Investing on the Capital Markets

If you missed them, our previous two articles were talking about the capital markets. The first one was a peep into the CM and the next one was a brief into the good and bad side of the stock markets.

images investingToday, we are taking the discussion deeper to share with you on the key aspects of investing on the capital markets with practical approach of our Ugandan perspective.

To invest on the capital market, you must use services of a licensed intermediary such as brokers and unit trust managers. They are licensed by Capital Markets Authority (CMA) and are paid a commission for their services. As an investor, you may opt to invest as an individual or as an institution. Under institutions you’ll get all sorts of organisations such as limited liability companies, partnerships, investment clubs, banks, insurance companies, pension funds and so forth.

Let us now explore the four main investment options on capital markets in Uganda today and they are;

  • STOCKS/ SHARES

These are types of securities that indicate ownership in a listed company and represent a claim on part of the company’s assets and profits. There are two main types of shares: common and preferred.

Common/Ordinary shares permit the owner to vote at shareholders’ meetings and to receive dividends. Preferred shares generally do not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

In Uganda, we have a total of sixteen (16) listed companies whose shares are traded on the capital market via the Uganda Securities Exchange and examples include UMEME Ltd, Stanbic Bank, NIC, Uchumi supermarket, DFCU Bank, New Vision among others.

In return for an investment, one benefits from the rise of the share prices and dividends. This option of investment is not risk free and one may lose money if the shares purchased drop in price and also if the company invested in makes losses and is unable to pay dividends.

  • TREASURY BILLS AND BONDS

These are marketable, fixed-interest government debt securities. In Uganda, they are issued by the central bank – Bank of Uganda to either regulate money supply in the country or to raise money to finance government activities through their expansionary or cautionary monetary policies. Treasury bills are short-term and mature within a year ranging from 90 days, 180 days to 365 days, while the bonds are long-term ranging from 2 to 15 years currently. This is a very secure form of investment as the government guarantees to pay back the invested amount in addition to interest. Though the average return on capital invested in treasury bills and bonds is lower than in stocks, these rates are above the returns on fixed deposit accounts in commercial banks.

  • CORPORATE BONDS

This is debt security issued by a corporation and sold to investors. These are usually issued to raise money effectively in order to expand their business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. The term “commercial paper” is sometimes used for instruments with a shorter maturity. Corporate bonds are attractive for many reasons, as they are usually considered safer than stocks and they often provide higher returns than government bonds. They are however considered higher risk than government bonds and as a result, interest rates are almost always higher, even for top-flight credit quality companies.

At the same time, corporate bonds are considered safer than common stocks, because in the corporate structure of a company, bondholders receive priority over stockholders in the event of a corporate bankruptcy. Therefore, corporate bonds occupy an interesting niche – providing higher returns than government bonds with greater safety than stocks. Most corporate bonds are debentures, meaning they are not secured by collateral. Their backing is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company’s physical assets may be used as collateral for bonds. Examples of corporate bonds include the recently issued (issued November 2013) bond of Kakira Sugar Limited of UGX 76 Billion and others by Stanbic Bank and Standard Chartered Bank among others.

  • UNIT TRUSTS UNDER COLLECTIVE INVESTMENT SCHEMES

A unit trust is what one may call a ‘collective investment’ managed by a fund manager. This means that a large number of investors pool their money together to create a much larger investment fund. The fund is divided into units, each worth a certain amount of money. So when one invests in a unit trust, that money buys a certain number of those units. The Fund Manager then uses the money in the fund to invest in assets that may constitute different types of investments that include stocks, treasury bills and bonds and corporate bonds as already discussed above. The assets generate a return which is added to the value of the Fund and in turn, the total value of the fund affects the value of your units. So if the fund increases in value, your units would be worth more, and if the fund is decreasing in value, your units would be worth less. The success of a unit trust depends on the expertise and experience of the management company.

The key benefit of investing in unit trusts is that; it reduces ones risk of investing in stocks or corporate bonds by pooling these savings with thousands of others, and then spreading the money across a wide range of shares or other types of investment. By diversifying your investment, a unit trust will spread the risk automatically. You could therefore benefit from stock market returns without limiting your investment to a small number of companies. Unit trusts are also cost effective, charging a fraction of what it would cost you to invest in a broad basket of shares by yourself. The beauty of unit trusts is that professional fund managers are employed to look after your money.

The first fund managers to launch unit trusts was African alliance in 2004 but opted to out of the business in December 2011 after failing to attain a critical mass. However, last year (2013) we saw three players; Stanlib Uganda, Insurance Company of East Africa Uganda and UAP Financial Services Ltd receive unit trust management licenses.

The decision to invest in bonds is much easier to make than in stocks since the return is pre-determined. To invest in stocks, one requires making adequate research and also seeking professional advice before making the decision to invest.

Uganda’s stock market performance is measured using the All -Shares Index (ALSI) which reflects the movement in prices for the listed stocks. An increase in ALSI reflects overall growth in share prices while a decline reflects a downward trend. A case for investing in Uganda’s stock market is backed by fairly good performance over the last five years where growth in share prices average over 24% as shown in the table below.

Year

Closing  ALSI

% Growth

2009

733

2010

1188

62

2011

864

-27

2012

1203

39

2013

1504

25

Source: USE website

In conclusion, despite the low participation of Ugandans on the capital markets, I recommend that we embrace the available opportunities. The risks still exist and therefore, I advise that every perspective investor starts with seeking to understand the mechanics of the markets by reading or asking professionals in the industry. This will allow informed investors to be informed and make their decision based on facts as opposed to emotions.

Secondly, make manageable investments at a time to allow yourself get familiar with the market dynamics of seeing the movement in share prices and also enhance your analytical skills of the industry factors.

Thirdly invest more and thereafter share your experiences with friends and family members as it will enhance the interest on the market which shall in the long-term benefits all players.

Brian Ahabwe KakuruBrian 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

 

BLEGSCOPE

BLEGSCOPE is the brand name representing all BLEGSCOPE business and other initiatives that operate under BLEGSCOPE Capital Ltd (BCL).

BCL is an investment holding company based in Uganda that was set up to provide a valuable and unparalleled platform for like-minded entrepreneurs to exploit the numerous business and investment opportunities in the Great Lakes region.

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