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How to choose shares on the NSE

Analyst Team trader
Updated 29 Sep 2022

The idea of purchasing stocks on the Nairobi Securities Exchange (NSE) is terrifying to a great number of people for several reasons. This is mostly as a result of their unfamiliarity with the stock market and the procedures that must be followed in order to buy and sell shares of stock.

A minority of people believe that the only people who should invest their money in the stock market are those who are already affluent. Recent times, however, have brought about a significant shift in this regard.

The development of new technologies has made it simpler for new investors to enter the market, and numerous reputable stockbrokers in Kenya cater to customers who have little to no prior experience in the stock market.

The key to profitable stock trading is selecting the appropriate stocks, both for your portfolio and for your individual investment profile. In the following, we will walk you through the process of selecting shares on the Kenya Stock Exchange (NSE).

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How to choose shares on the NSE

Check the company’s factors

The stock price of the company in which you are considering investing can rise or fall in response to company news.

This is because individuals tend to purchase stocks after hearing great news and sell equities after hearing unfavourable news. It is an element in the supply and demand dynamics that affects the price of the stock.

Changes in management or other employees can also have a big impact on a company's stock price, so investors must pay particular attention to any recent personnel alterations. Any changes in leadership could have an impact on the company's image, which would have an effect on the stock price.

It is essential to consider the impact of current financial developments on the market while selecting stocks. Other economic happenings include interest rate decisions, anticipated management changes, and other occurrences.

NSE stock trading

Research the reports

As part of their fundamental analysis, traders and investors should closely monitor the earnings pattern of a company. There is a risk that stock prices do not appropriately reflect value if declining earnings are not reflected in the share price.

The balance sheet of a business details its assets and liabilities. A company's stock price tends to increase in tandem with its balance sheet, as the former signals the latter's ability to make profits. As stated, stock prices are similarly susceptible to earnings.

A dividend is the portion of a company's net income that is distributed to its shareholders. They enable shareholders to profit from their holdings without selling any stock.

As a measure of a company's success and an indicative of its future profit potential, dividends can assist you in making an informed investment decision when selecting stocks to acquire.

Define your trading goals

For short-term investing, it is prudent to invest in stocks that you believe will appreciate rapidly and allow for a quick exit. On the other hand, you might hold on to stocks for a medium- to long-term period of time, such as dividend-paying corporations with a high yield.

The time frame you've designated for your investments will have a direct effect on the composition of your portfolio. The majority of dividend-focused stocks have reliable cash flow and high dividend yields.

Companies whose sales are increasing rapidly but may not yet be profitable are commonly referred to as growth stocks. Choose a value stock over a growth stock when searching for a stock to invest in. Typically, value stocks are established, long-lasting businesses with a history of consistent profit.

Decide how much you want to invest

How to choose stocks on the NSE

Nothing is certain in the world of investing and commerce. The value of stocks may fall unexpectedly or climb sharply and consistently for years.

Consequently, you should consider the amount of money you are willing to risk. Your investment strategy must be proportional to the amount of your portfolio. Investing in growth stocks can generate profits, but their volatility increases the portfolio's total risk.

Long-term investments are safer than short-term investments because long-term market gains tend to offset short-term losses. An effective approach for selecting stocks depends greatly on the investor's capacity to manage his or her unique risk profile.

Choose shares from an industry you’re familiar with

Choosing information provided from a field of expertise that you are proficient in might have substantial rewards. You will have an advantage over the competition due to your extensive knowledge of the company's prospects and risks.

To be successful in stock selection, you must be able to predict a company's future performance better than the market as a whole. You cannot accurately judge a company's future success if you are unfamiliar with its industry.

Before investing in a company, it is crucial to have a thorough understanding of its operations and finances. The examination of the organization might aid in achieving this objective.

Throughout their careers, professional investors often invest in a restricted number of companies.

The ability to anticipate the effects of macro and micro events, such as the introduction of new technology, can be vastly improved by a single-sector investor's concentration.

Use technical analysis

Technical analysis is a prominent strategy for identifying companies for intraday trading. This technique employs chart patterns and technical indicators to forecast future price movement using historical data.

This hypothesis is supported by three key premises:

  • Markets (price) reflect all relevant information about a stock
  • Prices trend rather than fluctuate arbitrarily
  • Trends tend to reoccur over time

Traders use technical indicators to determine when to enter and exit a transaction. Breakout stocks are those that breach their prior price ranges, which were established by support and resistance.

When a stock's price falls below a support level, investors become more pessimistic about the company's future prospects, and when the price rises over a resistance level, investors become more optimistic.

In technical analysis, candlestick charts are commonly employed due to the information they provide regarding probable future price movements based on present trends.

A ‘morning star,' which is characterized by a very small candle towards the bottom of a downward trend (i.e., a small difference between the open and closing prices), is an indication that a stock's price decline may be ready to reverse.

Follow up on what the analysts are saying

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Analysts at investment banks and other financial organizations create the investment cases and price forecasts for financial assets such as stocks using a combination of technical and fundamental analysis.

These frequently include a rating, such as “buy,” “hold,” or “sell,” indicating whether or not the analyst anticipates the stock price to rise within a given time frame (usually 12 or 18 months).

Analysts who assign a “Hold” recommendation to a stock anticipate that it will perform similarly to the market and/or its competitors.

A stock's share price tends to increase after an analyst upgrade (from, instance, a hold rating to a buy recommendation), but a downgrade has the opposite effect.

Analyst ratings often include a proposed selling price. Here is the analyst's forecast for the company's stock price for the next year. Again, an increase in the price objective typically leads in a share price increase.

Use sentiment indicators

Using specific leading and lagging indicators, it is possible to determine overbought or oversold stock values. A reversal in a trend may be signalled by a slackening in the rate of change in the price of a stock.

If the price of a stock has risen for 14 consecutive days, but the rate of increase is slowing, it is conceivable that demand is dwindling and the price may fall.

Additionally, market mood indicators can be used to stocks and other instruments. When people are hopeful about the economy, the price of everything typically increases.

Numerous investors use contrarian trading strategies based on market sentiment, such as purchasing cheap when investors are pessimistic and selling high when investors are positive. A combination of position analysis and sentiment readings can guide the timing of trade entries and exits.

Search for rising prices

how to choose kenyian shares

If a stock's trading volume is increasing, it may indicate that its recent upswing is gaining momentum. When both the price and volume of a stock rise at the same time, this may indicate that market demand for the asset is increasing.

Also, valid is the opposite assertion. The combination of declining volumes and rising stock prices may be indicative of an oncoming reversal.

Moreover, if volumes are increasing despite the price reduction, it is possible that prices will continue to shrink. Nonetheless, if falling prices are followed by falling volumes, the market may be approaching a bottom from which it can recover and gain in price.

Use stock signals

In response to fundamental or technical analysis, it is possible to program triggers or alerts for action, such as buying or selling stocks. These triggers and notifications can be customized to either buy or sell shares depending on the situation.

These may act as a useful reminder to take advantage of potential business opportunities when they present themselves.

The AskTraders Analyst Team features experts in technical and fundamental analysis, as well as traders specializing in stocks, forex, and cryptocurrency.