Nicholas Opolot L’akwang
The term stock trading is not a familiar one to most Ugandans who are pre-dominantly involved in the informal sector of investment which employs 80% of the population according to Uganda Bureau of Statistics (UBOS).
Many people feel that stock trading is either a preserve for the corporate business class or outright grand scheme fraud. However, these are all false assumptions and misconceptions.
What if you owned a small portion of a public company by buying their shares? This could change the story of your life through empowerment, financial independence and asset value addition.
In Uganda, stock trading is regulated by the Capital Markets Authority (CMA) and implemented by the Uganda Securities Exchange (USE) which is used as a market playground for all listed public companies.
Invest in stock and watch your money grow.
So what are shares?
A share is a single unit of ownership in a company. When an individual buys shares, he or she buys a stake in a company. One of the reasons and this being the main reason as to why companies sell ownership of their companies in the form of shares is the need to raise capital. You acquire one through an IPO (Initial Public Offering) issued by companies inviting the public to buy parts (shares) of the company which they will own.
The buying and selling of these shares is done by stock brokers who earn commission from each transaction made. Your money is safe with the brokerage firms because they’re monitored and regulated by CMA.
Alternatively, one can buy shares from those disposing off their company shares. It is then that one becomes a shareholder, a person that owns a part of a company. Your value and interest in the company are measured through a minority stake (few shares) or controlling interests (many shares).
To buy shares, visit one of our licensed stock brokerage firms and open a Security Central Depositary (SCD) Account. To open an SCD account, you need a valid ID and 3 passport photos.Please note that account opening is free and there are no monthly or annual charges.
How do you buy Shares?
- As an investor wishing to buy shares through the USE, you must approach your stock broker and express your desire to buy shares of a given listed company.
- Your Stock broker will provide you with details of the trust account specifically opened by the stock brokers to keep investor’s money intended for USE transactions
- 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.
How do you earn from your investment?
According to the USE website, you can make your money from shares in two basic ways: dividends and price appreciation. Usually on the trade counter, share prices rise and fall from day-to-day. They are determined by the lowest price that any one shareholder is willing to sell his or her shares for.
Prices tend to go up when a company is performing well. The advantage is that there’s potential for share prices to increase overtime. On the contrary if the market is sluggish, the share prices drop.
The advantage/disadvantage about this is that an investor who buys shares at this price would have made an even greater profit/capital gain whereas an investor who sold at that price would have made a greater loss.
In the long run, holding onto your shares buys you time to make a killing for healthy profit in the future. Knowing when and how to buy is key to this success. Invest in companies that have good returns at a fair price.
Paying out dividends – the pros and cons
Dividends are periodic cash payments that a company makes to its shareholders. They are the excess profit that the company has earned in the course of its financial year and are either directly deposited into a shareholder’s bank or trading account or mailed to them in the form of a cheque.
The amount of dividends paid varies according to the performance of the company. The bigger the company, the better the amount paid out. However, this is not the same amount paid out compared to when one bought a share. Hopefully, each year companies tend to grow depending on the investment climate.
According to the USE, dividend payments are not guaranteed. This depends on the companies’ overall performance of the financial year. Young companies/start ups can decide to use all of their extra cash to grow and expand. Other companies are forced to reduce their dividend or stop paying it altogether if they fell on hard times. Commissions and fees are fixed by the Capital Markets Authority at 2.1% of trade value for all transactions less than Ushs200 million.
At the recently concluded UMEME AGM 2016/17 at the Sheraton Hotel, Rwenzori Ballroom. I learnt that shareholders acquire rights from their ownership stake. Shareholders can vote for the corporate board members, Board resolutions and dividend payments.
Monitoring market trading is key to securities trading.
At the annual AGMs, a shareholder can hold the company directors accountable for their annual performance and other business decisions taken. Shareholders also receive annual reports to learn more about the company.
It is your right to demand access to public information to monitor progress and meanwhile it is mandatory for all public companies to publish their financial statements for the benefit of their shareholders.
In so doing, owning stock in the company you work for expresses loyalty and ties your personal finances to the success of the business as a whole.
Diversification of risk and profit
Holding all the eggs in one basket is dangerous for a businessman. The stock market helps you to spread the risk which lessens the burden of loss should the share price fall. This means you can own various business ventures with so much ease of minimal supervision since brokers carry out your trading transactions.
Holding stock can help you weather losses from other business ventures while adding potential for profit which helps investors to avoid ambitious strategies that have few alternatives for escape should the risk fall.
The writer is a Managing Partner at The Workshop Uganda