How does the Nairobi Securities Exchange Work?

Photo by Nicholas Cappello / Unsplash

If you’re new to shares and the stock market, you probably fall into one of two buckets:

  • You’ve heard horror stories of how people lost their life savings in stocks and you’re curious about how it happened.
  • You’ve heard how effective stocks can be at building wealth, so you want to learn how to take advantage of them.

Whatever the case, you’ve come to the right place. The stock market gets a bad rap for being responsible for many people’s misfortunes. But it’s also responsible for generating billions of shillings for other investors.

This article will help you understand how it works. Specifically, we’ll look at how shares are created, how they work, and the role of the Nairobi Securities Exchange in all that. Let’s dive in.

Where do shares come from?

Shares are formed and sold by companies that need to raise capital from the public.

Usually, such companies require substantial funds to make investments that increase their profitability. They may include acquiring new technologies, research and development, entering new markets, etc.

To raise this money, the company in need splits its value into equal portions (called shares) and then sells them to investors. The investors who buy the shares become part owners of the company since they now own ‘parts’, which entitles them to the privileges of ownership like:

  • Sharing in the company profits, and
  • Voting rights in major company decisions

The company gets all the money that investors pay to own these shares. In this way, the company gets access to the capital while the investors obtain partial ownership of the business.

So, a share represents two things:

  • Ownership - Investors essentially own a fraction of a business by owning its shares. Again, this grants them ownership privileges like profit-sharing and decision-making, just like a business owner.
  • Value - Meaning that it is a monetary asset. It can be sold or exchanged for real cash.

Therefore, a share is a slice of ownership in a company or a business that also represents a fraction of the company’s value. The total value of all shares adds up to the company’s total value.

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Where do investors buy shares?

This is where the stock market comes in. Simply put, the stock market is where all transactions involving shares are made.

Businesses that need to raise money for their investments go there to access buyers. Buyers who want to invest in shares go there to find sellers. Individuals who wish to exchange their shares for cash (i.e. to sell) also go there to find buyers.

The stock market bridges that gap by bringing them all together. In Kenya, the stock market is called the Nairobi Securities Exchange.

What is the Nairobi Securities Exchange?

Also known as the NSE, this is where stock buyers meet sellers in Kenya. It was established in 1954 and is the oldest and largest stock market in East Africa.

It ranks fifth in Africa, with a value of about $23Bn or KES 2.3 trillion, and offers an automated platform for the listing and trading of multiple securities. Both local and international investors can gain access to listed companies and take part in their economic growth.

There are 63 companies in a variety of sectors listed in the Nairobi Securities Exchange. These include:

  • Banking - KCB, Equity, NCBA, Co-op Bank
  • Agriculture - Kakuzi, Williamson Tea, Limuru Tea
  • Telecommunication and technology - Safaricom
  • Construction - Bamburi Cement, EA Cables, EA Portland Cement
  • Real Estate Investment Trust (REIT) - ILAM I-REIT
  • Insurance - CIC Insurance, Jubilee Holdings, Sanlam Kenya

How does the Nairobi Securities Exchange work?

Generally speaking, the Nairobi Securities Exchange involves five players, all of whom are instrumental:

  • The Capital Markets Authority (CMA) - this is the government body charged with the mandate of regulating the stock market. It serves in the role of a watchdog with the responsibility of monitoring, supervising, and licensing all market players and activities.
  • The Central Depository and Settlement Corporation (CDSC) - This is a limited company regulated by the CMA, whose main role is to facilitate the transfer of shares between investor accounts. Once investors have completed transacting shares, this is the body that makes sure they are transferred and delivered accordingly to their new rightful owners.
  • Stockbrokers - they act as the intermediaries between buyers and sellers. Investors have to go through stockbrokers to make transactions in the market. In other words, it’s the stockbrokers' job to connect buyers and sellers.
  • Listed companies - these are the businesses in need of capital that put up their shares for sale. There are currently 63 companies listed in the Nairobi Securities Exchange whose shares can be bought and sold by investors.
  • Investors - the most crucial players in the stock market, investors’ main role is to provide a market base and capital for the listed companies. They are the source of finances for the market and play a central role in the flourishing of the stock market as a whole.

So how do all these moving parts come together?

In a nutshell, the CMA is in charge of the stock market since it regulates everything, from the players taking part to the actual securities they trade.

When companies want to get listed, the CMA must approve them first. Investors can then start buying shares of listed companies through stockbrokers, who are the link between prospective buyers and sellers. Individual investors don’t have direct access to the stock market.

Before buying shares, however, investors must have a CDS account provided by the CDSC. This account works like a normal bank account except instead of holding money, it holds securities such as shares.

A 'security' is a term used to define a broad array of financial assets such as stocks, bonds, or investment contracts.

How do I buy shares at the NSE?

To begin buying shares, you’ll need three things:

  • A CDS account - Where your newly acquired shares will be stored.
  • A stockbroker - To link you with prospective sellers in the market.
  • The required money - This amount will vary according to the specific company’s shares you’d like to buy.

Keep in mind that individual investors don’t have direct access to the market so you’ll have to get a stockbroker to buy shares on your behalf. Here’s a complete list of licensed stockbrokers authorized to act on behalf of investors by the CMA.

Your stockbroker can also help you open a CDS account. Opening one requires two recently taken passport-size photos and an original national ID or passport.

Once your CDS account is ready and you have the required funds to buy your preferred shares, your stockbroker will acquire them on your behalf and they’ll be credited to your CDS account.

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