Investing in stocks, bonds and mutual funds is an option for every Kenyan. As long as you’re an adult, 18 years or older, you are encouraged to invest in any of these three for long-term benefits. According to latest reports, young people below the age of 40 are the most active investors in bonds and stocks. This is because as people grow older and approach retirement, they prefer to hold their savings in cash or cash-easy options. One advantage of bonds out of the three options discussed here is that they allow you to recover possible losses while reaping compounding benefits of growth. The trick is to fully understand how the market works.
The first step is to consider your options. Do you really need to invest in stocks? Will bonds work well for your situation? If you’re brand new to investing, take some time to get the lay of the land. Consider joining an investment group, and conduct some research on your own. By the time you take your money out, you should fully understand what a stock means, what a bond means, and what a mutual fund is. Furthermore, you should have understood the advantages and disadvantages of investing in any of the three and the sacrifices you’ll be required to make over the course of the investment.
Companies and Governments issue bonds to fund day-to-day operations. Oftentimes, a company or the Government may also issue a bond to fund a particular project. Buying a bond is like lending your money to the issuer for a specific period of time. So, if you bought a Ksh. 1 million bond from the government, you would be lending the government Ksh. 1 million.
Maturity date is the time when the loan becomes due. Typically, the issuer will provide a maturity date which is the time after which you will get back your investment. So, a bond that matures after 10 years allows you to get your investment after the 10 years. Some special types of bonds can be “called.” If a bond can be called earlier than the date of maturity, you may ask for your principal earlier. The length of the maturity period is called the “term.”
The person borrowing the bond will offer an interest on the bond. In fact, it is the rate of interest and the reputation of the company issuing the bond that often drives up bond sales. Interest is paid every year, and the principal is returned at the end of the maturity period.
See Also: How to Invest in Kenyan Real Estate
The face value of a bond is known as its “par value” while the interest is referred to as the “coupon.” A bond with a face value of Ksh. 1 million and a 7% interest rate has a Ksh. 7,000 coupon. Normally, the money will arrive in two portions, after every six months. So, you’d receive Ksh. 3,500 every six months. A popular term in the bond market is “coupon rate.” In the above example, the coupon rate is 7%. Yield is the actual earning on the investment and is calculated as the coupon rate divided by the price. In our example, if you if you bought a bond worth Ksh. 1 million and held onto it for the term of the bond, the yield would be 7%.
One important thing to remember is that prices of bonds vary over the trading day. Consequently, yield will also fluctuate over this period. Coupon payments, however, remain constant.
There are several types of bonds; the choice will usually depend on your situation. Treasury Bills, commonly referred to as T-Bills have very short maturity periods, typically between 1 and 13 years. Often you’ll buy them at a discount of the face value and get the face value in full at the end of the term. The difference is your profit.
Treasury Notes mature in 2 to 10 years with interest paid bi-annually. They have minimum investment rates. Treasury bonds have very long maturity periods. Again, interest is paid semi-annually. Other types of bonds include Zero-coupon, Inflation-indexed treasuries, corporate bonds, and municipal bonds.
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In Kenya, the main stock market is the Nairobi Stocks Exchange. A stock market is a place where public limited companies and other financial organizations come to buy and sell bonds and other derivatives.
The main difference between the stock market and a real market is that stock markets are risk-free. You can invest in stocks directly or indirectly.
Direct investment means that you buy shares in a company and become a shareholder in that company. The truth, however, is that even in direct investment you’ll need the assistance of a third-party broker. The Nairobi Stocks Exchange allows investors to buy and sell shares independently through share dealing platforms.
Indirect investment is the more common option. Here, you invest in more than one company therefore spreading any risk. Indirect investment is mostly done through an open-ended fund. The money in the fund is ring-fenced so that even if the company defaults, the money is still safe.
Mutual funds are some of the most over looked, yet probably the easiest way to invest; much easier than both stocks and bonds. A mutual fund is a pool of money, often from similar minded investors. You can sell your shares when and if you want. All shareholders of the fund benefit from the fund and share in any losses. Mutual funds have mostly been used as a way of increasing diversity in investment to minimize risk.
There are 5 categories of mutual funds;
- Dramatic growth funds – where you invest in stocks with high potential for rapid growth.
- Fund portfolios – these funds choose to invest in well established, stable, blue-chip companies with promise for aggressive growth.
- Income funds – that invest in more than one fixed-income securities
- Balanced funds – are a combination of growth and income funds.
- Money market mutual funds – these funds aim at maintaining capital reservation.
You’ve probably also head of closed-end and open-end funds. Closed-end funds operate for a fixed period of time; they are only open to subscription at specific times of the year. Open-end funds on the other hand remain open for subscription all through the year.
You should consider doing one of these three investment options. Once you feel that you’re ready to make the move, seek advice from your financial adviser and let them help you make a shrewd investment.