How to Open An Online Trading Account in Kenya

There are an estimated 75,000 online traders in Kenya and millions of shares and other instruments are traded every day. Financial markets in Kenya have become lucrative asset class to grow wealth. The Nairobi Securities Exchange (NSE) facilitates trading of various asset classes. Trading is regulated by the Capital Market Authority (CMA) and the shares or derivatives contracts are safely stored by the Central Depository and Settlement Corporation (CDSC).

This article is a step-by-step guide on how to open an online trading account in Kenya and explains every factor that one should consider before selecting a particular broker.

A Trading Account is a platform where traders can buy or sell assets. This is usually facilitated by a securities broker. This Trading Account is linked to a dematerialized account which holds investment assets like equity shares, bond securities, derivative contracts, CFDs, etc in an electronic form.

This Trading Account is also linked to your bank account which holds the cash. So whenever a trader wants to buy more assets, they can directly transfer the funds from their bank account to the trading account.

On the other hand, to withdraw funds post selling assets, a trader can transfer funds from trading to bank account. Other features of a trading account include: Historical Trade Data; Net Profit/Loss Ledger; Trade by Trade Brokerage Cost Data; Upcoming IPOs; and NFO and stock buy/selling Ideas.

 Types of Trading accounts and instruments in Kenya?

Investors can trade multiple asset classes or instruments in Kenya – short and long-term depending on the trader/investor.

Let’s look into the different types of instruments that one can trade at the NSE:

1. Equity Market: It involves majorly buying and selling of company shares, Exchange Traded Funds (ETF) and Real Estate Investment Trusts (REITs). These are listed on the NSE & can be traded via a NSE listed broker like Dyer & Blair, Faida etc. Traders can trade over the day (Intraday) or hold the stock/ETF for a period of time (Delivery Trading). Brokers also provide leverage, so that traders can bet on higher value of stocks, increasing the profits massively. For Example: To buy 1 million worth of ARM Cement stocks, one might need to pay only Ksh200,000 (1:5 leverage).

Foreign stocks & indices are not available at local brokers, but Kenyan traders can trade global indices like NASDAQ at regulated brokers that offer global indices as a CFD instrument.

2. Debt Market: Traders also speculate on Debt Market Instruments that are issued by corporations, governments to raise loan from investors, such as government, corporate bonds etc. Each bond comes with different characteristic and pays a fixed rate over a given period of time. There is an inverse relationship between bond price in the market with its interest rate. Using this theory, traders buy or sell the bonds in anticipation of making profits.

3. Derivatives Market: Derivatives in Kenya can be traded on stocks or indices as the underlying assets. Types of derivatives available in Kenya are Futures (buy today at a price fixed to be delivered in future). These are risky instruments and must be traded very carefully. Usually, derivatives are used to hedge risk. To trade Index and Single Stock Futures at NSE NEXT, you need to register at NSE NEXT Dealing members.

See Also >> Kenya’s Derivatives Market Has Come Of Age

4. Forex & CFDs: Forex is traded as a derivative instrument via CMA licensed forex brokers. In a nutshell, traders speculate on the value of a currency pair moving upwards or downwards against another currency, for example EUR/USD. Currently 1 EUR = 1.1819 USD. Traders would speculate this value and make profits if they are correct. CFD brokers like FxPesa, Scope Markets Kenya normally offer CFDs on instruments like indices, stocks, forex, commodities etc.

Steps required to Open a Trading Account

Now that we know the types of instruments in trading, let us learn about the steps to open a trading account and key points to remember that can prove crucial in your trading journey.

• Financial Asset/Instrument Type: There are 5 to 6 asset classes and more than 25+ instrument types. It is very crucial to start with a specific asset class and instrument. Markets have thousands of participants and therefore become highly unpredictable, if bonds look profitable to a trader, there should be a mechanism that can bring returns amidst all market conditions. Also, capital capacity varies in the market participants and hence instruments which suit one’s profile should be selected carefully before trading.
• Broker: Arguably the most important step while starting to trade is to choose the best suitable broker. Some brokers have low commission while others have high leverage & other features. Some allow trading in more instruments than others and some let you trade foreign markets. If a broker causes multiple technical glitches or failed execution of trades, it stalls the trading experience & also cause losses. It is also important to compare the initial deposit charges, yearly maintenance costs, trading fees, commissions and if they provide interest on liquid cash available in the account.
• Registration and KYC: Before choosing a broker, all you have to do is register and fill the required details and complete KYC so that a dematerialized and trading account can be created. List of documents required: full name and age proof, address proof, identity proof, photograph, email address & contact details and nominee details

Read >> 3 Investment Options That Will Surely Make You Richer

• CDS Account Registration: Once the account is opened by the broker, one needs to open a Central Depository System (CDS) Account. This can be opened by your broker on your behalf, if the broker is a Registered Central Depository Agent.­
• Paper or Demo Trading: Before trading live by investing huge capital, demo or paper trading should be used. It is nothing but trading with virtual currency, for testing if a particular strategy might work or not and hence prove to be highly cost saving.
• Start Trading: Finally, after all the steps, we are set to start trading. One can either use Web/Mobile platform for trading and all the key sections should be visited, so that benefits of the entire brokerage platform can be taken.

Trading Risks – What are the Risks of Online Trading?

There is no such thing as high returns without risk. Let us categorically understand the types of risks and how to minimize them:

1. Market Risks – Financial Markets are volatile and unpredictable. Factors like inflation, political events, market sentiment, economic cycles, etc are all risks that a trader needs to acknowledge while trading. It is not possible to win every trade, but with proper risk management controls in place, losses can be minimized.
2. Liquidity Risks – Every stock is not liquid and slippages are common. Liquidity forms a major portion of price execution efficiency. If a stock has extremely positive views, chances are sellers will quote higher prices and after some price action, spreads might increase between buy and sell prices which will squeeze the liquidity and make it difficult to get the best price to execute trade orders. So, to curb this, traders must be aware of strategies that can tackle this situation and eventually hedge the risk arising from lower liquidity.
3. Operational Risks – There are countless events where due to tech issues at the broker’s end, traders are not able to execute trades or close positions, incurring massive losses. So before choosing a broker, a deep dive research into execution percentage of trades becomes necessary. Also, one should refrain from a fat finger situation!
4. Security Risks – As trading strategies are highly classified and user data a privacy concern, it is going to cost a trader a fortune, if hacked. Therefore, only the most verified and secure broker platforms should be selected.
5. Settlement Risk – Settlement is the last step post securities selling, but very critical. If anything goes wrong in settling the trade or transferring the funds, all efforts made while trading will go in vain. Therefore, only very reliable and trusted platforms should be chosen while trading.

We have understood all the nitty-gritties of opening an online trading account and various attributes of it. Financial Trading is risky; therefore, it is only suitable for experienced investors who understand and can manage the risks.

Next >> Six Mobile Apps For Managing And Investing Your Money