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Business and Development

All You Need To Know About Investing In African Stock Market

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Africa was described as “The Hopeless Continent” by The Economist Magazine in 2000. However, 20 years later, the story has changed. African countries are now among the fastest-growing economies in the world. In 2018, Ghana and Ethiopia had the highest growth rate according to World Bank economic forecast. In that year, both countries GDP growth rate was 8.3% and 8.2% respectively.

The World Economic Forum went further to say that half of the fastest-growing economies in the world come from Africa. This proves that Africa has a promising future and investors already see the potential in African markets. However, the question is, how do you invest in African Stock Market? To many investors, the African Stock market seems confusing and too volatile. Don’t worry, we will tell you all you need to know about investing in African Stock Market.

The African Stock Market

Africa Stock Market

Johannesburg Stock Exchange Building (Photo credit: platinum wealth)

They are 29 stock exchanges representing 38 countries in Africa. However, the top 5 exchanges by market capitalization are;

  • Johannesburg Stock Exchange (JSE)
  • Nigerian Stock Exchange (NSE)
  • Casablanca Stock Exchange (CSE)
  • Egyptian Stock Exchange (EGX), and;
  • Namibian Stock Exchange (NSX)

Each of these represents major economies in Africa. So, they should be the priority for investors that want to invest in the African stock market.  

How to Invest In African Stock Market

Knowing the top African stock Markets to invest in is just one part of the solution. The next is knowing how to invest in these markets and which financial instrument to invest in. They are different financial instruments traded in the African Stock Market. Each of these comes with a level of risk which the investor must be aware of. Below are the ways to invest in the African stock market.

Through a local Brokerage

Opening a local brokerage account gives you direct access to the stock market. They are different brokerage firms that accept direct foreign investments. Make sure to check that the broker is duly registered. To find a broker in South Africa see JSE authorized broker and for Nigerian Stock Market see NSE authorized broker. Investing in stocks is ideal for long-term investors and traders with a moderate to high tolerance for risk. 

ETFs and Mutual Funds

Exchange-traded funds (ETFs) and Mutual Funds are a safer bet for beginner investors. ETFs allow an investor to invest in multiple assets in one industry or several industries. The benefit of ETF is that it brings diversification to the portfolio. Mutual funds are similar to ETFs because they are based on the same principle of diversification. However, there are some differences between the two types of investment. 

While ETFs are traded all day, Mutual funds are only traded once a day after the market closes. Also, Mutual funds are actively traded and incur higher fees than ETFs which are passively traded. Make sure to check with your broker to know which type is best for you. Also, find out what sectors/industry they will be investing in. Another benefit of investing in ETFs and Mutual funds is that you don’t need a local brokerage account. They are foreign exchanges that trade ETFs and Mutual Funds in Africa. This makes things a lot easier. 

ADRs

ADRs (American Depository Receipts) is a negotiable certificate issued by a depository bank in the U.S. It offers U.S residents an opportunity to invest in stocks overseas. Each issued certificate represents a certain number of shares of a foreign stock. Most ADRs investments in Africa are in the natural resource sector. Notable companies whose stocks are traded in ADRs are Sasol (SSL), DRD Gold (DRD), Randgold (GOLD), MiX Telematics (MiXT). All of these companies are listed on the New York Stock Exchange. 

Foreign Bonds

Another means of diversifying an investment portfolio is through foreign bonds. These are bonds issued by a foreign company in a domestic market. A typical example is if a South African company were to issue a bond in the U.S. One benefit of investing in foreign bonds is that you use your local currency. This eliminates your exposure to exchange rates which are often finicky. Some examples of foreign bonds are the Matilda Bond, Bulldog Bond, and Samurai Bond. You can find out more about this from your local broker. 

Johannesburg Stock Exchange

The JSE all-share index (Photo credit: sashares)

Steps To Take When Investing In African Stock Market

Before venturing into the African Stock Market, it is important you do thorough research. Here, we will provide a breakdown of the steps to take. Some of these steps will be familiar to any stock investor. However, you need to bear in mind that the policies are quite different and will depend on the country or region. 

#1. Find the right stock exchange

The diversity and potential of the African stock market will raise the appetite of any investor. But, before jumping in, you must decide on which stock exchange to invest in. This decision depends on factors like the political atmosphere of the country or region, the market cap of the stock exchange, as well as the available investment portfolios. 

