3 November 2012

Uganda: Before You Invest in Shares


Investing in shares gives you part ownership or a stake in a company. If the company performs well, you could reap a percentage of the profits accrued, especially if you own a considerable amount of shares.

The decision to invest, or not, in shares is one that novice investors grapple with. You can purchase a stake in a company during an initial public offer (IPO) - where a company undertakes the maiden sale of the shares to the general public within a designated period of time.

Prospective investors usually fill in share application forms that are available from participating broker/dealers as well as authorized selling agents. Alternatively, shares of listed companies can be bought from existing shareholders via the Uganda Securities Exchange through a licensed brokerage fi rm. These firms perform this role for a commission or brokerage fee.

Just like any investment decision in other asset classes, you have to consider a number of things before you decide whether to invest your money or not.

One of the things to consider is your investment objective/s. Remember that your current financial position is critical in determining your investment objectives. For example, if you have surplus funds, you may choose to invest in shares over a long-term horizon for capital growth.

On the other hand you could be eyeing dividends at the end of the financial year. In this case, when a company makes a profit and the board of directors endorses a dividend payment, you will get a percentage of that profit. Given the amount of money at your disposal, you may decide to buy a substantial stake to be able to reap meaningful dividends. Seasoned investors in the share market don't invest once, but continually build up their stock purchases whenever they deem fit.

The source of funding is another key issue to consider before you invest. The most prudent form of financing is from savings. However, if you decide to use debt, can you take responsibility for repayment especially when the anticipated gains from your share purchase do not materialise?

Equally important is keeping an eye on the anticipated return on your investment. This is essentially the return of the money invested, based on profits of that business. Your choice of investment should also be driven by whether you are looking at passive income or portfolio income and your level of risk appetite.

A good number of investors in the stock market usually invest with a long term view. With such an objective, you are not fazed by the cycles in the stock market that may be characterised by ups and downs. It's advisable not to involve yourself in speculative buying based on past performance of other companies because you could set yourself up for disappointment if the shares don't perform as anticipated.

More importantly, before you buy shares, you have to do thorough research about the companies you wish to invest in. Some of this information can be derived from the company prospectus. Make sure you understand what you are getting yourself into and if you do not comprehend some of the terms, talk to a licensed advisor or broker/dealer. While it's advisable to seek advice from a broker, you have to remember that you have to take responsibility for the decision to invest your money in shares.

More to that, benefits of investing in shares include; dividends, capital gains, using them as collateral and being able to transfer them to another person.

However, you should remember that like any other investments, there are risks associated with investing in shares. For starters, share prices fluctuate and can go down depending on the prevailing economic environment and company performance among other factors. If the company performs poorly, you will not be able to earn dividends.

Ultimately, your investment decision should not be driven by 'bang wagon' mentality in which you participate because everybody seems to be doing so. Your investment decision must be driven by clear investment objectives, financial, considerations and research to be able to make an informed decision.

The writer works with Bank of Uganda


