Stock market investing yet to ring a bell to many

Only 19 per cent of the adult population in Kenya invests in shares. This is in spite of the sharp increase in the number of companies floating shares at the Nairobi Stock Exchange in the past few years.

This contradicts the interest that stocks have raised among Kenyans, especially with the recent initial public offerings (IPOs) of state companies like KenGen, KenyaRe, and Safaricom. These were oversubscribed, indicating a healthy interest in the stock market.

A survey has cited lack of funds and, most important, knowledge about the workings of the stock market as the two major hurdles to participation at the bourse.

According to the research by Synovate, most Kenyans (81 per cent) do not invest in the NSE, with most people citing lack of money (61 per cent) or lack of knowledge about how the stock market works (40 per cent) as the reasons that keep them away from the bourse.
These findings were consistent across all the counties, as well as gender and age.

The media (newspapers, magazines, radio, and TV) remain the primary source of information about the stock exchange, with most investors (87 per cent) saying they depend on information provided by the media to help them choose stocks.

Only seven per cent of stock market investors rely on their stockbrokers for advice, while four per cent rely on tips from family or friends.

A significant percentage (40 per cent) said they did not know how the stock market works, which indicates a need for grassroots campaigns to educate the masses about how to buy and sell shares.

Herd behaviour

Such a campaign would be useful because investment analysts have often accused Kenyan retail investors of exhibiting herd behaviour.

While sophisticated investors would not take the long-term view picking stocks based on the underlying market fundamentals, retail investors are prone to anxiety because they are short-term speculators, selling stocks as fast as they bought them once a wave of uncertainty hits the market, a phenomenon known as panic selling.

Many investors braved long queues to buy Safaricom shares in what was Kenya’s biggest IPO, but were disappointed when they were allocated a paltry 21 per cent of the shares they had applied for as the IPO was heavily oversubscribed.

A significant fraction of the estimated 830,000 shareholders had borrowed from banks at 15 per cent interest, hoping to buy the shares which were on offer at Sh5 and cash in when they started trading.

But most were unable to harvest their investment or exit the counter because the share price plummeted to below Sh3. Many ended up selling the shares and were left servicing loans, thereby incurring losses.

An education campaign geared towards educating Kenyan retail investors on the need to go beyond the allure and hype and become more enlightened about long-term value investing would enable them to reap more benefits from the NSE.

The Synovate research shows that long-term investors, especially those who invest in a diversified portfolio, can ride out down-markets without dramatically affecting their ability to reach their investment goals and objectives.

Synovate’s target population was all Kenyan adults aged 18 and above from whom a sample size of 1,044 respondents was drawn using the urban/rural split of 37:63, according to the 2009 census data.

The margin of error attributed to sampling and other random effects of this poll’s sample size was +/- 3 per cent at 95 per cent confidence level.