Here’s the Biggest Threat to Your Kenyan Stock Portfolio

Brokerage commissions and fees are brutal on the Nairobi Securities Exchange. Here’s how much they impact your return and what you can do to beat them.

Frequent trading is the biggest threat to Kenyan stock performance
Photo by Mike Cilliers

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.

Other Articles You May Find Useful

How to Begin Investing on the Nairobi Securities Exchange
10 Effective Ways to Pick Better Stocks

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10 Effective Ways to Pick Better Stocks

How do you pick stocks that are likely to beat the market? When it comes right down to it, the answer is simple. Invest only in stocks that treat you well and let you sleep peacefully at night.

Here are 10 specific tactics that help you identify businesses that satisfy both criteria.

How to Pick Good Stocks
Photo by Ken Teegardin

How do you pick stocks that are likely to beat the market?

When it comes right down to it, the answer is simple.

Invest only in stocks that treat you well and let you sleep peacefully at night.

And just how do you do that?

Well, the answer varies a bit from person to person, but here are 10 specific tactics that help you identify businesses that satisfy both criteria.

1. Avoid complicated companies

Stick to companies that you understand. Even better, buy only companies whose products you use regularly.

Shoprite, for example, has a straightforward business model. It sells groceries through a large network of supermarkets. Kenya’s Safaricom sells wireless phone service and operates a popular mobile payment platform, M-pesa. Dangote Cement, makes … you guessed it … cement.

Understanding a company’s business model and products gives you a clearer view of what factors contribute to its success.

2. Don’t stray from established businesses

It can be tempting to buy that fast-growing community bank or to participate in that hot IPO that’s all over the news. Resist the urge.

Investing in unproven companies can yield out-sized returns, but they often also come with a high risk of catastrophic loss.

Focus instead on companies that are known quantities, that have proven they can prosper through good economic times and bad. They may not make for scintillating conversation material at parties, but they stand a better chance of building your wealth over time.

3. Sniff for scandal

Have company executives been charged with paying bribes? Has a parent company been caught running a Ponzi scheme? Does it dump toxic sludge into waterways?

Malpractice like this is insidious, and it can take years for a company to live it down. Distrust of such companies will weigh on their share prices like a ton of bricks. There are better places to put your hard-earned money to work. You don’t need to be associated with businesses like these.

4. Revenue growth is crucial

If a company isn’t selling an increasing amount of stuff to an increasing amount of people, there’s trouble on the horizon. A company can boost earnings for a year or two by cutting costs and becoming more efficient, but if sales are stagnant, profits will eventually stagnate, too.

Look for companies with long-term revenue growth rates that exceed your local rate of inflation. That’s 7% in Kenya, 18% in Nigeria, and 6% in South Africa.

5. Insist on profitability

Take a look at a company’s profit history. Has it reported negative earnings at any point in the past five years? If so, do not buy the stock unless you thoroughly understand the reason for the loss.

Everybody loves a good redemption story, but turnarounds and cyclical stocks are tough to analyze. Stick with a business that earns money year after year, and sleep better at night.

6. Look for consistent dividends

Good companies rarely reduce their dividend, and great companies boost them every year. When you buy a stock, you become a part owner of that company. As an owner, a mature, healthy company should be able to pay you a portion of its earnings in the form of a dividend every year.

If the amount of this dividend is cut, or remains stagnant for several years, there better be a very good explanation for it. If there isn’t, there are plenty of other, more profitable places to invest your money.

7. Watch out for debt

Companies with heavy debt loads suffer disproportionately during tough economic times and have fewer resources available to them when expansion opportunities arise. What’s more, they also have less flexibility to issue dividends or buy back shares.

KenolKobil is one formerly debt-strapped company that got serious about paying off its loans in 2013. The stock’s stellar performance since then speaks for itself.

8. Shun high P/E ratios

The price-to-earnings ratio is a blunt instrument, but like a hammer, it’s nevertheless one of the most valuable metrics in your analytical toolbox.

As a general rule, stocks that are priced at a low multiple to their most recent twelve months of earnings (below 15x), will outperform stocks with high P/E ratios. The market expects stocks with high P/E ratios to grow their earnings at high rates. And high expectations often end in disappointment.

9. Take CEO share purchases seriously

Who knows more about a business than its CEO? Pretty much, nobody. So, if you see a CEO buying a large amount of shares of her own company, you can be pretty confident that good things are in store for the stock. Calgro M3’s Wikus Lategan and James Mworia at Centum are two CEOs who’ve recently made big purchases of their own shares.

