30 July 2014

Kenya: What to Consider When Buying Shares

Nairobi — Since the Nairobi Securities Exchange (NSE) announced its Initial Public Offer (IPO) which runs from July 24 through August 12 this year, some investors have been wondering whether to buy the shares or not.

This hesitance is mainly informed by disappointments recorded in previous IPOs, negative perception about investing at the NSE and even lack of information on how to go about participating in the stock market.

In a one-on-one interview with Capital FM Business, Capital Markets Authority Acting CEO Paul Muthaura gives some of the basics that need to be considered by stock buyers, not only in the NSE stock, but any other at the bourse.

1. Do not take a loan to buy shares

First and foremost you do not borrow money to invest in shares; and that was one of the biggest challenge we saw with Safaricom (IPO). People borrowed money from a bank on the presumptions that 'on day I will sell the shares, pay the bank back, take my profit'. You do not do that. This is unless you are a global investment bank with a research team of a few hundred people who do nothing but crunch numbers and figure out margins.

2. Think long-term

It is good for investors to understand that capital markets investments are long term investments in their nature. In a case where you have many people investing in an IPO and 60 percent of the buyers want to sell them on day one - it's a supply and demand issue - that depresses prices.

We encourage people to think long-term when they invest in shares and not short-term. The Authority continues to work with the financial sector regulators as well as with intermediaries to do a lot of investor education.

3. Do not buy stocks because everyone is buying; read a lot.

With the IPOs we saw between 2006 and 2008, people were coming to the market because they heard everyone was investing. But they really didn't know why they were investing and the potential of the company they were investing in.

People really need to start focusing on reading prospectus or information memorandum so that they make their own decision on whether it is the right investment for them. Is it a high risk... is it a low risk, is it a first or slow growth company and so on. Then from there they can make a decision based on their own needs as an investor on when they need to get their money out or exit. Are they looking to receive dividends for the next 30 years or are they looking at selling the shares after 5 years because they hope it will have increased in value.

4. Seek professional advice

The reason why information memorandum has so much financial information is to help decisions be made. So if you feel you are not able to analyse that financial information, we really encourage people to consult those who can, because the facts are there; where the company is going, its projections in year one, year two or year five. The company would say something like 'we see very little opportunity for growth in year one and two but we think it will improve in year three and by year five it will reach 'x' percentage. All that information is usually in the document. People just need to build a culture of asking the questions and seeking the answers to help inform their decisions.

As the prospective stock buyer follows the above basics while participating in the capital markets, Muthaura says CMA is on its part placing great emphasis on regulatory measures to ensure sanity.

Some of the measures include electronic surveillance of the market.

"We think that now is a much more stable and attractive environment for investors to come back to the market and start enjoying real growth."


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