Why Investing is not to Maximize but to Maximize Risk-adjusted Returns

the cumulative inflows in 12 months to January this year totalled $3,113 million (Kshs. 342.4 billion) compared to $2811 million (Kshs. 309.2 billion) in 12 months to January 2020 which represents a 10.8% increase.

While not all of us can have enough capital to a start-up business that wow the world, yet, we can still get to be part of some of the already-listed companies in the various stock markets that exist in the world.

So in time, that amount of money you have been saving in a bank account can be a good start to creating some ‘paper wealth’ with quality returns in stock prices and dividends.

Benjamin Graham says, “A stock is not just a ticker symbol combined with a price tag, but an ownership interest in a business”.The stock will give you a piece of some of the best businesses around the world. 

Initial public offerings(IPOs) and private placements in the secondary market have made it possible to own shares in previously private entities: Safaricom Plc, East Africa Breweries Limited, and Williamson Tea Kenya Limited are some of the companies in different sectors that are listed at the Nairobi Securities Exchange. 

What is a listed company and why do companies list at a stock exchange? 

One crucial milestone of a company’s life cycle, which is particularly of interest to investors is the transition of a company from either a private entity or a parastatal, to a public entity through an IPO.

The primary reason for going public for most companies is to seek additional funds for growth and expansion purposes.

Additional motivation for going public include: gaining publicity, status, and employee ownership (Kim & Welsbach 2005).

Why invest in shares?

One of the ways to remain ahead of inflation is to invest in companies that pay dividends. 

Investors who buy ordinary shares of listed companies get compensated in dividends that companies pay annually from their earnings, bonus shares and price appreciation depending on when you made an entry into the market.

However, most stock exchanges have short selling that enables investors to make money from declining stock prices: there are gains to be made, but the losses are magnified. 

What to look for when buying shares

You have finally decided to invest in shares, but what shares do you add to your portfolio?

There are over 2000 companies listed at the New York Stock Exchange and over 55 at the Nairobi Securities Exchange.You can rely on fundamentals or technical analysis to identify stocks that are mispriced.

Fundamental analysis involves checking financial statements, future prospects, and industry competitors. 

Technical analysis involves the use of charts and trends to forecast the direction of stock prices.

If you cannot explain the operations of any company you probably shouldn’t be buying its shares.

How and where to buy shares

To be able to trade- buy and sell shares at the Nairobi securities exchange you should open a CDS account that shows the ownership of your shares when you buy or make a sell.

The link shows the requirements and process of opening a CDS account. 

Investment banks and brokers act as your agent and you need to look at their transaction fees and those with an online presence. 

Trading fees

Every time you execute a trade you are subject to both brokerage commissions and taxes based on the total value of your trades at a combined rate of 2.1%.

Being impatient will have you earning a negative return or decimating all your returns.

If I place an order through my broker to buy 1000 Safaricom shares that closed today at KSh  35.55  the total cost will be;

1000×35.55  = KES 35,550  

Plus 2.1% × 35,550= 746.55

Total value of trade= KES 36,296.55

Finally, the art of investment is not merely to maximize return but to maximize risk-adjusted returns. 

First published on People Pennies.

Kasiva Mutisya, she is  Finance and Investment Analyst. Follow on Twitter