The stock market is the greatest wealth machine ever created. Investing in stocks allows investors to own a share of a company’s growth and profits. Over time, stocks have historically provided higher returns than other asset classes, such as bonds or savings accounts, making them a powerful tool for building long-term wealth. Stocks are bought and sold through security exchanges.
A stock or securities exchange is a centralised marketplace where investors buy and sell financial instruments like stocks and bonds. It facilitates the trading of shares of publicly listed companies, ensuring liquidity, price transparency, and fair trading practices. Stock exchanges play a vital role in the economy by providing a platform for companies to raise capital through public share issuance.
Well-known examples include the New York Stock Exchange (NYSE) and the Nairobi Securities Exchange (NSE), Kenya’s primary stock exchange.
The NSE trades securities such as:
- Stocks/Shares.
This is a security that represents the ownership of a fraction of a company giving shareholders a claim on a portion of the company’s assets and profits. When you own shares, you hold equity in the company, and your investment can grow as the company performs well. Shareholders may also receive dividends, which are periodic payments made from the company’s earnings.
- REITs
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. Investors can buy shares in REITs to earn a portion of the income produced through commercial properties without directly owning or managing the properties themselves. REITs offer a way to invest in real estate with the liquidity of stocks.
What do you need to invest in the NSE?
To start investing in the NSE, you need to open a Central Depository System (CDS) Account. A CDS account is operated by the Central Depository and Settlement Corporation (CDSC). It facilitates the process of holding and transferring shares traded at the stock exchange. A CDS account can be opened either with a stoke broker broker or your bank.
Opening a CDS account with a Stoke Broker
A stockbroker is a licensed professional who buys and sells stocks and other securities on behalf of clients, usually in exchange for a commission. With Stock brokers like AIB_AXYS Africa, and Faida Investment Bank you can open a CDS account on your phone via their AIB Digi trader apps. You can also visit the physical offices of other brokers to open the account.
Opening a CDS account with your Bank
I would not recommend you open your CDS account with your bank, as most banks offer very poor stock brokerage services. You will miss out on a lot of services that other stock brokers offer if you go the bank route.
Why do you need a Stock Broker?
As an individual investor, you cannot buy or sell shares directly at the Nairobi Securities Exchange (NSE). You need a stockbroker to facilitate your trades, acting as an intermediary between you and the exchange. Stockbrokers have the necessary licenses and expertise to execute buy and sell orders on your behalf. They also provide valuable advice and insights to help you make informed investment decisions.
How do you choose the right Stock Broker?
To choose the right broker, you should consider the following factors:
- Investment costs.
Stock brokers charge various fees, including maintenance and trading fees, which can significantly impact your investment returns. High fees can erode your profits, so it’s crucial to choose a broker with lower costs. If you care about maximizing your returns, always prioritize brokers with competitive and transparent pricing.
- Ease of access.
We are living in an era where everything is accessible on our phones. You should be able to access your trading account on your phone as well. This convenience means you don’t have to visit your broker’s physical office every time you encounter issues with your account. A mobile-friendly platform ensures you can manage your investments anytime, anywhere.
- Customer service
As a client, you want to be treated well and have a great experience throughout your investing journey. It’s important to prioritize brokers with a strong public image and positive customer reviews.
- Regulation
Most importantly, you must ensure your broker is authorized by the Central Depository and Settlement Corporation (CDSC) and regulated by the Capital Markets Authority (CMA). This guarantees that your broker operates under strict legal and financial standards. Working with a licensed and regulated broker protects your investments and provides peace of mind. Always verify their credentials before engaging in any transactions.
How much money do you need to get started?
In every trade, you must purchase at least 100 shares. For example, let us say Safaricom shares closed at a price of Ksh 36.00. The minimum investment required to buy Safaricom shares would be 36 x 100 = 3600 Ksh.
Then also add about 2% of your trade amount to facilitate the trade fees. Hence Ksh 72 plus Ksh 3600 to start investing in the said example.
This highlights the need to plan your investments according to the share price and minimum purchase requirement.
Conclusion
Investing in the NSE is a simple 6-step process:
- Choose a stock broker
- Open a CDS Account
- Select the Assets you want to invest in
- Raise the Minimum Amount
- Buy the Asset
- Monitor your assets over the long run to decide whether to hold for the long run or when to sell
Before you start investing, it’s crucial to learn the fundamentals of investing and how to manage your finances. The stock market is a high-risk investment that can lead to significant financial losses if not approached wisely. While opening trading accounts is easy, picking great stocks is challenging. Always do thorough research before buying shares of any company to make informed decisions and minimize risks.
If you would like to level up your money game and get in-depth knowledge on investing, register for our September Money Mastery Masterclass.