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WHY YOU SHOULD INVEST IN STOCKS OR SHARES
Investors should buy stocks for various reasons. Some of them include:
1). Capital Gains
Capital is the initial sum invested in the acquisition or purchase of an asset. Therefore, capital gains is the increase in the price of an...
Investors should buy stocks for various reasons. Some of them include:
1). Capital Gains
Capital is the initial sum invested in the acquisition or purchase of an asset. Therefore, capital gains is the increase in the price of an...
...asset or the gain which accrues to an individual or company on the transfer or sale of an asset or property at a price higher than the acquisition or purchase price.
When a stock rises in price, the difference between the purchase or acquisition price and the current...
When a stock rises in price, the difference between the purchase or acquisition price and the current...
... market price is known as capital gains.
However, the gain is not realised until the asset is sold. Before the asset is sold or transferred, the capital gain is unrealised.
However, the gain is not realised until the asset is sold. Before the asset is sold or transferred, the capital gain is unrealised.
The opposite of capital gain is capital loss. A capital loss is incurred when the value or price of an asset drops below the purchase price.
Income in any given year includes all inflows of financial resources that can be used either for consumption or wealth creation.
Income in any given year includes all inflows of financial resources that can be used either for consumption or wealth creation.
Most individuals derive their income from sources such as earnings from regular, contractual, self employment or other businesses and 'side hustles'.
However, income can also be derived from passive sources (income that requires little to no effort to earn and maintain)...
However, income can also be derived from passive sources (income that requires little to no effort to earn and maintain)...
...such as capital gains from the transfer of non-cash assets such as shares.
2). Dividend Income
Dividend income is another source of profit for shareholders. Dividends refer to the portion of a company's profit that is distributed to its shareholders.
2). Dividend Income
Dividend income is another source of profit for shareholders. Dividends refer to the portion of a company's profit that is distributed to its shareholders.
Dividends are allocated as a fixed amount per share and paid on a regular (usually annually) basis.
The portion of profit that is not distributed, known as retained earnings, is invested in the company to create more value for its shareholders.
The portion of profit that is not distributed, known as retained earnings, is invested in the company to create more value for its shareholders.
Dividends are usually paid as cash, but they may also be in the form of a combination of cash and stock (scrip dividend) or bonus share issue.
The ratio between the fixed cash amount paid as dividends and the market price of each share (dividends ÷ share price) expressed...
The ratio between the fixed cash amount paid as dividends and the market price of each share (dividends ÷ share price) expressed...
...as a percentage, is known as the dividend yield.
The ratio between the fixed amount of dividends paid and the earnings/profit per share ( dividends ÷ earnings per share) or total dividends and net profit (total dividends ÷ net profit), is known as the dividend payout ratio.
The ratio between the fixed amount of dividends paid and the earnings/profit per share ( dividends ÷ earnings per share) or total dividends and net profit (total dividends ÷ net profit), is known as the dividend payout ratio.
It is the percentage of a company's profit that is distributed to shareholders.
A payout ratio of 1 means the company is paying its entire profit to shareholders, greater than 1 means the company is paying out more in dividends for the year than it earned while less than 1...
A payout ratio of 1 means the company is paying its entire profit to shareholders, greater than 1 means the company is paying out more in dividends for the year than it earned while less than 1...
...indicates that the company is paying less in dividends than it earned.
A low payout ratio indicates the company is retaining a greater proportion of its earnings instead of paying out dividends.
A low payout ratio indicates the company is retaining a greater proportion of its earnings instead of paying out dividends.
The retention ratio is calculated by dividing the retained earnings by net profit (retained earnings ÷ net profit).
3). Inflation Protection
Inflation is the general rise in the prices of goods and services. When this happens, money loses value given the same amount can...
3). Inflation Protection
Inflation is the general rise in the prices of goods and services. When this happens, money loses value given the same amount can...
...buy less goods and services.
Stocks have traditionally rewarded investors with the best rate of return over the long term which makes them an effective tool against inflation.
Stocks have traditionally rewarded investors with the best rate of return over the long term which makes them an effective tool against inflation.
However, not all stocks are created equal. Investors should focus on companies that have pricing power (can increase prices without losing customers) and generate rather than consume cash.
4). Diversification Benefits
4). Diversification Benefits
Diversification is a risk reduction strategy achieved by allocating capital in a way that reduces exposure to idiosyncratic (asset specific) risk.
By combining assets that are lowly correlated (assets whose returns or prices move independently of each other e.g when the price...
By combining assets that are lowly correlated (assets whose returns or prices move independently of each other e.g when the price...
...of one drops, the price of the other goes up), an investor could reduce his or her investment risk.
Such a strategy reduces risk by offsetting the price loss of one with the price gain of the other.
Diversification also helps to ensure the stability of cash flows.
Such a strategy reduces risk by offsetting the price loss of one with the price gain of the other.
Diversification also helps to ensure the stability of cash flows.
Owning a broad variety of uncorrelated or lowly correlated stocks is a great way of diversifying investments, sources of income and the risk of financial distress due to unexpected outcomes.
5). Retirement Planning
5). Retirement Planning
Stocks play a major role in the retirement plans of many individuals in an economy.
While retirement income can include pension benefits, annuities and social security, investments in the stock market can increase an individual's economic preparation for retirement.
While retirement income can include pension benefits, annuities and social security, investments in the stock market can increase an individual's economic preparation for retirement.
The two major factors that matter in retirement planning are human capital & financial capital.
Human capital is the present value of an individual's total expected future income while financial capital is the combined tangible & intangible assets owned such as stocks.
Human capital is the present value of an individual's total expected future income while financial capital is the combined tangible & intangible assets owned such as stocks.
The goal of retirement planning is to use human capital to build up financial capital over the years to provide a secure retirement income.
Since stocks offer the best long term growth potential, individuals can create retirement portfolios that are heavily concentrated in...
Since stocks offer the best long term growth potential, individuals can create retirement portfolios that are heavily concentrated in...
...stocks at the beginning of their work life when their human capital is high and gradually shift holdings to bonds as retirement nears and their human capital nears zero.
6). Tax Benefits
Investing in stocks is a legal way of avoiding tax. The income tax rules on capital gains in Kenya are set up to provide tax advantages for gains realised from marketable securities.
Investing in stocks is a legal way of avoiding tax. The income tax rules on capital gains in Kenya are set up to provide tax advantages for gains realised from marketable securities.
This is because the Income Tax Act excludes the transfer of shares traded on any securities exchange licensed by the Capital Markets Authority (CMA) from the provisions of Section 3(2)(f) of the Income Tax Act, which provides for the taxation of marketable securities...
...such as stocks issued by a municipal, a government authority or by a body created by a municipal or government authority in Kenya.
The exclusion means that any gains on the transfer of shares that are listed at the Nairobi Securities Exchange or any other securities...
The exclusion means that any gains on the transfer of shares that are listed at the Nairobi Securities Exchange or any other securities...
...exchange that is licensed by the Capital Markets Authority, will not be subject to both Capital Gains and Withholding Tax.
However, dividend income attracts a withholding tax at the rate of 5% for local investors with less than 12.5% ownership stake and 10% for foreign investors.
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#MakeSmartMovesIn2020 - Learn How To Invest In Financial Markets
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#MakeSmartMovesIn2020 - Learn How To Invest In Financial Markets
