This is part of a series of articles sponsored by NIC Bank. NIC will be having a rights issue starting 27th August. Read more about their rights issue here.
Shares are basically tradable portions of ownership in a company bought and sold through a market platform such as the Nairobi Securities Exchange. Studies have shown that shares are a good investment to make more so for long-term gains. Buying shares will bring you returns on your investment in two main ways; through dividends or capital gains.
[Read: Made it in the Market: Warren Buffet.]
Dividends
Dividends are a portion of a company’s earnings regularly paid to shareholders in proportion to the number of shares held in the company. For example, last year NIC Bank paid its shareholders a dividend of 25 cents per share meaning that if you owned 10,000 NIC shares you would receive 2,500 shillings. A company’s dividend policy – basically how much dividend it pays per share – is determined by a company’s board of directors subject to shareholder approval. Dividends paid vary based on several factors such as the company’s earnings and growth strategy.
Capital Gains
Capital gains are the returns from the appreciating value of your shares beyond the price you bought them. For instance, if you bought 5,000 NIC Bank shares at their price on January 4th this year, you would pay 110,250 shillings for them. As of yesterday, your shares would be valued at 157,850 shillings representing a capital gain of 47,600 shillings in the seven months since January. You would need to sell the shares to realize this capital gain.
With knowledge of the two main ways which shares can bring you returns on your investment, here are some reasons you would want to buy shares in the Kenyan stock market:
- Grow your savings – In many cases shares can grow your savings faster than a bank’s interest rate will like with the example given above. However, since the price of shares freely moves up or down on market forces of demand and supply, buying them will carry a higher risk than putting your money in a bank.
- Greater income – Dividends make good supplementary income especially if they are paid more than once a year and are high enough. Typically, blue chip shares currently pay the highest dividends in the Kenyan stock market because of their good financial position. Your income from dividends could also grow year-on-year if you own shares in a rapidly growing company.
- Inflation – Selling all or part of your shares to realize capital gains can cushion you in times of inflation, offsetting the rise in your daily budget. In fact, you can buy shares specifically for this purpose making sure to invest in shares that will bring you good capital gains.
- Future obligations – Buying shares is a smart way to finance future obligations such as weddings, housing or school fees. With a savvy investment in shares today, future capital gains can be realized to meet these future obligations with ease negating the need to take costly loans for the same.
- Collateral – Shares make good collateral for bank loans compared to conventional property. Instead of risking your house or piece of land, you can pledge your shares instead. This can afford you more freedom with how you manage your loan, as losing physical property is culturally considered worse than losing shares in a company.
- Ownership – Shares make you part owner in a company enabling you influence its direction and benefit financially from its success depending on your degree of ownership. The most commonly available shares on the NSE are ordinary shares which hold one voting right per share in the company’s meetings. Owning shares can therefore give you a say in matters such as how much dividends will be paid out to you and the other shareholders. In addition it can be psychologically fulfilling to be part of a company’s ownership and success.
- Excitement – Buying and trading shares can moderately or quickly grow your wealth giving you psychological satisfaction in either case depending on what you are looking for. In addition, riskier speculative share trading can be a source of excitement if you are more inclined to taking risks.
Next on Stocks 101 we will breakdown the process of buying shares at the Nairobi Securities Exchange.