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1.0   Equity

This refers to a stock or any other security that represents an ownership interest in a limited liability company. Equity ownership in can be obtained through an Initial Public Offer (IPO), a Rights Issue or through purchase through the Nairobi Securities Exchange.

As at 31st March 2018 had 64 companies listed and trading at the Nairobi Securities Exchange.

2.0   Bonds

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are creditors of the issuer. There are two main categories of bonds issued in the Kenyan Market namely: -

                 i.            Treasury Bonds

These are debt instruments issued by the Government of Kenya to finance budgetary goals. Treasury bonds are medium to long-term debt instruments usually longer than one year issued by the government to raise funds in local currency. Treasury bonds may be defined by the purpose, interest rate structure, maturity structure, and even by issuer.

The most commonly issued bonds in Kenya are fixed coupon bonds. Additionally, Treasury bonds in Kenya are issued on a monthly basis.

Treasury bonds are available in both the primary market (through auctions) and the secondary market (through the Nairobi Securities Exchange). An investor needs at least Kshs. 50,000 to purchase bonds in Kenya. 

               ii.            Corporate Bonds

These are long-term (at least one year and above) debt instruments issued by the private sector. Issuers of this instrument target high net worth investors who understand technical information about pricing, valuation, yields etc. 

3.0   Loan Stocks & Preference Shares

                 i.            Preference shares

These are shares of a company’s stock that rank higher in seniority, compared to ordinary shares, with dividends getting paid out first to shareholders holding them before common stock dividends are paid. In the event of bankruptcy, shareholders with preferred stock are have to be paid from the bankrupt company’s residual assets first, before ordinary shareholders are paid.

               ii.            Loan stocks

Loan stock are shares in a business that have been pledged as collateral for a loan. This type of collateral is most valuable for a lender when the shares are publicly traded on a securities exchange and are unrestricted, so that the shares can be easily sold for cash.

4.0  Collective Investment Schemes (CISs)

Collective investment schemes securities offered by a company under which, contributions made by the investors, are pooled and utilized with a view to paying a return in accordance with specific shared investment objectives that have been established for the scheme. Collective investmen funds thus group assets from individuals and organizations to develop a larger, diversified portfolio.

In return for putting money into these funds, the investor receives shares or units that represent their pro-rata share of the pool of fund assets. The unit price (also known as the net asset value (NAV)) is dependent on the market value of the instruments in which the pool of money is invested and therefore rises and falls. It is calculated daily.

As at 31st March 2018, there were 26 fund managers and 23 collective investment schemes licensed by the Capital Markets Authority.

5.0   Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts are pooled investments typically designed to enable the investors to benefit from investments in large-scale real estate enterprises. They invest in real estate through property or mortgages and often trade on a securities exchange like a stock. REITs provide investors with a liquid stake in real estate and mortgage properties.

In Kenya, the two main types of REITs are:

                 i.            Income Real Estate Investment Trusts (I-REITs)

This is a REIT that primarily derives its revenue from property rentals. It owns and manages income generating real estate for the benefit of its investors. Distributions to investors are underpinned by commercial leases. This means that income returns are predictable and generally less volatile. I-REITs provide an instrument for investing in the real estate market offering both liquidity and a stable income stream.

Kenya has already covered some ground on this front, with the listing of the first Real Estate Investment Trust, the Stanlib Fahari Income REIT in October 2016. The REIT raised KES3.6 billion to be invested in real estate projects.

               ii.            Development Real Estate Investment Trust (D-REIT)

This is a real estate investment trust that is principally involved in the development and construction of property for sale or and for rental.

6.0  Asset Backed Securities

Asset-backed securities (ABSs) are securities created by bundling loans – such as residential mortgage loans, commercial loans or student loans using a Special Purpose Vehicle – and creating securities backed by receivables from those assets, which are then sold to investors. Often, a bundle of loans is divided into separate securities with different levels of risk and returns. For investors, asset-backed securities are an alternative to investing in corporate debt. They are mainly used to finance roads, power, energy, ports, railways and many other projects.

7.0   Derivative Instruments

As the name suggests, a derivative is a financial instrument whose value is derived from the value of one or more underlying assets. Derivatives generally take the form of (legal) contracts in which two parties agree to payoffs based upon the value of an underlying asset or other data at a particular point in time. The main use of derivatives is to transfer risk. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indices Derivatives can either be traded over-the-counter (OTC) or on an exchange. An Over the Counter transaction involves trades done directly between two parties without any supervision of an exchange as opposed to trading on an exchange characterized by standards and rules upon which the parties engage.

