Opinion  :: Columns  :: Nairobi Notebook


Investing in stocks 101
Eric Ombok
Published: 15-JUN-06

In the investment portal, www.fool.com, Jim Gillies writes that “Investing is a lifetime endeavour, and sometimes we’re too clever. We trade in and out, or we get spooked, or we think that just because a stock has risen 20 percent, it can’t rise another 2 000 percent. But it can”.

Gillies says that that “When should I sell?” is one of the most popular investment questions. It’s a lot harder to answer than “When should I buy?” We worry we’ll sell too soon, leaving potential profits on the table. We worry we’ll sell too late, perhaps after a 20 percent pullback from an all-time high. We make decisions based on emotion - for example, selling in a fit following a bad earnings report.

He says he has made a resolution that he will not sell a share of stock this year and perhaps beyond. This follows several experiences where the prices went up after he sold the shares he held.

In one instance, Gillies says he had not one, but two chances to hold shares he had purchased in UnitedHealth Group, which is listed on the New York Stock Exchange. Previously, he owned shares in two smaller regional Health Management Organisations (HMOs)-Oxford Health Plans and Mid Atlantic Medical Services.

UnitedHealth acquired the two HMOs and he made a 43 percent profit on his Mid Atlantic sale and 14 percent on his Oxford sale. Both sound like good deals, but if he had not sold the UnitedHealth shares, he would be sitting on near doubles since the acquisitions.

It is often said that a good investor on the stock exchange is one who is prepared to lose his or her entire investment. My interpretation of this is that you should not invest your kitchen budget or school fees money on the stock exchange.

While there is no law stopping you from doing this, you will be one of those shoring up the number of hits on the Nairobi Stock Exchange website or the number of sales made by newspapers as you seek to find out the closing price of your stock everyday.

What you should do is to invest in a good company, which guarantees that you will earn regular annual income through dividends. If you have invested in several companies then you will have several incomes, which will take care of your kitchen budget or school fees. If the portfolio of shares you hold is big, you could actually live off dividends and capital gains on the stock exchange.

A capital gain comes about when you buy a share, for example at 10 shillings ($0,14) and sell it at 100 shillings ($1,39). Under the current Kenya taxation laws, you will not pay any tax for the 90 shillings ($1,25) profit.

Dividends are mostly paid annually. Some companies pay more than one dividend in a year, an interim dividend and a final dividend. A dividend is basically a paycheck for being one of the owners of the company or companies in which you hold shares.

Unlike in capital gains, Kenyan shareholders pay a 5 percent withholding tax on dividend payments and 10 percent for non-resident shareholders. Non-residents may be entitled to a tax credit in their country of residence, either under domestic law or under tax treaties.

Kenya has entered into non-double taxation treaties with Canada, Denmark, Germany, India, Norway, Sweden, the United Kingdom and Zambia. Treaties with Italy, Uganda and Tanzania have been signed, but are not yet in force.

In Kenya, you can only buy shares trough an intermediary, usually a stockbroker. Purchases or sale of shares below 100 000 attract a commission of 2 percent while those above 100 000 attract a commission of 1 percent.

However, you can buy the minimum number of shares, which is only 100. This dispels the myth that you need a lump sum to invest in shares. For example, assuming that when KenGen shares will be open to buying and selling on the stock exchange on 17 May 2006 at 11,90 ($0,16) per share, with 1 190 shillings ($16,55) plus 23.80 shillings ($0,33) you can become a shareholder in the electricity generating company.

You can then regularly, perhaps monthly, top up your portfolio through buying more shares in your company or companies of choice.

In the KenGen IPO, some 32 975 422 shares have been reserved for the 1 480 staff of the company. It may be a good idea to have a provision barring them from selling their portfolio for a certain period. If this has been done, well and good, if it hasn’t, may be it is too late or may be not.

But when Telkom South Africa was privatised, retired staff were not in a position to sell their shares during the first two years after the IPO. Today many of them have more cash than they ever dreamed of, in form of shares.

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