Basics of Buying and Selling Shares at The Nairobi Securities Exchange (NSE)

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This Article has first appeared on Ephram Njega‘s Facebook Post. The article below is fully original to his previous post that can be found here. This article is a summary of the simple basics of buying and selling shares at the Nairobi Securities Exchange (NSE).

Since my last post about trading at NSE I have received a lot of inbox messages asking a lot of questions. I have answered such issues below.

What is a share?

A share is a unit of ownership of a company. It makes you an owner of the company. It entitles you to a share of the company’s profit known as a dividend. It also entitles you to vote on matters at that company’s annual or special general meeting. A share is also known as stock.

What Institutions are involved in share trading (buying and selling of shares)

  1. Stockbroker – this is a market intermediary just like in other markets we have retailers, wholesalers etc. The role of stockbroker therefore is to connect the buyers and the sellers of shares. When you want to buy shares, you contact a stockbroker and give them instructions to buy shares of a given company at your preferred price. An order to buy is called a “bid”. If you want to sell share you contact your stockbroker and ask them to sell shares of a given company that you own at the price you want to sell at. An order to sell is called an “ask”.
  2. Nairobi Securities Exchange – This is the market where shares are bought and sold. Those who want to sell shares bring them to the market and those who want to buy shares come to the market with the money to buy shares. Thus the role of the market is to match the bid price (price at which the person wishing to buy shares is prepared to pay) and the ask price (price at which a person selling shares is willing to take). Once the two prices match a trade occurs that is if you want to buy 10,000 Safaricom Shares at KShs 27 you need to get someone willing to sell Safaricom shares at KShs 27 each.

The NSE also provides for self-regulation of its members such as stockbrokers and listed companies. For instance, listed companies have to file regular financial reports with the NSE as per stipulated timelines. They also have to file other significant developments in their company such as change of directors or proposed actions of significance like intent to buy another company.

For share of a company to trade at the NSE that company must be listed at the NSE after meeting various conditions. Interestingly NSE as a company is also listed at the NSE through a process called demutualisation. That means you can own the shares of NSE just like you can own those of another company such as KCB.

Note: NSE also deals with trading of other securities other than shares. This is write up is limited to trading in shares.

  1. Central Depository & Settlement Corporation Limited (CDSC) once you have bought or sold shares the next step is settlement i.e. if you have bought shares you get your shares and the person who has sold the shares gets the money. Once the settlement is done, the CDSC maintains a register that shows who owns what shares at any point in time. This is the ultimate evidence of ownership. CDSC sends you a statement whenever you trade showing the shares you hold at any point in time. They also have an online portal whereby you can register and log in at any time and see details of your shareholding. The formation of CDSC ended the need to hold a physical share certificate as a proof of shareholding.
  2. Capital Markets Authority – This is a government body that regulates the players involved in the process of share trading. You can think of CMA as the Central Bank of Kenya which regulates banks. CMA therefore regulates the conduct of market players to ensure it is in line with laws, rules and regulations. This means in case of a dispute you can visit or write to CMA so that they can assist you in resolving any grievances.
  3. Share registrar – Each company listed at NSE has to maintain a register of the people who hold their shares at any point in time. This is for purposes of communicating various issues with its shareholders from time to time. The register is also used for purpose of paying a dividend whenever it is declared. This is helpful because if you are entitled to a dividend and has not been paid or your cheque expired the share registrar is the one who will direct you on the way forward. Some companies maintain the register themselves and others have outsourced the services to another company such as Image Registrars.
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How does one make money at the NSE?

As earlier indicated NSE is a market just like any other. Someone once said, “NSE is not a fish market.” However, NSE is just like a fish market only that the fish being sold here are shares (units of a company’s ownership).

The first way you make money is by buying and selling shares. Like with any market, you make money by buying at a low price and selling at a higher price. For instance, if you buy one Safaricom share at KShs 20 and sell at KShs 27. The KShs 7 is your gross profit. From this profit, you subtract various transaction fees such as Stockbroker’s commission and other statutory charges. What remains is your take home or net profit i.e. the actual money you make.

The second way you make money is through payment of dividends. As earlier indicated as shareholder i.e. owner of the company you are entitled to a share of its profits. For example, Safaricom declared a dividend of KShs 0.97 per share for the financial year ended 31st March 2017. Details of a dividend declaration include the following key issues; Declaration Date i.e. the date when the company announces intention to pay the dividend and the amount to be paid per share. Books closure date i.e. the cut-off date by when you must be in the register of the company’s shareholder register for you to qualify to be paid the dividend. The other key date is the Payment Date i.e. the date on which you will actually be paid the money. This money will be paid through a cheque sent to your postal box or a direct transfer to your bank account whichever you prefer.

