Stocks and shares can be a fantastic way to make extra money and for many it is a lucrative career path. There are many different stock markets to invest in and it can be difficult to determine which ones are worthwhile.
There is an emerging trend of people investing in African stocks due to the economic boom many countries on the continent are experiencing. However, African stocks do have risk attached which may be greater than in other parts of the world. In this article, we take a look at why there are risks, and what you can do to mitigate them.
African stocks are historically riskier
First, it’s important to understand why there is an inherent risk when investing in African stocks. Of course, trading any stock carries a risk. Even the most informed businesspeople cannot reliably predict stock values and how they will fluctuate.
This risk is often magnified, however, due to the occasionally volatile nature of governments within African nations. Although many countries are now booming and enjoying economic stability, there is still a great deal of unrest. In the last decade, we have had governments overthrown and entire countries thrown into turmoil. Unsurprisingly, this has a huge impact on stock values.
Excellent dividends can be made by choosing the right stocks
Despite these potential barriers, provided you invest sensibly and consider the often-volatile nature of the continent, then you can make consistent dividends and complete some high-value stock trades. Below, we have listed five simple things that will help you navigate risk when investing in African stocks:
1. The JSE Top 40 is a great place to scout for profiting companies
The JSE Top 40 is a major stock index which is composed of companies listed on the Johannesburg Stock Exchange in South Africa. This is typically a great place to start and you can invest in JSE Top 40 companies with relative confidence due to their status and inclusion on the list.
Examples of current companies on the JSE Top 40 include Anglo American, Old Mutual, Vodacom, Woolworths, Bidvest Group and Clicks Group. Over the past ten years, the performance of JSE Top 40 companies has provided consistent yields and continued to improve year upon year suffering only a slight blip during the COVID-19 pandemic.
2. Natural resource companies are a great option
The continent of Africa is rich with natural resources and nations have sought to exploit these over the decades to boost their economies. As a result, there are many opportunities to buy stocks and shares in natural resource gathering companies.
This represents a relatively stable investment as the reserves of natural resources are certainly not close to running out. However, it is always prudent to check because investing in companies harvesting a resource that is nearly depleted could be disastrous.
3. Stocks typically mirror the African economy
As with most stock prices, African stocks are typically at the mercy of national economies. As climates change and economies and GDP take a plunge or grow, so do stock prices.
In times of economic crisis, businesses will often suffer, and their stock prices can drop dramatically. Many African countries now have stable governments and improved stability, so this hopefully should not be a factor. However, it is something that cannot be ignored. Investors are advised to always keep track of the general economic trends within Africa and the world.
4. Check news outlets for government stability
We have mentioned this several times, but it is one of the largest risk factors when investing in African stocks. It is a region where governments have been known to rise and fall overnight.
There have been military takeovers in Burkina Faso and attempted government coups in Guinea Bissau. Hopefully, this sort of thing is coming to an end as all of Africa is becoming much more stable and developed. Despite this, it would be short-sighted not to keep track of these things and monitor potential governmental turmoil.
Additionally, ensure you check the local news within countries because there are many factors such as rail strikes and natural disasters that can greatly affect stock values.
5. ADRs can be a great option too
Lastly, if you are an outsider looking to invest in African stocks, using American Depositary Receipts (ADRs) could be an option to consider. These are securities that allow US investors to trade in the African stock market with a greater level of security.
As you can see, there is great potential for investing in African stocks. The emergence of many strong governments, the proactive young workforce and the wealth of natural resources the continent possesses means there are numerous opportunities. It is vital that you monitor government statuses and keep track of any potential conflicts, however, as these can radically affect stock values and potentially lead to significant losses.
