Mr Paul Bwiso, the chief executive officer of Uganda Securities
Exchange. A stock exchange provides the marketplace for buying and
selling stocks among investors. FILE PHOTO
Until a
company goes public, individual investors are mostly unable to invest
in the company. Once the stock is trading on a stock exchange, any
investor – institutional or retail – can purchase the listed shares in
the stock exchange.
The Initial Public Offering (IPO) is attractive to potential investors and those who already own shares because they offer them chances to diversify their portfolios with new asset classes and new sectors that may come in the market.
However, there are market risk related to IPOs. The market price of shares issued in the IPO will move up or down based on various factors, including macro-economic conditions, governmental policies, prevailing interest rates, movements in the stock markets generally, consumer and investor sentiment, conditions or developments affecting the industry or sector in which the company operates and conditions, events or developments that are specific to the company.
In total, Uganda has had eight IPOs all of which have been successful during primary and secondary market.
Mr Paul Bwiso, the chief executive officer of Uganda Securities Exchange (USE), said that USE is expecting one IPO this year.
With limited IPOs in Uganda’s capital, Mr Bwiso says to make the stock market active, those companies intending to float IPOs should allocate more shares to retail investors because they buy and sale shares frequently unlike the institutional investors who buy and hold shares.
“We are encouraging retail investors first and institutional investors second. This can also be boosted by the liberalisation of the pension sector because of the large pension fund, liberlisation will encourage competition among the institutional investors in the market,” he said.
The institutional investors buy shares on behalf of their clients who they are managing their funds.
Mr Bwiso said: “Institutional investors buy shares and hold. They don’t trade frequently like retail investors. It would be good to allocate more shares during the IPO period to retail investors.”
For instance Stanbic Bank floated its IPO on November 22 to December 22 2006 worth 1,023,773394 shares at price of Shs70 per share to raise Shs70 billion. The response overwhelmed the company with 37,449 applications for 3 billion shares totaling Shs211billion. This implied that it received a 200 per cent oversubscription and was listed on the Uganda Securities Exchange.
Stanbic Bank allocated more shares to retail investors and it is one of the most active counters at USE because there is trading taking place almost every day.
Mr Bwiso said unlike Stanbic CPILA allocated more of its shares to institutional investors because it was the company’s policy and what has happened is that the limited shares trading in its counter are from retail investors.
However, Mr Bwiso says institutional investors matter in the secondary market as they buy shares being sold frequently by the retail investors.
The Initial Public Offering (IPO) is attractive to potential investors and those who already own shares because they offer them chances to diversify their portfolios with new asset classes and new sectors that may come in the market.
However, there are market risk related to IPOs. The market price of shares issued in the IPO will move up or down based on various factors, including macro-economic conditions, governmental policies, prevailing interest rates, movements in the stock markets generally, consumer and investor sentiment, conditions or developments affecting the industry or sector in which the company operates and conditions, events or developments that are specific to the company.
In total, Uganda has had eight IPOs all of which have been successful during primary and secondary market.
Mr Paul Bwiso, the chief executive officer of Uganda Securities Exchange (USE), said that USE is expecting one IPO this year.
With limited IPOs in Uganda’s capital, Mr Bwiso says to make the stock market active, those companies intending to float IPOs should allocate more shares to retail investors because they buy and sale shares frequently unlike the institutional investors who buy and hold shares.
“We are encouraging retail investors first and institutional investors second. This can also be boosted by the liberalisation of the pension sector because of the large pension fund, liberlisation will encourage competition among the institutional investors in the market,” he said.
The institutional investors buy shares on behalf of their clients who they are managing their funds.
Mr Bwiso said: “Institutional investors buy shares and hold. They don’t trade frequently like retail investors. It would be good to allocate more shares during the IPO period to retail investors.”
For instance Stanbic Bank floated its IPO on November 22 to December 22 2006 worth 1,023,773394 shares at price of Shs70 per share to raise Shs70 billion. The response overwhelmed the company with 37,449 applications for 3 billion shares totaling Shs211billion. This implied that it received a 200 per cent oversubscription and was listed on the Uganda Securities Exchange.
Stanbic Bank allocated more shares to retail investors and it is one of the most active counters at USE because there is trading taking place almost every day.
Mr Bwiso said unlike Stanbic CPILA allocated more of its shares to institutional investors because it was the company’s policy and what has happened is that the limited shares trading in its counter are from retail investors.
However, Mr Bwiso says institutional investors matter in the secondary market as they buy shares being sold frequently by the retail investors.
Importance
Institutional investors influence corporate pay-out and Research and Development investment policies. Higher pay-outs are encouraged by institutional investors, especially in firms with high free cash flow and poor investment opportunities.
They also positively influence stock repurchases, particularly in firms with high information asymmetry. The substitution of stock repurchases for dividends as a percentage of total pay-out is encouraged by institutional investors.
Institutional owners persuade firm management to increase research and development (R&D) investment overall and specifically in firms with higher stock liquidity, higher information asymmetry, lower free cash flow, and better investment opportunities. Institutional investors decrease agency costs in pay-out and R&D investment policy decisions.
Uganda’s stock market is composed of both local and foreign institutional investors. Mr Bwiso said currently, there are 4,700 institutional investors. There is a good mix of institutional investors in the market 1,400 are foreign investors and 3,300 are local institutional investors,” he said.
