What to Look Out for When Buying Shares at The NSE 2024

Investing in the Nairobi Securities Exchange (NSE) can be an enticing opportunity for individuals seeking to grow their wealth. With aspirations ranging from securing financial stability to achieving long-term financial goals, investors flock to the NSE in hopes of reaping substantial returns. 

However, a common pitfall in this pursuit lies in the tendency to focus solely on stock prices when selecting which shares to purchase. However, stock price is just one piece of the puzzle and an inadequate metric for making informed investment decisions. Diving headfirst without adequate preparation can lead to costly mistakes.  

Before venturing into the complexities and risks inherent in the stock market, it's crucial to equip oneself with knowledge and understanding. This entails conducting thorough research to grasp the fundamentals of investing, which starts by identifying the key factors to consider when buying shares. 

If you have been thinking about investing in the NSE, here are five things to look out for when buying shares.

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Market Conditions 

When buying shares, beginners often think they can time the markets and buy shares at the right time. They typically do this by waiting until the market bottoms out to buy stocks. However, this usually ends up delaying investing, and sometimes, investors end up waiting forever. 

Rather than attempting to time the market when buying shares, consider analysing market conditions as they can provide valuable insights into potential risks and opportunities. One way to do this is to utilise technical analysis tools to study historical price movements, trends, and patterns in stock prices to identify potential buying opportunities. Additionally, you can seek insights from financial experts, analysts, and investment advisors to gain a broader perspective on market conditions. 

Understanding market conditions allows you to mitigate systematic risks associated with broader market movements. It can also help you develop long-term investment strategies aligned with your financial goals, whether it's wealth accumulation, retirement planning, or education funding. 

When you are armed with knowledge about market conditions, you can make confident and informed decisions, avoiding impulsive actions driven by short-term market fluctuations or emotions. 

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Performance History and Trends

Assessing a company's historical performance is a crucial aspect of fundamental analysis when considering whether to invest in its shares. While past performance doesn't guarantee future success, it can provide valuable insights into the company's stability. 

Analysing historical performance can help you understand how a company operates within its industry and how it performs during different economic cycles. Companies with resilient performance across various economic conditions may offer more stable investment opportunities. Historical performance data can also help you assess the risks of investing in a particular company. 

By law, companies listed on the NSE are required to disclose their financial and operational results every year. Therefore, before buying shares, review the company's financial statements, including income statements, balance sheets, and cash flow statements, to analyse its historical financial performance, profitability, liquidity, and solvency. 

Additionally, study the company's quarterly and annual reports to gain insights into its performance metrics, business strategies, market trends, and future outlook provided by management. 

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The Fundamentals of the Company 

As an investor, owning a company shares means owning a portion of that company. Therefore, before buying its stocks, you need to understand the company's fundamentals. Legendary investor Warren Buffett once said, "Never invest in a business you cannot understand." 

Understanding a company's core business activities and revenue streams is crucial for investors to evaluate its growth potential, competitive advantages, and long-term viability. You should know what the company does, the products it makes/sells, and the services it offers before buying into it. 

And you should not stop there. 

Compare the company's performance with industry benchmarks and sector peers to evaluate its competitive position, market share, and relative performance within the industry. This comparison will help you assess the company's strengths and weaknesses in the context of its industry. 

You should also assess the effectiveness of the company's executive leadership. Good corporate leadership plays a crucial role in shaping a company's strategic direction, culture, and performance. Strong leadership fosters innovation, drives operational excellence, enhances shareholder value, inspires investor confidence, and attracts investment capital. Together, these factors can positively impact share prices over the long term. 

Dividend/Income Potential 

Dividends represent a fraction of a company's profits that it opts to distribute to its shareholders. They serve as a means for shareholders to generate income from their investments without selling their shares. 

Dividends signify the company's profitability and can be a key indicator of good financial health. Companies that pay dividends demonstrate confidence in their financial health and ability to generate sustainable profits. 

For income investors, dividend and income potential is a vital factor to look out for when buying shares. Dividend-paying stocks can provide a stable income stream, especially during periods of market volatility or economic downturns. This regular income can supplement other sources of income and provide financial stability. 

Even growth investors should consider this factor, as increasing earnings can translate into higher shareholder value through capital appreciation and potentially higher dividend payouts. Growth investors will have the option to reinvest dividends to compound returns and accelerate wealth accumulation.

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Suitability

When buying shares, you want to avoid herd mentality and greed for quick profits. Instead, invest in shares suitable for your investment objectives and risk profile. 

The best way to do this is to ensure the shares you buy fit your investment objectives and align with your investing strategy. This is crucial for achieving your financial goals. Whether you're investing for income, growth, capital preservation, or a combination of these objectives, selecting stocks that complement your strategy increases the likelihood of success. 

Investing in shares that match your risk profile and investment horizon helps you manage risk effectively. For example, if you have a low tolerance for risk and a short-term investment horizon, you may prioritise stable dividend-paying stocks over volatile growth stocks. 

Investing in NSE without considering suitability may distract you from your long-term investment strategy and goals. It can lead to impulsive decision-making based on short-term market fluctuations rather than a disciplined approach guided by your investment objectives. It can also cause you to miss out on potential opportunities for growth or income generation. 

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WRAPPING UP 

Preliminary research when buying stocks in the NSE is important but only forms the foundation of your investment strategy and guides your stock selection process. Real work begins after identifying the shares and buying them. 

To maximise returns and lower risks, you will need to do more, including: 

• Review your portfolio to assess whether your current holdings remain suitable for your investment objectives. 
• Diversify your portfolio to help spread risk across various investments and reduce the impact of any single stock or sector on your portfolio. 
• Rebalance your portfolio as needed to realign your asset allocation with your target investment strategy. 
• Keep up with financial events and follow company news of all the companies you've invested in. These details can help you decide whether it is worth staying invested or liquidating.