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How to Invest in Kenyan Stocks

27 Nov

Historically in order to to start huge businesses, which no single merchant could raise alone. It therefore became inevitable for them to come together, pool their savings and start these businesses as partners or co-owners. The contribution of each partner to the enterprise was to be represented by a unit of ownership. This was the precursor to what we call shares. And through this, ‘joint stock’ companies were born.

In Kenya, dealing in shares and stocks started in the 1920s when the country was still a British colony. However, the market was not formal as there did not exist any rules and regulations to govern stock broking activities. Trading took place on a ‘gentleman’s agreement.’ Standard commissions were charged with clients being obligated to honour their contractual commitments of making good delivery and settling relevant costs. At that time, stock broking was a sideline business conducted by accountants, auctioneers, estate agents and lawyers who met to exchange prices over a cup of coffee. Because these firms were engaged in other areas of specialisation, the need for association did not arise. In 1954 the Nairobi Stock Exchange was then constituted as a voluntary association of stockbrokers registered under the Societies Act. Since Africans and Asians were not permitted to trade in securities, until after the attainment of independence in 1963, the business of dealing in shares was confined to the resident European community. At the dawn of independence, stock market activity slumped, due to uncertainty about the future of independent Kenya. 1988 saw the first privatisation through the NSE, of the successful sale of a 20% government stake in Kenya Commercial Bank. The sale left the Government of Kenya and affiliated institutions retaining 80% ownership of the bank.

The Nairobi stock exchange

The Stock Market is therefore a market, which deals in the exchange of shares of publicly quoted companies, and government, corporate and municipal bonds among other instruments for money. The Kenyan stock market; the Nairobi Stock Exchange, which was formed in 1954 as a voluntary organization of stockbrokers, is now one of the most active markets in Africa. It is located on 1st Floor,Nation Centre on Kimathi Street, in Nairobi. As a capital market institution, the Stock Exchange plays an important role in the process of economic development:

It helps mobilize domestic savings thereby bringing about reallocation of financial resources from dormant to active agents. Long-term investments are made liquid, as the transfer of securities (shares and bonds) among the participating public is facilitated. The Exchange has also enabled companies to engage local participation in their shares ownership, thereby giving Kenyans a chance to own shares of reputable firms. Companies can also raise extra finance essential for expansion and development. To raise funds, a company (issuer) issues extra shares; an issuer publishes a prospectus, which gives all pertinent details about the operations and future prospects of a company, while at the same time stating the price per share of the Issue. A stock market also enhances the inflow of international capital. Stock markets also facilitate government’s privatization  The first step when buying securities (shares/bonds) is to decide what company to buy in. When selecting a company to invest in, one should make sure the company is in a strong industry, and/or that it is strong or growing. Choosing the company to invest in is no easy job, and there are many different methods people have come up with to select one. These include: Fundamental analysis; which is a method, in which you study the company’s current management and position in the market. Technical analysis; this is a method which is totally based on charts, in which you identify trends the company has, and invest accordingly. After one decides what company to invest in, you need to select a stockbroker/investment bank to use. The two are the only ones that can make an order to buy or sell securities. Potential customers contact stockbrokers/investment banks either by mail, telephone, personal visits or regional agents and give their buying or selling orders. When one gives a stockbroker/investment bank an order, they relay the order to the floor traders. The floor traders do all the actual buying and selling, since they hold a seat on the stock exchange. After one finds a stockbroker/investment bank and buys the securities, the stockbroker/investment bank does the rest of the work to seal the transaction.programme.

While the Nairobi stock exchange is has not been a great performer for the years it is still a buyers market so there are massive bargain opportunities. Factors that include a weakening currency (which has finally begun to stabilize), escalating fuel prices, a surge in local liquidity prompted by heavy bank lending to the private sector, and food inflation caused by the region’s persistent drought make it ideal frontier market. It offers foreign investors exposure to the Kenyan economy, and — because many listed firms have expanded beyond Kenya’s borders — it also serves as an entry point to the regional economy. In the short term, foreign investors can capitalize by investing in the weak shilling and seek exit points as it strengthens against the US dollar.




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