Investing In The Stock Market, What You Need To Know

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Article first appeared at Inversk Magazine on 10th April 2017.

Studies reveal that employment income is no longer able to keep up with the lifestyle demands of the current fast paced increasingly digital lives. A huge percentage of employees feel squeezed and unable to go through a month without money issues.

To maintain a decent lifestyle, it has become almost mandatory for one to have a second income generating plan. Most people result to working longer hours or begin side hustles, which eventually prove to be quite counterproductive.

As a fresh graduate, you can do yourself a favor to avoid this rut by simply investing to earn passively. These are incomes that don’t warrant for your much involvement. Investment income, copyright income, patent income, leases, mining rights can all be termed as passive. They involve a onetime big effort then very minimum involvement required later.

In this article, we explore one of the ways of raising investment income; which is investing on the stock market.

In a small survey I carried out, I sought to find out how many young people in my class knew the location of the Nairobi Securities Exchange (NSE). Only a few raised their hands.

Does it really matter? No, it doesn’t; but it is a good barometer of the investment knowledge individuals have. If you are going to participate in this market, it is important you know where it is, whether physically or digitally. Then you need to understand what is bought and sold in this market, as well as understand the language so that you are able to intelligently communicate.

Essentially, a stock market facilitates the buying and selling of bonds, shares and their related derivatives such as Mutual funds and exchange traded funds (ETFs), options and futures. Real Estate Investment Trusts (REIT) is a Real Estate instrument tradable on the stock exchange too.

Bonds refer to fixed income securities premised on debt. When you buy a bond, you are lending either the government or the corporate entity that issued the bond. The risk is relatively low and in fact when you lend to a stable government it is risk free. In the two five four, the returns on debt securities averages to 12%-15%.

Stocks accord you the right to own part of a company and receive dividends and or bear losses as allocated by the company. The income from stocks is highly variable, day after day. Compared to bonds, equities apart from providing variable incomes also provide capital appreciation or depreciation in form of an increase or reduction in the market value of the shares.

Mutual funds, ETFs, futures and options are all derivatives of the basic bond and shares. Mutual funds and ETF’s are essentially pooling your resources with other investors which is then invested in a combination of bonds and stocks and professionally managed for you while futures and options are contracts to buy and sell at future pre-determined prices.

Now that you know what you can invest in on the stock market, you need to establish how much money you should invest to achieve your financial goals, noting your current expenditure and your earnings potential:

 A budget should be your starting point.

In it, allocate your living funds and your investment funds. Your ultimate aim is to ensure that your passive income replaces your active income, and then you can retire from active employment.

How are you going to do the investment?

Once you have determined your budget and chosen the investments to buy into. Are you going to do it alone, walking to the stock exchange or are you going to hire a broker, or a financial consultant?

It is important to note that the costs vary with each choice. Costs associated with investments include brokerage fees, commissions; stamp duty, withholding taxes etc.

To buy bonds and shares on the stock market, the investor would need to open an account with a local stockbroker or bank that will in turn open a Central Depository and Settlement Corporation (CDSC) account for them.

The CDSC account is where all tradable shares are held electronically. You then send money and instruction on what and how much of bond or share the stockbroker or bank should purchase for you. In case of bonds, an individual can also buy directly from the central bank.

Investing is a personal endeavor which guarantees you extra income while you are still working or the only income during your retirement.

There is no one size fit all solution when it comes to investments. Explore as many alternatives as possible. Have a mix of shares, bonds, Real estate etc. and keep re-jigging this portfolio to maximize on returns, while minimizing your risk.

The concept of interest compounding favors the young, as it converts time into money for you, therefore take advantage and start investing now.

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