This archive report was first published on 9 August 2019.
On July 2019, the Nairobi Securities Exchange (NSE) launched derivative products, dubbed NEXT, marking a significant milestone for investors in Kenya.
Derivatives are financial contracts that allow investors to manage risk and speculate on market trends. They are widely used across the world, with a combined value of $544 trillion, six times larger than the total global GDP of $88 trillion.
However, derivatives have a negative connotation for some investors, given their role in the last global financial crisis. The NEXT products launched by the NSE are simple, standardized contracts that are transparent, valued, and settled daily, allowing investors to take their profits and close loss positions.
Investors can now buy single stock futures for shares of Safaricom, EABL, KCB, BAT, and Equity, or an Index Future that tracks the NSE25 Share Index. Trading fees are 0.17 percent for single stock futures and 0.14 percent for index futures, making it easier for investors to manage their portfolios.
For the first time, investors can speculate on a share price dropping and take advantage of down market trends, not just the traditional buy low and sell high that has been the norm for shares. Derivatives futures will help further integrate Kenya with international capital markets, becoming the second country in Africa, after South Africa, to offer these products.
At the NEXT launch, Derivatives Market at the NSE Chief Officer Terry Adembesa simplified derivatives by saying, “in simple terms, yoghurt is a derivative of milk.” However, while the costs to invest are smaller, and the returns are greater, so are the risks of trading through leverage.
