Do you own shares? Why equities should be part of your investment portfolio.
This week we take a stab at breaking down shares/equities/stocks. This is often an overlooked investment option that statistically has the best returns over the long term. We will do an introduction to trading shares and as we continue in this investment journey we will discuss various strategies to employ when you are investing in shares.
If you are young (less than 55yrs) you should really consider this option and find a way to add it to your investment mix. However the risk is also high and I would advise anyone who is risk averse to stay clear of them as they will drive you nuts.
Let’s take the journey of understanding shares at the Nairobi Stock Exchange (NSE). We will discuss various ways to invest in other markets outside Kenya in future articles.
Definition of Shares
Shares are units of ownership interest in a company that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Most shares you will purchase at the stock market will be common shares. Back in the day, they were traded using physical paper stock certificates but this has been replaced with electronic recording of shares.
What do I need to be able to purchase shares?
Purchasing shares at NSE requires you to have a Central Depository System (CDS) account and a licensed broker.
A CDS account is opened with the Central Bank of Kenya. This account allows you to trade in shares. The easiest way to obtain one is through a licensed broker. (see list)
This account acts as your record of all your shares transactions. Once you get your CDS account you can then approach a licensed broker (see list) and open an account with them. To open an account with any of the brokers, you will need to provide your broker with the following documents to facilitate the account opening process:
- Two passports sized photos (Colored)
- Copy of your National ID or Passport (a notarized copy is acceptable for investors living outside Kenya)
- Duly completed CDS 1 FORM
Some brokers may request for some form of additional documentation such as a copy of a recent utility bill, bank statement or a copy of your PIN Certificate. Make sure the broker you pick provides you with an online share trading platform.
How can I make money through shares?
Shares may benefit shareholders through appreciation and dividends. Appreciation is when the share price goes up beyond your initial purchase price. Dividends are proceeds that are given to shareholders whenever the company decides to distribute the profits/reserves. This is not guaranteed and not all companies give them out. The companies that gave dividends in 2018 include: KCB(2), Equity(2), Stanchart(19), Total(1.3), Safcom(1.85), Bamburi(4.5), Centum(1), Kenya RE(0.3), Kakuzi(14) etc.
Most people are driven by the need to figure out the right time to buy shares. I will share with you the secret. There is no exact formula and if you keep chasing the right opportunity to start and trying to time the market you will likely end up frustrated and lose money.
The best advice I can give you is to select key sectors within the market (e.g. banking, commercial, agriculture, energy), then in each sector select a company that has strong fundamentals and set aside a fixed amount and buy shares every month. The market is bound to have its ups and downs but this approach will allow you over the long run to build a portfolio that appreciates with time and gives you income in form of dividends.
The Risk is REAL
Risk is something we are taught to run away from at a very early age. However, in investing the lower the risk the lower the return. Most people will flock to safety of bonds and sacrifice the chance of enjoying a possible higher return. The best thing you can do for yourself in your investment journey is to add some higher risk options in tolerable ratios in your investment mix.
At the moment the stock portfolio is taking a beating as foreign investors cash out their positions after the dividend season. The table above shows how much money I would lose if I sold my shares today. This might scare many away but my current strategy is to accumulate my current holdings. My portfolio is suffering but that doesn’t stop my resolve to keep growing it because I am focused on 5 year investment cycle.
When you concentrate your efforts in key stocks (3–4 companies) you can weather the downward trends. Most people will be tempted to diversify and purchase many types of stock but unless you are trying to “wash wash” you won’t have enough capital to spread among various stocks.
The NSE is dominated by foreign investors who are very sensitive to dollar trends. The current trade war between America and China has caused them to flee emerging markets. Since they account for more than 60% of the trading, they have a huge sway in the share prices when they buy and sell in bulk.
For savvy investors this is the best time to accumulate your existing positions as most stocks are at their lowest since 2009.
Key takeaways:
- Shares are a must for any portfolio mix that is looking for long term growth
- Have the courage to venture out and dip your toes into the stock market. If for nothing else get yourself a CDS account. You never know when you might need it.
- You should NOT try to time the market, just keep investing regularly remember this is not a sprint.
- Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
- Do not be tempted to over diversify your portfolio by buying too many stocks. Lock down some key stocks with potential
Feel free to give your feedback/questions/suggested topics we should discuss in the comments section below and share the article with your friends that could benefit from it.
Happy investing!
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