This is how to invest in financial securities

Financial securities. You think it is a rigged system, one that is too risky. It does not help that the figures and percentages hogging  financial headlines seem too complex. PHOTO| FILE| NATION MEDIA GROUP

What you need to know:

  • The truth is, despite the risk involved, financial securities such as stocks, bonds, foreign currency and treasury bills are a viable investment option to raise a passive income for your financial goals.
  • We break down the intricacies  under the guidance of Rufus Mwanyasi, an investment analyst based in Nairobi.

Financial securities. You think it is a rigged system, one that is too risky. It does not help that the figures and percentages hogging  financial headlines seem too complex.

The truth is, despite the risk involved, financial securities such as stocks, bonds, foreign currency and treasury bills are a viable investment option to raise a passive income for your financial goals.

We break down the intricacies  under the guidance of Rufus Mwanyasi, an investment analyst based in Nairobi.

What is a stock or a share?

It is ownership of a piece of a company. For example, if you have a business partnership of 10 people, the presumption is that you each have a 10 per cent stake of the company. That 10 per cent stake is what you call a company share or stock.

Why is purchasing a company’s shares a good investment choice?

It is a passive income and gives you the opportunity to participate in someone else’s business. If you are starting a business and you need money, you have the idea but you do not have money, a great trade off with investors is offering shares of the company. When the company makes a profit, investors also do earn dividends in accordance to the shares they have bought. That gives private investors surplus cash to invest in numerous companies. You give a company your capital as an investor and you get profits in the name of dividends from the company.

What does it take for a small to medium company to be listed on the Nairobi Securities exchange?

In the NSE there is a section for Small and Medium Companies to trade it, called the Growth Enterprise Market Segment (GEMS). First, the total minimum shares in the company need to be at least 100, and your capital needs to be at least 10 Million and you need to have at least 25 shareholders in the company. The shares also have to be free and tradable; you should also have at least five directors in your board of governors. As long as the business is transparent in its operations and profitable, and you are willing to share your operational and financial information publicly, that is something you can consider among other requirements.

What are securities?

It is broader than just stocks. It covers more tradable instruments, company stocks, treasury bills and bonds and foreign currency.

What are treasury bills and treasury bonds?

They are simply loans to the government. Some governments are generally broke, and therefore  borrow from their citizens. Following the reading of the budget this year, our budget came to Sh2 trillion with a deficit of Sh400 billion - where will the government get the cash?

It has to borrow, either from a foreign country, such as the Eurobond or locally through banks or people like you and me.

A treasury bill (T-Bill) is short term; you are lending the government money for not longer than one year.

Treasury bonds however are long-term lending to the government beyond a year to up to 30 years. Treasury bills are split into three categories; three, six and 12 months.

What is return on investment on treasury bills and treasury bonds?

Since the government is deemed to be safe, the returns tend to be lower. A three-month treasury bill offers you an 8.5 per cent return on investment. Six months is about 10 per cent, and 12 months about 11.7 per cent. For bonds, such as a five-year long bond, earnings range from 12 to 15 percent.

What types of Bonds exist?

These are also in categories. There are fixed rate bonds, whose interest rate is fixed for the duration of the bond, for example, a five-year bond at a fixed rate of 15 per cent which does not change over the duration. There are also floating rate bonds, meaning the interest earned keeps adjusting; one year it could be 15 percent, the next 18 percent and so on.

For anyone interested in investing in financial securities, what is the best way to start?

For a newbie, there are numerous options. Rates have been reduced, so for treasury bills, you can invest just Sh100,000. For Treasury bonds; you only need Sh50, 000. For stocks, it is a lot less - you can for instance buy stocks for as little as Sh100. There is a rule in the market that the minimum number of shares you can buy is 100 shares. There are some stocks that go for Sh1, so if you buy 100  of them, that makes it Sh100 for your initial investment in shares. It is ideal for young people - stocks are deemed to be a little risky, since there is a lot of price fluctuations. If you start young, you have more time to ride out the fluctuations of the market and recoup your investment.

When is the best age to get started?

