To better know how to invest in the financial markets, one should first understand what they are and how they are regulated. A financial market is a generic term for all markets on which financial transactions take place, for example loans, or financial instruments, such as securities, money market instruments, foreign exchange, and other financial assets are traded.
Depending on their maturity, financial markets are subdivided into a money market (instruments with a term of up to one year) and a capital market (long-term bonds and equity capital such as shares).
A capital market is a place where trading takes place – similar to a weekly market or a supermarket. However, it is not fruit or vegetables that are traded, but stocks and securities. As in any other market, supply and demand determine the price. Such a market is a rather complicated system.
On the money market, funds, in technical terms, are traded. These are Kenyan shillings, euros, or dollars. Everything that has to do with short or long-term credit and interest takes place in the money market. If a person, but also a state or a company urgently needs a large sum of money, they look for a bank on the money market that will lend the money. Depending on supply and demand , the interest that has to be paid on the borrowed money will rise or fall.
Understanding the primary market and secondary markets in Kenya
There are different types of financial markets in Kenya. There is the so-called “primary market” where new securities coming onto the market are traded there. Per Investopedia.com, the primary market is where securities are created. It’s in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock. An IPO occurs when a private company issues stock to the public for the first time, such as the popular Safaricom IPO.
Next is a “secondary market” where securities that have been in the market for a long time are traded. This involves trading of shares in the stock exchanges, the Nairobi Stock Exchange. For this reason, it is also called the stock market because stocks are another name for shares. The traders are professionals who should be well versed in the rules of the game and the risks involved in these trades. To trade a company’s shares, it has to be listed by the Nairobi Stock Exchange (NSE). Some of the Nairobi Stock Exchange (NSE) listed companies include:
Financial markets can function according to precisely defined rules like stock exchanges or based on trading habits such as free trading between banks ( over-the-counter, OTC). Loans are usually requested individually from banks by households and companies, and the conditions for granting them, including interest on the loan, are contractually agreed.
Banks as well as insurers and funds are among the financial intermediaries that accept capital from investors and pass it on to borrowers or facilitate trade between lenders and borrowers.
Regulation of the financial market in Kenya
To help you better understand the financial market and how it is regulated in Kenya, I found the following excerpt from the University of Nairobi erepository to be worthwhile:
The financial services sector plays an important role in a country’s economy. For an economy to thrive, a sound regulatory framework is required. Such a regulatory framework should effectively protect consumers and adequately control market abuses such as unlawful and unauthorized disclosures, insider dealing, and money laundering among others. The financial services sector in Kenya today adopts the institutional model of regulation. This model is such that each of the intermediaries in the sector is regulated by a different authority, agency or body. For instance, Insurance Regulatory Authority regulates the insurance sector, Central Bank of Kenya regulates the banking sector, Capital Markets Authority regulates the securities markets and the Sacco Societies Regulatory Authority regulates the Sacco societies.
The institutional model of regulation for the Kenyan financial services sector has continually undergone a lot of challenges. Some of these include poor governance, insufficient regulation to adequately cater for the services offered by the sector and questions of independence of the regulatory bodies. Multiplicity of regulations has equally increased cases of poor or even subjective compliance by the sector players. An instance is where a listed company provides insurance services. Such a company is of course registered under the Companies Act, and regulated by both the Insurance Regulatory Authority and the Capital Markets Authority.
How to invest in financial markets in Kenya
To invest in the Kenyan stock market, one must follow simple steps:
- Open a trading account with the Central Deposit System; either with a broker or a bank
- Choose your stocks
- Get a broker, often you will use different stock brokers for local and international investment.
- Start trading
To invest in mutual funds in Kenya, one must:
- Look for institutions that have mutual funds.
- Understand the type of mutual fund the financial institution offers. Options are: a money market fund, a dividend fund, or a balanced fund?
- Register to start investing in the mutual funds.
- They are the largest asset manager by assets under management in Kenya.
To invest in bonds in Kenya, one must:
- Open a CDS account with the Central Bank. This is important for the Central Bank to establish who holds government securities.
- Decide how you want to invest in the government securities
- Fill in and submit an application form
- Get the auction results
- Make payments
- Wait for maturity to get proceeds