News Column

MONEY: Open an account with stock broker or go for unit trusts

January 22, 2014

Investing in the stock market requires vast information on how the market runs. Skills on how to select good stocks, what price to get in, and when to sell are key. These factors inform your decision on what to buy and at what price with the objective of making gains either through dividend or price appreciation. You can invest in the Nairobi Securities Exchange (NSE) in two ways, one would be to go to a stock broker or an investment bank. The other option is to invest in funds that invest in the NSE. In the first case, you usually open an account with a stock broker, who in turn opens a Central Depository and Settlement Corporation (CDSC) account for you. The CDSC is where all tradable shares are held electronically, and transactions processed. Normally, you will need a recent passport photo, copy of your national identification card, among others to open this account. The decision of which shares to buy is entirely yours, or with the advice of your stock broker or investment banker. However, always consider the health of the economy, the industry in which a target company is operating and the strong points of the firm including management, market share and sustainability of profits. Avoid making selections based on speculation with no supporting fundamentals to justify the potential growth of a company's share price. Note that the share price often moves based on the performance and company growth. Regarding the minimum capital to invest in shares, this will vary from company to company since the least number of shares you can buy is capped at 100 units. Nonetheless, remember that shares with low prices are not necessarily cheap, it is wise to focus on a company's fundamentals and future growth prospects as opposed to simply whether the price is in single, double or triple digits. Setting benchmarks, tolerable risks and targets on how much returns you wish to make over a given timeis very essential in guiding you on what to buy, how long to hold and when to sell. There will be transaction fees and levies charged on trading, detailed information on such charges can be obtained from your stock broker or investment banker. The other options would be to join a unit trust which invests in shares of companies listed at the NSE. This is an indirect approach that does not require you to actively make any share selections since this is done on your behalf by professionals. The structure of such funds varies in terms of joining requirements, minimum amount required, and how to buy and sell units, among others. Balanced funds and equity funds are the unit trust instruments that partly invest in shares of listed firms. Share performance will depend on the mix of shares that the fund has invested in at any point in time as well as its investment policy. Generally, investments in the stock market require longer time frames, and regular investments to take advantage of market cycles. In the short-term, prices are usually volatile but over a longer period, shares tend to have relatively good returns depending on a company's fundamentals. Gains on any investment of shares are not guaranteed and the possibility of making a loss is equally probable. Changes in price occur. A decline in price below the purchase price will create loss; if the price appreciates above the buying price, you then have an unrealised profit. The loss or gain is realised (actualised) when you sell the shares and collect the money. We encourage you to try your hands on stock investments, but seek wise advice.


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Source: Nation (Kenya)


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