The Basics of How Stock Exchange Works in Uganda
A stock exchange refers to an organized and regulated financial market where securities (bonds, notes, shares) are bought and sold at prices governed by the forces of demand and supply. A stock exchange does not own shares. Instead, it acts as a market where stock buyers connect with stock sellers. Stocks can be traded on one or more of several possible exchanges such as the Uganda Securities Exchange (USE). Although you will most likely trade stocks through a broker, it is important to understand the relationship between exchanges and companies, and the ways in which the requirements of different exchanges protect investors.
Stock Exchange in Uganda
The Uganda Securities Exchange (USE) was established in 1997 as a company limited by guarantee and was licensed in 1998 by the Capital Markets Authority to operate as an approved securities exchange. The Exchange is governed by a Governing Council whose membership includes licensed broker/dealer firms, investment advisors, a representative of investors and a representative of issuers.
As a young person looking to know more about the stock exchange world and how you can tap into it, these common terminologies will help you best understand what you need to know about stock exchange in Uganda today;
What is a Share?
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 get into the stock exchange. To sell ownership of their companies in the form of shares is the need to raise capital.
How to become a shareholder
Visit one of Uganda Securities Exchange’s 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 about the selling of Shares?
- As an investor wishing to sell his shares through the USE, you must approach your stock broker and express your desire to sell your shares of a given listed company.
- Your Stock broker will assist you to complete a Sell Order form
- Your stock broker will then post the sell order on the ATS
- When the offer is matched with a bid, the transaction is considered to have been concluded, and the shares will have been sold.
- Your stock broker will then debit the shares from your SCD account.
- Money is then wired to your bank account by your Stock broker.
Types of Stock Exchange Orders
An investor may instruct his/her stock broker to process several types of orders.
- Limit order which has a specified price when it is posted for execution
- A market order which does not have a specific price when posted for execution. This type of 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.
How to Access Your Shares Digitally
The Uganda Securities Exchange (USE) recently launched the e-platform dubbed ‘Easy Portal’ as a strategy to ease access to real time trading information, cutting the journey to a stockbroker. The portal provides an option for investors to take charge of their portfolio by personally monitoring their accounts. It is a self-service portfolio management solution. In addition to that, the portal also provides an IPO application service for existing investors to participate in public offers. To access this portal, visit http://scd.use.or.ug/
How do you benefit from owning shares?
- Ownership: An investment in a share gives you part ownership of the company.
- Voting Rights: As a shareholder, you will be a participant in the running of a company through your Voter’s Rights. Voting rights give you the power to decide on future company actions at the company Annual General Meeting (AGM).
- Income Return: If market conditions are favorable, some companies pay out dividends which can make the investor money even if the share price does not rise.
- The form of Savings: Some shareholders commit a part of their monthly salary or earnings to buying shares. Share prices can increase by any margin, unlike fixed deposits which have a fixed interest rate.
- Investments are Liquid: Shares and Bonds can be bought and sold anytime the market is open for trading.
- Offer protection against Inflation especially when stock prices appreciate at rates greater than inflation.
- Accessibility: There are many stocks and bonds available in the market today.
- Safe Investment: A principal amount is returned to the investor after maturity.
- Limited Liability: One of the great advantages of buying stocks is limited liability. Even though you own part of the company, you are not held personally liable if the company goes bankrupt and has to pay debts. The Capital Markets Authority (stock market regulator) monitors the market to ensure the safety of shareholders’ investments.
- Enhances wealth through Capital Appreciation. You get to increase your wealth and worth as the price of your shares rise over time. E.g. you may buy shares 100,000shares in a particular company at 100ugx each. If, after some time, each share increases to 300ugx and you sell, you will have made a gain of 200ugx per share. In the year 2000, BATU sold shares at 1000ugx each. If you bought 1000shares then, today BATU share price is 30,000ugx. Your net worth today would be 30,000,000ugx.
- Collateral Security for getting loans: Shares can be used as collateral for securing loans.
- Gains through Bonus and Rights Issues. A bonus issue is when a public listed company gives free shares to its existing shareholders. A rights issue is when a public listed company gives its existing shareholders the right to buy more shares at a reduced (discount) price compared to the prevailing market price. In both cases, the shareholders can sell their newly acquired shares at the prevailing market price and make a profit but one has to be a shareholder already to qualify for bonus shares or rights.
What are the risks you may face?
- Unfavorable changes. Share prices vary widely day to day. This may be caused by changes in the industry, economically or politically driven. This can affect a company’ financial performance in the Stock Exchange.
With the above information, you freely make your way into a licensed broker’s office and acquire a Security Central Depositary Account to start your investment in the stock exchange market. For more information, Contact Uganda Securities Exchange Ltd Offices at Nakawa Business Park, Block A, 4th Floor or visit www.use.or.ug.