A quick guide to the parameters of the stock market

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

18 October 2009

After the long discussion on the KenGen Bond, Martin Munyua says he has taken a keener interest on investments. He writes, “I have now started checking the trading tables appearing on Tuesdays’ newspapers. [In the process], I have also noticed that there a second table on stocks… [Now] I realise that I don’t know much about them either. Could explain the meanings of the columns of the stocks table?”

The first column in this table – labelled “Par Value” – shows the face value of the shares. This is how much each share was worth on the day the company was formed.

The “VWAP” appearing in the second and third columns is short for Volume Weighted Average Price. It is determined by adding up the total value of all transactions for a particular company during the week and then diving this by the number of shares that were dealt.

For example; suppose in one transaction, 1,000 (one thousand) shares of Safaricom Ltd are exchanged at Sh3.80. Then in the next deal, 100 (one hundred) shares are traded at Sh3.70. What is the average price for these two deals? You may be tempted to say Sh3.75; and you would be right. That is the “simple average”, but it is misleading because it does not take into account the fact that the first transaction is much larger than the second one.

To get the better volume weighted average, we add the value of the first transaction (Sh3,800) to that of the second one (Sh370); and then divide the total (Sh4,170) by the number of shares traded (1,100). The answer is Sh3.79, or, approximately, Sh3.80.

While the “Shares Traded During the Week” is self-explanatory, the “Total Shares Issued” is somewhat confusing. It can be taken to mean the number of shares that were offered for trading during the week. That is NOT so.

“Total Shares Issued” refers to the number of shares that make up the whole company – 100 percent of the company, if you like. The entry for Safaricom Ltd in this column is 40,000,000,000 (40 billion shares)…a number that many shareholders of this company have been ignoring!

“Mkt. Cap” is short for Market Capitalisation. It is total market value of the company. To get it you simply multiply “VWAP” by “Total Shares Issued”. Thus if wished to buy the whole of Safaricom Ltd at last weeks VWAP, you’d need to pay Sh148,000 million, err, sorry, Sh148 billion!

“EPS” is another number that many of Safaricom Ltd shareholders have turned away from. It stands for Earnings Per Share and is calculated by dividing the total profit (after tax) of the company by the “Total Shares Issued”.

Despite making over Sh10 billion last financial year, the EPS for Safaricom Ltd is only Sh0.26 (26 cents). Thus, those who were saying that the 10cents dividend per share (labelled “DPS” in the table) was an insult didn’t know what they were talking about!

“P/E” stands for Price divided by Earnings, or, more formally, Price-to-Earnings (ratio). It indicates whether a share is underpriced or overpriced in relation to the others in the Stock Exchange.. To calculate P/E, you divide VWAP by EPS. The entry for Safaricom Ltd is 13.95. When you compare this to the market average of 12.02, it turns out that, at Sh3.75, Safaricom Ltd is amongst the more expensive shares at the Stock Exchange.

The “Dividend Yield” in the last column is obtained by dividing DPS by VWAP and expressing the answer as a percentage. DPS is only important when a company has declared dividend but hasn’t paid it out; that is, when it is trading “Cum-Dividend”, or “cd”.