Introduction to investment unit3

1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
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The nature and principles of investment
Types of Investments in Uganda
Capital Markets Operations
MODULE COVERAGE
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2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Capital Markets
• Basically the capital market is a type of financial market, which includes the stocks
and bonds market as well. Generally the capital market can be defined as the
market for securities where either companies or the government can raise long
term funds.
• One way that the companies or the government raise these long term funds is
through issuing bonds, which is where a person buys the bond for a set price and
allows the government or company to borrow their money for a certain time
period but they are promised a higher return for allowing them to borrow the
money. The higher return is paid through interest that accrues on the money that
the government or company borrows.
• Another way that the companies or government can raise money in the capital
market is through the stock market, most of the time you don't see the
government as a part of the stock market, but the government can also participate
in the stock markets hence the need to include them.
• The stock market works through the companies selling the shares of their stock,
which is basically ownership in the company, to ordinary people and other
companies, as a way of raising capital/ money. The people who buy the stock are
usually given dividends each year, if the company has agreed to pay out dividends,
which is another return on their investment.
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3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
The capital market actually consists of two markets. The first market is the primary
market and it is where new issues are distributed to investors, and the secondary
market where existing securities are traded.
Both of these markets are regulated by the Capital Markets Authority (CMA). The
Authority was set up by the Capital Markets Authority Statute No. 1 of March 1996
as an autonomous body under the Ministry of Finance, Planning and Economic
Development. Capital Markets Authority is responsible for supervising the
securities markets including licensing formal exchanges, dealers, asset managers
and collective investment schemes.
When capital funds are made available to borrowers by lenders, the borrowers deliver
a contract, or an instrument, representing their relationship with the investors.
These capital contracts include:
• fixed interest securities i.e. debentures
• variable interest securities i.e. mortgages
• shares i.e. ordinary company shares
• negotiable documents i.e. options- letter of allocation
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4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Uganda Capital Markets
An interested party can join the Capital
Markets Authority through:
i. Issuing company shares to the public
ii. Listing the company on the Uganda
securities exchange
iii. Issuing commercial paper
iv. Issuing a Bond
v. Obtaining a license as:
a. Broker/ Dealer,
b. Investment Advisor
c. Fund Manager
d. Unit Trust Manager or Trustee
Investment Opportunities in the Uganda
Capital Markets Industry
i. Brokerage, sales and tracking services
firms with international experience
and network;
ii. Fund management;
iii. Investment Advisors and Asset
Managers to mobilizes capital
(savings) for the market;
iv. Discount houses for making a market
and securities thereby developing a
secondary market for those
securities;
v. Underwriting of securities;
vi. Establishing of Investment banks;
vii. Operating of Collective Investment
Schemes.
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5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Uganda Securities Exchange:
A quick guide on how to buy or sell shares through Uganda securities Exchange
a) An individual wishing to buy shares at Uganda Securities Exchange must
approach any of the Licensed Brokers/Dealers and express his/her desire to buy
shares of a given listed company. This individual must hand over to the
stockbroker/dealer the money equivalent of the number of shares he is willing to
buy.
b) The Dealer/Broker will deposit the money so received in a Trust a/c- an account
specifically opened by the brokers to keep clients money intended for Uganda
Securities Exchange transactions. It is a requirement of the Uganda Securities
Exchange that for local orders, payment is made upfront by the investor.
c) The selected dealer will post the order (bid) on the trading board on the
following trading day.
d) When the bid matches an offer (an order to sell) by either the same broker or
other brokers, then the transaction is considered to have been concluded.
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6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Selling of Shares
An individual wishing to sell his/her shares will have to follow the following
procedures;
a) Contact any of the Licensed Brokers/Dealers indicating his/her desire to sell the
shares of a listed company.
b) The individual will have to surrender his/her share certificate to the Licensed
Brokers/Dealers and conclude the process of opening up an account at the
Central Depository System (CDS) of the Uganda Securities Exchange.
c) The Licensed Brokers/Dealers will have to verify the validity of the certificate
with the issuer, one of the listed companies and deposit the shares/bonds in the
CDS. The verification process takes less than a day
d) The Licensed Brokers/Dealers, having opened a CDS account for the client, and
having deposited the shares therein and verified the certificate, will then come
to the Uganda Securities Exchange Trading Floor and post the offer on the board.
e) When the offer equals a bid price quotation, the transaction is considered to
have been concluded, and the shares will have been sold.
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7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Types of Orders
A client may instruct a broker to process several types of orders. An order may be;
i. A Limit order is an order which has a specified price when it is posted for
execution; or
ii. A Market order is an order, which does not have a specific price when posted for
execution. This type of an order must be executed promptly at the best price
obtainable and will have priority over limit order at the same price levels .It
assumes an initial price limit value normally based on the price most
advantageous in the market. A market order trades through a range of prices
starting at the best price in the market.
The basic function of Uganda Securities Exchange is to provide a facility for raising
funds for investment in long-term assets. While this is extremely important as the
engine through which the stock exchange is driven, there are other important
functions of the Uganda Securities Exchange:
Savings
The exchange helps in the mobilisation of savings for investment in productive
enterprises as an alternative to putting savings in bank deposits, purchase of real
estate, and outright consumption. It is an addition to the Banking System as it
provides more diversity to the already available financial instruments.
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8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Financing
Accessing finance by new and smaller companies is futuristic in most developing
countries because venture capital is mostly unavailable. The listing requirements
of Uganda Securities Exchange have been specially designed to meet the needs of
this sector.
Exchange liquidity
The creation of liquidity – this is the ability of securities to be converted into cash at a
market price. Acquiring and selling of shares is fairly simple, inexpensive and swift
and can be done at any time to suit the investor’s convenience.
The financial services sector
Institutions for example the insurance, pension and provident fund schemes nurture
the spirit of savings. Uganda Securities Exchange provides an avenue through
which financial securities can be traded by such institutions in order to facilitate
their activities as financial intermediaries.
Exchange Standards
Institutions such as the insurance, pension and provident fund schemes nurture the
spirit of savings. Uganda Securities Exchange provides an avenue through which
financial securities can be traded by such institutions in order to facilitate their
activities as financial intermediaries.
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9. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Equity financing
Equity financing has a component of flexibility – the company pays holders
depending on its performance; whereas debt financing requires that the
holder of the security be entitled to a fixed sum in interest disregarding
the performance of the company.
Government Owned Companies
The Uganda Securities Exchange assists in the divestiture of government
owned companies. The privatisation process through capital markets
includes the flotation of shares and the secondary market for its success.
Through this process, the indigenous people are able to attain a stake in
the privatised companies.
Price Discovery
The exchange provides a mechanism for price discovery through open market
operations at the Exchange. The price at which a deal is made indicates
not only the value of the shares in question but also the value the market
is willing to pay for the shares in question.
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10. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
The listed companies in Uganda Securities Exchange as at June 30th 2012 are
1. Uganda Clays Ltd listed in January 2000
2. British American Tobacco (BAT) Uganda Ltd listed in October 2000
3. Bank of Baroda (U) Ltd listed in November 2002
4. DFCU Ltd listed in October 2004
5. New Vision Printing and Publishing Co Limited listed in December 2004
6. Stanbic Bank Uganda Limited listed in January 2007
7. National Insurance Corporation listed in 2010
8. East African Breweries Limited listed in March 2001
9. Kenya Airways listed in March 2002
10.Jubilee Holdings limited listed in February 2006
11.Equity Bank Limited listed in June 2009
12.Kenya Commercial Bank Limited listed in November 2008
13.Nation Media Group listed in 2010
14.Centum listed in 2011
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11. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
END
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