Nairobi Securities Exchange (NSE) -What you need to know

Nairobi Securities Exchange (NSE) -What you need to know

What is Nairobi Securities Exchange (NSE)? FAQs

The Nairobi Securities Exchange is a Market, and commonly known as the NSE.

What is a share at NSE?

A share is a piece of ownership of a company or enterprise. When you buy a share, you become an investor and thereby an owner of a piece of the company’s profit or losses.

Why do companies sell shares at NSE?

Companies sell shares to raise  (borrow) money from members of the public to expand their business activities in order to make more profits. They invite members of the public to buy shares and by so doing have a say in the running of the company as lenders of money and owners.

Shareholders expect a profit as a reward from lending their money to expand the business of the company.

Also read: Shocker for dormant CDS Accounts come December 31, 2018

See FAQS for more on CDS accounts

Who is a shareholder at NSE?

A shareholder is an investor who buys shares with an expectation of profit. Profits in shares are through dividends, gains in share prices, bonuses, rights etc.

Also Read: Kenya to block dormant CDS accounts by December 31 2018

A shareholder owns a piece of the company and its profits equal to the number of shares he/she owns.

Market days at NSE

The market is open Monday to Friday from 8.00 a.m. to 5.00 p.m. trading activities start at 9.00 a.m. and continues until 3.00 p.m. Members of the public can view the market from the public gallery at any time while the market is open. The market is closed during public holidays.

Display of Shares at NSE

Shares are grouped into 4 sectors namely Agriculture, Commercial and Services, Financial and Industrial & Allied sectors. The shares are displayed in alphabetical order in each group for easy location by investors viewing trading from the public gallery.

Display of Bonds at NSE

Bonds are in two groups namely: Treasury Bonds – issued by the government; and Corporate Bonds – issued by companies.

They are displayed as and when the government or a company issues one.

What amounts can an investor buy at NSE?

An investor can buy as little or as much as he or she can afford. It is also possible to invest very little money in groups of small investors pooled together by money managers in the market.

 

Minimum number of shares you can buy at NSE

Share are bundled in minimum lots of 100 shares and above in the main market boards. Fewer shares that 100 are available on the odd lots board.

Minimum number of Bonds at NSE

Bonds are sold in minimum bundles of KShs. 50,000.00. Small investors can pool their money together and buy a bond with the help of a money manager.

Delivery and settlement at NSE

This is where share accounts and bond accounts are transferred from one investor to another and payments completed. It is also here that shares and bonds of deceased persons are transferred to beneficiaries at a small administrative fee.

What are benefits of owning shares?

  • A source of profits;
  • A guarantor for borrowing loans from Cooperative Societies and Banks;
  • A way of saving your money for the future;
  • An easy and quick asset to buy and sell;
  • A new business activity that is beneficial in many ways. An investor can trade in other markets trade in maize, bananas, potatoes, tomatoes, onions, mangos etc.
  • Buying at low prices and selling at high prices to make a profit;
  • A solution that increases financial activity and economic growth.

What are the qualities of a good share?

  • Frequent and generous dividends
  • The company is managed productively, transparently and is accountable to shareholders
  • No wastage in the use of resources
  • Respect of shareholders and their opinions
  • Shares that are easy to buy and sell quickly in the market
  • The company abides by the rules, regulations and laws

What is a bond at NSE?

A bond is a loan between a borrower and a lender. The borrower promises to pay the lender some interest quarterly or semi-annually at some date in the future. The borrower also promised to repay the initial money invested by the lender. The lender lends and expects to make a profit. The profit from a bond is gained in the form of an interest. At the moment some bonds in the market have an interest rate of 14%, 12%, 10%,8% depending on the type of bond it is, and when it was issued.

At the Nairobi Securities Exchange, the lender is called an investor and the borrower the issuer.

Who can buy bonds at NSE?

Any individual, Co-operative Society, Women Group, Kiama, Youth Club, Church, School, College, University, Investment Group, Insurance Company, Bank, Pension Scheme, and many other can buy bonds.

Can a bond be sold before maturity at NSE?

Yes. In times of need or emergencies, an investor can sell his or her bond easily and quickly in the market. The interest on a bond grows on a daily basis and so a bond has new value and price every day. An investor can therefore buy or sell a bond on any day of his or her choice. There are no penalties for selling a bond before the maturity date.