A politically unstable government is a danger sign. An atmosphere of instability in a country is often an indication of poor governance. Nigeria is a typical example in this case. Despite its wealth and resources, many investors shy away from the Nigerian markets because of the high level of instability in the country. Countries like South Africa and Egypt are quite peaceful and politically stable. The Namibian and Casablanca stock exchanges are also investor-friendly. Political instability often leads to rapidly changing government policies that can affect the stock market.

The Casablanca stock exchange serves the Middle Eastern and Northern African regions. This brings the best of both worlds. As of 2018, the CSE was the third-largest stock exchange in Africa by market cap. The Namibian stock exchange also provides considerable diversity with up to 44 listed companies. Out of the 44 companies, 24 equally listed in the JSE, this means more liquidity and access to international markets.

#2. Know your investment style 

What type of investor are you? Do you prefer to buy and hold stocks or are you interested in quick trades? Do you have a high tolerance for risk or would you prefer less risk-low yield investments? Your investment strategy will determine the stocks you’ll invest in and your choice of a stockbroker. Active investment is volatile and characterized by high yield-risk trades executed over a short period of time. It also requires experience that most investors don’t have and incurs higher fees due to frequent trade execution. Passive investment is less volatile and characterized by buying and holding stocks for the long-term. Both strategies have their pros and cons. While trading stocks passively may seem less risky, it is still vulnerable to market risk

#3. Choose the right stockbroker

The right stockbroker depends on the investment style you prefer. Stockbrokers can lean towards either an active or passive investment portfolio. If you are not sure of where you stand, it is advisable you chose a broker that guarantees a mix of both passive and active trading. Also, if you are an active trader, you should look out for the fees charged per trade execution. Brokers with lower execution fees are a better option for active traders.

Moreover, you have to find out if your broker offers full or discounted services. The difference is that full-service brokers will provide investment advice backed by experience and research. They make it easier for you to make decisions without having to carry the burden of research all by yourself. Subsequently, discounted brokers do not offer these extra services. So, before choosing a broker, you should decide if you want a full or discounted service.

There are advantages and disadvantages of choosing either the full service or discounted service. Full-service brokers provide recommendations that could save your time. On the flip side, they charge extra for their services and your investment skills may never be adequate enough to become an independent investor. The discounted service brokers provide the tools needed for making better investment decisions. This is a great way to invest in yourself and grow as an investor—albeit time-consuming. 

Mistakes to Avoid when Investing in African Stock Market

A common mistake that most foreign investors make is receiving dividends via mail. Dividends are payouts to shareholders. A drawback of investing in foreign stock is that the dividend is issued in a foreign check. So, you will be receiving a foreign check that can only be cashed in the issuing country. So, how do you avoid this? By making preparations before you start investing. Here are ways you can prepare;

#1. Find out from your broker if they can collect dividends on your behalf. This could be deposited directly back into your account where you can withdraw or re-invest. 

#2. Some countries have policies that restrict the broker from cashing in on behalf of their clients. If that is the case, then the next best step is to open a local account. Once the account is set-up, it can be used for receiving and transferring your dividends. 

#3. If it is not possible to open a local bank account, then open a Nominee account. This allows your broker to hold all shares on your behalf. The dividends are also deposited in an account held by the broker. However, make sure to take full responsibility for all buy and sell decisions. You must make this clear from the beginning to avoid unauthorized trades. 

Which African Country is Best For Investing?

South Africa is the best African country for investing. The Johannesburg Stock Exchange (JSE) is the largest exchange market in Africa. It has a market cap of 1,005 billion US dollars and 339 listings. The JSE offers a well-diversified investment portfolio that will excite foreign investors. 

Conclusion

Investing in Africa’s emerging market comes with so many benefits. Its growing economy means investors can expect huge jumps in profits within a short time. However, it is not without risk. So, before investing, make sure you choose the best strategy for yourself. Short-term or speculative investments are often more volatile than long-term investments. Yet, they present the highest profit margins in the shortest possible time. Know your risk tolerance level and always get as much information as you can before investing. Hope this article was helpful? Got any questions? Kindly reply in the comment section below. 

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