Studies show that the participation of small investors is important in IPOs, because retail investors absorb any excess supply of shares beyond institutional demand. They contain value and stability of in the post IPO market.
Mr Bwiso says there are currently 33,000 retail investors in USE, with 3,700 being foreign retail investors while the other remaining numbers being the local.
“It is important when a company sells to them at a discount rate during the IPO period to minimise the challenge in secondary market when more shares offered at a discount rate during IPO went to institutional investors,” he said.
Mr Bwiso added: “With more retail investors holding shares during the IPO, there is growth in value in demand and supply in the secondary market.”
Institutional investors are specialised financial institutions which manage savings collectively on behalf of small investors, with an objective in terms of acceptable risk, return maximisation and maturity of claims.
Institutional investors may promote stock market development through their functions such as clearing and settling payments, pooling of funds, transferring economic resources, managing uncertainty, controlling risk, introducing financial innovation, using price information, and dealing with incentive problems (Bodie, 1990; Davis, 1996; Vittas, 1998).
They further argues that these functions lead to increasing liquidity and market capitalisation, decreasing price volatility, more efficient asset pricing, higher international stock market integration and improving institutional indicators of stock markets.
In Uganda, the National Social Security Fund (NSSF) is the largest institutional investors in both debt and equity market.
In an interview with Prosper, the managing director of NSSF, Mr Richard Byrugaba said the NSSF is investing in all the stock exchanges in East African region.
Mr Byrugaba said both the equities and bonds are giving reasonable returns to people who are saving with the NSSF (fund members).
“We are investing in both equities and bonds. Our total investment in equity across East Africa is Shs1.7 trillion and Shs7 trillion in Uganda government bonds,” he said.
Institutional investors influence corporate pay-out and Research and Development investment policies. Higher pay-outs are encouraged by institutional investors, especially in firms with high free cash flow and poor investment opportunities.
They also positively influence stock repurchases, particularly in firms with high information asymmetry. The substitution of stock repurchases for dividends as a percentage of total pay-out is encouraged by institutional investors.
Institutional owners persuade firm management to increase research and development (R&D) investment overall and specifically in firms with higher stock liquidity, higher information asymmetry, lower free cash flow, and better investment opportunities. Institutional investors decrease agency costs in pay-out and R&D investment policy decisions.
Uganda’s stock market is composed of both local and foreign institutional investors. Mr Bwiso said currently, there are 4,700 institutional investors. There is a good mix of institutional investors in the market 1,400 are foreign investors and 3,300 are local institutional investors,” he said.
Studies show that the participation of small investors is important in IPOs, because retail investors absorb any excess supply of shares beyond institutional demand. They contain value and stability of in the post IPO market.
Mr Bwiso says there are currently 33,000 retail investors in USE, with 3,700 being foreign retail investors while the other remaining numbers being the local.
“It is important when a company sells to them at a discount rate during the IPO period to minimise the challenge in secondary market when more shares offered at a discount rate during IPO went to institutional investors,” he said.
Mr Bwiso added: “With more retail investors holding shares during the IPO, there is growth in value in demand and supply in the secondary market.”
Institutional investors are specialised financial institutions which manage savings collectively on behalf of small investors, with an objective in terms of acceptable risk, return maximisation and maturity of claims.
Institutional investors may promote stock market development through their functions such as clearing and settling payments, pooling of funds, transferring economic resources, managing uncertainty, controlling risk, introducing financial innovation, using price information, and dealing with incentive problems (Bodie, 1990; Davis, 1996; Vittas, 1998).
They further argues that these functions lead to increasing liquidity and market capitalisation, decreasing price volatility, more efficient asset pricing, higher international stock market integration and improving institutional indicators of stock markets.
In Uganda, the National Social Security Fund (NSSF) is the largest institutional investors in both debt and equity market.
In an interview with Prosper, the managing director of NSSF, Mr Richard Byrugaba said the NSSF is investing in all the stock exchanges in East African region.
Mr Byrugaba said both the equities and bonds are giving reasonable returns to people who are saving with the NSSF (fund members).
“We are investing in both equities and bonds. Our total investment in equity across East Africa is Shs1.7 trillion and Shs7 trillion in Uganda government bonds,” he said.
Expert’s view
An independent financial consultant, Dickson Musoni told Prosper that during IPOs, the institutional investors participate in buying shares that have been floated in the primary market.
Mr Musoni said world over, institutional investor are the majority in the stock market.
Speaking on the market conditions in USE, Mr Musoni said: “What we are seeing are mostly retail investors buying and selling shares. There are few institutional investors in the market currently. Overall, the institutional investorsare gearing up to look at the financial results of companies to make decisions.”
Mr Musoni said in Uganda, there is still a problem of awareness among the retail investors and they still don’t understand the stock market very and such there is need public education about the benefits of investing in stock market.
An independent financial consultant, Dickson Musoni told Prosper that during IPOs, the institutional investors participate in buying shares that have been floated in the primary market.
Mr Musoni said world over, institutional investor are the majority in the stock market.
Speaking on the market conditions in USE, Mr Musoni said: “What we are seeing are mostly retail investors buying and selling shares. There are few institutional investors in the market currently. Overall, the institutional investorsare gearing up to look at the financial results of companies to make decisions.”
Mr Musoni said in Uganda, there is still a problem of awareness among the retail investors and they still don’t understand the stock market very and such there is need public education about the benefits of investing in stock market.
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