There are four most common types of derivative instruments.

                 i.            Forward Contract

A forward contract is a non-standardized agreement between two parties – a buyer and a seller to purchase or sell an asset at a later date at a price agreed upon at the time of signing the contract.

               ii.            Futures Contract

This is a standardized   contract between two parties – a buyer and a seller, to buy or sell an asset at a future date, with a clear central counterparty arrangement. Prices are determined by the forces of demand and supply as the contracts are traded on an organized exchange.

              iii.            Options Contract

An option bestows upon the holder of the contract the right, but not the obligation, to buy or sell the asset underlying the option at a pre-determined price during or at the end of a specified period.

              iv.            Swaps

Swaps are private agreements between two parties to exchange one financial instrument for another in the future according to a prearranged formula. The exchange takes place at a predetermined time as specified in the contract. They can be regarded as portfolios of forward contracts. The two commonly used swaps are interest rate swaps and currency swaps.

8.0  Venture Capital Funds

Venture capital is capital invested in a project where there is a substantial element of risk, but with potential for high return too, especially in a new venture or an expanding business in exchange for shares in the business.

Venture capital Funds are emerging as critical in addressing the funding needs of entrepreneurial companies that generally do not have the size, assets, and operating histories necessary to obtain capital from more traditional sources, such as public markets or banks.

In Kenya, the number of venture firms has increased significantly over the years given that Nairobi is considered an investment hub within the East African region by external investors.

9.0  Private Equity Funds

Private equity funds invest and acquire equity ownership in private companies, typically those in high-growth stages. These PE funds purchase shares of private companies or those of public companies that go private, with a strategy to exit at the opportune moment. There are various types of private equity firms, and depending on strategy, the firm may take on either a passive or active role in the portfolio company. Passive involvement is common with mature companies with proven business models that need capital to expand or restructure their operations, enter new markets, or finance an acquisition,

while active involvement means that the firm plays a direct role in restructuring the company, reshuffling the senior management, and providing advice, support, and introductions.

While venture capital is a subset of private equity, there are differences between the two. The most notable difference is that venture capital funds raise capital from investors to specifically invest in startups and small- and medium-size private companies with strong growth potential.

10.0           Exchange-Traded Funds (ETFs)

An exchange traded fund unit is an exchange traded security that tracks an index (of pooled underlying securities like bonds or shares), a commodity or a defined basket of assets. After creation, the traded security can be bought or sold throughout a trading day on a stock exchange at a market-determined price just like a share. In the case of an index ETF, just like a collective investment scheme, such an ETF offers investors a proportionate share in a pool of stocks, bonds or other assets.

In the case of a commodity ETF, such an ETF invests in real commodities such as agricultural goods, natural resources and precious metals like Gold and Silver. It is possible for a commodity ETF to focus on a single commodity, with holdings in a physical storage safe or to invest in futures commodities contracts.

11.0           Depository Receipts (DRs)

Depositary Receipts (DRs) are a means for investors to hold and trade foreign securities as if they were local securities.  A DR is an instrument issued in one country representing an interest in an underlying security issued in another country. The underlying securities are held by a Depositary Bank, which in some instances, is   responsible   for   creating   and   issuing   the   DRs   and   for   passing   through   any entitlements, such as dividends, to the holders of the DRs.  The Depositary Bank either creates or cancels DRs as securities are moved into or out of this form. The bonds equivalent of DRs are referred to as Depository Notes (DNs).

12.0           Islamic Finance

Islamic Finance refers to sharia-compliant finance in which financial transactions, products and services are issued and traded in compliance with the principles and guidelines of Islamic law which emphasize on among other things;

  1. Prohibition of interest or Riba.
  2. Prohibition of any transaction that involves uncertainty (or Gharrar)
  3. Sharing of profits and losses as Muslims are considered partners in a business, and should therefore bear the risk of loss and profit sharing in equal measure.

The development of Islamic capital markets seeks to position Kenya as a Regional Islamic Finance Hub as envisioned in the 10-year Capital Markets Master Plan, a flagship project under Kenya’s economic blueprint, Vision 2030.

