The Capital market is complex. Many individuals feel embarrassed asking questions about the capital market which shouldn't be. Warren Buffet, a great investor, gathers more knowledge about finance and investing concepts daily.

There are unlimited resources available to gather information about investing. The Capital Market Authority (CMA) which regulates the capital market and stock exchange in Kenya has investor educational materials.

These materials are available on their website www.cma.or.ke and are accessible to all. Also, the Nairobi Stock Exchange Mobile App is a must-download for every investor. This app displays securities available for investing and compares investor companies using graphs.

In this article, we shall give answers to some commonly asked investing questions. Let's dive right in!

Common Questions

1. What is the function of the Nairobi Stock Exchange (NSE)?

A stock exchange is a spot, either physical or virtual, where stocks are traded. Also known as the Nairobi Securities Exchange, the Nairobi Stock Exchange (NSE), serves as the national stock exchange of Kenya.

Companies listed on the NSE raise capital through the selling of shares and reward their investors with dividends after an agreed period. The NSE functions as a place where securities are traded. Other roles of the NSE are highlighted below:

• Data Services: The NSE displays the market, bond, derivatives, and equity statistics of quoted companies daily. The unquoted companies have their statistics shown through the Unquoted Securities Platform (USP). It also shows the top gainers, losers, and the percentage change in their prices. This information enables the public to make an informed decision.

• Facilitate the trade of futures contracts: This is undertaken by NEXT, the NSE derivatives markets. NEXT is regulated by the CMA and allows you to trade Equity Index and Single Stock Futures.

• Digital Academy: The NSE offers training to the public on investment-related concepts, helping them gather knowledge at a given fee.

2. Who is a Broker?

 A broker is a middleman between the investor and the exchange. The stock exchange receives orders only from members of the exchange, hence the need for brokers. A broker, whether an individual or firm, places orders on the security exchange on behalf of the investor.

A broker is compensated by commissions, fees, or payments from the security exchange itself. The Capital Markets Authority oversees the activities of brokers in Kenya.

There are two types of brokers which are stockbrokers and forex brokers. A stockbroker buys and sells stocks on behalf of investors while a forex broker provides a platform for trading foreign currencies.

A forex broker is further classified into Dealing Desk and Non-dealing Desk brokers. A Dealing Desk broker, also known as a market maker, fixes a bid and ask price and waits for a trader to place orders within that range.

Once an order has been placed, the brokers search for a match from their other traders or an external liquidity provider. If a match cannot be found, then the dealing desk broker takes the opposite side of the investor's trade.

On the other hand, the non-dealing desk brokers do not take the opposite side of the investor's trade. They can either be Electronics Communication Network (ECN) brokers or Straight Through Processing (STP) brokers. They work directly with liquidity providers. All forex brokers in Kenya are non-dealing desk brokers.

Online share trading has become prevalent due to platforms like MetaTrader and cTrader. These platforms provide easy stock trading from your home and on the go.

3. What is a Derivative?

Simply put, a derivative is a financial contract that relies on the value of one or more assets. The underlying assets are mostly stocks, bonds, market indices, commodities, and currencies.

This contract involves two parties that can trade on an exchange or over-the-counter (OTC). Since a derivative is dependent on leverage, it is very risky to undertake. Derivatives can be in the form of futures, options, and CFDs. Derivatives are used to hedge risk and to speculate on price movements.

 Firstly, Futures are a financial contract between two parties for a buyer to claim possession of an asset or a seller to sell an asset at a determined price in the future. For futures, an investor speculates the price of an asset at a future time hoping to make a profit from price fluctuations.

The trader can buy or sell the assets at the set price on the agreed date or sell off the contract before its expiration. Futures trading is highly risky due to leverages and volatile price instabilities of assets in the market. Futures are traded on an exchange.

Secondly, options are similar to futures in the sense that prices are set for an asset at a future time. The major difference however, is that the buyer or seller is not compelled to take action at the expiration of the contract.

