Questions to ask yourself before investing


Don’t rely on advertising the investment product or on social media chatter and promises of huge returns.

Choosing an investment product can be like grocery shopping. Lots of products with lots of fancy packaging.

As an investor, you need to look beyond the packaging and read the composition of the ingredients used to make a product.

The capital market landscape in Kenya is changing daily and prospective investors need to be knowledgeable enough about investment products before spending their money.

The following questions will help investors make a good investment choice:

Is investment allowed in Kenya?

Every participant in the Kenyan capital market, whether primary or secondary, must be licensed by the regulatory body which is the Financial Markets Authority, CMA.

As a potential investor, you should get the name of your broker or investment broker/provider and go to the CMA website to check the list of licensees to see if your broker is legit.

Trade participants such as brokers, traders, etc. must meet all CMA requirements before being deemed fit and suitable to do business in Kenya. It’s not bureaucracy, but it is for investor protection against fraudulent brokers.

What are the benefits of dealing with an Approved Market Participant?

Investor Compensation Fund

The Investor Compensation Fund (ICF) is a fund set up by CMA to compensate any investor who suffers erosion of funds due to system problems or negligence by a trading participant in the performance of their duties. functions.

In accordance with the law, the Investor can receive maximum compensation from Kes. 50,000.

The investor is compensated when the reason for the loss of funds is not his. Doing business with an approved company means you are eligible for compensation from the ICF.

Transparency and fair trade

When you deal with a licensed company, you can be assured that you will not be cheated and that your trades will be executed on time and in your best interest.

Indeed, the CMA monitors everything that licensed members do and has the legal power to intervene and take disciplinary action in the event of a dispute, in order to ensure fair treatment from its members. .

How does the investment instrument work?

The capital market in Kenya is saturated with various types of financial products, from the simplest such as debt securities to the most complex such as derivatives.

Whatever your investment choice, you need to take the time to research it and know what you’re getting into.

Do you see what you get?

Don’t rely on advertising the investment product or on social media chatter and promises of huge returns. Most of the time, these investment products are marketed as one thing and end up being another.

When considering an investment product, always be aware that it can be simple products or complex products.

Simple investment instruments

They do not depend on any other asset to derive their value and they are quite simple. Some examples in Kenya are

1. Treasury bills

Issued on a monthly basis in Kenya and interest paid every six months until maturity, these are debt instruments used by the government to raise additional funds to finance projects. In Kenya, fixed coupon bonds enjoy great popularity.

They can be purchased on the primary market from banks and financial institutions or through the Nairobi Securities Exchange. You need Kes. 50,000 and more in order to acquire bonds in Kenya. These are considered low risk investments as they are backed by the government.

2. Corporate Bonds

When a private sector organization/company wishes to raise funds without selling its shares, it issues bonds to the public.

3. Undertakings for collective investment (UCITS)

They pool the resources of various investors to invest in a particular asset. The investor is allocated shares of the CIS as proof of his investment and is paid dividends.

As stated on the CMA website, there are 29 licensed CIS in Kenya.

4. Shares / Equity / Shares

When you buy shares in a company, you become part owner of the company. Shares can be purchased on the primary market (through initial public offerings) or on the secondary market (through the Nairobi Stock Exchange).

A dividend is usually paid to shareholders at the end of each financial year, although companies may decide not to pay dividends.

There are 63 companies listed on the Nairobi Stock Exchange and investors can invest in these companies through licensed stockbrokers.

5. Preferred shares

Have you ever heard the term “common stock”? Well, preferred stock is like common stock but with a preference for its holders.

Preferred shares are superior to common stock and have unique features such as dividends are paid to preferred shareholders first and in the event of corporate bankruptcy; preferred shareholders are paid before ordinary shareholders.

6. Outstanding loan

If a company takes out a loan, it can choose to use its shares as collateral. In a case like this, you can choose to buy the shares and benefit from the dividend until the loan is fully repaid.

