1. What is a stock market?
A stock market is a mechanism through which company’s shares are bought and sold. It is a public market. It is used for the trading of company stocks and securities at an agreed price.
2. What are the various types of financial markets?
The financial markets can broadly be divided into money and capital market.
Money Market: This is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days Treasury Bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.
Capital Market: This is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like securities exchanges. Capital market can be further divided into primary and secondary markets.
3. What is a primary market?
In the primary market, securities are offered to public for subscription for the purpose of raising capital or funds.
4. What is a Secondary Market?
Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on a Securities Exchange. Trading is done in the secondary market. Secondary markets consist of equity markets and debt/fixed income markets.
For the investor or shareholder, the secondary market provides an efficient price discovery mechanism and liquidity for trading of securities. For the management of the company, Secondary equity markets serve as an efficient valuation, monitoring and control tool—by providing value-enhancing control mechanisms, encouraging transparency through disclosure and regulatory oversight, encouraging incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.
5. What is the difference between the primary market and the secondary market?
In the primary market funds go from the investor to the issuer i.e. that securities are offered to public for subscription for the purpose of raising capital or funds.
In the Secondary market, funds and securities change hands between investors i.e. This is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While securities exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market where a stockbroker runs a desk and trading is based on the “willing buyer, willing seller) principle.
6. What are the products dealt/available in the secondary markets?
The following are the main financial products/instruments dealt in the secondary market:
Equity: The ownership interest in a company’s securities. The various kinds of equity shares are as follows:-
Equity Shares:An equity share is commonly referred to as ordinary share or common stock and also represents the form of partial ownership in which a shareholder, as a partial owner, undertakes the maximum entrepreneurial risk associated with a business venture. Equity shareholders are members of the company and have voting rights.
Rights Issue: The issue of new securities to existing shareholders. Shareholders are given an option to purchase new discounted shares at a ratio to those already held. This constitutes an option that gives existing shareholders the right but not an obligation to invest in more shares of a company.
Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years. Bonus shares convert a company’s reserves into capital and can be considered a form of dividend payment.
Preferred Stock / Preference shares: These enjoy priority/preference over the common equity shareholders in payment of surplus and claims. In the event of liquidation, their claims are paid after creditors, bondholders / debenture holders. Preference shares attract a fixed dividend which is usually paid regularly.
Cumulative Preference Shares: these are preference shares on which unpaid dividends accumulate. All of these accumulated arrears are paid out before paying dividend on equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.
Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid.
Government securities (T-Bills, Bonds & Infrastructure Bonds): These are sovereign coupon bearing instruments which are issued by a country’s Central Bank on behalf of its Government. T-Bills and Bonds have a fixed coupon that is paid on specific dates on half-yearly basis.These securities are available in a wide range of maturity dates, from short term money markets (T-Bills – less than one year) to Fixed Income Securities or Bonds (Longer term – up to twenty years) these include infrastructure bond offers whose coupons are pegged on levies collected from specific development projects.
Corporate Bond: An unsecured, negotiable debt security that is issued by a company, municipality or government agency. A bond investor lends money to the issuer in exchange for a promise to repay the loan amount on a specified maturity date. Corporate bonds yield periodic interest payments over the life of the loan. The various types of Bonds are as follows-
Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market instrument issued normally for tenure of below 1 year.
Treasury Bills: Short-term (up to 365 days) bearer discount security issued by the Government as a means of financing its short term cash requirements.
7. Who is a Stockbroker?
A Stockbroker is a member of a recognized securities exchange e.g. the NSE, who is permitted to trade on the Automated Trading System (ATS) of a securities exchange. He is enrolled as a member with the concerned exchange and regulated by an authority like the Capital Markets Authority (CMA) in Kenya.
8. What is the role of Stockbrokers in the Secondary Market
Stockbrokers facilitate trading on the Automated Trading System (ATS) of a securities exchange on behalf of the clients.