For example, an investor can buy a bond of 5 years and expect an interest of 12%. The interest is paid after every 3 or 6 months. Such an investor can sell the bond at any time of his or her choice at the current market price. The market price of a bond will depend on the number of other willing sellers and buyers in the market on that particular day. When there are many sellers in any market, prices go down and vice versa.

Who borrows money Through Bonds?

In Kenya, it is the government and companies. In other Stock Markets, Municipal Councils, Cooperative Societies, Hospitals, Universities, Schools and other organizations can borrow money from the public through bonds. All that is required is that the organization has a good reputation and members of the public have trust in the other lending situations, a lender must trust the borrower before he or she can lend any money. The borrower must therefore be creditworthy in the eyes of the lenders or investors.

Bonds are therefore a very easy, quick and transparent way of raising money. For example, trusted and credit worthy Municipal Councils can borrow money from the public with a promise to pay a reasonable interest rate. The Council can borrow money from public with a promise to pay a reasonable interest rate. The Council can use the money to build roads, improve security, cleanliness, water supply and streetlights. A Co-operative Society can do the same and build milk cooling and processing factory or a food processing factory. These and many more money solutions are available with the help of money managers.

What are the benefits of buying bonds?

  • A bond is a very convenient asset to own;
  • Accepted guarantors for may types of loans by Cooperative Societies and Banks;
  • A sure source of income;
  • A good money planner to meet specific needs. For example an investor can buy a bond whose interest matches payment of school fees, car or medical insurance, rent, pension allowance and much more;
  • Easy and quick to sell in the market in times of need;
  • A way of saving money for the future;
  • Convenient and confidential;
  • Easily transferable.

What is the difference  between a bondholder and a shareholder?

A Bondholder

  • A bondholder is only a lender to a company
  • Expects a profit in form of an interest at a specific agreed date in future
  • Does not vote or participate in the management of the company
  • Invests to earn a reasonable return at a low risk
  • A watchdog of the borrowers activities

       A Shareholder

  • A shareholder is a lender and an owner
  • Expects a profit in form of a dividend, gain in share price, bonuses and cheaper shares (right issues)
  • Attends Annual General Meetings, gives personal pinions about the company and votes thereby participating in the running of the company
  • Invests expecting the highest return possible
  • Accept risk as part of any business
  • A watchdog of the management and company’s activities
  • An influencer of the company’s performance

Can one be Bondholder and a Shareholder at the same time?

Yes. This gives an investor the opportunity to diversify and enjoy a balance between reasonable and very high profits.

What is a Real Estate Investment Trust (REIT)

A REIT is a regulated investment vehicle that enables the issuer to pool investors’ funds for the purpose of investing in real estate. In exchange, the investors receive units in the trust, and as beneficiaries of the trust,share in the profits or income from the real estate assets owned by the trust.

What types of REIT’s are provided for in Kenya?

There are 2 types of REITS; D-REITS and I-REITS.

Income Real EstateInvestment Trusts (I-REITs)
An Income-REIT (I-REIT) is a real estate investment scheme which owns and manages income generating real estate for the benefit of its investors therefore providing both liquidity and a stable income stream. Distributions to investors are underpinned by commercial leases. This
means that income returns are generally predictable.
Development Real Estate Investment Trusts (D-REITs)
A Development Real Estate Investment Trust (D-REIT) is a development and construction real estate trust involved in the development or construction projects for housing, commercial and other real estate assets.

What is an Exchange Traded Fund(ETF) ?

 An Exchange Traded Fund (ETF) is a listed investment product that track the performance
of a basket of Shares, Bonds or Commodities. An ETF can also track a single commodity
such as oil or a precious metal like gold.

Why invest in ETFs ?

   1. Diversification

One fund can hold potentially hundreds—sometimes thousands—of individual stocks
and bonds, which helps spread out risk. ETFs allow access to asssets that were previously
not available to all investors such as gold.

     2. Professional management

You do not have to keep track of every single investment your ETF owns. The fund is
managed by fund experts who take care of that for you. Reporting is done daily to the
investor through the NSE.

     3.Liquidity

ETFs offer you the same liquidity you get when trading stocks and bonds listed on the
NSE.

