If you are particularly a Ugandan in the diaspora or have knowledge of interest rates in markets such as the US and UK, you will know that the Bank of England base rate is 0.5%. The US Fed rate is currently 0.25%. This is the rate that basically determines the commercial banks’ lending rates, and therefore the interest rates they pay on savings. The UK rate is not expected to change for, say, the next 3 years, ie until 2015, I expect the same for the US rate. So you can expect the interest you will receive on your savings to be close to zero.

The search for investments that pay a “good” return never ends in these difficult times. One option is to consider investing in stocks and bonds on the Uganda Stock Market (USE).

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

Inventory (using an example)

Stock, also called stock or stock, is a “portion” of a company’s capital stock 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 may choose to offer 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 nominal price, but rather issues them at UGX 2 each (thus at a premium).

As an investor, you could buy, say, 20% of the shares, i.e. (200,000 shares) at Shs 400,000 (UGX 2 x 200,000). You can then choose to sell these shares, say at 4 UGX each, thus for 800,000 Shs and make a profit of 400,000 UGX. Buying and selling shares is really how the stock market works, it connects buyers and sellers of shares of a public company.

Bonds (using an example)

Just as stocks are a means for a company to obtain financing (since shares are typically issued at a premium), as in the example above, bonds are also another means for a company (or, for example, the government) to obtain financing. The difference is that a stock gives you partial ownership of the company, while a bond is similar to a “note”, in other words, the issuer of the bond (for example, the company) promises to pay you at a future date (for example, 3 years) the principal amount of the bond (or the amount it is loaning you) plus interest.

Thus, a “3 Year 10.25% UGX 1 Million Treasury Bond” means that the issuer of the bond (in this case, the Government of Uganda (GOU)) will repay you the principal of Shs 1 million plus 10.25% interest in 3 years. Interest is usually paid semi-annually.

Like stocks, bonds can be traded on a stock market. In other words, an institution like the National Social Security Fund (NSSF) will buy bonds during an auction, but will say that in the unlikely circumstance that you don’t want to hold the bonds for the maturity period, i.e. the 3 years, you can choose to sell your bonds on the stock market. The person buying 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 the investor pays less than the face value of the bond and will enjoy the interest on the bond for the remainder of the maturity period plus the discount on the purchase of the bond.

But what about investing in USE stocks and bonds?

USE and its “bull market” phase

The USE has only been around since June 1997 and is now in its 15th year. It’s still very much an emerging market, of course, compared to markets like 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.

However, this works in your favor. Emerging market stocks often have significant rise/growth in the early years as they develop and as such are typically “bull markets” (a market where prices are rising or are expected to rise). USE All Share Index (ALSI) growth statistics; A measure of all publicly traded companies, for example, shows that stock prices have been rising overall, except for 2008, the peak of the credit crunch.

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

The above sounds promising, is it worth investing in stocks and bonds via USE?

FIRST THE CONS (of course)

1. Low liquidity due to low trading volume

Despite the increasing activity on USE, since we are still an emerging market, the trading volume is quite low, and according to trading statistics, some stocks have no activity for a day or couple of days.

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

2. Exchange losses (Forex)

A key consideration when investing in the US, especially if you are a Ugandan in the diaspora, is to consider exchange rate movements. The shilling has depreciated over the last 5 years against the British pound (GBP) and the US dollar (USD) and so if you are investing in, say, a 3-year bond, you need to consider how exchange rate depreciation might move and therefore affect the value of your investment.


1. Good returns for stocks due to bullish market trends

In light of the highlighted CONS, the clear advantage for the investor who has access to other stock exchanges but wants to invest in USE is to consider investing in short-term holdings of shares, i.e., say one year before selling, since in a bull market (such as USE), share prices are expected to rise.

2. No capital gains tax

One of the main advantages of shares is that there is no capital gains tax (CGT). Capital gains are the gains made when you sell shares for a higher price than you bought them for. Therefore, the investor can enjoy his profit tax free. It is not uncommon to pay CGT in more developed economies.

Building on the above Pros, therefore, I summarize the financial model below.

  • Initial capital (A): Shs. 18,931,650
  • Profit per year (B): 12,586,182
  • Other costs (C) (broker fees and Forex losses): Shs 1,145,357
  • Return on Investment/Capital (years to recover the capital) (A/ (BC)): 1.65 years

Now the basics that you must have well before investing.

  • It works through a corridor. As the clear winner is considering equity investments for a short time, it will most likely be necessary to have an investment broker to provide you with regular reports and guidance so that you can carry out your buying and selling strategy. The Capital Markets Authority (CMA), the USE regulator, has a list of brokers, fund managers and investment advisers.
  • Investigation. If you choose not to use a broker, the least you can do is thoroughly research information such as pricing and qualitative information about your target. Financial statements and press reports/stories give you an indicator of the nature of the entity. Of course, there is a limit to this investigation; Past performance does not equal future performance. Chances are your broker/advisor can help you with this as well.


While you may not be a professional in the open auction system that USE uses and not interested in the intricate details of how stock markets work, there is definitely a lot of merit in investing in USE considering that despite CONS such as Forex movements, there can be returns in just over 1 year which can be much better than investing in eg fixed UK or US savings accounts.

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