Investing in a stock exchange market is often portrayed as something expensive, tiresome and complicated.
To many Ugandans, the words ‘stocks, equities and shares’ are incomprehensible and highly technical.
In this article, we attempt to demystify the myths about the stock exchange market, explaining that in fact, investing in the stock market is not only for the rich.
What is a stock market?
A stock exchange market is where different companies list their shares for the public to buy.
Mr Keith Kalyegira, the chief executive officer of Capital Markets Authority (CMA) simplifies the stock exchange market as where those who have money get those who need money. CMA is mandated to licence, protect investors and regulate the stock exchange market in Uganda.
In Uganda, we have the Uganda Securities Exchange. The top global stock exchange markets are Tokyo Stock Exchange, London Stock Exchange, Hong Kong Stock Exchange, Shanghai Stock Exchange, New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE), among others.
When a company is planning to offer shares to the public, it is known as an Initial Public Offering (IPO). They are making available, for the first time, the opportunity to purchase a share of ownership.
Upon completion of an IPO the shares are said to be ‘listed’, this simply means that they are placed on an exchange where buyers and sellers can trade them.
What one needs to invest in a stock market
Getting a stock broker
To buy or sell shares/stock/equities, we need an intermediary. Much in the same way we approach a broker to buy or sell a plot of land.
In this case, one can appoint a stockbroker, fund an account and give them instructions to buy or sell individual stocks. stockbrokers exist to help match buyers and sellers for a fee.
Ms Anita Kwikiriza, a stock broker, says to make effective stock picks, one must understand the underlying dynamics of the business well and its prospects. Detailed research is vital to good decision making.
Ms Kwikiriza adds that alternatively, one can put money in an investment fund. Investment funds are collective schemes where members of the scheme can input money at regular intervals.
“The fund pools this money and purchases stocks. Most individual investors are likely to find it easier to drip-feed money into the stock market in small increments,” she explains.
One is also required to visit a licenced stock brokerage firms and open a Security Central Depositary (SCD) Account.
The licensed stock brokerage firms include custodian banks such as Stanbic Bank Uganda Ltd, Housing Finance Bank Ltd, Kenya Commercial Bank Uganda Ltd, Standard Chartered Bank Ltd and Bank of Africa Ltd.
The SCD account is free and there are no monthly or annual charges. To open an SCD account, you need a valid ID (preferably national ID) and 3 passport size photos.
“What one requires to invest in the stock exchange market is a National Identification Card or a passport and a bank account. One requires a minimum of Shs50,000, and 100 shares to invest in the market,” says Mr Gavin Kimuli, an agent of Equity Stock Brokers.
But other companies such as the British American Tobacco Uganda require a minimum of Shs3million, he adds.
Once one has gained knowledge of the above, Mr Kimuli advises that before one starts investing in stocks, one has to have read the financial statements of the companies they wish to invest in. They should also rely on those who have experience in the market.
Mr Kalyegira says the whole game of investment is about return on investment. You need to compare rates of return on each investment before you commit your money. Then make the leap.
“Instead of saving your money on the account that attracts a monthly charge, you could invest in a financial instrument, where you deposit a minimum of Shs100, 000 or Shs200, 000 even more on monthly basis into a unit trust to earn a reasonable return,” says Kalyegira.
Depositing investment money
You will then deposit the money of any amount into the trust account. It is a requirement of the USE that for local orders, payment is made upfront by the investor.
Your stock broker will then post the order (bid) on the Automated Trading System (ATS) during trading hours.
When the bid matches an offer (an order to sell) by either the same stock broker or other stock brokers, then the transaction is considered to have been concluded. Your Stock broker will then credit the shares to your SCD account.
If one follows all the above requirements, they will be able to either receive annual dividends from the company that they have invested in.
Instead of receiving dividends, some companies can give out more shares, Mr Kimuli explains.
Stock market investing has two aspects, capital gains (rise in share price) and income (dividends). The value of your shares may rise providing you with a capital gain.
Over time, if a company is successful, profitable and expands it should become more valuable, making its shares worth more.
The growth in share price can be considerable. If you buy a share for Shs100 and the price rises to Shs200 that is a 100 per cent gain on initial investment.
In addition to that, one could also expect capital gains, being able to attend annual general meetings of the company, and rights issue (being able to buy shares at a lower price as compared to those who are not investing in the company).
Collateral security can be an added advantage as orient bank has already started with this and it is also hereditary, as it could be passed on from one generation to another.
Another advantages of buying stocks is limited liability. Even though you own part of the company, you are not held personally liable if the company goes bankrupt and has to pay debts.
The Capital Markets Authority monitors the market to ensure the safety of shareholders’ investments.
Risks and challenges
However, it is important to note, that when you invest in stocks your capital is at risk.
The financial market is ambiguous, hence one may receive low returns. You could buy a share for Shs100 and its price falls to Shs50 representing a 50 per cent loss on your initial investment.
The other could be bankruptcy; in this case, the shareholder can make a loss or lose their money.
“One has to invest in the long term to receive higher returns and also to follow up on the company that one is investing in so as one doesn’t end up in losses,” Mr Kimuli says.
There are currently 17 companies that are listed on the Uganda Securities Exchange.
The local companies are Stanbic Bank (SBU), Bank of Baroda (BOBU), Cipla Quality Chemical Industries (CIPLA), Dfcu Group (DFCU), Uganda Clays Limited (UCU), New Vision Limited (NVL), British American Tobacco Uganda (BATU), National Insurance Corporation (NIC) and UMEME.
The cross-listed companies are Kenya Commercial Bank (KCB), Equity Group Holdings Limited (EBL), Jubilee Holdings Limited (JHL), East Africa Breweries Limited (EABL), Centum Investments Limited (CENT), National Media Group (NMG), Kenya Airways (KA) and Uchumi Supermarkets.