In equity investing, historical results offer insight into the type of returns expected in future by investors. This rule holds 90 per cent of the times. For decades, equities have been the best performing asset class making investors to resort to buying into the investment. Less preferred are the fixed income securities whose rate of return still remains at a single digit.
Recent activity at the bourse is clear evidence that not only are the high net worth and corporate investors the only beneficiaries of stock success stories but the retail investors too have a story to tell. The increased participation by people from all walks of life can be attributed to the increased public awareness, especially by brokerage firms/investment banks. Moreover, corporate interest to list their firms in search of capital has sparked a lot of interest from the public.
Of all asset classes, equity, better known as shares, is the highest yielding hence the excitement at the bourse. However, increasing market efficiency could dissuade the retail investor from enjoying such privileges. This is because as the economy grows, so does the cost of living, income gap and, cost of doing business.
In reaction to the economic shifts, most brokers and investment banks have directly or indirectly put floors to the amount of cash that one can invest in. For example, brokerage firms will make it clear that for you to have a new account registered; one needs a minimum of Ksh. 50,000 (US$ 724.64) among other requirements. For most investment banks, this amount is pegged at Ksh. 250,000 (US$ 3,623.20). On a higher note however, other brokerage firms and investment banks do not put any floor. Nonetheless, for you to qualify for proper service delivery, and a more personalized service, your account may as well be on the lows of Ksh. 1,000,000 (US$ 14,492.75).
During the recently concluded Eveready IPO (Initial Public Offering), subscription exceeded targets by over 800 per cent. In its case, individual investors had their own allotment while the corporate investors had their reserve. In the IPO, the corporate investors ended up being the advantaged lot because having had a higher cut off point; the masses were locked out from the special category leaving out fewer people to compete for the shares. On the other hand, the individual/retail investors had the masses crowding into the offer leading to an excessive and affordable demand.
In the KenGen IPO however, both corporate and retail investors were accorded equal subscription opportunity. Due to this, corporate investors could not get a quarter of the number of shares they were applying for hence being forced to buy from the secondary market (post IPO). This left the retail investors controlling the market, a factor that has led to the stalled price of the KenGen shares, a drop that is not supported by company fundamentals but the nature of the market.
During the closing days of the Eveready IPO, investors at the Nairobi Stock Exchange (NSE) were selling registered company names to willing investors just to enable individuals fit into the corporate slot. Company names, together with seals went as high as Ksh.20,000 (US$ 289.85).
These scenarios are evidence that the investors are moving out of the typical small accounts into larger accounts. Due to the lengthy business registration requirements, most investors are opting to form investment clubs whose operation is more of a merry go round. The luckier bit have given their investment clubs a corporate identity that enables them to transact like a normal limited liability company- only that most will not have an office.
That gets one thinking; what should work best for our markets? Having individuals putting in their US$289.85 or having 10 individuals committing the amount into one account then trading jointly as US$2,898.5? Security related cost is one good reason that makes it easier to deal as a group. While buying securities in the Kenyan market, one attracts a total commission fee of 1.78 per cent for a single transaction of Ksh.100,000 (US$ 1449.28) and 2.078 per cent for a single transaction less than that amount. Raising Ksh.100,000 is no easy task for a majority of Kenyan retail investors. Kenya is mainly a speculative market with majority of investors being for the short term. Majority buy shares worth less than Ksh.100,000 thus attracting high costs on trading.
The pace at which investment clubs have sprang up shows the reversing trend in the equity market. We have had consortiums of all ages; lifestyles and career backgrounds emerge and jointly amass so much wealth. Transcentury, one of the most popular investment clubs is valued at billions yet its background still stems from the investment club whose objective was probably to make money out of equity trading. Other investment clubs have emerged and jointly acquired big stakes of both listed and non listed firms.
Although no statistics are available yet, the stake held by investment clubs could be valued in the tune of billions. If taxed, the current levels of the Kenya Revenue Authority (KRA) tax income could triple.
We have embraced individual wealth ownership and made little gains. At other times, individuals have acquired property and benefited from it for a short time. However, joint ownerships have attracted a plethora of interests within the circle leading to a diversity of ideas and increased opportunity flow.
A Mr. Mwangi reckons that the only reason why his dreams came true was when he joined Newgen Investments Limited. Through the six month old group, they will be able to use the shares they have as collateral to get a facility at their bank and embark on a grand project in South Sudan which will earn each of them a clean Ksh.1 million within nine months. How sweeter can a deal well planned get- when not approaching singly.