The Lusaka Securities and Exchange (LuSE) is an integral part of Zambian commerce. However, asking the common man or woman in Zambia, few people know what its role is. Those that do have often found themselves wondering what this institution is all about and whether it can deliver on the promise of value creation.
This is the inaugural article that will aim at demystifying what the LuSE is all about and it is intended to bring awareness to the citizens of Zambia and hopefully encourage participation. But first before one can participate in the financial empowerment journey, one must understand what the institution is all about.
What is LuSE?
The Lusaka Securities Exchange (Formally known as Lusaka Stock Exchange) began operation on February 21 in 1994. However, the story of the Zambian market place that people can use to buy and sell shares of companies did not begin then. The story of trading in Zambia began long before that. Looking into the history of Real Estates Investments Zambia (REIZ), trading of shares in Zambia actually began with North Western Rhodesia Farmers Co-operative (their original name) in the 1920’s. Back then they were trading farm produce and not shares but essentially this set the pace of what would eventually become the stock exchange. As a matter of fact, Farmers House PLc was actually one of the first companies to list on LuSE for trading back in 1994.
Hence when you think of LuSE think of an established institution that has been around for a long time and has been bringing together all of the sellers and buyers of different shares of different companies that are listed. The LuSE is therefore an efficient, orderly and transparent market for shares among other things.
But Wait! What Does LuSE Actually Trade In?
Like any market place, there are goods to be traded and LuSE is no exception. The goods in this case are what are known as shares and securities. A share is a part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute. In this particular case that part is a piece of a known company. A security is an instrument for raising finance by the shareholders of a particular company. Companies use different methods to raise capital for various purposes that range from servicing working capital and paying off debts.
In the realm of securities, there are two types which the LuSE offers. The first is an equity security. This type of security usually provides a steady income as dividends but may fluctuate significantly in their market value with the ups and downs in the economic cycle and the fortunes of the issuing firm. In short, this type of security gives one ownership of a part of a company and with it a right to a share when the company declares a profit.
The second is a debt security. This type of security is a debt instrument, such as a government bond, corporate bond, certificate of deposit (CD), municipal bond or preferred stock, that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount borrowed), interest rate, and maturity and renewal date. These are typically issued for a fixed term and the amount of capital represented by them has to be paid back to their owners at the end of the security’s term.
Why Should You Consider Buying Shares?
Making an investment in to shares is all about one’s personal belief system regarding whether or not they believe in a going concern. A going concern is simply an accounting term for a company that has the resources needed to continue to operate indefinitely until a company provides evidence to the contrary, and this term also refers to a company’s ability to make enough money to stay afloat or avoid bankruptcy. In short, it is a business that is operating and making a profit.
An individual’s belief system will have it that if they wish to be a part of a profit, they have to make the commitment of investing in that particular business. Furthermore, the choice is between putting that surplus income in a bank account that will yield bank fees as well as simple fixed interest or taking a chance with a going concern whose prospects are determined by how well the management team manage to navigate the macro environment in order to continue generating unrestricted profit margins. In short, the choice is between investing in a fixed return and unfixed return.
However, in addition to the belief system, a potential investor also has to consider the fact that investing in a stock market is a long term strategy of creating wealth. Making investing on the stock market a regular habit by placing small amounts to shares is one way of saving and accumulating wealth for a future that could potentially secure your generation and the next.
How Do You Go About Buying Shares?
Once you have made the decision to start investing, it is important you get to know some information about the going concerns (companies) you wish to invest in. The best place to start is by visiting the company website to find out more information about what kind of business that company is in. Once you have learned a thing or two about that company, it is important to understand the industry that company is in and whether that industry is performing well or not. However, note that sometimes some industries may perform badly due to certain macro-economic conditions. This does not mean those companies are not worth investing in. No. It simply means that the fundamentals of those companies doing business are constrained in the short term, therefore seeking professional advice is always important.
The professional advisors are the stockbrokers. A stockbroker is a LuSE member firm and is licensed by the Securities and Exchange Commission to buy and sell securities on the LuSE on behalf of investors. To start the process of investing on the stock market, the broker will request the investor to open an account with them.
As of 31 March 2015, there were seven stock broking firms in Zambia. There contact information can be found on our website www.Luse.co.zm. In order for the account to be opened with them, they will demand for the following information: An NRC, document showing proof of physical address, two passport size photos. Furthermore, some brokers will demand for a minimum amount to be deposited for the account to be created. This information can be found on our website or the website of the respective brokers.
Once the account has been created, the investor can now purchase shares. As indicated earlier, armed with company information, at this point it is necessary to engage with the broker in order for them to help you create a suitable portfolio that can balance opportunity and risk. The broker will also advise you on which investments that are listed or quoted on the LuSe are doing well. Furthermore, they will also indicate to you whether or not there is an investment you may consider in the future based on the price of the share on the market. Some shares may be higher at a particular time so it is the role of the broker to give you this information so that you can make an informed decision about your investment future.
In addition, it is important to note that there is a trading system in place when you are purchasing shares. It is called the “T + 3” trading system which is a three day process required for a transaction involving shares to be settled on the LuSE. Translated literally, it stands for “Transaction + 3 business days”.
Once Invested, Then What?
Once you have invested in shares of select companies, the journey of investment begins. Unlike bank accounts where the interest rates are fixed, there is minimal need for you to continuously check on your bank account. In the case of shares, we encourage you form a long lasting relationship with your broker. Brokers share information with their clients on a day to day basis (Monday to Friday). Every day, astute brokers will share with you information regarding what the daily trades were and what shares were available for purchase. In addition, they will also provide you with information coming out companies that are listed. This could be information regarding change in management or divestures or notable investments that the company is making. What this information serves to achieve is to provide investors with signals that can influence you belief system regarding how you will interact with your shares.
Become a constant reader of business news. There are few resources available for the investor that include the investor pages of the company you have bought shares in, our website also provides day to day information coming from companies as well as independent analysts that write about company performance. This process is not meant to make you super vigilant of your investment through information overload. It is meant to ensure that you have an idea of how your investment is and will perform as time goes by. This is the advantage of investing in the stock market. Knowledge is power and with that power, you as an investor are able to make the right choices regarding which companies you believe will give you the sort of return you desire.
For more information about the LuSE, please contact + 260 211 228391 or email trading@luse.co.zm or info@luse.co.zm . In our next article, we will discuss the mechanics of investing in companies.