What Are Shares in Kenya? [Stocks Explained]

Shares, also known as stocks or equities, represent ownership in a company. When you purchase shares of a company, you become a partial owner or shareholder. Companies issue shares as a means of raising capital to finance their operations, growth, and expansion.

Each share represents a portion of the company’s ownership and carries certain rights, such as voting rights in major company decisions and a share in profits through dividends. Shareholders have the opportunity to benefit from the company’s success in the form of capital appreciation if the stock price increases.

The value of shares is determined by various factors, including the company’s financial performance, industry conditions, market sentiment, and supply and demand dynamics. Share prices can fluctuate frequently based on market conditions and investor perceptions.

You typically buy and sell shares on stock exchanges, where investors come together to trade securities. Investors can buy shares through brokerage accounts or participate in initial public offerings (IPOs) when a company offers shares to the public for the first time.

Common Stock Market Terms

To understand shares or stocks better, let’s break down the key elements and concepts involved:

• Share Capital: Share capital refers to the total value of shares issued by a company. It represents the ownership stake in the company that is available for purchase by investors. Share capital is usually divided into a specific number of shares, each with a nominal value.
• Nominal Value: The nominal value, also known as the face value or par value, is the value the issuing company assigns to each share. It is often a small amount (e.g., KES 1 or KES 5) and does not necessarily reflect the market value of the share.
• Market Value: The market value of a share is determined by the forces of supply and demand in the stock market. It represents the price at which investors buy and sell shares. Market value can fluctuate based on various factors, including company performance, economic conditions, industry trends, and investor sentiment.
• Dividends: Dividends are a portion of a company’s profits distributed to shareholders. When a company earns profits, it may choose to distribute a portion of those earnings to shareholders as dividends. Dividends can be paid in cash or additional shares (known as bonus shares).
• Voting Rights: As a shareholder, you may have the right to vote on important company matters. This can include decisions related to the appointment of directors, mergers and acquisitions, changes to the company’s constitution, and other significant corporate actions. The voting power typically corresponds to the number of shares you own.
• Stock Exchanges: In Kenya, the Nairobi Securities Exchange (NSE) is the primary stock exchange where shares of listed companies are traded. The NSE provides a regulated platform for buying and selling shares, ensuring transparency and fair market practices.

Understanding Shares in Kenya

Let’s consider an example to illustrate shares in Kenya:

Company XYZ is a publicly listed company on the NSE. It has issued 1,000,000 shares with a nominal value of KES 10 each. If you decide to invest in Company XYZ by purchasing 1,000 shares, you would own a 0.1% stake in the company (1,000 shares / 1,000,000 shares). If the market value of each share is KES 15, your investment would be valued at KES 15,000 (1,000 shares x KES 15).

As a shareholder, you may be entitled to receive dividends if the company declares them. If Company XYZ announces a dividend of KES 1 per share, you would receive KES 1,000 in dividends (1,000 shares x KES 1).

Additionally, as a shareholder, you would have the right to attend and vote at the company’s Annual General Meeting (AGM) and participate in decision-making processes, depending on how many shares you own.

Types of Shares in Kenya

There are primarily two types of shares that companies issue:

• Ordinary shares
• Preference shares

Ordinary Shares

Ordinary shares, also known as common shares, are the most common type of shares. Holders of ordinary shares have ownership rights in the company and typically enjoy voting rights in company decisions, such as electing the board of directors.

They also have the potential to receive dividends if the company distributes profits. In the event of liquidation, ordinary shareholders are entitled to a share of the company’s assets after other obligations are settled. Ordinary shares carry a higher level of risk and potential reward compared to other types of shares.

Preference Shares

Preference shares, also called preferred shares, have certain preferential rights over ordinary shares. Preference shareholders receive a fixed dividend payment before any dividends are paid to ordinary shareholders. This fixed dividend rate is often stated as a percentage of the nominal value of the preference shares.

Unlike ordinary shares, preference shares usually do not carry voting rights. However, they may have priority over ordinary shareholders in the event of company liquidation, entitling preference shareholders to receive their investment back before ordinary shareholders. Preference shares are generally considered less risky than ordinary shares but may have limited potential for capital appreciation.

Companies can have different classes of shares within these broad categories, each with its own rights and restrictions. For example, companies may issue different classes of ordinary shares with varying voting rights or different classes of preference shares with different dividend rates or redemption features.

When considering investing in shares in Kenya, it’s advisable to carefully review the company’s articles of association and prospectus to understand the specific rights and characteristics associated with the shares being offered. Consulting with a financial advisor or broker can also provide valuable guidance in navigating the different types of shares available in the Kenyan market.

Why Do Companies in Kenya Issue Shares?

