The Nairobi Stock Exchange

By Jasan Njoroge Wanyoike

In order to understand the stock exchange we must venture to the rationale for it: Why does it exist?

Most people have been involved in trade in its simple forms, say, buying tomatoes in the grocery shop and giving money in exchange for the tomatoes. Well, that is the basic theory of tra de and that is what the stock exchange means in its rudimentary form.

In order to understand the stock exchange we must venture to the rationale for it: Why does it exist?
Most people have been involved in trade in its simple forms, say, buying tomatoes in the grocery shop and giving money in exchange for the tomatoes. Well, that is the basic theory of tra de and that is what the stock exchange means in its rudimentary form.

But let us start by understanding the jargon. An exchange is a market place. Yes, it is that simple! But what an exchange trades in are shares (the Americans call them stock).

A share is a piece of a company; the value paid for the share. The number of shares bought means you own a piece of that company equal to those shares times their value.

Why Then Does the Price Keep On Changing?

Once the share has been bought it can always be sold to a third party, presumably at the price it was bought at. But as we know the price keeps on changing; either rising or falling. The reason for this is that at any one time the share is expected to represent the value of the company. Supposing now that initially our company was making 2,000 shillings as profit per year which it distributes to shareholders (owners) per year (read dividends). Then the owner of the share will get some return from his investment which means that the value of the share may depend on the dividends it gives and to some extent the profits it makes. Note that these are very simplistic assumptions and in practice many mathematical models are used to evaluate the share price based on the profits and dividends a company makes.

But remember: shares are traded at the stock exchange, and like any normal market the differences of supply and demand determine the price, which brings us to other factors that determine the price every second. Yes, every second because any trade takes just a click of a computer in the automated system at the NSE. Its logic: if a huge number of people want to buy the share at a various low prices (everyone quotes his own price) and only a few people want to sell at a high prices then only those who can raise their bids get the share at the high price. Well things are not as simple as this but that is the basic concept.

More Jargon

You may ask: How do the investor s make money from their shares? Simple. If the share rises and they sell it, they make a profit called capital gains and if the company gives dividends they get their returns. Speculators are short term investors who invest in shares by just studying their movement. This form of study is called technical analysis. Investors who concentrate on the value expected of the company from its performance (i.e. profits, cash flows, assets, management etc) are longer term investors and thy do what is known as this is called fundamental analysis.

The market has many shares of many companies and usually trades on all these shares happen on designated trading days. Analysts have come up with ways to assess the market performance as whole through indexes (such as the NSE-20 share index) which takes into account the movement of the shares as a group in order to generalise the market movement. Hence the 20-share index has a selected group of 20 shares which meet certain criteria. If this group as whole rises in value the index goes up, if it falls, the index goes down. So we can now guess what the NSE- All share index measures. But then why the 3000 figures, well that’s because there are many shares and the index has been measured since the 1960s cumulatively.

Bulls, Bears and Pigs

Sometimes the markets will tend  to have rising prices, which you agree with me is what everyone wants( inasmuch as the investors above are concerned but more advanced markets have ways in which you can make profits from falling prices!). This phenomena of rising prices signifies a bull market, analysts will tell you that the market is bullish. When prices are going down it is referred to as a bear market. Well the pigs’ part isn’t official but some wise investor suggested that bulls make money, bears make money and pigs get slaughtered. And you can guess what ‘pigs’ refers to.

Back Home

Like any market, the stock exchange has rules and a lot of them too so it is not as simple as buying and selling shares. At the NSE for example you can’t buy or sell less than 100 shares per trade (but well there is trade of even 1 share which is done under other provisions which cannot be explored under this article). Trade is controlled directly by the Nairobi Stock Exchange. And just so you know, not everyone trades at the NSE only 15 people do. These people act as agents (stock brokers) and you place your orders through them.

There is an authority which has been put up to check the relationship between brokers and traders. This is known as Central Depository & Settlement Corporation (CDSC). It safeguards the assets of traders. As a result of these anyone who wants to trade at the NSE must register with them and is given a central depository system (CDS) account. This operates more like a bank account only it is proof that you own shares in various companies. Before this system, traders had to have share certificates to show that they own shares in a given company. This process was very slow. There’s is still a lot more to learn in order to trade at the bourse. Say what is an IPO? Are there people who can’t trade at the bourse? Do prices rise or fall indefinitely in the market? What determines the price of each trade? Who is Warren Buffet and how come he made such a huge fortune in the market?

Jasan is a 3rd year Bachelor of Quantity Surveying student at the University of Nairobi.

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