I would say, if you are looking at, at least, a 30-year window before retirement, stocks are a good option. For someone retiring in two-three years, there is no need to risk the principle, you are better off investing in treasury bills or bonds.

If you are to scale financial securities from one to 10, one being the least risky and 10 being most risky, how would you rank them?

If I am to compare stocks, bills and bonds, stocks would be the most risky of the three. Treasury Bills have the least risk, bonds have moderate risk. If you add other securities such as foreign currency, they are much more risky than stocks. Currency is very volatile; look at Brexit, (The UK’s vote to exit the European Union) the Great British pound dropped by 9 per cent in a day.

What are the key principles of financial investment?

The first is time. On a minimum, if you want to participate in the stock market, give it at least three years. You are taking a stake in a company; you need to give it time to grow its profits and value. If your intention is to invest today and exit tomorrow, then you are the guy, or girl, who tends to believe that the market is rigged.

The stock price will always be choppy, but soon it forms an upward trend. Secondly, diversify. Invest in different stocks for different industries and also try out Treasury bills and Bonds.

Third, research before you get into an investment. Always do your research on the company; look at the management, look at their track record; they are the stewards of the company, see their performance, skills and decision-making process. Fourth, accountability: is the company disclosing losses, do they provide their financial reports on time.

Even if it means quarterly communications of potential losses and setbacks; that transparency helps one fully understand the risk they are investing in.

And finally returns: look at returns as a benchmark. T-bills are a good investment.

For example, since T-bills are lower risk investments providing a 10 per cent return, it is only logical that stocks are higher risk and ideally should have higher returns.

When I buy a company’s shares, do I need to attend the boring Annual General Meetings?

Yes. As an investor of a company, you are a part owner of the business. You need to be involved in the decisions steering the company’s future.

Companies get consent from their shareholders through elections and at AGMs, so you have to be there.

You can speak up at these meetings to express your concerns; you also get to elect the company board members. If you feel that one board member is not delivering, you have a right to dismiss them.

What are mutual funds and what makes them an attractive investment option?

Mutual funds exist to pool investor resources and invest the money in several financial securities such as stocks and bonds.

As an individual investor with Sh3,000 you cannot really buy higher trading shares at Sh900 per share.

Secondly, if you have no time or know-how to trade in stock effectively, this is an option to consider. If your money is pooled in mutual funds, you will have a designated fund manager who will charge you 2 per cent annual interest for trading in various securities on your behalf. 

What should I look for when choosing a Mutual fund management firm?

 Before you invest, ask them for their track record. Find out what kind of returns they have had for their clientele over the past five-seven years. There are several mutual funds, some dedicated to stocks, others to Treasury Bills and Treasury Bonds.

 

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Want to start trading in shares?

There are 18 stockbrokerage firms in Kenya registered by Capital Markets Authority (CMA). Visit their website for the list, which is updated annually.

 

1. Pick your stock brokerage firm or investment bank.

 

2. The stock brokerage firm will open a Central Depository System account to enable you to trade in stocks. Different firms need different registration particulars, such as your National ID and passport photos amd PIN certificate. Some may ask for bank statements - this is mostly common with investors of larger sums. Opening an account may take on average of one to two weeks.

 

3. Pay attention to the stocks movement and then call your broker to buy or sell certain stocks. Every time you buy or sell stocks, a broker charges you a 2 per cent commission. That is why they are called brokers. That is the only job of a stock broker, but some may go beyond this and give recommendations of stock to trade, but that is just that, a recommendation.

 

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Steps to starting to trade in treasury bills and treasury bonds

1. Go to Central Bank of Kenya and request to open an account with them to trade in the Treasury Bills and bonds.

2. They will give you a form known as a mandate card, which you take to your bank and fill in the details.

3. Every Friday in the local newspapers, there is an announcement of new Treasury bills and bonds, (monthly) available for investment.

4. Once you get the details of the bill or bond you want to purchase, you have up to Wednesday 2pm of the following week to make your purchase at Central Bank of Kenya branches across the country. You can also go through your bank, which has a custody department that can open a custodial account for you, which will be under your name at the bank. To CBK, it will be under your Bank’s name.