Is Investing in Stocks and Bonds on the Uganda Securities Exchange (USE) Any Good?

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If you are particularly Ugandan in the diaspora or know the 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 United States is currently 0.25%. It is the rate that essentially determines the borrowing rates by commercial banks and therefore the interest rates they pay on savings. The UK rate is not expected to change for the next 3 years i.e. until 2015 I expect the same for the US rate. So you can expect the interest you will earn on your savings to be close to zero.

The search for investments with a “good” return is endless in these difficult times. One option is to consider investing in stocks and bonds in the Uganda Securities Market (USE).

First, the basics of what stocks and bonds are and how the stock market works.

Stocks (using an example)

Shares, also known as stocks or shares, are a “slice” of a company’s share capital that is offered to the public. If a company has say 1 million UGX in share capital and each share is worth say 1 UGX (nominal price), then there are 1 million shares. The company can then choose to say it is offering 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 the nominal price but issues them at 2 UGX each (therefore at an additional cost).

As an investor, you can buy, say, 20% of the shares, ie (200,000 shares) at 400,000 Shs (UGX 2 x 200,000). You can then choose to sell those shares, say at 4 UGX each, so for 800,000 Shs and make a profit of 400,000 UGX. Selling and buying stocks is really the way the stock market works, it connects the buyers and sellers of a public company stock.

Bonds (using an example)

Just like stocks are a way for a company to raise funds (because stocks are usually issued at a premium) like in the example above, bonds are also another way for a company (or say the government). to raise funds. The difference is that a stock gives you a share of ownership in the business while a bond is akin to an “IOU,” that is, the issuer of the bond (say the company) agrees to pay you at a future date (say 3 years) the principal of the bond (or the amount you lend it) plus interest.

A “10.25% 3-year T-bill of one million UGX” therefore means that the issuer of the bond (in this case the Government of Uganda (GOU) will pay you back in 3 years. principal of Shs 1 million plus interest of 10.25% Interest is generally paid semi-annually.

Just like stocks, bonds can be traded on an exchange. In other words, an institution such as the National Social Security Fund (NSSF) will buy the bonds at an auction but in the unlikely event say that they do not wish to keep the bonds during the maturity period. , that is to say the 3 years, it can choose to sell its bonds on the stock exchange. 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 he pays less than the face value of the bond and will benefit from the interest on the bond for the remainder of the maturity period plus the discount at the end of the term. purchase of the bond.

But what about investing in stocks and bonds on the USE?

USE and its “bull market” phase

USE has only been in existence since June 1997 and is now in its 15th year. This is still an emerging market in comparison to such markets as the New York Stock Exchange (NYSE) which was formed in 1792, the London Stock Exchange (LSE) which was founded in 1801 and the Tokyo Stock Exchange (TSE) in 1878.

It works to its advantage, however. Emerging market exchanges often experience significant increase / growth in the early years of their development and as such are typically “bull markets” (a market where prices are rising or are expected to rise). USE’s All Share Index (ALSI) growth statistics; a measure of all listed companies, for example, shows that the share price has generally increased except in 2008, the peak of the credit crunch.

The bond market is also experiencing increased growth and according to USE’s 2010 annual report, activity increased by 4%.

The above looks promising, so is it worth investing in stocks and bonds through USE?

FIRST THE DISADVANTAGES (of course)

1. Low liquidity due to low volume of transactions

Despite the increase in 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 actually have no activity for a day. or a few days.

This means that to consider investing in this area, especially for profit, the focus should probably be on stocks that have the highest trading volumes, as you can expect them to be. the most representative of an active market in which you can buy or choose as you wish. wish without delay to find a seller or a buyer.

2. Foreign exchange losses (Forex)

A key consideration in investing in the USE, especially if a Ugandan in the diaspora has to account for exchange rate movements. The shilling has depreciated over the past 5 years against the British pound (GBP) and the US dollar (USD). affect the value of your investment.

AND NOW THE PROS

1. Good returns for stocks due to bullish market trends

In view of the CONS highlighted, the obvious advantage for the investor who has access to other exchanges but who wishes to invest in the USE is to consider investing in the holding of shares in the short term c ‘ that is, a year before selling them as in a bull market (as is the case with USE), stock prices are expected to rise.

2. No capital gains tax

One of the main advantages of stocks is that there is no capital gains tax (CGT). Gains are the profit made when you sell stocks for more than the price you bought them for. The investor can thus profit from his profit tax-free. It is not uncommon to pay CGT in more developed economies.

Based on the Benefits above, I therefore summarize the financial model below.

  • Start-up capital (A): Shs. 18 931 650
  • Profit per year (B): 12,586,182
  • Other fees (C) (brokerage fees and Forex losses): 1,145,357 Shs
  • Return on investment / capital (years to recover the capital) (A / (BC)): 1.65 years

Now, the basics that you need to master before investing.

  • Act through a broker. As the clear winner is considering investing in stocks for a short period of time, it is most likely necessary to have an investment broker who will give you regular reports and guidelines so that you can carry out your buy and sell strategy. . Capital Markets Authority (CMA), the regulator of USE, has a list of brokers, fund managers and investment advisers.
  • Research. If you choose not to use a broker, the least you can do is research information like pricing and qualitative information about your target market. Financial statements and news articles / articles give you an indicator of the nature of the entity. There is of course a limit to this research; past performance is not equal to future performance. Your broker / advisor can most likely help you in this regard as well.

LAST WORD

While you may not be a pro at the open scream auction system used by USE, and given that you may not be interested in the intricate details of how the stock markets work, there are certainly has a lot of merit in investing in the USE given that despite the DISADVANTAGES such as Forex movements, there can be returns in just over a year which can be much better than investing, for example. example, in fixed savings accounts in the UK or the US.



Source by D E Wasake

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