    4.Lower cost

Funds that track an index, like ETFs and index mutual funds, generally offer lower
expense ratios than conventional mutual funds.

   5.Transparency

The ETF is backed by its constituent underlying assets or assets of an equivalent value.
Issuers produce a factsheet for their ETFs which states what investors are being exposed
to and how the Net Asset Value of the ETF is calculated. By contrast, unit trusts, typically
only provide historical information on portfolio holdings and not current holdings, for
competitive reasons. Tracking performance is also published.

   6.Investor owned assets

The constituent assets or securities shall be housed in a trust arrangement with a CMA
approved trustee being appointed. Even in the case of insolvency by the ETF manager,
administrator or issuer, through the trust arrangement, these assets are ring fenced,
protected by law, and are the exclusive property of the ETF. Therefore owning an ETF
does not give the investor the right to vote at Annual General Meetings (AGMs) of the
underlying securities, as you own a portion (unit) in the fund and not the underlying
securities themselves.

What are the eligibility requirements for listing at the Nairobi Securities Exchange (NSE)

There are three investment market Segments at the Nairobi Securities Exchange namely:

  • Main Investment Market Segment (MIMS);
  • Alternative Investment Market Segment (AIMS); and
  • Fixed Income Securities Market Segment (FISMS).

To list securities on any of these boards, the following eligibility criteria must be satisfied:

Requirement Main Investment Market Segment (MIMS) Alternative Investment Market Segment (AIMS) Fixed Income Market Segment (FISMS)
Incorporation status The issuer must be a public company limited by shares and registered under the Companies Act (Cap 486) The issuer must be a public company limited by shares and registered under the Companies Act (Cap 486) The issuer must be a public company limited by shares and registered under the Companies Act (Cap 486) or any other corporate body.
Share Capital The minimum authorized, issued and fully paid up capital must be Kshs. 50 Million. The minimum authorized, issued and fully paid capital should be Kshs.20 Million The minimum authorized, issued and fully paid up capital must be Kshs. 50 Million
Net Assets The net assets should not be less than Kshs. 100 Million immediately before the public offer. Net assets immediately before the public offer should not be less than Kshs.20 Million The net assets should not be less than Kshs. 100 Million immediately before the offer.
Transferability of shares The shares to be listed shall be freely transferable. The shares to be listed shall be freely transferable. May or may not be transferable.
Financial records. The audited financial statements of the issuer for five preceding years be availed. The audited financial statements of the issuer for three preceding years be availed. The audited financial statements of the issuer for three preceding years be availed (except for the government)
Directors and Management The directors of the issuer must be competent persons without any legal encumbrances.  The directors of the issuer must be competent persons without any legal encumbrances. The directors of the issuer must be competent persons without any legal encumbrances
Track record The issuer must have declared positive profits after tax attributable to shareholders in at least three years within five years prior to application. The issuer must have been operating on the same line of business for at least two years one of which it must have made profit with good growth potential. Not a requirement.
Solvency The issuer should be solvent and have adequate working capital. The issuer should be solvent and have adequate working capital. Not a requirement
Share ownership structure At least 25% of the shares must be held by not less than 1000 shareholders excluding employees of the issuer. At least 20% of the shares must be held by not less than 100 shareholders excluding employees of the issuer or family members of the controlling shareholders. Not a requirement
Certificate of comfort May be required from the primary regulator of the issuer if there is one. May be required from the primary regulator of the issuer if there is one. May be required from the primary regulator of the issuer if there is one.
Dividend policy The issuer must have a clear future dividend policy The issuer must have a clear future dividend policy Not a requirement
Debt ratios Not a requirement Not a requirement Major ratios:

  1. Total indebtedness including the new issue not to exceed 400% of the company’s net worth as at the latest balance sheet.
  2. The funds from operations to total debt for the three trading periods preceding the issue to be kept at a weighted average of at least 40%.
  3. A range of other ratios to be certified by the issuer’s external auditors.
Issue lots Not a requirement Not a requirement Minimum issue lot size shall be:

  1. Kshs. 100,000 for corporate bonds or preference shares
  2. Kshs. 1,000,000 for commercial paper programme.
Renewal date Not a requirement Not a requirement Every issuer of commercial paper to apply for renewal at least three months before the expiry of the approved period of twelve months from the date of approval.

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