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Example: Safaricom Ltd Announced a Final dividend of Kes.0.97 on 10-May-2017; Books Closure 01-Sep-2017; Payment 01-Dec-2017. (note the Book Closure has been changed changed to 15th September this year). This means even though the dividend was declared in May if you buy the share today you will receive the dividend payment as your name will be in the register when books close on 15th September. The share is said to be trading cum dividend i.e. when you buy the share you get the share as well as the dividend. NOTE. The current settlement cycle is T+4 i.e. if you trade and buy shares say on Monday the will be credit to your account after four days.

The third way you can make money is through bonus shares. These are free shares declared and distributed based on the number of shares you currently hold in a company. For example, this year Cooperative Bank announced a bonus share issue as follows; Co-operative Bank of Kenya Announced a Bonus Issue of 1:5 on 17-Mar-2017; Books Closure 30-Jun-2017. (Subject to Approval). This means you get one free share for every five shares you currently own. If you own ten shares, you get two free shares; if you own 100 shares, you get 20 free shares and so on and so forth.

Where do you start the buying and selling of shares at the NSE?

You start by going to a stockbroker of your choice who will facilitate you to open a CDSC account. Opening a CDSC account is free. This is the account that will allow you to buy and sell shares. Once that is done, you send money to your stockbroker which will be credit to your account. With the money in your account, you can now buy and sell shares.

How do I buy and sell shares at the NSE?

You can buy the shares by calling your stockbroker and giving them an order to buy. You can also sell shares by calling your stockbroker and giving them an order to sell. Alternatively, you can register for online share trading. This will enable you to buy and sell shares online from the comfort of your computer from wherever you might be.

What information do you need and where do you get it from?

You need a lot of information for you to engage in share trading. This information include the following;

  1. Current prices of shares at the Nairobi Securities Exchange (NSE) – part of this information is usually reported during business news by various TV stations every day. You can also download the NSE App. You can also use websites such as http://www.wazua.co.ke/investor/livefeedfull.aspx
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Rich website http://bit.ly/1GqLSGO

If you are registered for online share, trading the trading portal has real time data on share prices. Additionally the only portal will show you how many share one is offering to sell or buy and at what price.

  1. General company news – This is general news about the company you have invested in. Prices of shares of a company are influenced by any news about the company. You can get this news from various media sources and social media platforms. Key sources of such news include online sources as

http://www.businessdailyafrica.com/

http://kenyanwallstreet.com/

You also need to read business news segments of newspapers or watch business news on TV regularly.

  1. Statutory Company Filings. Companies listed on NSE are required to file important information with the regulator CMA and NSE. These include information such as their financial performance, AGM resolutions, changes in directors, important announcement such as a cautionary statement etc. You can get such information from sources such as the following;

http://www.wazua.co.ke/investor/corporateevents.aspx

https://www.nse.co.ke/listed-companies/company-announcements.html

http://kenyanwallstreet.com/calendar

  1. Daily summaries of developments at the NSE – This is information on trading performance at the NSE. You can get these from NSE website whereby you can even subscribe for daily emails. If you want more detailed information you can use this website;

http://www.aibcapital.com/index.php/research/daily-briefs

  1. Detailed analysis and commentaries of shares and sectors. There are many stockbrokers who do detailed analysis of various sectors e.g. the banking sector and give recommendations on whether to buy, hold or sell shares of a various company. They also often give forecasts on the direction a share might take going forward in terms of its price. However, these are just recommendations and what is contained in them might never happen. This information can be obtained in your stockbroker’s website or that of another stockbroker
  2. Investor education – this is information to increase the knowledge of investors. In the websites of NSE, CMA and CDSC you will get a page with detailed information on most of the issues discussed here and more.

https://www.nse.co.ke/inverstor-relations.html

https://www.cdsckenya.com/investor-education/cda-list

https://www.cma.or.ke/index.php/investor-education/investors-information

DECLARATION: Kindly note these are my personal opinions based on my knowledge as a business major, consultant, analyst etc They are also based on my own practical experience at the NSE. They do not constitute any technical advice as I am not licensed by CMA as a market player.

By Ephram Njega.

You can contact Ephram Njega here if you have more queries about investing in shares. You can also follow him on his Twitter handle:

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Writer at Tunayo Business Magazine