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How we make money from investing in shares

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How to invest in shares in Kenya: Kennedy Waweru, a 29-year-old Nairobi marketer, 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.

“I started investing in the stock market out of curiosity and interest of how other people made money,” he says.

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 Sh. 3.

The stock is currently trading at about Sh. 23 apiece, having appreciated by more than 300 per cent from the time he bought his shares. Since buying Equity’s stock at about Sh. 10, the share price has gained to Sh. 37 apiece.

He bought Britam’s stock at Sh9 during IPO and sold it off at Sh. 27.75. The stock is now trading at Sh. 9 again.

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.

In 2014, he bought about 2,000 Equity Bank shares which were going for about Sh. 44 apiece, valuing his portfolio at over Sh. 88,000 then.

The bank’s stock quickly hit Sh. 50 each valuing his stake at Sh. 100,000. This gave him a 13 per cent capital gain.

In the same year, he also bought 5,000 Safaricom shares, each of which was trading at Sh. 13.9. Today, his Safaricom portfolio is worth Sh. 115,000 giving him a gain of 46,000. But he has kept on growing this portfolio in belief that Safaricom’s share is still way below its value and will appreciate significantly in the next two years. From the initial 5,000 shares, he now holds some 15,000 Safaricom shares.

“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 says.

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.

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 says..

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.

Apart from Mumias, 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 Sh. 12 apiece. Its share price shot up by 108 per cent to Sh. 25 apiece on the listing day valuing the firm at Sh. 10 billion. Mumias on the other hand did a secondary IPO in 2006. Its shares were going for Sh. 49.5 apiece.

These two stocks are now penny stocks that shouldn’t be trading on a reputable market.

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.

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