Over the last couple of months, TFHZPC has been writing on a series of articles that chronicle Fizambia.com’s journey through the experience we have had investing in 5 companies on LuSE. However, although our pursuit has been for capital gains and dividends, there is another beneficiary that we cannot ignore. The Zambian economy. The economy is also a beneficiary of a healthy stock exchange and can play a critical role in how money is made in the country. It also plays a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent.
How does the market affect the economy?
The role of our stock exchanged is engraved in law through the Securities Act of 2016. Government has realized that in order to foster development, different ways of raising capital must be employed for the economy to grow. This growth is achieved through financing of projects that expand the operations of businesses in different sectors. Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. The end result is that more jobs get created and the economy sees a rise in middle income individuals.
Benefits of having a stock exchange in Zambia
One of the primary benefits of having a stock exchange is that investors can take advantage of company strategies as they try to beat inflation. Stocks can beat inflation over time because companies can raise prices to account for rising costs brought about by inflation. When companies increase their prices, their revenues and earnings also increase. Although this is subject to competitive forces, the higher the earnings, the higher the valuation, which leads to higher share prices. Conversely, with higher earnings, listed companies can purse expansionist strategies that create employment in the economy.
Another way the stock market benefits the Zambia economy is that if offers companies that are in much need of capital an alternative way in which they can raise finance for projects. The banks will always finance but that often attracts interest. With the stock market, ownership is the only thing at stake. This inadvertently benefits the economy in that investors have an opportunity to participate through ownership in the listed companies.
By participating in the stock market, Government can use the investment patterns to gauge how well the economy is doing. Although the LuSE has only 22 companies across different industries, Government can have an idea through the analysis of these companies on how well the economy is doing. For example, when trades are low that could be indicative of low liquidity in the market. As such, the behavior of a country’s stock markets can serve as a reliable indicator of national economic performance.
When the stock market performs well, it can act as a magnet for international investors. For example, companies such as Zambeef and ZAMEFA have off shore investors. When the question is asked why they invested, the answer is that they saw the good performance of the company. Therefore, when external investors start to send money into the LuSE it means that their economic perception of Zambia has been affected. With Foreign Direct Investment (FDI) coming into Zambia, the local currency sees stability. This is an inadvertent consequence of having a stock market.
The government too can benefit from the stock market by providing a trading platform for it. For example, the government may need more money to develop a community housing estate, build a water treatment plant or initiate any other public projects. Instead of increasing taxes to raise the required revenue an alternative way would be for it to issue bonds through the stock market. When investors buy these bonds, the government is able to raise the capital it needs to do various projects that can improve the cost of living or even create employment for locals. In the long run, this improves the economy.