The purpose of this article is to provide a comprehensive assessment of Zambia’s capital markets. Its main objectives are to (i) suggest products characteristics suitable for Zambian investors such as Government-regulated, professionally managed, easy transfer of ownership, unlimited Life and Continuous existence and sticking to a Solid Strategy. Suggest product characteristics that will help to attract investors (ii) suggest new products for the capital market that would be appropriate for issuers and investors and (iii) summarizes how the products will help to develop the Zambian capital markets in the next 10 years.
In order to provide context and background, this article will first look at the importance of capital markets to Zambia providing a summary overview of Investing, paying particular attention to; (i) advantages and disadvantages, (ii) factors to consider when investing and (iii) investment options.
Lusaka Securities Exchange was established in 1993 and started business operation on February 21st 1994 (www.luse.co.zm. Retrieved 2017-08-16). Since then the Lusaka Securities Exchange has managed to diversify financial instruments on the market with equities, unit trusts, government and corporate bonds. Pujari (yourarticlelibrary.com) describes capital markets as a market which deals in long-term loans, supplies industry with fixed and working capital on both a medium-term and long-term basis. There are two licensed exchanges namely the Lusaka Securities Exchange, which deals in shares and bonds and the Bonds and Derivatives Exchange which deals in bonds and derivative securities.
Benefits of having stable Capital Markets
- The Capital Market is the best channel to route savings into long-term productive use.
- The advantage of investing in Capital Markets is the price of the securities fluctuates in response to change in supply and demand. However, it is important to note that these price fluctuations may also pose as a disadvantage if the prices sway in an unwanted direction.
- Capital Markets play an important role in improving the policy framework of a country. A policy framework can be defined as a document that sets out a set of procedures or goals which might be used in negotiation or decision making to guide a more detailed set of policies. Therefore Capital Markets improve the policy framework by providing a guide to policymakers to formulate policies that provide both short term and long term benefits to the investors.
Investing
Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.), with the expectation of obtaining an additional income or profit. Investing is a means to a happier ending.
According to Warren (2012) investing is the process of laying out money now in expectation of receiving more money in the future. In a financial sense, investing refers to committing money to a financial asset or security, such as stock or bond, in hopes of receiving even more money later.
Advantages of Investing
- One of the primary advantages of investment is that a prudent investor can have their money work for them to earn more money, rather than having to earn that extra money themselves.
- Another advantage is that people can manage investments plans as a means of saving and growing money that might be needed in the future.
- An important aspect of investing is that the investor can reasonably anticipate making a profit on their investment due to their advance research and selection of an appropriate investment.
- Having an investor’s mindset does help individuals to direct their interests and capital toward making less risky investment choices (Burns, 2014).
Disadvantages of Investing
- Investment can be the slowest way to make money as compared to other means of making money such as being a day trader.
- Because investing involves the reuse of the same capital very infrequently, its annual returns may not be as good as a successful trader.
- It requires a lot of time. Research is needed to determine how profitable the investment will be and there is a need to read financial statements and annual reports.
- The major disadvantage of investing is that it is always possible to lose money on whatever investment you make.
Factors to Consider when investing
All kinds of investment would contain a certain degree of risk. It’s very important to go for calculated risk and stick to a risk/reward ratio analysis which compares the expected returns of an investment to the amount undertaken to invest in that item.
In investment, the investor should know that the type of investment that worked for other investors may or may not be the best choice of investment for them. This could be due to having different risk tolerance which may lead the investor to sell off the investment during volatile times.
The capital that an investor has can affect the choice of investment one has to take. It should be noted that the amount you can invest in a project should not limit one who does not have a huge amount of cash.
Time Horizon is a very important factor in investing as it determines the investor’s income requirements and desired risk exposure, which then helps with choosing the appropriate investment product.
Investment Options on the Zambian Capital Markets
A bond also known as a fixed income security, is a debt instrument mainly for the purpose of raising capital. These are usually agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.
