- For those with a short-term investment plan such as to buy a car, house wedding etc, experts advise you to flee from the stock market as a crash will not afford your investments time to recover and meet your goal.
- Long term investment goals involve retirement plans, saving for children's university education etc.
If you are thinking about investing, then there are probably so many questions bothering you. These questions could range from the type of investments, how much to invest, where to invest, what are the risks etc.
While it is a fact that investing is a path to financial security and freedom, not many people are sure how to go about it.
This ignorance breeds fear and makes many lose out on genuine investment opportunities.
With this educational topic, we'll try to provide clear answers to the seven most common questions which bother most people about investing.
Our answers will be made so simple that even the layman on the streets will have a clear understanding of what investing is all about.
1. Where Should I Invest if I'm New to Investing?
The question of where to invest inundates new investors or those with intent to invest. Although there is no straightforward answer to this question, experts advise you to decide what you want to achieve. This means you set an investment goal.
Your investment goal could be long-term or short-term.
Long term investment goals involve retirement plans, saving for children's university education etc.
If you fall in this category, you should invest in equities as they do deliver greater returns in the long run.
Investing in the stock market for long-term investors is also good as it gives your investments time to recover in the event of a stock market bearish cycle.
For those with a short-term investment plan such as to buy a car, house wedding etc, experts advise you to flee from the stock market as a crash will not afford your investments time to recover and meet your goal.
Those with a short-term investment goal are advised to put their money in less risky investments such as fixed deposits, savings account, treasury bills, government bonds etc.
2. Is Trading the same as Investing?
No, trading and investing are two different things.
Karan from Safe Forex Brokers explains that “Trading involves speculating on the future price trajectory of different financial instruments. It is buying and selling securities with the intent to make a profit from their price movements. “
“A typical example of trading or speculation is forex trading where traders try to predict the rise and fall in prices of currencies of different countries while trading with margin," he says.
"Trading is highly risky, especially when it involves margins. It is advised that only highly skilled, experienced and professional traders engage in this form of trade,” Karan explains.
On the other hand, investing involves seeking returns by buying and holding securities such as stocks, bonds and other investment instruments for more than a year, while being fully aware of the downside risks.
Investment usually lasts over a while with some investors holding their investments lasting decades, while traders do enter and exit the market sometimes in a matter of minutes.
Trading and investing sound similar, but there is a difference between both.
3. How Much should I Invest?
The question about how much of a person's income he should invest has bothered both investors and investment experts over the years.
This question, like others, also does not have a straightforward answer. It all boils down to your income, expenditure and investment goals.
The benchmark for investing is to invest not more than 60 percent of your income so as to have an emergency fund to take care of urgent needs.
Going to touch your investments each time there is an emergency incurs brokerage fees or exit charges and can be counter-productive in the long run.
This percentage should go for equity stocks and it should be spread among different company stocks in diverse industries, or you can simply invest in Index Funds.
Investment advisors believe that you should start investing immediately you start earning a steady income and you could invest any amount. You can buy stocks in companies for a few thousand Shillings.
However, you are also advised to go for least risky investments where you understand the downside.
Starting to invest early in one's career is very crucial as during this period you could invest a sizeable chunk of your income since your expenses are few.
Finally, your investment goals and your lifestyle will also determine how much of your income you're willing to risk or invest to meet these set goals irrespective of their short-term or long-term status.
Short-term goals can usually gulp more of a person's income than long-term goals.
4. Which Stock or Instrument should I Invest in?
There is no direct answer to it.
There is no single or particular stock or instrument to invest in that will guarantee a good income in the end. Any company can go bankrupt or fail in the future.
However, your choice of stock to invest in should factor in these two parameters; comprehensive knowledge of the company and knowledge of the industry of the company and its future prospects.
Experts also advise you should avoid investing all your funds in one company's stocks. It should be spread across different companies .
You can invest in a basket of stocks from different sectors or you can create your stock portfolio following benchmark index or you can just put your money in a mutual fund or Exchange traded fund (ETF) that tracks a market index such as the FTSE NSE Kenya 15 Index.
The NSE Kenya 15 index tracks the performance of the 15 most valuable companies listed on the Nairobi Stock Exchange.
With benchmark index like NSE15, you can track the past performance and volatility while making the investment decision.
Investing in companies in the Index Fund diversifies your risk & protects your investment since it is nearly impossible for all companies listed on the index to fail together.
This guarantees you income from an average of dividends from the companies in the index. Unlike investing in one particular company’s stock where the chances are high that the company might record losses.
You can also invest in blue-chip companies listed on the Nairobi Stock Exchange (NSE) such as Safaricom that have proven to be a safe and reliable investment over the years.
5. How do I Get Started with Investing?
Getting started on investing has to do firstly with your choice of investment.
For example, if you wish to invest in a public company listed on the stock market in Kenya, you have to pass through a Capital Markets Authority (CMA) licensed stockbroker.
All stockbrokers in Kenya must be licensed by the CMA and doing business with an unlicensed stockbroker means you may be patronizing scammers.
If you suffer loses while dealing with unlicensed brokers, you will not be compensated from the investor compensation fund (ICF) which was set up to offer redress to investors who lose money due failure of a license holder to carry out his obligations.
The list of CMA approved stockbrokers is available on its website. The Nairobi Stock Exchange (NSE) is the regulated exchange where stocks are traded in Kenya.
Alternatively, passive Kenyan investors can choose to invest in CMA regulated mutual funds. This is another investment option.
6. What is Diversification?
The term diversification means a lot of things to different people.
To investors, diversification means having investment in different company’s stock or having different investment options.
What this means is that your investment portfolio should contain assets from different sectors and in different parts of the world.
The practical description of this is that your investment portfolio should contain investments in different industries for example agriculture, health, tech, energy, construction etc. and in different parts of the world such as Europe, the U.S., Africa, the Middle East etc.
The idea behind diversification is not to put all your eggs in one basket. This means diversification aims at protecting one's investment in the event of a downturn in a particular sector.
For example, a rise in oil prices will not affect your overall investment due to higher inflation as other sectors that are protected against inflation will serve as a cushion.
Also, a recession in a particular region will not cause much damage to your investment as economic growth in other regions of the world will limit the losses.
It is for such reason investment advisors ensure investors spread their investments across stocks and bonds in different industries and economic regions.
7. What are the Taxes on the Profits from my Investment?
According to the Kenya Revenue Authority, the profit tax on capital gains in Kenya is 5%.
Profit realized from sale of stock held for more than one year before selling is termed long term capital gain (LTCG) and is taxed at 5% and is a final tax meaning it is not going to be taxed again.