What are Stocks and Shares?
Stocks (also known as shares) represent ownership in a company. When you buy stocks, you are essentially becoming a partial owner of that company. By investing in shares, you provide capital to the company to support its growth and expansion, in exchange for a portion of its profits.
Buying Shares = Becoming a Partial Owner
As a shareholder, you share in the company’s successes and risks. When the company profits, you benefit from capital gains and dividends. However, if the company performs poorly, the value of your shares may decrease.
How Shares Make Money
Shares provide two main ways to earn money:
1. Capital Gain
Capital gain is the profit made when the price of a stock increases, and you sell it for a higher price than what you paid. The difference between the purchase price and the selling price is your profit.
Example:
- Suppose you buy 100 shares of a company like KenGen at KSh 50 per share.
- After a year, the price of the shares increases to KSh 70 per share.
- You decide to sell all 100 shares.
Calculation:
- Purchase Price: KSh 50 × 100 shares = KSh 5,000
- Selling Price: KSh 70 × 100 shares = KSh 7,000
- Capital Gain: Selling Price – Purchase Price = KSh 7,000 – KSh 5,000 = KSh 2,000
So, your capital gain from selling the 100 shares is KSh 2,000.
2. Dividends
Dividends are payments made to shareholders from a company’s profits. The more shares you own, the higher your dividend income. Companies typically pay dividends on a per-share basis, often on an annual or semi-annual schedule.
Example:
- Suppose the same company, KenGen, pays a dividend of KSh 5 per share annually.
- If you own 100 shares, you will receive a dividend payment based on the number of shares you hold.
Calculation:
- Dividend per Share: KSh 5
- Number of Shares: 100
- Dividend Income: KSh 5 × 100 = KSh 500
So, your dividend income for the year would be KSh 500.
The Benefits of Owning Shares
1. Potential for High Returns
Stocks have historically provided higher returns compared to safer, low-risk investments such as money market funds, SACCO savings, or treasury bills. If you invest KSh 100,000 in shares and the company performs well, your returns could significantly exceed the interest you would earn from other low-risk investments.
2. Diversification
Investing in shares allows you to diversify your portfolio. By buying stocks in different industries—like agriculture, energy, or telecommunications—you spread your risk. If one industry performs poorly, the gains from others can offset the losses. Diversification is a key strategy to help reduce the impact of market volatility on your overall portfolio.
Disadvantages of Investing in Shares
1. Risk of Investment Loss
One of the main risks of investing in stocks is volatility. Share prices can change drastically in the short term, leading to potential losses. For example, a stock worth KSh 8 this month could drop to KSh 4 the next month. If you decide to sell, you may incur losses. Similarly, a company may fail to pay dividends in a particular year, reducing your income.
2. Dividends Are Not Guaranteed
Unlike fixed-income investments, dividends are not guaranteed. Companies can choose to reduce or even eliminate their dividend payouts, particularly during times of economic difficulty or financial instability. For instance, Kenya Power and Lighting Company (KPLC) has not paid dividends for the last six years, but they paid out dividends in 2024.
3. Requires Time and Research
Investing in stocks is not a passive activity. It requires time, research, and monitoring of market trends and company performance. Successful stock investing involves speculation, patience, and staying updated with economic conditions. You must be prepared to make informed decisions based on your research and market trends.
How to Invest in Stocks in Kenya
To start investing in shares in Kenya, follow these simple steps:
- Choose a licensed stockbroker: In Kenya, stockbrokers are authorized by the Capital Markets Authority (CMA) to facilitate stock trading on the Nairobi Securities Exchange (NSE).
- Open a CDS account: A Central Depository System (CDS) account is necessary to buy and hold shares. Your stockbroker will help you open one.
- Start investing: Research potential companies, analyze their performance, and place your buy orders through your broker’s portal.
Conclusion
Investing in stocks can offer great rewards, especially with the potential for capital gains and dividends. However, it is essential to understand the risks and the time commitment required to succeed. With the right knowledge and strategy, investing in shares can be a valuable part of building wealth and securing financial independence.
Watch this video to get you started