1.0   Equity

This refers to a stock or any other security that represents an ownership interest in a limited liability company. Equity ownership in can be obtained through an Initial Public Offer (IPO), a Rights Issue or through purchase through the Nairobi Securities Exchange.

As at 31st March 2018 had 64 companies listed and trading at the Nairobi Securities Exchange.

2.0   Bonds

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are creditors of the issuer. There are two main categories of bonds issued in the Kenyan Market namely: -

                 i.            Treasury Bonds

These are debt instruments issued by the Government of Kenya to finance budgetary goals. Treasury bonds are medium to long-term debt instruments usually longer than one year issued by the government to raise funds in local currency. Treasury bonds may be defined by the purpose, interest rate structure, maturity structure, and even by issuer.

The most commonly issued bonds in Kenya are fixed coupon bonds. Additionally, Treasury bonds in Kenya are issued on a monthly basis.

Treasury bonds are available in both the primary market (through auctions) and the secondary market (through the Nairobi Securities Exchange). An investor needs at least Kshs. 50,000 to purchase bonds in Kenya. 

               ii.            Corporate Bonds

These are long-term (at least one year and above) debt instruments issued by the private sector. Issuers of this instrument target high net worth investors who understand technical information about pricing, valuation, yields etc. 

3.0   Loan Stocks & Preference Shares

                 i.            Preference shares

These are shares of a company’s stock that rank higher in seniority, compared to ordinary shares, with dividends getting paid out first to shareholders holding them before common stock dividends are paid. In the event of bankruptcy, shareholders with preferred stock are have to be paid from the bankrupt company’s residual assets first, before ordinary shareholders are paid.

               ii.            Loan stocks

Loan stock are shares in a business that have been pledged as collateral for a loan. This type of collateral is most valuable for a lender when the shares are publicly traded on a securities exchange and are unrestricted, so that the shares can be easily sold for cash.

4.0  Collective Investment Schemes (CISs)

Collective investment schemes securities offered by a company under which, contributions made by the investors, are pooled and utilized with a view to paying a return in accordance with specific shared investment objectives that have been established for the scheme. Collective investment funds thus group assets from individuals and organizations to develop a larger, diversified portfolio.

In return for putting money into these funds, the investor receives shares or units that represent their pro-rata share of the pool of fund assets. The unit price (also known as the net asset value (NAV)) is dependent on the market value of the instruments in which the pool of money is invested and therefore rises and falls. It is calculated daily.

As at 31st March 2018, there were 26 fund managers and 23 collective investment schemes licensed by the Capital Markets Authority.

5.0   Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts are pooled investments typically designed to enable the investors to benefit from investments in large-scale real estate enterprises. They invest in real estate through property or mortgages and often trade on a securities exchange like a stock. REITs provide investors with a liquid stake in real estate and mortgage properties.

In Kenya, the two main types of REITs are:

                 i.            Income Real Estate Investment Trusts (I-REITs)

This is a REIT that primarily derives its revenue from property rentals. It owns and manages income generating real estate for the benefit of its investors. Distributions to investors are underpinned by commercial leases. This means that income returns are predictable and generally less volatile. I-REITs provide an instrument for investing in the real estate market offering both liquidity and a stable income stream.

Kenya has already covered some ground on this front, with the listing of the first Real Estate Investment Trust, the Stanlib Fahari Income REIT in October 2016. The REIT raised KES3.6 billion to be invested in real estate projects.

               ii.            Development Real Estate Investment Trust (D-REIT)

This is a real estate investment trust that is principally involved in the development and construction of property for sale or and for rental.

6.0  Asset Backed Securities

Asset-backed securities (ABSs) are securities created by bundling loans – such as residential mortgage loans, commercial loans or student loans using a Special Purpose Vehicle – and creating securities backed by receivables from those assets, which are then sold to investors. Often, a bundle of loans is divided into separate securities with different levels of risk and returns. For investors, asset-backed securities are an alternative to investing in corporate debt. They are mainly used to finance roads, power, energy, ports, railways and many other projects.

7.0   Derivative Instruments

As the name suggests, a derivative is a financial instrument whose value is derived from the value of one or more underlying assets. Derivatives generally take the form of (legal) contracts in which two parties agree to payoffs based upon the value of an underlying asset or other data at a particular point in time. The main use of derivatives is to transfer risk. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indices Derivatives can either be traded over-the-counter (OTC) or on an exchange. An Over the Counter transaction involves trades done directly between two parties without any supervision of an exchange as opposed to trading on an exchange characterized by standards and rules upon which the parties engage.

