Investing on the Uganda Securities Exchange could be a good idea
By James Abola
Studies have found that Ugandans are one of the most entrepreneurial people in the world going by the number of new businesses springing up every year. It is not possible however for everybody to be involved in business as means of growing or sustaining their wealth. Some people must find a passive means of investing. The passive investor provides money and does not have to report to office at 8 am and knock off at 5 pm in order to get a return. The favoured arena of the passive investor is the securities market, like the Uganda Securities Exchange (USE).
The major items traded on the securities exchange or market are shares and bonds. Shares and stocks are the same, only that Americans prefer stocks while the British use shares. Shares represent units of ownership in a public company. In the case of Uganda examples of public companies include Uganda Clays, Bank of Baroda and BAT (Uganda). Shares are the most common ownership investment traded on the market.
Bonds on the other hand are basically a chance for the investor to lend money to the government or a company. The investor receives interest and the principle back over predetermined amounts of time. Bonds are the most common lending instruments traded on the market.
I will spend more time on shares because they are more suited to a small investor as compared to bonds. The simple reason is that to make a meaningful trade in shares on the Uganda Securities Exchange you need between Shs 400,000 to Shs 500,000 while just one unit of a bond requires principle payment of about Shs 10 million.
The beginning of trading in shares is the Initial Public Offering (IPO). An initial public offering (IPO) is the sale of equity in a company, generally in the form of common shares, through an investment banking firm. These shares subsequently trade on a recognized stock market. Usually during the IPO companies want to avoid a situation where there will be less demand than the number of shares offered, so the IPO price is set low enough to generate enough or even excess demand for the offered shares and to avoid the winner’s curse. In most cases therefore shares offered at the IPO are sold at a discount.
While the brief history of the USE indicates that share prices appreciate, in many cases very substantially, after the IPO it is important to know of what is often called the winner’s curse. The winner’s curse is a financial theory that the winning participants within an auction will typically pay an overvalued price for the winning item. The problem of the winner's curse occurs during any auction process when bidders must estimate the true or final value of a desired good. Generally, bidders are considered to be risk averse and the average bid is expected to be lower than the final value. However, due to estimation errors, the winning bid is usually much higher because the highest overestimation made by any of the bidders will win the auction.
One man told me that he would never buy shares of Ugandan companies because they do not pay dividends. A dividend is just one of the two major gains that a shareholder can receive. A dividend is similar to interest in that the company you have invested in pays out money to shareholders in accordance with the number of shares held. Dividends can be paid in cash or in forms of additional shares also known as bonus shares.
Another important gain derived by a shareholder is the appreciation in share price. Take the example of my friend who bought shares of a company on the USE at about Shs 234 per share and a few months later the price had about doubled. Even if my friend did not get dividends he could sell his shares and have twice the amount of money he paid when he acquired them.
Most Ugandans are wary about investing in shares because of the experiences of Greenland Investment Limited (GIL) and Centenary Rural Development Bank (CERUDEB). GIL collapsed about 1998 and people who bought shares found themselves holding empty pieces of paper. In the case of CERUDEB people were mobilised to invest through their churches so the shareholder is not the individual but the church. The common factor in both cases is that the shares of both institutions were bought before a regulator was appointed for the securities market. Now with a regulator and a well defined securities market in place, companies listing go through greater scrutiny and it is very unlikely that any body would be taken for a ride as it were.
Note
This article has been written to provide general information and education and should not be taken as an investment advice. Readers are strongly encouraged to seek professional advice before undertaking, postponing or cancelling any investments.
Studies have found that Ugandans are one of the most entrepreneurial people in the world going by the number of new businesses springing up every year. It is not possible however for everybody to be involved in business as means of growing or sustaining their wealth. Some people must find a passive means of investing. The passive investor provides money and does not have to report to office at 8 am and knock off at 5 pm in order to get a return. The favoured arena of the passive investor is the securities market, like the Uganda Securities Exchange (USE).
The major items traded on the securities exchange or market are shares and bonds. Shares and stocks are the same, only that Americans prefer stocks while the British use shares. Shares represent units of ownership in a public company. In the case of Uganda examples of public companies include Uganda Clays, Bank of Baroda and BAT (Uganda). Shares are the most common ownership investment traded on the market.
Bonds on the other hand are basically a chance for the investor to lend money to the government or a company. The investor receives interest and the principle back over predetermined amounts of time. Bonds are the most common lending instruments traded on the market.
I will spend more time on shares because they are more suited to a small investor as compared to bonds. The simple reason is that to make a meaningful trade in shares on the Uganda Securities Exchange you need between Shs 400,000 to Shs 500,000 while just one unit of a bond requires principle payment of about Shs 10 million.
The beginning of trading in shares is the Initial Public Offering (IPO). An initial public offering (IPO) is the sale of equity in a company, generally in the form of common shares, through an investment banking firm. These shares subsequently trade on a recognized stock market. Usually during the IPO companies want to avoid a situation where there will be less demand than the number of shares offered, so the IPO price is set low enough to generate enough or even excess demand for the offered shares and to avoid the winner’s curse. In most cases therefore shares offered at the IPO are sold at a discount.
While the brief history of the USE indicates that share prices appreciate, in many cases very substantially, after the IPO it is important to know of what is often called the winner’s curse. The winner’s curse is a financial theory that the winning participants within an auction will typically pay an overvalued price for the winning item. The problem of the winner's curse occurs during any auction process when bidders must estimate the true or final value of a desired good. Generally, bidders are considered to be risk averse and the average bid is expected to be lower than the final value. However, due to estimation errors, the winning bid is usually much higher because the highest overestimation made by any of the bidders will win the auction.
One man told me that he would never buy shares of Ugandan companies because they do not pay dividends. A dividend is just one of the two major gains that a shareholder can receive. A dividend is similar to interest in that the company you have invested in pays out money to shareholders in accordance with the number of shares held. Dividends can be paid in cash or in forms of additional shares also known as bonus shares.
Another important gain derived by a shareholder is the appreciation in share price. Take the example of my friend who bought shares of a company on the USE at about Shs 234 per share and a few months later the price had about doubled. Even if my friend did not get dividends he could sell his shares and have twice the amount of money he paid when he acquired them.
Most Ugandans are wary about investing in shares because of the experiences of Greenland Investment Limited (GIL) and Centenary Rural Development Bank (CERUDEB). GIL collapsed about 1998 and people who bought shares found themselves holding empty pieces of paper. In the case of CERUDEB people were mobilised to invest through their churches so the shareholder is not the individual but the church. The common factor in both cases is that the shares of both institutions were bought before a regulator was appointed for the securities market. Now with a regulator and a well defined securities market in place, companies listing go through greater scrutiny and it is very unlikely that any body would be taken for a ride as it were.
Note
This article has been written to provide general information and education and should not be taken as an investment advice. Readers are strongly encouraged to seek professional advice before undertaking, postponing or cancelling any investments.
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