Getting a Foot In the NSE Door {Part 2}: Take the Plunge!

If you have consistently followed our stocks column so far, there is probably a good reason you are still interested. Your financial future matters enough for you to choose to learn and take some action. In the first part of this post, we covered the need for a Personal Financial Plan and I am sure that is now on your To Do list. Now let us talk about your stockbroking agent and the research necessary for meaningful participation in the NSE.

The NSE is regulated by the Capital Markets Authority (CMA). Trading at the NSE is through equally CMA-regulated entities called stock brokers. For the avoidance of confusion, there are entities licensed to carry out other activities in addition to stockbroking and are styled as investment banks. For purposes of trading at the NSE, there is no difference whether one is a stockbroker or an investment bank.

The NSE has 24 stock broking participating members. (See full list and contacts here). In order to get started at the NSE, one requires to open a CDS Account through any of these brokers. The CDS Account is maintained with the Central Depository and Settlements Corporation (CDSC), the entity that provides clearing, delivery and settlement services for securities traded at the Nairobi Stock Exchange. To open a CDS Account, all one needs to do is decide which stock broker to use and to pay them a visit with the following items generally required for Know Your Customer (KYC) purposes: (Ask your selected broker if they require more.)

1. Copy of ID or Passport
2. Copy of a Utility Bill
3. Copy of KRA PIN Certificate/PIN Number
4. Two colour passport size photographs
5. Copy of bank statement/proof of bank details/ATM Card Copy

Stockbrokerage is a service offered by a broker to their customers and for which the broker earns a fee, and you should, therefore,  have some service expectation standards when you sign up with one. Like you would do when choosing the bank where you wish to open an account, it does help to seek references from people you know who have active relationships with their stockbrokers so they tell you about their experiences in the field. You certainly want a stockbroker who will give you some attention when you require their services.

Owing to the low volume of transactions on a regular day at the NSE, most brokers do not employ an awful lot of staff to service their clients. Most beginners will also not command the kind of volumes or value of transactions that attract a personalized service by the brokers. It is therefore important to have realistic expectations when seeking their services. One method to get some personalized attention is to deal with the broker through a stockbroking agent. A good agent has a greater personal attachment to his clients as s/he is more likely to understand their long-term plan enough to be willing to invest in them upfront for rewards in future when their portfolio grows. All stockbrokers engage agents who are registered with them and are equally regulated through the brokers. With some research, you should be able to find an agent for the broker of your choice to make your trading experience more personal than directly dealing with the broker’s front office staff for all your requirements.

With your CDS Account now open, you are ready to trade. You only need to deposit some cash with the stockbroker and make your order.

However, in order to do this, you need a basis for picking which of the listed companies you wish to buy stocks in. The NSE has over 60 listed companies. (See list here: https://www.nse.co.ke/listed-companies/list.html) This is where the need for research comes in. You invest so you get the best return on your investment while safeguarding your capital. You also may have personal reasons why you wouldn’t want to hold stock of certain companies, irrespective of returns prospects. You, therefore, need to establish a way by which you obtain information about the listed companies in order to make your decisions.

Stockbroking firms have research departments that carry out and share research information with their clients. While this is useful, you must always keep in mind that research is only as good as the quality of the persons who did it, and remember that stockbrokers get paid when you trade – this might incentivise them to recommend more trades than would be prudent.

For this reason, you need to do your own due diligence, through references in case you do not have the necessary financial background to be able to countercheck some of the research information yourself. Joining an investment club or chat forums that have investors who are well versed in research and company results interpretation is helpful. Investment in your own financial literacy is inevitable for success as an investor. The other option is to ensure that your stockbroking agent is able to do independent research that they can discuss with you in their capacity as an investment advisor to you. For this, you should be prepared to pay a fee if they supply it at a cost. It is well worth it.

Armed as above, you are in a position to choose some 3 – 5 stocks on which to build a portfolio and plan on how to go about buying them. The market continually keeps producing information that will inform your sell or change course decisions. Keep making use of it and moving on. A regular conversation with your agent on your portfolio will be helpful.

Finally, do not be daunted by short-term trends in the stocks you choose because there is no science of predicting day to day movement of stocks. Your three-year presence in the market should however well point out to you the quality of your investment decisions in order to fuel your determination for the first ten-year stint that will get you hooked. So do go on – take the plunge.