Thursday, March 20, 2008

NSE: A diaspora's guide to the myths & facts

The foreign exchange movements will wipe out your gains:
Depends. On how long you are investing, currency used and timing. If you send funds for an IPO such as Safcom for speculative purposes using one of the strong currencies, you definitely lose because the Ksh will strengthen pre-IPO and weaken post-IPO as others do like you. For the long-term investor, as the economy grows, then ceteris paribus, the Ksh will strengthen, i.e. you'll gain twice. Or you could keep the funds in Kenya.
You are crowding out resident Kenyans:
Probably. So are you if you are in real estate or helping someone set up a business i.e. BS. Kenya needs your foreign currency/capital badly. And if you to make have a buck to send it there, investing at the NSE is your route
Its not easy to get a good broker:
Yes. Go for the obvious ones (D&B, CFC) and ones that meet your initial needs until you have found your feet.
It’s an illiquid market i.e. it’s hard to buy/sell shares when you want them
Yes. It’s not the FTSE or NYSE. There are like 49 stocks being traded and most have around 30% of their shares that are actively traded. That said....
Shares take long to execute:
Depends. On what quantity you want, the share you are looking to buy and your price vs the prevailing market price and timing. Typically, you can get 10,000 KCB shares in the same day if you've priced them within range of the previous day's high and low provided its a normal trading day i.e. there are no events affecting KCB's price or the NSE. By comparison, you'll be waiting for days to get 1,000 NMG shares.
There is no online trading:
True. But you can do your orders online (for D&B anyway). The actual issue is that Kenya doesn't ye have the legislation allowing Kenyan banks to use encryption for online transactions.
There is a lack of information about the listed stocks:
True up to a point. The last two years have seen an explosion of information websites from NMG's Business Daily, StocksKenya, brokers research teams to various blogs. On the other hand, a combination of unclear corporate governance legislation, CMA incompetence and firms' lack of awareness of shareholder value mean many barely have functional websites let alone providing updated information.
Its not easy to send money to a broker:
Apart from D&B, I don't of any other broker that has a correspondent bank. So this might be a tricky one if like me, you like to see an audit trail in your payments.
The trading charges are very high or unknown:
Myth. You get charged 2.12% if your order is under Ksh100,000 and 1.82% if its over Ksh100k. The tricky bit comes when your order even if over Ksh100k can not be executed in one go. Then you get charged 2.12% for each separate order.
The brokers will take your money/shares:
It’s been happening since the CDSC came along and even before. However, I don't expect it to go much longer because even GoK will get tired of it (otherwise, we won't get the foreign investors we want to come to Kenya). If you have relas/friends you trust in Kenya, pay them a apportion of your dividends and once a week the will go and demand a printed of your account from either your broker or CDSC.
Brokers will ignore your price requests:
True, if they are crooked, they'll. Others will ignore your order altogether if you ask for a price at 50% below prevailing one unless you know something they don't. Typically, ask for a price ceiling i.e. "at no more than". For most brokers, the order remains live for a month and then you have to re-order again.
Brokers only pay attention if you have loadsofmoney to invest:
Several brokers, Kestrel among them have set thresholds for the type of client they want. I think D&B should do the same because it practices it. However, some of the smaller brokers (e.g. Afrika Investment Bank) do deal with investors equally.
Capital gains tax is not applied when you sell your shares:
True, but you get 30% charge on dividends.


Ssembonge said...

Nice post.

Every investor, even on the big board, has to recognize/understand the risks and trade accordingly.

Note to self: keep away from the NSE

bankelele said...

- To get trades done, stay with big brokers, they earn a commission either way, big trade, small trade
- Online trading, not there, but do you need it? I e-mail orders to CFC, buy /sell; I don't have a specific advisor. I got burnt a few years ago with Francis Drummond promised online trading but then went AWOL and I thought they would be in the Nyaga/FT basket – but they seem to have stabilized and recapitalized and are now an investment bank
- Fees – plan on 2.5% commission either way, since there are other statutory fees as well (CMA, tax, NSE) - but they are fixed and that's the beauty! But look out for transaction/process fees being charged by some institutions for processing the Safaricom IPO – it’s not standard
- And investors pay 5% tax on dividend (deducted from each cheque) not 30%
More tips:
- You need a local bank account to bank your dividend cheques. Don't leave cash with the broker
- You need a mailbox and a relative/pal: This is still a paper economy and you will be receiving Get CDS statements, dividends, annual reports, etc.

MainaT said...

Ssem, can/can't understand your paranoia with the NSE.

Banks-tx for the additional tips. Still avoid getting relas involved in my business unless absolutely necessary. Will need to re-check on my dividends, looks like I've been stitched up.

Montel said...

Greetings friends,

If you are in the diaspora, like I am, and keen on a investing in the NSE, I recommend that you go the unit trusts way. Presently, trading through Old Mutual and its proving to:

1. More convenient because I don’t need any third party. I can buy or sell my units by directly contacting Old Mutual. Furthermore, it’s easy to carry out transactions directly from my overseas account to Old Mutual’s account.

2. The cost of administration is on an annual basis and not per transaction as you would with brokers at the NSE, and as such, may be cheap for you … if you transact big amounts, am sure you will appreciate the percentages however tiny will matter.

3. No need to keep tabs, i.e. issue buy and sell transactions, because … like any unit trust, I have the professional fund managers to think and make wise decisions on my behalf. That’s what I pay them to do, and for the last 4 years, they have done a great job

4. For more info:

Hope this was helpful.

Jon Sigurdsson said...

Thanks for the explanation!
Will definitely help in understanding the market

Australian Shares to Buy