Investing in the stock market can seem complicated when you are just starting out. From understanding share prices to opening a CDS account, there are terms you will encounter along the way. Knowing what they mean can help you make informed financial decisions and better understand how Kenya’s stock market works.
Here are 10 essential equity investment terms worth knowing.
1. Equities
Equities represent ownership in a company. When you buy shares in a listed company, you become a shareholder and own a portion of that business. If the company performs well, your investment may increase in value, and you may receive dividends. However, if the company struggles or market conditions change, your investment may lose value. Equities can offer opportunities for long-term growth, but returns are never guaranteed.
2. Shares
Shares are units of ownership in a company. Think of a company as a large cake, with each share representing a small piece of it. When you buy shares, you acquire an ownership interest in that business. Investors buy shares for different reasons, including the potential to earn dividends or benefit from an increase in share price. The value of your shares will depend on factors such as the company’s performance, market demand and wider economic conditions.
3. Nairobi Securities Exchange (NSE)
The Nairobi Securities Exchange is Kenya’s main securities exchange, providing a marketplace where investors can buy and sell shares of listed companies and other securities. It enables companies to raise capital from investors and gives individuals an opportunity to participate in the financial markets. For Kenyans interested in investing in local businesses, understanding how the NSE operates is a useful starting point. Share trading is conducted through authorized market intermediaries, subject to the applicable rules and regulations.
4. CDS Account
A Central Depository System (CDS) account is used to hold securities electronically, rather than through physical share certificates. If you want to invest in shares listed on the NSE, you will generally need a CDS account opened through an authorized Central Depository Agent, such as an eligible stockbroker or investment bank. The account records the securities you own and helps facilitate transactions when you buy or sell shares. Before opening one, confirm the requirements, services and applicable charges with your chosen intermediary.
5. Share Price
A share price is the amount at which a share trades in the market. Share prices can rise or fall depending on factors such as company performance, investor demand, economic developments and market sentiment. For example, if you buy a share at KSh 20 and its price increases to KSh 25, your investment has increased in value. If the price falls to KSh 15, its value decreases. Remember that a low share price does not automatically mean a company is a good investment; it is important to consider the business’s overall financial position and prospects.
6. Dividends
Dividends are payments that a company may distribute to its shareholders, usually from profits or other legally distributable reserves. For investors, dividends can provide a potential source of income in addition to any change in share price. For example, if a company declares a dividend of KSh 2 per share and you own 100 eligible shares, you would receive KSh 200 before applicable taxes. However, not all companies pay dividends, and payments may vary from year to year depending on the company’s financial performance and decisions.
7. Capital Gains
A capital gain occurs when you sell an investment for more than you originally paid for it. In equities, this happens when you sell your shares at a higher price than your purchase price. For example, buying 100 shares at KSh 20 each and later selling them at KSh 25 each results in a KSh 500 gain before transaction costs and applicable taxes. However, if the share price falls, you may make a loss instead. Capital gains depend on market movements, so investors should avoid assuming that share prices will always rise.
8. Bull Market
A bull market describes a period when share prices generally trend upwards, often reflecting positive investor sentiment and confidence in the economy or business environment. During such periods, investors may expect companies to perform well, which can increase demand for shares. However, rising prices do not mean every company will perform positively, and markets can change direction unexpectedly. For investors in Kenya, understanding market trends can provide useful context, but investment decisions should still be based on research, personal financial goals and risk tolerance.
9. Bear Market
A bear market describes a period when share prices generally trend downwards, often because of economic uncertainty, weaker business performance or declining investor confidence. During such periods, the value of an investor’s portfolio may decrease, which can be unsettling, particularly for beginners. However, falling markets do not affect every company in the same way, and a decline in share prices does not automatically mean every investment should be sold. Understanding your investment goals, the reasons behind market movements and your ability to withstand losses can help you make more considered decisions.
10. Market Capitalization
Market capitalization, often called market cap, is the total market value of a company’s outstanding shares. It is calculated by multiplying the current share price by the number of outstanding shares. For example, a company with 10 million outstanding shares trading at KSh 20 per share would have a market capitalization of KSh 200 million. This measure helps investors understand a company’s size in the stock market and compare it with other listed businesses. However, market capitalization alone does not determine whether a company is financially healthy or a suitable investment.
Start Your Investment Journey with Knowledge
Understanding these 10 terms can help you become more familiar with equities and the Nairobi Securities Exchange. Whether you are a young professional, entrepreneur or first-time investor, building your financial knowledge is an important step towards making informed investment decisions.
At Standard Investment Bank, learning about investment opportunities and understanding the risks involved can help you approach your financial goals with greater confidence.