9. Whom should I contact for my transactions?
You can contact a Stockbroker such as NIC Securities Ltd who are members of the Nairobi Securities Exchange (NSE) and regulated by an authority like the Capital Markets Authority (CMA) to facilitate your carrying out your transactions pertaining to the capital market. NIC Securities contacts are as follows Tel: 020-2888444, 071104100 and 0732141000:
10. What is ATS?
ATS refers to Automated Trading System: this is a wide area network based trading system that replaced the open outcry system of trading at the securities exchange. It is more efficient and allows trading to be done from remote locations rather than the traditional trading floor. All trades are matched electronically which increases price discovery efficiency and transparency.
11. What is CDSC?
CDSC stands for Central Depository and Settlement Corporation. Investors’ securities are stored electronically at CDSC. Automated settlement eliminated the use of certificates in trading at the Nairobi Securities Exchange which also subsequently reduced the settlement period to the current T+3.
12.How do I open a CDS/NIC Securities Account?
You complete and sign the CDSC1 and NIC Securities account opening forms, and General Terms and Conditions. The following Know Your Customer (KYC) documentation is also required;
For individual or joint accounts
ID / Passport copy
2 color passport size photos
Evidence of physical address (utility bill, lease or tenancy agreement)
Email Indemnity (Optional Kes 200/-)
Signed and sealed CDS 1 and NSE Securities account opening form
2 color passport sized photos, ID copies and utility bills of each director and signatories if any.
Board resolution on approval of account opening including account signatories
Memorandum and articles of association
Certificate of incorporation
Company PIN certificate
Evidence of physical residence (utility bill, lease or tenancy agreement)
Evidence of income of the business (bank statement)
The originals of the above documents need to be sighted by NICS staff for certification, or be certified by a notary public.
13. What are the responsibilities of a Stockbroker?
A Stockbroker manages client’s portfolios. This includes the collection of company stocks and shares that they own. Stockbrokers maintain contact with the client, research companies and markets and buy and sell stocks and shares on behalf of the client. The job demands integrity of character as a Stockbroker needs to deal with his client’s money and finances.
14. How do I know if the Stockbroker is registered?
All registered Stockbrokers have an up to date certificate issued by Capital Markets Authority (CMA).
15 .Am I required to sign any agreement with NIC Securities before transacting?
Yes. You are required to sign the “NIC Securities – Client agreement” for the purpose of engaging a NIC Securities to execute trades on your behalf from time to time. The Agreement contains clauses defining the rights and responsibilities of the Client vis-à-vis NIC Securities. The documents prescribed are model formats. The securities exchanges/ NIC Securities may incorporate any additional clauses in these documents provided these are not in conflict with any of the clauses in the model document, as also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines.
16. What is the NIC Securities –Client Agreement Form?
This is an agreement entered between a client and NIC Securities in the presence of a witness where, the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through NIC Securities after being satisfied of NIC Securities capabilities to deal in securities. The member, on the other hand agrees to be satisfied by the genuineness and financial soundness of the client and making client aware of NIC Securities liability for the business to be conducted.
17. What kind of details do I have to provide in NIC Securities Client Registration form?
In case of individual client registration, you have to broadly provide following information:
Requirements for individuals & joint Accounts
Passport size photo
Certified copy of ID card
Certified copy of PIN certificate
Copy of utility bill, lease agreement, Title deed or employer letter
18. What other information is required for Organizations (Limited Company/Society/Partnerships/Sole Proprietorship) Sole Proprietorship
Business Registration Certificate
PP photo, ID/PP, PIN Certificate & Utility Bill of proprietor
Business PIN Certificate & Utility Bill/Lease Agreement
List of Directors
Business Registration Certificate
PP photo, ID/PP, PIN Certificate & Utility Bill of Partners
Business PIN Certificate & Utility Bill/Lease Agreement
List of Members of Managing Committee
Certificate of Incorporation
PP photo, ID/PP, PIN Certificate & Utility Bill of Directors
PIN Certificate & Utility Bill/Lease Agreement of Company
Memorandum & Articles of Association
Resolution of Board of Directors
Power of Attorney (Foreign Companies)
Club/ Society/ Association
Certificate of Registration
PP photo, ID/PP, PIN certificate & Utility Bill of members of Managing Committee
Tax Exemption Certificate
Power of Attorney (Foreign Companies)
What is meant by Unique Client Code?