Companies in Kenya, like in other countries, issue shares for several reasons:

• Capital Generation: One of the primary reasons for issuing shares is to raise capital. By selling shares to investors, companies can raise funds to finance their operations, invest in new projects, expand their business, or repay debts. The issuance of shares allows companies to access a broader pool of capital beyond traditional loans or borrowing.
• Business Expansion: Companies also issue shares to facilitate their growth and expansion plans. The additional capital raised through share issuance can be used to enter new markets, acquire other businesses, invest in research and development, or upgrade infrastructure. By attracting investors through share offerings, companies can fund their expansion initiatives and seize new opportunities.
• Dilution of Risk and Liability: By issuing shares, companies can dilute the risk and liability borne by a single individual or a small group of owners. Shareholders, as partial owners, share the risks and rewards of the business. This spreads the financial burden and reduces the exposure of the company’s owners to potential losses.
• Enhancing Financial Stability: The infusion of capital from share issuance can improve a company’s financial stability. It can strengthen the balance sheet, increase liquidity, and provide a cushion against economic downturns or unforeseen circumstances. With a more stable financial position, companies can better withstand challenges and pursue long-term growth.
• Attracting Talent and Expertise: Offering shares as part of employee compensation packages can be an effective way to attract and retain talented individuals. By providing employees with an opportunity to become shareholders, companies can align their interests with the success of the business and foster a sense of ownership and commitment among employees.
• Enhancing Company Image and Reputation: Publicly issuing shares and becoming listed on a stock exchange can enhance a company’s visibility and credibility. It can improve the company’s reputation and perception among investors, customers, and business partners. When a company is publicly traded, it can also provide access to potential partnerships, collaborations, and further funding opportunities.

Issuing shares also comes with certain responsibilities and obligations, such as financial reporting, compliance with regulatory requirements, and addressing the interests of shareholders. Companies must carefully consider their capital structure and evaluate the benefits and implications of issuing shares before proceeding.

Is Investing in Shares Risky?

Investing in stocks in Kenya carries inherent risks. It’s essential to understand and assess these risks before making investment decisions.

Here are some key factors that contribute to the risk associated with investing in stocks in Kenya:

• Market Volatility: The stock market can be subject to volatility and fluctuations in share prices. Economic conditions, political factors, global events, and investor sentiment can influence market volatility. Prices of stocks can rise or fall rapidly, impacting the value of investments.
• Company-Specific Risks: Investing in individual companies’ stocks exposes investors to company-specific risks. Factors such as poor financial performance, management issues, competition, industry changes, or legal and regulatory challenges can affect the value of a company’s stock.
• Liquidity Risk: The liquidity of stocks refers to how easily investors can buy or sell them in the market without significantly affecting their price. Some stocks in Kenya may have lower trading volumes, making it difficult to execute transactions at desired prices, especially for large positions.
• Currency Risk: If you are investing in stocks denominated in a currency other than your own, currency fluctuations can impact your returns. Changes in exchange rates between the Kenyan Shilling and other currencies can affect the value of your investments.
• Regulatory and Political Risks: Changes in regulations or political stability can impact the stock market. Government policies, legal frameworks, taxation, and political instability can introduce uncertainties that affect stock prices.
• Market Information and Transparency: Access to accurate and timely information about companies can be crucial for making informed investment decisions. In some cases, obtaining comprehensive and up-to-date information on companies listed on the Kenyan stock market may be challenging, limiting the ability to assess risks adequately.

While investing in stocks carries risks, it also offers the potential for returns and wealth accumulation. Investors can manage and mitigate risks through thorough research, diversification across different sectors and companies, long-term investment strategies, and staying updated on market trends and news.

Consulting with a qualified financial advisor, conducting thorough fundamental and technical analysis, and understanding your risk tolerance are crucial steps to make informed investment decisions in the Kenyan stock market.

How Do You Buy Shares in Kenya?

Specific processes and requirements for buying shares in Kenya may vary, so consult with your chosen stockbroker for detailed instructions and guidance tailored to your situation.

The Bottom Line

Shares in Kenya represent a pathway to ownership, growth, and financial opportunities. They embody the essence of investment in the vibrant Kenyan market, where companies seek capital, investors pursue returns, and individuals strive to secure their financial future.

Ordinary shares and preference shares each carry unique characteristics and potential rewards, empowering investors to tailor their strategies to align with their goals and risk tolerance. Share issuance serves as a catalyst for growth and enables companies to tap into diverse sources of capital, propelling their aspirations to new heights.

While investing in shares entails risks, such as market volatility and company-specific uncertainties, the potential rewards are enticing. By approaching investments with diligence, research, and a long-term perspective, you can navigate the risks and optimize your chances of success in the Kenyan stock market.