Contract for Difference (CFD)

A CFD is a contract that allows you benefit from rising and falling prices of an underlying asset without actually owning the asset.

If you think the price of an asset will rise you ‘Buy CFDs’ and if you think the price of an asset will fall you ‘Sell CFD’s.

If you choose to BUY or go long on CFDs, your broker takes the opposite SELL position thus going short.

One of you will be wrong in your prediction and whoever that is will pay the other party the price difference.

The regulated forex brokers allow CFD trading. For example, FXPesa allows trading on 4 Asset Classes including forex, CFDs on indices, commodities & shares. They are is one of the 6 regulated forex brokers.

4. What is the difference between Investing and Trading?

Although investing and trading are aimed at profit-making, the concepts are different. Investing is geared at generating wealth over a long period by holding financial instruments such as stocks and bonds.

Investors are not concerned about daily changes in the prices of their assets since the investment is for the long term.

Trading, however, is for a shorter period. The trader takes advantage of the rise and fall in the value of financial instruments and takes necessary action. A trader buys when the prices are low and sells when the prices go up thereby making profits.

5. What is Forex Trading?

Forex, also known as foreign exchange, is a market for exchanging currencies. Forex has the largest most liquid asset market in the world. The market adopts over-the-counter trading and is available 24 hours 5 days a week.

Big institutions, banks, retail investors, and traders are participants in the forex market. Currencies are traded in pairs example EUR/USD, and profit is realized from speculating the rise or fall in the value of one currency against the other.

To trade forex in Kenya, you must sign up with a CMA regulated forex broker in Kenya who will offer you their online platform to trade on. There are only 6 regulated online forex brokers in Kenya & these brokers also have local offices.

Care must be taken to choose a broker whose online app supports the popular MetaTrader platform and whose fees and spread are not exorbitant.

For example, FXPesa is one of the largest forex broker in Kenya. when you look at this list of Best Forex Brokers in Kenya, you will realize some of them charge higher fees and offer more currencies than others.

The CMA has restricted leverage brokers can offer clients to 1:400 but if you are not experienced, you should opt for lower leverage as it can multiply your losses.

6. What is the difference between an ETF and Mutual Fund?

Exchange-traded funds (ETFs) and Mutual Funds are a collection of different assets that provide portfolio diversification to investors. Mutual Funds have been in existence since 1924 while ETFs which were launched in 1993 is relatively new.

A major difference between Mutual Funds and ETFs is that Mutual Funds can only be purchased at the close of each trading day while ETFs can be bought and sold just like stocks. 

In previous times, Mutual Funds have been actively managed with continuous buying and selling of securities within the fund resulting in higher fees and operation costs.

On the other hand, ETFs have been passively managed with little operating costs. In recent times, however, ETFs are becoming actively managed.

Mutual Funds can be classified as open-end funds (no limit to the number of shares available for sale) or close-ended funds (fixed number of shares).

7. What is a Bond?

A bond is a secure form of investment whereby you borrow the government or a company money to run its operations. It is a low-risk investment that accrues interest once every six months.

Bonds issued by the government are government bonds while those issued by companies are called corporate bonds.

The Central Bank auctions treasury bonds every month. The National Treasury also issues tax-exempt infrastructure bonds.

Kenyan government bonds have a fixed rate of interest which is usually paid twice in a year. Your initial capital would be paid on the maturity date of the bond.

You can buy government bonds from authorized banks during the Central bank of Kenya’s Primary auction or you could buy from the NSE which is the secondary market.

You can find information on bonds available when you download the NSE mobile app to your phone.

 Summary

With the answers provided above, you will understand financial concepts in a simple and more clear form. Also, with this knowledge, you should be able to initiate your research make more informed decisions.

Mind you, the information provided doesn't serve as financial advice. Online share trading and complex instruments like forex trading are risky and investors should tread with caution.