10. Beware rising share counts

When a company increases its number of shares outstanding, it’s rarely good news for shareholders.

Issuing share options to employees dilutes existing shareholders’ stake in the business. Acquisitions funded by the issuance of shares dilute shareholder value and expose the company to the risk of a new venture. Rights offers dilute shareholders who don’t have additional cash to invest in the business, and indicate that the company that may be over-leveraged. And bonus share issues are essentially an attempt to weasel out of paying a dividend.

Favor companies whose total share count remains level, or, even better, reduces from year to year.

So, there you have it. The stock market offers no guarantees, but if you can identify a company that passes this checklist with flying colors, there’s a good chance you’re looking at a long-term market-beater.

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7 Reasons You Should Be Investing in Shares

Investing in shares on the Johannesburg Stock Exchange offers a host of benefits for the long-term investor. Here’s a handful.

Meet Cassandra – Cassy for short.

Cassy graduated last year – Honours in Tax – and has landed her first real gig. She got a job with a multinational company and is coming in as a junior to learn the ropes.

Cassy is long-term oriented and knows the importance of saving for the future.

She intends to open up her own tax consulting business after she has gained sufficient practical experience. In the meantime, she’ll be investing her long-term savings on the Johannesburg Stock Exchange (JSE).

Cassy has signed up with an online brokerage platform and has budgeted R700.00 a month for investing.

She’s done her homework and knows that there are costs involved in buying and selling shares.
So, to keep trading costs to a minimum, she intends to invest in the Satrix ALSI Index Fund. This fund is not only cost-efficient, but it gives her exposure to all the shares trading on the JSE, which diversifies her risk.

She decides to educate herself so that she can make her own calls on what shares to invest in next year.

If history’s any guide, her steady, consistent approach will yield a crafty little nest egg in the next 15 years – large enough for her to spread her entrepreneurial wings.

Why Cassy Loves Investing on the JSE

Cassy’s strategy capitalizes on three attractive features of investing on the JSE.

1. It’s convenient. Many South African stockbrokers offer intuitive online trading platforms. They’re easy to use and allow her to buy and sell shares with a click of a mouse.

2. A wide variety of index funds and ETFs make it easy to diversify her portfolio quickly and cheaply.

3. World-class financial reporting requirements give her excellent visibility into the goings-on at each listed company, giving her the information she needs to pick winning shares.

Meet DJ Deejay

Photo by Matt Rhodes
Photo by Matt Rhodes

Deejay is a house music DJ and has been making mad music for a good few years. His beats have proven quite popular on the Durban club scene, and he has managed to rake in some serious cash.

His friend Natasha suggested that he think about investing on the JSE:

“Deejay, take the advice of a good old friend – investing in companies on the JSE is a great way to build wealth over the long-term.

  • If you buy good companies at fair prices, you can expect the value of your shares to grow over time.
  • Many companies even pay dividends to their shareholders once or twice per year.

But keep in mind that owning shares is like being in a relationship – you don’t end it when things get rough. Buy shares of a quality company at a fair price and stick with them during tough spells. Your reward will be handsome if you remember this.”

Intrigued, Deejay contacts one of the well-known banks and informs them of his decision to invest his money.

His savings allow him to open up a premium account with access to a personal broker who will help him to build and manage a healthy share portfolio to match his long-term goals.

Why Deejay Loves Investing on the JSE

Deejay wants a decent return on his money, but unlike Cassy, he’d rather be at the club than spending an evening poring over financial reports. Investing on the JSE allows him to accomplish both aims.

4. Diversified share portfolios tend to appreciate in value over time. In fact, no other asset class has been so successful at building investor wealth.

5. Periodic dividend payments can provide Deejay with a valuable income stream as he patiently watches his portfolio grow.

6. The nature of share investing allows him to choose to be very involved in choosing stocks or, instead, turn over the task of managing his account to a trusted broker.

This Is Thulani

Thulani is a man of his word.

His photographs have been pulled off his cubicle “wall” and his mug from home is packed snugly in the box on the floor. This is it. He has finally made it.

Unlike many his age, Thulani is not afraid of retirement because he has invested enough of his income over the years in what is now a solid share portfolio to carry him through the later years of his life.

