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Why shares are a good investment option

ENTERPRISE
By Peter Wambu | November 17th 2021
By Peter Wambu | November 17th 2021
ENTERPRISE

There are various options for investing your money. Among them are savings accounts, unit trusts, forex, government bonds, land, real estate, shares and so on.

But why should you choose stocks over the other options?

There are a number of factors to consider in deciding on an investment option. First and most important is the return on investment (ROI). The higher the return, the better.

Second, is the risk of losing capital. No matter how good the returns may be, you don’t want an investment where your capital or gains can disappear in the twinkle of an eye.

Other factors include turnaround time, the ease of cashing out and the capital required to start off.

When checked against all these factors, shares score the best in the long run.

Return on shares has been known to double or even triple within relatively short periods of time. Other than that, when trading shares of rolling stocks, returns of 10 per cent to 25 per cent are a common occurrence.

A look at price charts of various stocks on the Nairobi Securities Exchange (NSE) will readily provide the evidence.

While shares are considered by many as a risky venture, this is not entirely true. Risk comes because the investors might not know what they are doing. But if you are fully in control and have a simple and clear method of trading or investing in shares, you can minimise your risk considerably.

To use an analogy, if you are not a pilot, it is very risky to fly an aeroplane, but for a pilot, this is a normal thing.

Hope is not a strategy

One of the greatest insurances against risk in stocks is selling.

If the market behaves contrary to your expectations, simply get out at a price you will have predetermined before buying the stock.

However, what most people do is hold even as the price is falling, hoping that the gods of the market will reverse the trend in their favour. Hope will never be a strategy in trading or investing in shares.

Selling or cutting losses, as commonly referred to in investment circles, saves you more than money. It also saves you emotional anguish.

In terms of turnaround time, some investments such as real estate can drag on for months or years before a transaction goes through.

Savings accounts, bonds and unit trusts usually require a minimum of a calendar year to fully mature.

But with shares, gains can sometimes be realised within a few days, weeks or months. This is especially true when the market is exuberant and stocks are generally rallying upwards, a period when the market is described as being bullish.

To cash out of shares, all that you need is to punch in a sell order on your stock broker’s trading platform. If there is a buyer on the other side, the transactions happen immediately.

No paperwork is needed and no chain of intermediaries is involved.

How to Know what stocks to buy

And the beauty of it is that the transaction can be done from anywhere as long as you have an internet connection. After four days, your money will be available to you. This may even take a shorter time in future when a one-day trade settlement becomes operational at the NSE.

This is why shares are also considered liquid. To convert them into money just takes a transaction.

One other advantage with shares is that you do not require huge capital to start off. If, for instance, the price of a stock is Sh5, to buy the minimum lot of 100 requires just about Sh510, commissions included. Thus, anyone can invest in stocks.

However, the returns you expect are commensurate with how much you invest. The important thing to realise is that you can start small and grow with time.

The tricky part in stocks is knowing what stocks to choose, at what price to buy at and at what time to buy and sell. But this is not rocket science if you know your style and the strategies that go with it.

Commit to opening an account today and start investing or trading in shares. As long as you have kept your trading or investing system simple and straightforward, shares will not take much of your time, contrary to what many people believe.

And with their attendant advantages, they could just be the extra source of income that you need to attain your financial goals.

- The writer, Peter Wambu, is the author of “The Ultimate Framework for Success in Shares” 

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