per cent from the time he bought his shares. Since buying Equity’s stock at about Sh10, the share price has gained 400 per cent to Sh50 apiece as of Thursday last week.
He bought Britam’s stock at Sh9 during IPO. The stock has since appreciated by over 180 per cent to Sh25.5 as at the end of trading on Thursday, last week.
Although he has since sold some of the stocks to focus on a few firms, his portfolio is currently at about Sh220,000.
One of the first things that a stock market investor is told is to think long-term. This is what Joe Nyagah, a 26-year-old marketer bears in mind. He quit his banking job after two years to focus on sales and marketing and venture into both stock market and real estate industries.
He says the salary he received as a banker was not impressive. The job also lacked flexibility that would allow him take financial classes as well as research on available investment opportunities.
Each month, he saves 60 per cent of his salary for investment. His bank has a stock brokerage arm, making it easy for him to wire his savings for purposes of investing in stocks.
“What I learned about stocks is that you take risks for long-term gain. When you invest in the stock market, you are simply making your money work for you,” he said.
Early this year, he bought about 2,000 Equity Bank shares which were going for about Sh44 apiece, valuing his portfolio at over Sh88,000 then. The bank’s stock as at close of trading on Thursday, last week, was going for Sh50 each valuing his stake at Sh100,000, a 13 per cent capital gain.
On Thursday, last week, he bought 5,000 Safaricom shares, each of which was trading at Sh13.9 by the close of trading. He believes Safaricom’s share is still way below its value and will appreciate significantly in the next two years.
“I am looking to diversify my portfolio. Safaricom and Equity are getting into competition. I, however, see a lot of potential in Safaricom, which I think is undervalued,” Mr Nyagah told Money.
According to the Capital Markets Authority, the first step one should take when buying shares is to establish which companies are experiencing a robust performance.
POINTS TO PONDER
While a lot of investors invest in the stock market to get capital gains through appreciation of share price in the long-run, others do so to get investment income in the form of dividend.
“An investor who invests for this purpose (investment income) should invest in firms with a concrete dividend declaration policy or history,” the markets watchdog notes.
Some of the things an investor can also bear in mind before buying shares include evaluating the target company’s management.
Are the board of directors and key management personnel people of repute? Are they reliable? Can they be trusted to run the company?
Are the company products or services vulnerable to vagaries of weather or are they likely to be subject to international trade restrictions?
Is the firm a monopoly or an oligopoly? Is the company’s future clear or imprecise?
Stock brokers and investment bankers are the authorised agents which investors approach when they intend to invest in the stock market.
An investor can ask their stock broker or investment banker to buy or sell shares at the best price or to trade only when the stock has attained a certain price or better. An investor can also ask the broker to sell his/her shares when the price falls below a certain level.
Mr Geoffrey Injeni, an accounting and finance lecturer at Strathmore Business School says that an investor in the stock market must invest for the long-term if they are to realise full potential gains.
“You must then have a strong heart to withstand the bad times, for instance, when the share prices go down. Don’t buy shares today in the hope to sell in a week when there is a slight increase in prices. Generally, share prices go up, but in the long run,” Mr Injeni told Money.
He also says that there is no formula that guides an investor’s entry or exit from the bourse. This will depend on an individual investor’s situation, especially with regard to risks and returns.
A look at the specific fundamentals — the industry and overall economy — may also give an investor the insights into the direction of a company’s share and the stock market.
“Unfortunately, there is some speculation or gambling. If you suspect there will be an upward trend in share prices, then buy and hold. If you suspect there will be a downward trend in the share prices, then sell or exit,” Mr Injeni said.
A lot of retail investors have often exited some counters at the earliest sign of poor performance. A number of retail investors, who did not want to go on record, said they burned their fingers after putting their money in Mumias and Eveready counters, which have sharply depreciated.
Since its opening in 1954, the Nairobi Securities Exchange (NSE) has churned out millionaires and also eroded investors’ wealth in equal measure. Total investor wealth at the NSE has nearly doubled within two years to Sh2.3 trillion as at the end of last week compared to Sh1.2 trillion as at the end of November 2012.
Apart from Mumias and Eveready, Home Afrika is among companies that have performed poorly.
Home Afrika listed 405 million shares on the Growth Enterprise Market Segment in July 2013 at Sh12 apiece. Its share price shot up by 108 per cent to Sh25 apiece on the listing day valuing the firm at Sh10 billion.
The stock however traded at Sh4.1 at the end of trading on Thursday, last week.
Mumias on the other hand did a secondary IPO in 2006. Its shares were going for Sh49.5 apiece.
The stock traded at Sh2 at the end of trading on Thursday. Eveready, which listed on the NSE in August 2006 at Sh9.5 per share, traded at Sh3.7 each at the end of Thursday, last week. Some of the best performing stocks are in the banking, investment, insurance and manufacturing sectors. Investors are now required to pay a capital gains tax of five per cent on their shares.