He would have loved to have his wife waiting at home for him, God is the best of planners after all.

His heart skips a beat when he thinks of his trip to Nairobi next week where he will be visiting his daughter and grandchildren.  He’ll Skype her first thing when he gets home.

Thulani will be selling off his investment in the Satrix 40 ETF month on month to cover his living expenses and a few trips here and there.

He is glad of the liquidity that his investment brings and is thankful to his younger self for thinking about him in his old age.

He hopes that his daughter has taken his advice and is investing 10% of her monthly salary each month.

Why Thulani Loves Investing on the JSE

7. In a word, liquidity. Unlike real estate and many other investment classes which take time to sell, investing in shares on the JSE allows Thulani to sell (withdraw) the money that he needs at the time that he needs it. He doesn’t need to worry that his cash will be tied up if an unexpected opportunity or financial emergency arises.

Your Turn

What questions do you have about the JSE or investing in shares more generally? Let’s hear them in the comments!

What Is a Share? And How Does It Build Your Wealth?

You spend less than you earn. You’ve paid off your debt. And you’ve stashed some emergency cash in a savings account at your bank.

Now it’s time to learn about investing in shares.

But, first things first, just what is a share, anyway? And how exactly do you make money by investing in them?

You spend less than you earn. You’ve paid off your debt. And you’ve stashed some emergency cash in a savings account at your bank.

Now it’s time to learn about investing in shares.

But, first things first. Just what is a share, anyway? And how exactly do you make money by investing in them?

What is a share?

African stock markets
Photo by Graham Holliday

Quite simply, a share is a tiny piece of a big business.

Companies sell shares to the public in order to raise funds for expansion and growth.

Pause for a moment and think about a company that produces something you use every day or week.

You might buy your groceries at Shoprite.

Or maybe you’re a Safaricom subscriber.

Perhaps you enjoy a Guinness while watching the big football match.

All three of these companies, Shoprite, Safaricom, and Guinness Nigeria, consist of hundreds of millions of shares owned by tens of thousands of investors.

The exact share count of each company is in the table below:

Total Shares
Shoprite 572,871,960
Safaricom  40,065,428,000
Guinness Nigeria 1,505,888,188

So, the moment you buy one share of a company like Shoprite, you suddenly own a tiny little piece of every Shoprite store, truck, and cash register. You own a tiny little piece of every item of food sitting on the shelves. You even own an itty-bitty piece of the stapler that sits on the CEO’s desk.

Pretty cool, right?

As a shareholder, you really are a part-owner of a business. The most successful investors never lose sight of this.

How do you earn money investing in shares?

You can make money from shares in two basic ways — dividends and price appreciation.


Dividends are periodic cash payments that a company makes to its shareholders. They are the excess profit that the company has earned in the course of its financial year and are either deposited directly into a shareholder’s bank or trading account or mailed to them in the form of a check.

Here’s the dividend that Shoprite, Safaricom, and Guinness Nigeria currently pay for each share of stock.

Dividend per Share
Shoprite R3.61
Safaricom  Ksh0.64
Guinness Nigeria N3.20

Typically, the dividend payment is pretty small compared to the price that you pay for a share. It’s usually in the range of 1 – 5% of the share’s current price. But if the company is growing and profitable, the amount of the dividend will increase steadily with each passing year.

Keep in mind, however, that not all companies pay dividends. Some young companies decide to use all of their extra cash to grow and expand. Other companies are forced to reduce their dividend or stop paying it altogether if they fall on hard times. So, dividends are never a sure thing.

The most consistent dividend-paying companies tend to be big and well-established. Their profits are so large that they can fund both growth and a dividend.

Price Appreciation

The other big reason to invest in shares is because of their potential to increase in value over time.

Share prices rise and fall from day to day. They are determined by the lowest price that any one shareholder is willing to sell his or her shares for.

So, if a company is doing very well or if its future looks promising, its share price will tend to rise. Conversely, if the company’s performance is poor or if it encounters a big obstacle to growth, its share price will tend to fall.

Here’s how the share prices of the companies mentioned earlier have changed from five years ago.

Share Price
Share Price
Price Change
Shoprite R82.73 R171.83 +107.7%
Safaricom Ksh5.85 Ksh16.50 +182.1%
Guinness Nigeria N158.51 N160.25 +1.1%

But, like dividends, there are no guarantees that a share’s price will rise. A share that’s worth R100 today might be worth R500 five years from now, but it might also be worth zero if the company fails. It all depends on the performance of the underlying business and investors’ expectations about its future potential.