There are four most common types of derivative instruments.

                 i.            Forward Contract

A forward contract is a non-standardized agreement between two parties – a buyer and a seller to purchase or sell an asset at a later date at a price agreed upon at the time of signing the contract.

               ii.            Futures Contract

This is a standardized   contract between two parties – a buyer and a seller, to buy or sell an asset at a future date, with a clear central counterparty arrangement. Prices are determined by the forces of demand and supply as the contracts are traded on an organized exchange.

              iii.            Options Contract

An option bestows upon the holder of the contract the right, but not the obligation, to buy or sell the asset underlying the option at a pre-determined price during or at the end of a specified period.

              iv.            Swaps

Swaps are private agreements between two parties to exchange one financial instrument for another in the future according to a prearranged formula. The exchange takes place at a predetermined time as specified in the contract. They can be regarded as portfolios of forward contracts. The two commonly used swaps are interest rate swaps and currency swaps.

8.0  Venture Capital Funds

Venture capital is capital invested in a project where there is a substantial element of risk, but with potential for high return too, especially in a new venture or an expanding business in exchange for shares in the business.

Venture capital Funds are emerging as critical in addressing the funding needs of entrepreneurial companies that generally do not have the size, assets, and operating histories necessary to obtain capital from more traditional sources, such as public markets or banks.

In Kenya, the number of venture firms has increased significantly over the years given that Nairobi is considered an investment hub within the East African region by external investors.

9.0  Private Equity Funds

Private equity funds invest and acquire equity ownership in private companies, typically those in high-growth stages. These PE funds purchase shares of private companies or those of public companies that go private, with a strategy to exit at the opportune moment. There are various types of private equity firms, and depending on strategy, the firm may take on either a passive or active role in the portfolio company. Passive involvement is common with mature companies with proven business models that need capital to expand or restructure their operations, enter new markets, or finance an acquisition,

while active involvement means that the firm plays a direct role in restructuring the company, reshuffling the senior management, and providing advice, support, and introductions.

While venture capital is a subset of private equity, there are differences between the two. The most notable difference is that venture capital funds raise capital from investors to specifically invest in startups and small- and medium-size private companies with strong growth potential.

10.0           Exchange-Traded Funds (ETFs)

An exchange traded fund unit is an exchange traded security that tracks an index (of pooled underlying securities like bonds or shares), a commodity or a defined basket of assets. After creation, the traded security can be bought or sold throughout a trading day on a stock exchange at a market-determined price just like a share. In the case of an index ETF, just like a collective investment scheme, such an ETF offers investors a proportionate share in a pool of stocks, bonds or other assets.

In the case of a commodity ETF, such an ETF invests in real commodities such as agricultural goods, natural resources and precious metals like Gold and Silver. It is possible for a commodity ETF to focus on a single commodity, with holdings in a physical storage safe or to invest in futures commodities contracts.

Prerequisites of investing in Exchange Traded Funds

Types of Exchange Traded Funds

11.0           Depository Receipts (DRs)

Depositary Receipts (DRs) are a means for investors to hold and trade foreign securities as if they were local securities.  A DR is an instrument issued in one country representing an interest in an underlying security issued in another country. The underlying securities are held by a Depositary Bank, which in some instances, is   responsible   for   creating   and   issuing   the   DRs   and   for   passing   through   any entitlements, such as dividends, to the holders of the DRs.  The Depositary Bank either creates or cancels DRs as securities are moved into or out of this form. The bonds equivalent of DRs are referred to as Depository Notes (DNs).

12.0           Islamic Finance

Islamic Finance refers to sharia-compliant finance in which financial transactions, products and services are issued and traded in compliance with the principles and guidelines of Islamic law which emphasize on among other things;

  1. Prohibition of interest or Riba.
  2. Prohibition of any transaction that involves uncertainty (or Gharrar)
  3. Sharing of profits and losses as Muslims are considered partners in a business, and should therefore bear the risk of loss and profit sharing in equal measure.

The development of Islamic capital markets seeks to position Kenya as a Regional Islamic Finance Hub as envisioned in the 10-year Capital Markets Master Plan, a flagship project under Kenya’s economic blueprint, Vision 2030.

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