Shares are defined as units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits that are declared in dividends form.
Mostly its common shares are issued because they come with voting rights and give shareholders more control over the business. They at times come with pre-emptive rights which ensures that shareholders buy new shares and retain their ownership when the corporation issues new stock.
A Unit Trust is a collective investment scheme, licensed by the Securities and Exchange Commission of Zambia that enables individuals to pool their money into a fund, which is then invested in a widespread of fixed interest securities and equities. An example is the Madison Unit Trusts that are managed by Madison Asset Management Company Limited.
I am glad to say that this is the most investment product that interests me most as it is essential to developing a vibrant capital market. The unit trust industry in Zambia has excellent potential to develop to be a strong component of capital markets with appropriate changes in the industry structure, products, distribution methods, and investment education.
Suggestion of product characteristics
The sale and investment of products should be government regulated to protect issuers and customers. Companies with such products should file their financial statements with the Securities Exchange Commission so that investors can see the performance of the companies and decide which products to invest in.
Products traded on the capital markets should be professionally managed by professional experts. Since investors do not actively manage the business there ought to be professionally qualified experts to manage the products invested in and as a result, this will lead to an increase in the confidence of investors.
Many people are failing to invest in the Zambian capital markets due to the long processes of the transfer of ownership of some products. The transfer of ownership of products should be made easy and should be transferred there and then, as this will pave way for investors to easily own the products.
Unlimited Life and Continuous Existence
A product that should attract investors and customers should have an unlimited life and should be in existence for a long period of time. As many products are owned by companies and managed by employees, the sale of the company or inability of an employee should not have an impact on the continuous life of the product.
The best-performing products perform well because they are directed by a good investment strategy. Investors should be aware of the product’s investment objective and the strategy the product manager uses to achieve that objective. According to Porter (1985), competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.
Suggested Products for the Zambian Capital Markets
Covered warrants are traded on the London Stock Exchange and are issued by some of the world’s leading financial institutions. Based on a variety of underlying assets including individual shares, baskets of shares, indices, commodities, and currencies, covered warrants offer investors a whole range of investment opportunities.
Key benefits of covered warrants
- offer access to a range of markets, including international markets
- offer a wide variety of underlying products including equities, indices, commodities and currencies
Exchange-Traded Commodities (ETCs)
These are relatively new products to the market but are rapidly growing in terms of size and popularity. ETCs are very effective tools for portfolio diversification and give exposure to markets that are not easy to access as an individual investor such as precious metals or oil. These products are adequate for the long term buy and hold investor or even the trader looking to take advantage of short term price fluctuations.
An exchange-traded note (ETN) is a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark, minus investor fees. They can offer investors exposure to market sectors and asset classes, which may be difficult to achieve in other investment types with the same level of cost-efficiency, and they can act as an effective hedging tool.
How Suggested Products will Help Grow the Zambia Capital Markets
If these products are introduced on the market it will lead to market efficiency as a lot of investors will start to research more about the products before an investment is made and many researches will be made, resulting in awareness of the capital markets in Zambia.
If these collective suggested products are exploited to allow Small and Medium Enterprises to share investment risk and return, then the capital market participants will be increased. In order to expand the options available for Small and Medium Enterprises access to finance, the Government should create a Small and Medium Enterprises board with less stringent compliance requirements for their listings.
Zambian Capital Markets have few competent experts to provide adequate demanded services to all investors as per needs and this affects the development of markets. However, the introduction of such products will enable the Capital markets to have competent experts who will determine the quality of services provided in the capital market and the quality of the stock exchange.
It is the job of Zambia’s policymakers to set policies with objectives of increasing the size of capital markets in the country, create public awareness, improve information technology, improve electronic automation system for trading of securities and professionalism with better regulatory enforcement in order to improve stock market efficiency.
Aaron Siame is an audit professional at KPMG in Zambia. The views expressed in this article are his own and not necessarily those of KPMG.
REFERENCES
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