The Process of Funding, Selecting Shares, and Order Execution on the NSE

Investing in the Nairobi Securities Exchange (NSE) involves several critical steps, from funding your trading account to selecting shares and executing your orders. This guide will walk you through the entire process in detail, covering everything you need to know to start trading successfully on the NSE.

1. Funding Your Trading Account

Before you can buy shares on the NSE, you need to fund your trading account opened with a broker. This account is linked to your Central Depository System (CDS) account, where your shares are held.

Steps to Fund Your Trading Account:

Have a bank account or Mpesa account: Make sure you have a bank account or Mpesa account from where you can fund your trading account, receive dividends, and payments after the sale of shares.
Deposit Funds: Transfer money from your bank or Mpesa or deposit cash in the broker's designated bank account. The broker will post to your trading account. This can be done via online banking, bank transfer, or depositing cash to the broker's designated bank account or Mpesa paybill.
Confirm Availability of Funds: Ensure that the funds are reflected in your trading account. This may take a few hours, and the broker may require confirmation of payment. Some brokers are fully automated with Mpesa to allow real-time posting of funds done via paybill.
Set a Budget: Decide how much you’re willing to invest in each stock you want to buy.

2. Selecting Shares Using the NSE Price List or Research Recommendations

Choosing the right shares to invest in is crucial to your success in the stock market. You can base your selection on the NSE price list, which provides current market prices and corporate actions, or on research recommendations from financial analysts.

Steps to Select Shares:

Review the NSE Price List: The NSE publishes a daily price list that includes the prices of all listed securities, the previous day’s closing prices, and any price changes. This list is a good starting point for identifying potential investments. It also contains a section for corporate actions that many investors don’t know has crucial profit-making stocks. All shares that have declared dividends, bonuses, splits, IPOs, and rights issues are added here. We will go into detail on how you can use this information to maximize your profits.
Analyze Market Trends: Look for trends in the price list. For example, shares that have consistently increased in price over several days or weeks might indicate strong market confidence. Check even the past prices and compare them with the current trend.
Research Company Fundamentals: Beyond the price list, delve into the fundamentals of the companies you’re interested in. Look at their earnings reports, industry position, and future growth prospects. Research recommendations from financial analysts can also provide valuable insights.
Consider Industry Sector: Diversify your portfolio by selecting shares from different sectors. For example, you might invest in both financial services and consumer goods to balance risk and potential returns.
Set Investment Goals: Are you looking for long-term growth, income through dividends, or short-term gains? Your investment goals will influence the types of shares you choose.

3. Selecting Price from Market Depth: Understanding Supply and Demand

The market depth, also known as the order book, provides detailed information on the supply and demand for a particular share at different price levels. This data helps you decide at what price to place your order.

Understanding Market Depth:

Bid Price: This is the highest price that buyers are willing to pay for a share. If you’re selling, you’ll want to set your price close to the bid price.
Ask Price: This is the lowest price that sellers are willing to accept. If you’re buying, you’ll aim to place your order near the ask price.
Market Spread: The difference between the bid and ask prices. A narrower spread indicates a more liquid market, while a wider spread suggests less liquidity.
Order Quantity: The market depth also shows the number of shares available at each bid and ask price. Large quantities at a particular price level can indicate strong support or resistance.

How to Use Market Depth in Selecting a Price:

Assess Supply and Demand: Look at the quantity of shares available at different prices. High demand at a particular price suggests that the share is undervalued at that level, while high supply might indicate overvaluation.
Choose a Price Level: Based on the market depth, decide on the price at which you want to buy or sell. For instance, if you see a large number of buy orders at a particular price, you might choose to place a buy order just above that level to increase your chances of execution.
Place Your Order: Set your buy or sell order at the price level you’ve selected, ensuring it aligns with your investment strategy.

4. Understanding Different Types of Orders

When placing an order to buy or sell shares on the NSE, it’s important to understand the different types of orders available. Each type serves a different purpose, depending on your trading strategy and market conditions.

Common Types of Orders:

Market Order: This is an order to buy or sell shares immediately at the current market price. Market orders prioritize speed over price, ensuring that your order is executed as quickly as possible.
- When to Use: Use a market order when you want to buy or sell shares quickly and are less concerned about the exact price.
Limit Order: This is an order to buy or sell shares at a specific price or better. A buy limit order is executed at the limit price or lower, while a sell limit order is executed at the limit price or higher.
- When to Use: Use a limit order when you have a specific price in mind and are willing to wait for the market to reach that price.
Stop Order: A stop order becomes a market order once the stock reaches a specified price, known as the stop price. A stop order is typically used to limit losses or protect profits.
- When to Use: Use a stop order when you want to automatically sell a stock if its price falls to a certain level, thereby limiting your potential loss.
Stop-Limit Order: This order combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at a specified price or better.
- When to Use: Use a stop-limit order when you want to have control over both the price at which your order is triggered and the price at which it is executed.
Fill or Kill (FOK) Order: This is an order that must be executed immediately in its entirety or not at all. If the order cannot be filled completely, it is canceled.
- When to Use: Use a FOK order when you need to buy or sell a large quantity of shares immediately and are unwilling to accept a partial fill.
Good Till Cancelled (GTC) Order: This order remains active until it is either executed or canceled by the trader. It does not expire at the end of the trading day.
- When to Use: Use a GTC order when you’re willing to wait for your desired price and don’t want to keep re-entering the order each day.

5. Queuing of Orders and Execution

Once you’ve placed your order, it enters the market queue, where it waits to be matched with a corresponding buy or sell order.

How Orders Are Queued and Executed:

Order Matching: The NSE uses an electronic order matching system to pair buy and sell orders based on price and time priority. Orders with the best prices are executed first, followed by those placed earlier in time.
Partial Fills: If there aren’t enough shares available at your specified price to fill your entire order, a partial fill may occur. The remaining shares will stay in the queue until more shares become available or the order is canceled.
Order Execution Confirmation: Once your order is executed, you will receive a confirmation from your broker, detailing the number of shares bought or sold, the price, and the total transaction cost.
Settlement: The NSE follows a T+3 settlement cycle, meaning that the trade will be settled three working days after the transaction date. During this time, the shares will be transferred to your CDS account, and the payment will be deducted from your trading account.

Additional Considerations for Order Submission and Execution

Market Volatility: In highly volatile markets, prices can change rapidly, affecting the execution of your orders. Limit orders can help protect you from unfavorable price movements, but they may not always be executed if the market moves away from your limit price.
Order Monitoring: Keep an eye on your orders after submission, especially if you’ve placed limit or stop orders. Market conditions can change, and you may need to adjust your orders accordingly.
Brokerage Fees: Remember that each transaction incurs brokerage fees, which can affect your overall returns. Factor these costs into your trading decisions to ensure they align with your investment goals.
Cancellation and Modification: If you change your mind or market conditions shift, you can usually cancel or modify your order before it’s executed. Check with your broker about their specific procedures for order changes.

By understanding the full process—from funding your account to selecting shares, placing orders, and ensuring successful execution—you can navigate the NSE with greater confidence and improve your chances of achieving your investment goals.