Kengen Trades at the Nairobi Securities Exchange: How do Financial Markets Work?

As one of the major stock exchanges in the region, the Nairobi Securities Exchange offers the platform and the regulated environment for investors seeking Kenyan financial assets, including stocks. As a result, it facilitates the trading of a broad range of stocks, including those of large-cap, mid-cap, and small-cap companies, catering to the diverse investment preferences of market participants.

The Nairobi Securities Exchange operates through a centralised electronic trading system, which ensures fair and efficient transactions. This way, investors access real-time market data, track stock prices, and place orders through authorised brokerage firms connected to the exchange. This ensures that transactions are executed promptly at fair market prices. Check out this article for more information on how the stock exchange works.

While investing in shares issued by Kengen may present an attractive opportunity, investing solely in it can expose you to company-specific risks. Let's discuss the stock picking strategy: Diversifying your portfolio is essential to mitigate these risks.

Is Stock Picking Your Trading Strategy?

A stock pick is when an investor concludes that a particular stock (Like Kengen) is a good investment. In other words, the investor thinks the stock's price will rise or if it will pay (or keep on paying) dividends in the future. Stock picking can be challenging because there is never an easy way to determine the future stock price. 

Nevertheless, stock picking is the investing strategy that most investors start with; their investment journey begins by saying things like: 'I want to buy XYZ Shares' or 'I've heard that the price of this stock will increase shortly'.

Charlie Munger, a legendary investor (Warren Buffett's partner at Berkshire Hathaway), wrote 'Art of Stock Picking'. He defends this investing method over diversifying an investment portfolio by asking: 'Who has 56 brilliant ideas? How many of you have two or three insights you have some confidence in? I rest my case.'

He says that although diversification (or, in other words, buying many stocks across several industries) might decrease the risk of a portfolio, it is impossible to beat the market's performance. In Munger's view, an intelligent investor has to pick a few companies he believes in, buy the stock, and stick to them. To summarise, Munger's stock-picking strategy is to buy stocks of a few companies and keep them for an extended period.

To contrast Munger's investment strategy, another legendary investor, Carl Icahn, has said: 'My investment philosophy, generally, with exceptions, is to buy something when no one wants it.'

As a contrarian investor, Icahn identifies corporations with stock prices that reflect poor financial indicators, like low price-to-earnings (P/E) ratios or book values that exceed the present market valuation. He then aggressively purchases a significant number of shares in the corporation and either push for the election of an entirely new board of directors or sells the company's unprofitable assets to deliver more value to shareholders.

As you may see, there are different (and contrarian) investing methods for picking stocks. Stock picking is the purest form of investing in stocks. However, there are others; let's dive into the diversification concept.

Diversification: Spread your Financial Risk

Forecasting the price of a single stock is not easy, and you are far from being able to predict the future. We are not contradicting Charlie Munger or Carl Icahn's strategies here; we are implying (humbly) that we do not have their financial savviness or access to the financial information they can access.

Stock picking contrasts, then, with diversification. Diversification involves spreading your investments across various asset classes, sectors, and regions. This strategy helps to reduce the impact of any single investment's performance on your overall portfolio (For example, allocating your capital on Kengen as a single investment).

By diversifying your holdings across multiple stocks, industries, and asset classes, you can enhance your risk-adjusted returns and reduce the impact of any individual stock's performance on your investment outcomes. Investing in an index can be an excellent way to implement a diversification strategy in your investment portfolio.

NSE All Share: Investing in Kenyan Stocks in a Diversified Way

An index represents a specific market or sector of the economy. It comprises a basket of stocks or other assets constructed by selecting a specific group within this frame. The construction process involves defining criteria, such as market capitalisation, to determine which assets the index will represent. The selected securities are then weighted, aiming to create a representative market sample, providing investors with a benchmark to gauge performance.

Investing in an index exposes you to a diversified portfolio of securities within that particular market segment. As a result, investing in an index provides a convenient and efficient way to achieve broad market exposure and participate in the overall growth of an industry or the broader economy.

The NSE All Share Index serves as the primary benchmark for the Nairobi Securities Exchange, representing the overall performance and direction of the market and also the country's economy as a whole.

A rising price indicates that, on average, stocks included in the index are likewise experiencing an upward movement. In other words, many companies within the index perform well, potentially reflecting favourable market conditions and investor optimism. Monitoring the index's price can provide a simple way to gauge the stock market's overall direction and understand whether it is generally trending upwards or downwards.

Incorporating an index-based diversification strategy into your investment approach can enhance your portfolio's stability and potential long-term returns. So, if you arrived at this article convinced about investing in Kengen, you now have a broader alternative. You may invest in an index through a financial asset tracking the index, for example, an ETF.

A mutual fund or an ETF are designed to track the performance of a specific market index or sector, providing instant diversification across a broader range of assets. Investing in such financial instruments exposes you to a diversified portfolio, spreading risk across multiple holdings.

Investing in Global Stocks

Are you aware that Kenyan investors may invest in international stocks?

Local investors have a valuable opportunity to expand their investment horizons and access global stocks through international brokers. By engaging with these brokers, investors can unlock a world of investment possibilities beyond their local market. International brokers provide platforms and services that enable Kenyans to trade stocks listed on major global exchanges, such as the New York Stock Exchange or the London Stock Exchange.

This access to international markets allows investors to diversify their portfolios geographically and tap into companies' potential growth opportunities across various sectors and regions. Check out our list of the Top International Brokers for Kenyan investors. You may benefit from access to real-time market data, e-Learning courses and research resources through these international brokers.