In order to facilitate maintaining database of their clients and to strengthen the Know Your Client (KYC) norms; NIC Securities assigns unique client codes linked to the client account details of the respective client which will act as an exclusive identification for the client.
19. How do I place my orders with NIC Securities?
You can either go to NIC Securities office or place an order via the internet (Internet/emailIndemnity is required for this). Investors will also have credentials to trade directly on the NIC Securities online trading and the mobile trading platforms.
20.How do I know whether my order has been placed?
The ATS assigns a Unique Order Code Number to each transaction, which is generated and sent by NIC Securities to the client and once the order is executed, this order code number is printed on the contract note.
NIC Securities also maintains the record of the time at which the client has placed the order and reflects the same in the contract note along with the time of execution of the order.
21. What documents should be obtained from the Stockbroker on execution of a trade?NIC Securities sends the client a statement indicating the execution of the trade. Email statements are sent to clients who have signed an email indemnity.
22. What details are contained in the contract note issued by NIC Securities?
A Stockbroker has to issue a contract note to clients for all transactions in the form specified by the securities exchange. The contract note inter-alia should have following:
Name, address and CMA Registration number of NIC Securities.
Name of partner /proprietor /Authorized Signatory.
Dealing Office Address/Tel No/Fax no, Code number of the member given by the Exchange.
Unique Identification Number
Date of issue of contract note,
Time period for settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and Kind of Security brought/sold by the client.
Stockbrokerage and Purchase /Sale rate are given separately.
Any other charges levied by NIC Securities.
Signature of the Stockbroker/Authorized Signatory.
Appropriate stamps have to be affixed on the original contract note or it is mentioned that the consolidated stamp duty is paid.
Contract note provides for the recourse to the system of arbitrators for settlement of disputes arising out of transactions. Only the Stockbroker can issue contract notes.
23. What does NIC Securities charge per transaction?
The Stockbrokerage charges by NIC Securities has been specified in the Nairobi Securities Exchange Regulations as follows.
2.1% for equity transactions below Kes 100,000
1.8% for equity transactions above Kes 100,000
0.035% for fixed income transactions.
24. What is a Transaction Settlement Period?
A Transaction Settlement Period is a period where the funds and securities pertaining to a transaction are settled. For example, trades for the period Monday to Friday are settled together. This is a period of T+3 i.e. 3 working days from the transaction date
Note: The above is a typical settlement cycle for normal (regular) market segment. The days prescribed for the above activities may change in case of factors like banking holidays, weekends etc. You may refer to scheduled dates of pay-in/pay-out notified by the Exchange for each settlement from time-to-time.
25. In case of purchase of shares, when do I make payment to NIC Securities?
The payment for the shares purchased is required to be done prior to making the order for purchase.
26. In case of sale of shares, when should the shares be given to the Stockbroker?
All shares to be traded should be immobilized and held in the CDSC database to enable trading. Shares in certificate form must be immobilized to enable trading at the NSE.
27. How long does it take to receive my money for a sale transaction and my shares for a buy transaction?
T+3 is the standard
28. Is there any provision where I can get faster delivery of shares in my account?
29. What happens if I do not get my money or shares on the due date?
In case a Stockbroker fails to deliver the securities or make your payment on time, or if you have complaint against conduct of the Stockbroker, you can file a complaint with the respective securities exchange. The exchange is required to resolve all the complaints. To resolve the dispute, the complainant can also resort to arbitration as provided on the reverse of contract note /purchase or sale note. However, if the complaint is not addressed by the Securities Exchanges or is unduly delayed, then the complaints along with supporting documents may be forwarded to CMA. Your complaint would be followed up with the exchanges for expeditious redress.
