Brokerage commissions and fees on the Nairobi Securities Exchange are brutal.
Every time you buy or sell a Kenyan stock, no matter your broker, you will be charged a fee equivalent to 2.1% of the trade’s total value.
Of this total fee, 1.76% of the trade value goes to your broker and 0.34% goes toward taxes and statutory fees.
[Note: If the trade value is greater than Ksh 100,000, the commission rate is 1.85% and can be negotiated lower on very large deals.]
This means frequent trading will decimate your portfolio performance. You must be a patient investor to have any chance of pocketing a positive return.
How Brokerage Fees Eat Stock Profits
Let’s walk through a quick example.
Assume you bought 1000 shares of SmileSave Supermarkets at a price of Kshs 10.00 per share.
The total cost of the trade would look like this.
Kshs 10.00 x 1000 shares = Kshs 10,000
Kshs 10,000 x 2.1% commission = Kshs 210
So, you spent Kshs 210 to buy Kshs 10,000 worth of shares.
Over the next three months, the stock performs pretty well, rising 4.0%. The value of your SmileSave shares is now Kshs 10,400.
Kshs 10.40 x 1000 shares = Kshs 10,400
A 4% return in three months is a very good return. But think carefully before deciding to cash in. Why? Because you’ll be charged a 2.1% commission when you sell, too.
Here’s how that would look:
Kshs 10,400 x 2.1% = Kshs 218
So, even though the value of your shares increased 4% in three months, you actually ended up Kshs 28 poorer than when you started.
Kshs 10,400 – Kshs 210 – Kshs 218 = Kshs 9,972
In order to break even on a trade with a 2.1% commission on purchases and sales, the value of your shares must increase by at least 4.3%.
That’s a formidable hurdle.
Don’t Forget the Opportunity Cost
This hurdle gets even higher when you consider that you could just put your money in a savings account at the bank and, thanks to the new interest rate rules, get at least a 4% annual return.
Therefore, if you bought a stock on the first day of the year, and sold it on the last day, the share price would need to rise at least 8.3% just to match the 4% return you could get at the bank.
To help put that in perspective, only three Kenyan stocks have appreciated by more than 8.3% in 2016.
Time Is On a Patient Investor’s Side
So, with this in mind, how do you get the numbers to work in your favor? Trade infrequently. Buy shares of a solid business that you understand well and hold onto them until you need the cash or until they appear significantly overvalued.
After all, the whole purpose of investing is to build your wealth… not your broker’s.
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