As an investor, the key is to buy shares of a good company at a fair price. Do this and there’s a very good chance that the value of your shares will rise over the long-term. Then, at some point in the future, you can sell them for a healthy profit.

For more background on shares (and why companies sell them to investors in the first place) check out the story of Boniface.

What Is a Stock, Really? The Story of Boniface

It’s Your Turn

What questions do you have about shares? Let’s hear them in the comments! And stay tuned for future articles as we explore exactly how the stock market works.

How to Build an Emergency Fund and Invest with Confidence

You earn more than you spend. Fantastic!

The debt monster no longer threatens you. Excellent!

But before you dial up that stock broker, constructing an adequate emergency fund is an absolute necessity. Here’s how to do it.

emergency fund
Photo by Tom à La Rue

You earn more than you spend. Fantastic!

The debt monster no longer threatens you. Excellent!

But before you dial up that stock broker, there’s one more thing you absolutely must do.

Don’t invest without a safety net

When you look at the long-term performance of African stock markets, it’s clear that there are no guarantees that the value of any given share is going to rise.

The Nairobi Securities Exchange has dropped 3.4% over the past month. The Nigerian Stock Exchange has fallen more than 27% since last April. And the Botswana Stock Exchange’s main index was worth more five years ago than it is today.

Now, that’s not to say that you shouldn’t invest in shares. Far from it. Over the long-term, very few investments come close to matching the performance of the stock market.

But there will most definitely be bumps in the road. And if one of these stock market bumps happens to coincide with a rough patch in your career or personal life, it could leave your finances in a shambles.

If you invested all of your savings in shares, what would you do if the stock market took a nosedive at the same time you were retrenched from your job?

The shriveled value of your shares may not be enough to sustain you and your family until you find new employment, which could leave you little choice but to tangle with the debt monster once again.

This is why you need an emergency fund. It’s a safety net in the event that the stock market and your disposable income drop simultaneously.

Make sure it’s big enough to support you

To figure out how large an emergency fund you need, take a look at your monthly income and expenses chart.

(You are keeping track of them, right?)

Look closely at your total expenses over the past six months. Add them all up.

The resulting sum is the target amount for your emergency fund.

Why is six months of expenses the magic number? Because this is a reasonable amount of time for you to find a new job or otherwise replace your lost income if you’re suddenly unemployed.

Does six months seem too short? Then, by all means, save more. Build an emergency fund equivalent to nine, 10, or even 12 months of expenses.

But don’t go less than six. The job market can be tough, and it’s amazing the peace of mind that an ample emergency fund can bring.

Put it to work

Now, where should you stash all that emergency cash?

Not behind the wardrobe. Not in a coffee can. Not sewn into the hem of your bathrobe.

Not even the cleverest of hiding places will protect it from inflation.

Bankelele is one of my favorite financial bloggers.

A wise ex-banker, Bankelele tracks the price of common Kenyan household items over time. In December 2009, he noted that a two-kilogram pack of maize flour cost KES 83.00. Five years later the price had risen to KES 101.00. Over the same time period, the cost of sugar rose 25%.

Clearly, inflation will decimate any cash that you allow to become lazy.

Where to stash your cash

So, where should you put your rainy day money to work?

It should be invested in a vehicle that is

  • guaranteed against loss of principal,
  • readily accessible in the event of emergency,
  • and pays a healthy interest rate.

Many banks offer savings accounts that meet all three of these criteria. Here are a few that I’ve come across recently:

Kenya: Barclays Bank’s Zidisha Bonus Account
Nigeria: Zenith Bank’s EazySave Premium Account
South Africa: Capitec Bank’s Flexible Savings Account

In summary, a healthy emergency fund lessens the likelihood that you’ll be forced to wrestle with debt if your share investments turn sour.

Do you already have a comfy emergency fund? Fantastic! It’s now time to explore investing in shares.

Stay tuned for future articles as we explore exactly how the stock market works.

Your turn

How many months of expenses do you think is adequate for an emergency fund? Where do you think is the best place to stash it? Let us know in the comments!

Related Reading

Here’s Where You Start: The First Step Toward Successful Investing
How to Defang the Debt Monster and Reap a 43% Annual Return
What Is a Share? And How Can They Build Your Wealth?