I’ve received lots of great questions from readers via the contact form in recent months. So I thought I’d answer some of them publicly in the hope that they might help answer others’ questions, too. Here’s one from Zimbabwe:
l’m Zimbabwean and don’t earn much, but I feel like I should be investing.
Most of your articles are about Americans investing in Africa at minimum deposits that are far above an amount I can even dream of.
Is it possible for a minimum-wage earner like me to invest on an African stock exchange for a reasonable amount?
Thanks for your message!
Remember that stocks are relatively risky
I began investing in the stock market while on a relatively low income. So, the good news is that it can be done, but always remember that positive returns are not guaranteed. Stock prices are volatile and can move up — and down — in a hurry for a whole host of reasons.
So never invest money in stocks that, if lost, would immediately jeopardize you and your family’s financial health.
Here are a few things to think about before investing your hard-earned money in the stock market.
Pay down debt first
Before opening a brokerage account, you should first consider whether you have any interest-bearing debt. Do you have a credit account on clothes at Truworths? Or a furniture account at Meikles? Or a car loan? If so, the best way to invest your money is, in most cases, to pay off that debt.
Consider an example. Let’s assume you have a credit account with a furniture store. You bought $500 worth of furniture on credit at an annual interest rate of 35%.
If you paid nothing toward that furniture for a period of one year, not only would the furniture store be very unhappy with you, but, at the end of the year, you would owe them $675 ($500 + $175 in interest).
So, if you had paid $500 toward your furniture debt, it would have, in effect, earned you $175 over the course of one year.
Say you had invested that $500 in the Zimbabwe Stock Exchange, instead, and the stock exchange had a fantastic year. You were well diversified and the value of your stocks appreciated 32%. At the end of the year, your investment is worth $660 ($500 + $166 in capital appreciation). So, in effect, your stocks earned you $166 for the year.
Which was the better investment? The investment in paying down debt was more profitable. Because, even during a fantastic year on the stock market, it earned you more than your stocks did.
Save up an emergency fund
Now, let’s say you’re debt-free. You’ve paid off all your outstanding debt, and you are beginning to save up money.
I would now suggest that you open a savings account at a bank and steadily save up enough money to cover six months of living expenses (food, housing, medical care, transportation, etc.). This is your emergency fund in case you should lose your job or have an illness or some other immediate need.
This money will sit safely and securely (and, hopefully, earn a small amount of interest) until you need it. You don’t want to invest your emergency fund in stocks because stock prices are variable and can just as easily drop over a short time period as they can rise.
Find a reputable broker with a low initial investment requirement
If you’ve paid off all your high-interest debt and built up an emergency fund, you can now give some consideration to investing a portion of your savings in the stock market.
But, again, always bear in mind that stocks are risky assets. If you will need the funds within five years, I don’t advise investing them in stocks, because the money might not be when you need it. Look for lower-risk vehicles like certificates of deposit or bonds instead.
If you are comfortable with a long-term investment horizon of at least five years, you’re next step is to find a stockbroker. Zimbabwean stockbrokers all require a minimum initial investment of at least $1000. So, it may take some time to save up an amount sufficient to open an account.
Here are the stockbrokers that require the least to open a trading account on some other African stock exchanges.
|Stock Market||Minimum Investment Requirement||Stockbrokers with Lowest Minimum|
|Botswana||No minimum, but trades must be executed in lots of at least 100 shares.||All|
|Cote d'Ivoire||No minimum.||Impaxis Securities|
|Ghana||No minimum.||African Alliance Ghana, CAL Brokers, FirstBanc, Stanbic Bank Ghana|
|Kenya||No minimum, but trades must be executed in lots of at least 100 shares.||NIC Securities|
|Nigeria||No minimum.||Chapel Hill Denham|
|Uganda||No minimum.||African Alliance Uganda, Crested Securities|
|Zambia||No minimum.||African Alliance Zambia|
|Zimbabwe||$1000.00||EFE Securities, Lynton-Edwards Securities|
Invest according to your risk tolerance
Be clear with your broker or other financial advisor as to how aggressively you would like to invest.
Are you seeking a large, quick return? Then you will likely need to take on significantly more risk.
Will you lose sleep if your portfolio ends up losing money? Then you should invest conservatively. Diversify into a broad range of large companies that you understand and pay large dividends. Or, better yet, invest in an index fund if there is one available in the country you decide to invest.
Trade as infrequently as possible
Your stockbroker will charge a commission (typically about 2% of the total trade value) every time you buy and sell a stock. Thus, it is in your interest to buy a good stock and hold it for the long term.
If, for example, you have $1000 to invest. The broker will charge roughly $20 in commission and fees when you first buy a stock. So, your initial investment has already lost 2%. You will also be charged 2% when you sell. Therefore, if your stock’s value appreciates to $1000 in one year, and you decide to sell, you will net a 2% loss for the year.
In order to simply break even on a trade where commission is 2%, your stock must appreciate 4.1%. This is illustrated below:
$1000 – $20 commission = $980
$980 * 1.041% = $1020
$1020 – $20 commission = $1000
Small investors who would like to invest outside of Africa should also factor in the costs of wiring money. This could be as much as $50, depending on what your local bank charges for this service. As you can see, this can take a huge bite out of your investment return.
Other tips for investing in small amounts?
What advice do you have for Nicky and other new investors who would like to invest small amounts in African stock markets? Let us know in the comments!