If the shares are publicly traded, lenders can easily sell those shares for cash.

seven. Real Estate Investment Scheme (REIT)

If you want to profit from real estate without actually owning a house, this instrument is for you.

In Kenya, two types of REITs are in play, Development REIT (D-REIT) and Income REIT (i-REIT). REITs build houses, apartment complexes, hotels, etc. and pay dividends to shareholders from rents and income generated.

The CMA website has published two authorized i-REIT companies and one D-REIT company operating in Kenya.

Complex investment instruments

Complex investment instruments are more complex than simple instruments. These are more risky but have the potential for higher returns.


Derivatives are considered complex instruments and are not suitable for common investors. They depend on one or a group of underlying assets to obtain their value. Assets can be interest rates, commodities like gold, exchange rates, etc.

  • Futures contracts: An agreement between two parties to buy or sell a good on a given date and for a given price. Settled over-the-counter (OTC), it cannot be traded on the Nairobi Securities Exchange.
  • Futures contracts: It is an exchange-traded version of a futures contract.
  • Option contracts: The holder of an option has the right but not the obligation to buy or sell an asset at an agreed price and date.
  • Trades : It is when two financial instruments are exchanged at an agreed time and under agreed conditions. Interest rate swaps and currency swaps are the most commonly traded.

Asset-backed securities

This type of instrument consists of grouping together different types of loans in a basket and making it a security.

Investors buy the security and profit from the proceeds of interest earned on the loan.

Take your time to fully understand the instrument in which you are investing. Discover the risks involved and its complexity.

What are the risks ?

When you trade, you are faced with two possible outcomes, winning or losing. You might want to decide how much money you’re willing to lose if things don’t go your way.

For example, in Forex Trading, Kenyan traders can trade using leverage of up to 1:400. The six non-dealing CMA-licensed forex brokers in Kenya, namely FXPesa, HotForex Kenya, Pepperstone, Scope Markets, Exinity Limited, offer margin trading in forex and CFDs with leverage of up to 1:400.

With leverage, you trade using the margin offered by the broker and it is classified as a complex product. This amplifies your risk and you could lose your money quickly in just one trade if you’re not careful.

You must fully understand the risks of the instruments they are trading or investing in.

When deciding how much you are willing to lose, you can use safety mechanisms such as stop loss orders and stop limit orders. They allow you to set an automated loss level so that the system closes your position when that limit is reached.

You must remember that complex instruments are riskier than simple instruments. Additionally, instruments that have higher yields are more risky.

What is the maturity period of the investment?

The choice of an investment product should be based on the objective you wish to achieve.

Short-term investments are investments made for a period of a few months but which can last a few years.

Like fixed deposits which can have a typical term of 12 months, they have the advantage of being more liquid as you can easily access your funds. Their downside is that their ROI is usually low because you haven’t given it enough time to mature.

Short-term investments, which are usually held for a few months, can be for purposes such as saving for a wedding or vacation.

Long term investments are normally for a few years. For example, investing in stocks/stocks can be more profitable because stocks of good companies generally appreciate over time. Businesses that start small can become more valuable businesses.

You can also invest for the long term in treasury bills. Investing in stocks is generally riskier than government bonds.

Long-term investments are ideal for purposes such as buying a home, funding school fees, and more.

What transaction fees are involved?

When most investment instruments are announced, they do not fully inform investors about the full list of fees that may apply.

Exchange-traded instruments generally have certain fees and commissions. For example, in intraday trading specifically, brokers charge a fee for everything and the more complex the instrument, the higher the fee.

Regulators also step in to keep tariffs reasonable. The NSE had lowered intraday trading fees to encourage traders.

An investor should also know if there are any charges in case of early liquidation of the investment. This is important because certain circumstances may justify you ending the investment and getting your money back. You need to know if this is possible and if there is a penalty for doing so.

Content provided by TVZ Corporation.

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