Investing in Bonds and Equities
Bonds, Equities and Cash are referred to as traditional investments since they are common investment avenues as opposed to alternative investments such as venture capital, private equity and commodities which are less usual.
BONDS
Bonds are financial instruments used by both corporations and governments to raise money. They are debt securities. The institution seeking funds is known as the issuer, while the lender of money is called the bondholder who is also the investor.
Money is lent with the assurance of a fixed return and repayment of the initial sum given out at the end of the bond’s life. Hence bonds are in the category of Fixed Income securities just like treasury bills. The risk level of investing in bonds is relatively low compared to other investments such as shares or commercial money lending.
In most cases if the issuer of the bond is a government, the investment is considered risk free since most governments are unlikely to default on payment of their debts. Where the issuer is a corporation, the risk of investing in the bond is higher but bond holders will be given first priority in compensation in case of liquidation.
In the Kenyan capital markets, the most prominent bonds are those issued by the government, known as treasury bonds. Returns on bonds known as coupons are subject to withholding taxation with the exemption of those from Infrastructure bonds which are not taxed.
All bonds issued in Kenya have a time horizon of not less than one year and not more than thirty years. Under 1-year bonds are better known as Treasury bills which are issued in 3 categories of 91 Days, 182 Days, and 364 Days.
As of March 2024, bond returns (coupons) ranged from 9% to 18.46% per year depending on the bond held. A prospective investor is required to have a minimum of Ksh 50,000 to invest in ordinary treasury bonds and a minimum of Ksh 100,000 to invest in Infrastructure bonds though most recent infrastructure bonds have allowed investors to invest as low as Ksh 50,000.
Returns on bonds are paid semi-annually while the amount lent is paid at the end of the bond’s life, at maturity. Investors can earn returns in 2 ways: coupon earned semi-annually, and Capital gains earned through trading of the bonds in the secondary market.
The secondary market allows investors to trade bonds after they are issued in the Primary market. The Primary issue of bonds takes place when the Central Bank issues the debt security to the investors while the secondary trading involves trade of the debt security between investors.
It is key to note that bond trading does not include physical exchange of monies, transactions are executed electronically by your bank after your authorization and the bond enters your CSD Dhow account once the payment (settlement) is done.
EQUITIES
Equities, also known as stocks or shares, is an investment that entails having an ownership interest in an institution. Institutions issue shares of ownership to investors in exchange of funding. After providing funding to corporates, investors are afforded the opportunity to share in the institution’s financial success through distribution of profits in terms of dividends.
Investors also can benefit from selling their shares at a price higher than they bought them, therefore making profits known as capital gains. It is generally stated that for equity investments to grow and yield returns investors should be willing to have a time horizon of at least five years. This period allows investors to ride out periods of market volatility before their investment starts to grow.
In Kenya there are 64 listed companies from various sectors of the economy such as banking, automobile, construction, telecommunication, agriculture, investments among others. The minimum number of shares an investor can invest in is 100 units in any listed company.
IN CONCLUSION
It is important for prospective investors to inquire about the risks associated with both equities and bonds from qualified advisors before committing capital to them. The investment process should take into consideration a client’s objective, needs, risk profile, financial position among other relevant issues that a qualified advisor will assess.
Additionally, investors should not limit themselves to only these two asset classes since there are other avenues where they can take their investment funds to diversify their portfolios and consequently avoid some level of risk exposure.
Key notes:
- Bond investors need to have an account with the CBK known as the Dhow CSD account.
- Equity investors need to have an account with an Investment Bank known as the CDS account
Article by,
Edward Macharia Irungu – Fixed income trader at Securities Africa Kenya Limited.
For more information, consultations or investing, Call / WhatsApp him on 0725347269.
Edward is a member of St. Paul's Self-Help Group