If you are particularly Ugandan in the diaspora or are aware of interest rates in markets such as the US and UK, you will know that the Bank of England base rate is 0.5%. The Fed rate in the US is currently 0.25%. This is the rate that basically determines the lending rates of commercial banks and, therefore, the interest rates they pay for savings. The UK rate is not expected to change over the next 3 years, that is, until 2015, I expect the same for the US rate. Therefore, you can expect the interest you receive on your savings to be close to zero.
The search for investments that pay a “good” return is endless in these difficult times. One option is to consider investing in stocks and bonds on the Uganda Stock Market (USE).
First, the basics of what stocks and bonds are and how the stock market works.
Actions (using an example)
Shares, also called stocks or shares, are a “portion” of a company’s capital stock that is offered to the public. If a company has, for example, UGX 1 million share capital and each share is worth UGX 1 (nominal price), therefore there are 1 million shares. The company can choose to offer 20% of these shares to the public. In other words, it offers 200,000 shares to the public. However, it does not offer them at face price, but issues them at UGX 2 each (hence at a premium).
As an investor, you could buy, say, 20% of the shares, that is (200,000 shares) at 400,000 shillings (UGX 2 x 200,000). You can then choose to sell these shares at, say, UGX 4 each, thus for Shs 800,000 and make a profit of UGX 400,000. Selling and buying shares is really the way the stock market works, connecting buyers and sellers of shares in a public company.
Bonds (using an example)
Just as stocks are a means for a company to obtain financing (since stocks are normally issued at a premium), as in the example above, bonds are also another means for a company (or, say, the government ) get financing. The difference is that a stock gives you partial ownership in the company, while a bond is similar to a “promissory note”, in other words, the issuer of the bond (let’s say the company) promises to pay you at a future date (let’s say 3 years) The principal amount of the bond (or the amount you are borrowing) plus interest.
Therefore, a “10.25% 3-year Treasury bond of UGX 1 million” means that the issuer of the bond (in this case, the Government of Uganda (GOU) will return the principal of 1 million to you in 3 years shillings plus 10.25% interest Interest is generally paid semi-annually.
Like stocks, bonds can be traded on a stock market. In other words, an institution like the National Social Security Fund (NSSF) will buy bonds during an auction, but in the unlikely event that you don’t want to hold the bonds for the maturity period, i.e. the 3 years, you can choose to sell your bonds. bonds in the stock market. The person who buys the bonds will often buy them at a premium or a discount (depending on market interest rates). If the investor buys the bond at a discount, it means that the investor pays less than the bond’s face value and will enjoy the bond’s interest for the remainder of the maturity period plus the discount on the bond’s purchase.
But what about investing in stocks and bonds on the USE?
USE and its “bull market” phase
EUS has only existed since June 1997 and is now in its 15th year. It is still a very emerging market, of course, compared to markets like the New York Stock Exchange (NYSE) that was formed in 1792, the London Stock Exchange (LSE) that was founded in 1801, and the Stock Exchange. Tokyo (TSE). )) in 1878.
However, this works to your advantage. Emerging market stock exchanges often have significant rise / growth in the early years as they develop and as such are typically “bull markets” (a market where prices are rising or expected to rise) . USE’s All Share Index (ALSI) growth statistics; A measure of all publicly traded companies, for example, shows that the price of stocks in general has been rising, except in 2008, the peak of the credit crunch.
The bond market is also experiencing higher growth, and according to USE’s 2010 annual report, activity was up 4%.
The above looks promising, is it worth investing in stocks and bonds through USE?
THE CONS FIRST (of course)
1. Low liquidity due to low trading volume
Despite the growing activity on the USE, given that we are still an emerging market, the trading volume is quite low and some stocks, based on trading statistics, are in fact inactive for a day or a couple of days.
This means considering investing in this, especially for profit, the focus should most likely be on those stocks that have the highest trading volumes, as you can expect them to be the most representative of an active market in the one you can buy or choose as you like. I wish without delay in finding a seller or buyer.
2. Exchange losses (Forex)
A key consideration when investing in the USE, especially if a Ugandan in the diaspora must be aware of exchange rate movements. The shilling has depreciated over the past 5 years against the British pound (GBP) and the US dollar (USD) and so if you are investing in, for example, a 3-year bond, you need to consider how it might move exchange rate depreciation and therefore affect the value of your investment.
AND NOW THE PROS
1. Good equity returns due to bull market trends
In light of the highlighted CONS, the clear advantage for the investor who has access to other stock exchanges but wants to invest in the USE is to consider investing in short-term stock holdings, that is, one year before selling them as In a bull market (as with USE), stock prices are expected to rise.
2. No capital gains tax
One of the key advantages of stocks is that there is no capital gains tax (CGT). Capital gains are the gains made when you sell stocks at a higher price than you bought them. Therefore, the investor can enjoy its benefits tax-free. It is not uncommon to pay CGT in more developed economies.
Based on the above pros, therefore, I summarize the financial model below.
- Start-up capital (A): Shs. 18,931,650
- Profit per year (B): 12,586,182
- Other costs (C) (Forex broker fees and losses): Shs 1,145,357
- Return on investment / capital (years to recover capital) (A / (BC)): 1.65 years
Now, the basics must be correct before investing.
- Act through a broker. Since the clear winner is considering equity investments for a short time, chances are that you will need an investment broker to provide you with regular reports and guidelines so that you can carry out your buy and sell strategy. Capital Markets Authority (CMA), USE’s regulator, has a roster of brokers, fund managers, and investment advisers.
- Investigate. If you choose not to use a broker, the least you can do is thoroughly research information such as pricing and qualitative information about your goal. Financial statements and press reports / stories give you an indicator of the nature of the entity. Of course, this research has a limit; past performance is not equal to future performance. Your broker / advisor can most likely help you in this regard as well.
FINAL WORD
While you may not be a professional in the open-shouting auction system that USE uses and considering that you may not be interested in the intricate details of how the stock markets work, there is definitely a lot of merit in investing in it. USE considering that despite CONS such as Forex movements, there can be returns in just over 1 year, which can be much better than investing, for example, in fixed savings accounts in the UK or USA. .