Whereas many people have heard about capital markets, not many are familiar with the way these markets operate. To start with, a capital market is a financial market for buying and selling financial instruments also called securities such bonds, notes, shares/stocks. Capital markets channel funds raised from savings and investments from the different suppliers of capital such as retail and institutional investors to the different users of capital like businesses and government. These markets channel the wealth of savers to those who intend to put it to long-term productive use, such as companies or governments making long-term investments.
In Uganda, we have the Uganda Stock Exchange (USE) where different parties as mentioned above can participate. A key division within the capital markets is between the primary and secondary markets. In primary markets, new stocks or bonds are issued (call it sold) to investors. The main entities seeking to raise long-term funds on the primary capital markets are governments and business enterprises. Governments tend to issue bonds, whereas companies issue either equity or bonds.
On the local market here in Uganda, the most recent was the UMEME Initial Public Offer (IPO) in October 2012. In the secondary markets, existing securities are sold and bought among investors or traders. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. A good example is if you’re interested in buying Stanbic Bank shares today, you’ll have to buy them off the secondary market.
Capital markets have numerous participants including individual investors, who could be you or me, institutional investors such as pension funds like NSSF and mutual funds like we have from African Alliance, governments, businesses and organizations of different sizes and banks and other financial institutions. To participate on the capital markets, one must use the services of a licensed intermediary. There are different intermediaries that included licensed to carry out different roles. The key intermediaries licensed by CMA are Stock Brokers, Investment Advisors and Fund Managers among others.
One of the most important roles of the capital markets to the economy is how it encourages saving and also boosts investments in the economy. The capital market functions as a link between savers and investors. It plays an important role in mobilising the savings and diverting them in productive investment. In this way, capital market plays a vital role in transferring the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the productivity and prosperity of the country.
The capital market mobilises savings for investment in productive businesses as opposed to just putting savings in fixed bank deposit account, purchase of real estate or outright consumption among others while providing different products that allow businesses to raise long-term funds by providing a market for securities, both through debt and equity.
Given the sensitivity of the products traded on the capital market and the possible negative impact that they may have on an economy, they are often regulated. In Uganda’s case, we have the Capital Market Authority (CMA) which is responsible for promoting, developing and regulating the capital markets industry in Uganda, with the overall objectives of investor protection and market efficiency. It approves the offers of all securities to the public, licenses market professionals like broker-dealers, investment advisers and fund managers.
In Thursday’s article, i shall share with you why you should or should not think about raising financing through the Capital Markets.
Brian is the Managing Director at BLEGSCOPE®, and has over 9 years of management consultancy experience notably in the finance and banking industry, MSMEs, FMCG companies and in the service industry. You can follow him on twitter: @BrianAhabweK