What are shares/stock?
Shares represent ownership in a company.
When you buy shares of a company, you become a shareholder, which means you own a portion of that company proportional to the number of shares you hold.
The more shares you own, the larger the portion of the company you own.
How Shares Make Money:
Shares make money in two ways:
- Capital Gains:
These are profits made from selling shares at a higher price than what you paid for them.
Example: Suppose you buy 100 shares at Safaricom at Kes 17 per share, investing a total of Kes 1,700.
If the price per share increases to KES 25 and you sell all your shares, you would receive KES 2,500.
Calculation:
Total Investment = 100 shares × KES 17 = KES 1,700
Sale Proceeds = 100 shares × KES 25 = KES 2,500
Capital Gain = KES 2,500 – KES 1,700 = KES 800
In this example, you would make a capital gain of KES 800
2. Dividends
When a company makes profits, they distribute it to shareholders.
This can be done annually, semi-annually or quarterly
Example:
Suppose Safaricom pays an annual dividend of KES 10 per share.
Calculation
If you own 1,000 shares, then you will receive KES 10,000. (KES 10* 1,000 shares)
Can you make a lot of money?
Yes, you can make a lot of money two conditions:
If and only if
- The value of the shares increases
- You buy a lot of shares so that when you sell them, you make a lot of income. Or when profits are being distributed, you earn more dividends
So if the value does not increase you won’t make that much.
Disadvantages of investing in shares
- Making money is not guaranteed.
Shares are very risky.
The performance of a share depends on several factors such as
- Management of the company
- External factors like COVID-19
- Government policies like interest rates etc.
If you bought shares at Kenya Airways , you were reaping big between 2010-2013.
The company started making losses around 2014 and any shareholder till today, 2024 is losing big.
2. Selling shares for quick cash is not possible.
Assuming the performance of Safaricom shares has hit the rocket high and that’s the best time to sell shares since you will get a higher capital gain, the chances of somebody buying the shares is less. Why? The price is already high. Unless the buyer speculates that the price of the share will continue to increase.
In such a case, you will only benefit from higher dividends.
3. Patience
Shares require you to be patient to allow the value of the company to go up, just like land. Remember, shares are assets .
Therefore, they are a long term investment as you wait for more than 5 years for the value to go up.
If you want quick investments that return quick money, they are not for you.
Watch a video on Youtube on How to Invest In Shares for Beginners
Here is a list of Companies registered in the Nairobi Securities Exchange Market.