Beginner's Guide to investing in the Capital Markets
Do you feel the urge to participate in the capital markets but you don't know how? Below is a simple guide.
Step One: Conduct 'Financial self examination'
Analyze your financial objectives, your income sources, constraints and risk tolerance. Ask whether you are financially ready to invest in the capital markets. For beginners it is not advisable to borrow to invest in the capital markets. In a volatile market, you could lose the borrowed money and still have to pay for it.
Step Two: Deal only with licensed Entities
Identify your financial investment advisor and open an account with them. Your investment advisor, be they an investment bank a stock broker or any other firm advising you on investment must be a licensee of the Capital Markets Authority (CMA).
Step Three: Open a Central Depository System (CDS) account
A Central Depository System (CDS) a computer system operated by Central Depository and Settlement Corporation (CDSC), which facilitates holding of securities in electronic accounts opened by shareholders. It manages clearing and settlement of all financial instruments traded through the Nairobi Stock Exchange (shares and bonds) in a safer, faster and easier manner.
Step Four: How to open a CDS Account
You open a CDS account by completing and signing a securities account opening/maintenance form with your Central Depository Agent (CDA), providing two recent passport size photographs and a photocopy of your national identity card. A CDA is a central depository agent, either a Stockbroker an Investment Bank or a Custodian Bank, who has been authorized by Central Depository and Settlement Corporation (CDSC) to open CDS accounts on behalf of investors.
Step Four: Take Control of your Trading Account
Ensure you take full responsibility of your trading account at your Investment Bank or Stockbroker. These accounts are for your exclusive use. Never let anyone, including your dealer's representative use your account for their own trading. It is important to make sure that you are receiving all documents relevant to your transactions including; receipts, transaction statement, purchase and sales contracts, CDS account statements, etc.
Tips to investing wisely in the capital markets
These are some of the basic things one may need to know as they make entry in the field of investing in the capital markets
Know What Investment Products Are Available
Find out what financial products are available in the market before investing. This information can be obtained from any of our licensed institution.
Know Your Investor Profile
All investments carry risk; some very much more than others. You have to find out whether you are "risk-taking" or "risk averse" type of a person, so that you can pursue an aggressive, moderate or conservative investment programme, in other words, an investment strategy that fits your risk profile.
Choose the Right Investment Product
Know the various financial investment products available in the market and do an analysis of each and make a choice. But if you cannot make the right choice, seek advice from a professional advisor licensed by CMA.
Do Your Homework before You Invest
Don't put your money in until you have understood all relevant information regarding the investment. Prepare yourself to do (or have your broker or investment bank do) the vigorous homework of analyzing company annual reports, accounts and other statements while keeping abreast of what's happening in the industry, country and elsewhere in the investment world. The rule with buying stocks is caveat emptor: let the buyer beware.
Build Your Buffer First
Do not embark on any investment programme if you have not built up a liquidity or cash buffer to take care of financial emergencies. The buffer is vital as otherwise a financial mishap can cause you to plunder your investment programme too early for it to gain momentum. Understand the greater risk of investing with borrowed money.
Think Long Term
Bear in mind that in any investment, there will always be short-term aberrations that will even out in the long-term, so have the sustaining power to hold your investments for longer periods. History has shown that investment markets always recover and move on to new heights. But if you decide to turn speculator and go for quick-grabs, do so with your eyes wide open and never with more money than you can afford to lose.
Avoid Putting All Your Eggs in One Basket
The best way to minimize total risk while keeping return rates high is to diversify your investments across various investment products and within asset classes.
Stay On Course
Review and monitor your investments regularly to ensure that your investment programme is still relevant to your financial goals; monitor prices, attend Annual General Meeting, read research publications etc. Track the performance of your investments to determine whether your expectations of returns have been met, or if there is a need to restructure your investments if your asset mix gets out of balance.
Be Aware Of Scams
Ensure you deal with only licensed institutions.
As a wise investor, you should know your rights and responsibilities. Be aware of the rules that protect you and your investments, and the legal recourse if things go wrong. You can report abuses in the industry to the Capital Markets Authority.