Different Types Of Investments

Introduction

In Kenya, the investment landscape is as diverse as it is promising, offering a range of options from stocks and bonds to real estate and beyond. This guide aims to provide you with key insights into the world of investing, helping you make informed decisions that align with your financial goals.

Stocks

Buying shares in a company makes you a partial owner, and you stand to gain if the company performs well.

Stocks represent ownership in a company. When you buy a stock, you're purchasing a "share," which is a piece of the company. Owning a share makes you a shareholder, giving you a stake in the company's assets and earnings. Companies issue stocks to raise capital for various purposes, such as expanding their business, launching new products, or paying off debt.

How Do Stocks Work?

Stocks are traded on stock exchanges, like the Nairobi Securities Exchange (NSE) in Kenya or the New York Stock Exchange (NYSE) in the U.S. The price of a stock fluctuates throughout the trading day based on supply and demand dynamics. Various factors, such as company performance, economic conditions, and market sentiment, influence stock prices.

Types of Stocks Available

The NSE categorizes stocks into various market segments, including the Main Investment Market Segment (MIMS), the Alternative Investment Market Segment (AIMS), and the Growth Enterprise Market Segment (GEMS). These segments cater to companies of different sizes and sectors, offering investors a broad range of options.

• Blue-Chip Companies: These are large, well-established companies with a history of stable performance. Examples include Safaricom, KCB Group, and Equity Group Holdings.

Risk and Return Dynamics

Just like in other markets, investing in stocks in Kenya involves balancing risk and return. While blue-chip stocks are generally considered safer, they may offer lower growth potential compared to smaller companies. On the other hand, investing in smaller or newer companies can be riskier but may offer higher returns if the companies perform well.

• Sector-Specific Risks: The Kenyan market has its own set of sector-specific risks, such as regulatory changes in the banking or telecommunications sectors.

How to Start Investing

1. Open a CDS Account: To trade stocks on the NSE, you'll need to open a Central Depository System (CDS) account through a licensed stockbroker or investment bank.

2. Research: Utilize resources like financial news, company reports, and even mobile apps that provide Kenyan market insights to make informed decisions.

3. Diversification: Given the volatility in emerging markets, diversification is crucial. Consider spreading your investments across different sectors and even asset classes.

Interesting Fact: The NSE launched its online trading platform in 2017, making it easier for individual investors to participate in the stock market.

Regulatory Environment

The Capital Markets Authority (CMA) regulates stock market activities in Kenya. It's essential to be aware of the regulatory environment, including tax obligations. For instance, capital gains on the sale of shares are subject to a 5% capital gains tax

Bonds

These are essentially loans you give to the government or corporations, who pay you back with interest.
During periods of economic instability, investors often gravitate towards low-risk assets. In Kenya, government-backed debt securities are considered a safe haven. These include:

Treasury Bonds: These are medium- to long-term investments that are generally considered secure. The central bank holds monthly auctions for these bonds, which usually come with a fixed interest rate. Investors receive interest payments twice a year until the bond matures.

Treasury Bills: Offered weekly by the central bank, these are short-term investments with maturity periods of 91, 182, or 364 days. They are sold at a discount and mature at their face value.

Investors have the option to buy these bonds and bills directly or through intermediaries like banks. Direct investment usually yields higher returns but requires a Central Depository System (CDS) account and involves a more complex investment process.

Advantages of Treasury Bonds and Bills

• Government-backed, hence low risk.
• Certain bonds, such as infrastructure bonds, offer tax benefits.
• Competitive yield compared to other savings options.
• Varied investment durations, from one month for treasury bills to up to 30 years for treasury bonds.
• Treasury bonds offer a stable, bi-annual income stream.
• Bonds can be easily sold on the Nairobi Securities Exchange (NSE).
• Accessible to small-scale investors through Money Market Funds (MMFs) and unit trusts.
  
  

Disadvantages of Treasury Bonds and Bills

• High minimum investment requirement of Ksh 50,000.
• Inflation risk, as fixed interest rates may result in lower returns if inflation rises.
• Liquidity risk, as selling bonds before maturity may result in a loss.
  
  

Mutual Funds

A mutual fund is a type of investment where different investors, with the same financial goals, pool their money together and have a team of investment professionals invest it on their behalf.

In Kenya, mutual funds can be categorized into various types based on the asset classes they invest in:

• Equity Funds: Invest primarily in stocks listed on the Nairobi Securities Exchange or other global markets.
• Bond Funds: Focus on government or corporate bonds.
• Money Market Funds: Invest in short-term debt instruments and are considered low-risk.
• Balanced Funds: A mix of stocks and bonds to offer both growth and income.

Mutual funds often come with various fees, including management fees, administrative fees, and sometimes, entry or exit fees. It's crucial to understand these costs as they can eat into your returns.

Real Estate

Investing in real estate is often considered one of the most stable and rewarding investment avenues. In Kenya, where the property market has seen consistent growth, real estate offers two primary benefits: rental income and capital appreciation. Let's delve into why these aspects make real estate a compelling investment option.

Commodities:

Commodities are basic goods that can be interchanged with other commodities of the same type. These include physical assets like gold, oil, and agricultural products such as tea, coffee, and maize. In Kenya, commodities play a significant role in both the economy and investment portfolios, offering an alternative to traditional asset classes like stocks and bonds.

In Kenya, you can invest in commodities through:

• Direct Ownership: Such as buying gold bars or agricultural land.
• Commodity ETFs: Exchange-traded funds that track the price of a commodity.
• Futures Contracts: Agreements to buy or sell a commodity at a future date at a predetermined price.

Risks and Returns

Commodities are known for their volatility, often more so than stocks or bonds. While they offer the potential for high returns, the risks are also elevated. Factors like geopolitical events, supply and demand, and currency fluctuations can significantly impact commodity prices.