What Stock A Good Investment? – Brian Blue
So, after paying all your bills, restocking your fridge, repaying your ex for emotional damage, you realize you have 200 Ksh left between you and poverty, and instead of spending this 200 and being broke for the rest of the month, you decide to invest it in the hopes that it could end your financial misery and turn into a million one day.
I am here to help guide you on where you can put that 200 Ksh. It might not end up being a million one day, but hey, at least you’ll be broke but own something.
Investing won’t feel like complex calculus equations to you once you know how to determine the kind of stock that is right for you.
I am presuming you already have the prerequisites required to invest (i.e., you have a broker and you have a CDS account). If not, you can simply head to your nearest bank and open one, or, if you wish for simplicity, just open one on the Zidii platform. I recommend having your own CDS account with a bank that offers brokerage services, like KCB Investment Bank or Equity Investment Bank.
With that done and out of the way, let’s talk about the decision-making involved in picking your stock.
Okay, first, before getting into investing, you should have a reason for why you are investing that money. Your reason for investing your money determines the kind of stocks you invest in, or the best picks for that matter.
For instance, if your main goal is aggressive growth for your money, then I wouldn't advise you to invest your money in a defensive stock (not to be confused with a defence stock). You should be more inclined to place it in a tech stock or a promising startup. With that said, let’s first classify these companies so you know which one best aligns with your investment goals and how they can guide your portfolio.
There are lots of ways to classify stocks, but these are the ones I deem relevant to a beginner trying to find their place in the investment world.
Defensive stocks – These are stocks that tend to remain relatively stable even during economic downturns and uncertainties. They are the stocks you find safety in as an investor, and in some instances, they may act as a hedge for your stock portfolio when your other stocks are not performing well. Examples of such stocks on the NSE are East African Breweries Ltd. ($EABL) in Kenya and Procter & Gamble in the US.
Growth stocks. This is where you want to pay attention if your main aim is to maximise your gains and grow your investment. These are stocks that are projected to grow their earnings and revenues faster compared to the industry average or their peers. Examples of these would be NVIDIA (NVDA)andSafaricom(SCOM).
Value stocks. Value stocks are shares of reputable companies that are deemed by investors to be trading below their intrinsic value (their potential), and these conclusions are drawn from fundamentals such as their earnings, book value, and other applicable metrics (we’ll talk about this soon).
Dividend stocks. These are stocks that prioritise giving back their profits to their investors. An example is Coca-Cola (KO)andSafaricom(SCOM).
Cyclical stocks. These are stocks that tend to rise and fall based on economic cycles. They are great for short-term investments. An example of such a stock is Exxon Mobil ($XOM), which fluctuates with oil prices. They allow investors to make use of economic growth and recoveries, etc.
Speculative stocks. These are high-risk, high-reward kinds of stocks in companies whose current financial data, business models, and fundamentals are unproven, weak, or don’t exist. You’re basically betting on the company. Examples of such stocks are Joby Aviation (JOBY)andHomeAfrikaLtd.(HAFR).
These are just a few of the different ways to classify stocks. There are other ways to categorise companies, for instance, by market cap, that you should also put into consideration when deciding which stocks to invest in.
NB: Companies don’t just fall into one category or the other; they cross over a lot. For example, a growth stock can also be a dividend stock, or a speculative stock can also be a value stock, and so on.
So Which Category of Stocks Suits You Best?
Growth stocks are the most common investment path for most people, as you prioritise long-term investment over short-term capital gains. Go for growth stocks if you are not going to depend on them for income and if you can watch your portfolio take swings for the next ten years.
Well, if you’re looking for short-term gains, then you might find yourself opting for a cyclical stock. If you want to receive dividends quarterly, then opt for a dividend stock. All in all, just take time to know your investment goals and reasons, understand the risks, and research your favourite stock.
This categorisation does not mean you choose one or another; it simply means you have the freedom to choose a company from different categories, create your own investment strategy, and hence have your own perfect portfolio.
In my other articles, I will guide you on how to delve into these categories, compare companies, learn the important formulas, and land on your perfect stock.
Thanks for reading.
Defensive stocks – These are stocks that tend to remain relatively stable even during economic downturns and uncertainties. They are the stocks you find safety in as an investor, and in some instances, they may act as a hedge for your stock portfolio when your other stocks are not performing well. Examples of such stocks on the NSE are East African Breweries Ltd. ($EABL) in Kenya and Procter & Gamble in the US.
Growth stocks. This is where you want to pay attention if your main aim is to maximise your gains and grow your investment. These are stocks that are projected to grow their earnings and revenues faster compared to the industry average or their peers. Examples of these would be NVIDIA (NVDA)andSafaricom(SCOM).
Value stocks. Value stocks are shares of reputable companies that are deemed by investors to be trading below their intrinsic value (their potential), and these conclusions are drawn from fundamentals such as their earnings, book value, and other applicable metrics (we’ll talk about this soon).
Dividend stocks. These are stocks that prioritise giving back their profits to their investors. An example is Coca-Cola (KO)andSafaricom(SCOM).
Cyclical stocks. These are stocks that tend to rise and fall based on economic cycles. They are great for short-term investments. An example of such a stock is Exxon Mobil ($XOM), which fluctuates with oil prices. They allow investors to make use of economic growth and recoveries, etc.
Speculative stocks. These are high-risk, high-reward kinds of stocks in companies whose current financial data, business models, and fundamentals are unproven, weak, or don’t exist. You’re basically betting on the company. Examples of such stocks are Joby Aviation (JOBY)andHomeAfrikaLtd.(HAFR).
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