30. What is CMA Investor Compensation Fund (ICF)?
Investor Compensation Fund is the fund set up by the CMA and NSE to meet the legitimate investment claims of the clients of the defaulting members that are not of speculative nature. CMA has prescribed guidelines for utilization of ICF at the NSE. The CMA compensation limit is currently Kes 50,000. The ICF will get a stake of not less than 20% of the total shareholding of the NSE after the demutualization of the exchange, ICF represents a way to compensate investors who have lost money due to rogue stock brokerage or any other misdemeanor in the system provided that the amount of compensation available against a single claim of an investor arising out of default by a member Stockbroker of a Securities Exchange shall not be more than Kes 50,000/-.
31. What are the main things an investor should be aware of while dealing with a Stockbroker/Agent
Good understanding of investment opportunities alone may not help the investor in the securities market to trade. It is also important that the investor understands the process of investing, such as finding an appropriate Stockbroker, handling buying and selling of securities and maintaining records.
32. Before choosing a Stockbroker/the investor should strive to know the following:-
Where did the Stockbroker learn the business?
How long has he been serving in the securities industry?
Do they have eligible qualifications as a Stockbroker?
How many clients does he serve?
What fees and expenses does he charge?
33. What are the major obligations and responsibilities of NIC Securities?
Entering into an agreement with and the client
Maintenance of separate books of accounts and records for clients
Maintenance of money/funds belonging to clients in a separate account from its own company account
Issue of daily statements of collateral utilization to clients
Appointment of a compliance officer
Issue of contract note to its client within hours of the execution of the contract.
Delivery / Payment to be made to the client within hours of pay–out.
Other duties as specified in the CMA (NSE) Rules.
34. What are the major rights and obligations of an investor?
Before entering into a contract with the Stockbroker, ensure that he is registered with CMA/NSE.
Satisfy yourself about the credentials of the Stockbroker by asking for information/documents supporting his claims.
Keep a documentary proof of all money or securities ordered for through the Stockbroker.
Before activating your trading account, obtain from your Stockbroker, all Stockbrokerage, commissions, fees and other charges which will be levied on your trades.
Furnish all your details in full as are required by the Stockbroker as required in the “know your client” (KYC) norms.
Ensure that a contract note is issued by the Stockbroker and contains complete records of every transaction within hrs of the execution of the contract.
In case of money pay-out and / or securities is not received on the next working day after date of pay-out, follow up with the concerned Stockbroker for its release. If it is not released within five working days, ensure to lodge a complaint immediately with the Investors’ Grievance Cell of the exchange.
Ensure to receive a complete ‘Statement of Accounts’ for both funds and securities settlement every quarter.
35. What accounts should an investor should have to be able to trade in the securities market?
NIC Securities Account
36. How does trading take place and what is the process of trading?
The normal course of online/physical trading in the Kenyan market context is placed below:
Step 1 Investor / trader decides to trade
Step 2 Investor/trader places a written/online order with a Stockbroker to buy / sell the required quantity of respective securities
Step 3 Best priced order on ATS matches based on price-time priority
Step 4 Order execution is electronically communicated to the Stockbroker’s terminal
Step 5 Trade confirmation slip is issued to the investor / trader by the Stockbroker
Step 6 Within hours of trade execution, a contract note is issued to the investor / trader by the Stockbroker
Step 7 Pay-in of funds and securities before T+3
Step 8 Pay-out of funds and securities on T+3
37. What is Online Trading and Direct Market Access (DMA)?
Direct Market Access (DMA) is a facility which allows Stockbrokers to offer clients direct access to the exchange trading system through the Stockbroker’s infrastructure (internet) without manual intervention by the Stockbroker.
38. What are the advantages offered by DMA?
Direct control of clients over orders,
Faster execution of client orders,
Reduced risk of errors associated with manual order entry,