Ben K. Gwamaka-Art in Tanzania Internship
Marketing and Management program
INTRODUCTION
The capital market has played a significant role in national economic growth and development worldwide. One intermediary in the market operates as a rallying point for the overall activities in the stock exchange market. It is a common postulation that without a functional stock exchange market, the capital market may be very illiquid and unable to attract investment.
The Tanzanian government’s policy is to transform its economy from a public sector-dominant economy to a private sector-driven economy, so it established the Dar es Salaam Stock Exchange.
All trading systems on the DSE Trading floor are conducted under an Automated Trading Electronic System (DATES), which matches bids and offers using an electronic matching engine.
This is because the stock exchange market provides liquidity and promotes efficiency in capital formation and allocation.
STOCK EXCHANGE MARKET
The stock exchange market mainly provides liquidity by enabling firms to raise funds through the sale of securities with relative ease and speed. As a result, the stock exchange market can influence investment and economic growth. The large stock exchange market lowers the cost of mobilising savings, facilitating investment in the most productive technologies.
Thus, for sustainable growth and Development, funds must be effectively mobilised and allocated to enable businesses and the economy to harness their human, material, and managerial resources for efficient productivity. The stock exchange market allows the government to raise long–term funds (capital), which will enable it to expand, modernise projects, and finance new investments.
STOCK MARKET SYSTEM
- Primary Market
A primary market is a financial market where new securities are sold to initial buyers for the first time, commonly referred to as Initial Public Offerings (IPOs). A good example is when a company floats its shares or sells its corporate bonds to the investing public for the first time. The securities issued in the primary market are later sold in the secondary market.
The Primary Market provides the channel for the sale of new securities. It also offers an opportunity for securities issuers, both government and corporate, to raise resources to meet their investment requirements and/or discharge some obligations.
2. Secondary market
A later market deals with buying and selling securities previously issued and subscribed to (in the Hands of investors) in the primary market. An example of a secondary market institution is a stock exchange, such as the DSE, which is a market where investors, through their brokers, buy and sell listed securities. The DSE is, therefore, one of the key institutions in a financial system, serving unique functions.
A secondary market is a market where securities are traded after being initially offered to the public in the primary market and/or listed on a stock exchange. The majority of trading is conducted in the secondary market, which encompasses both equity and debt markets.
DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKETS
In the Primary Market, securities are offered to the public for subscription to raise capital or funds.
A secondary market is an equity trading venue where already existing/pre-issued securities are traded among investors.
ROLE OF THE STOCK EXCHANGE MARKET
- Contributes to cultural transformation in Tanzania.
When the DSE was established, only a handful of Tanzanians could claim to be knowledgeable about stock market operations. The operationalisation of the DSE has contributed substantially to public enlightenment, which has led to a few Tanzanians investing in listed companies as a result of this transformation.
2. Encourage and Mobilise Domestic Savings
The stock market provides an additional channel for encouraging and mobilising domestic savings for productive investment, as an alternative to bank deposits, real estate investment, and as a financing source for consumption loans.
3. Provide Markets for Listed Securities.
It enables those wishing to join or leave the listed companies to do so, and those wishing to go to do so.
4. Facilitate Equity Financing.
The stock exchange market provides an equity financing cushion for companies against the variability of cash flows and even possible losses: it is permanent financing that does not demand regular fixed returns like debt.•Stock exchange market improves the gearing of the domestic corporate sector by facilitating equity financing, which helps to reduce corporate dependence on borrowing, thus strengthening the financial system.
5. A Barometer of Business Direction.
Economists and policymakers focus on the stock market because of the perceived benefit it provides for the economy. According to Obadon (1995), the stock market serves as the fulcrum for capital market activities and is often cited as a barometer of business direction. An active stock market can be relied upon to measure changes in general economic activity using the stock market index.
6. Raise of Capital for Enterprise.
Stock exchange market, facilitating the raising of capital for enterprises: The stock exchange enables companies to sell new shares or bonds at better prices, which lowers the cost of capital for these companies and increases their operating profit.
WHY TRADE IN THE STOCK MARKET?
1. Unlike buying property and paying a monthly mortgage, you do not need a lot of money to start making money.
2. It requires very minimal time to trade, unlike building a conventional business
3. It’s ‘fast’ cash and allows for quick liquidation (You can convert it to cash easily, unlike selling a property or a business).
4. Learning how to profit from the stock market is easy.
But you need to have your basics clear. Unless you do….you will be wasting your time and losing money. You need to be crystal clear about each aspect of Investments, stock options, Stock Trading, Company, Shares, dividends & Types of Shares, Debentures, Securities, Mutual Funds, IPO, Futures & Options, and what the Share Market consists of. Exchanges, Indices, SEBI, Analysis of Stocks – How to check on what to buy?, Trading Terms (Limit Order, Stop Loss, Put, Call, Booking Profit & Loss, Short & Long), Trading Options – Brokerage Houses, etc.
ADVANTAGES OF LISTING SECURITIES
a) The company can raise capital relatively cheaply from the public. The standard practice for financial increases among firms is to raise capital through loan acquisitions from banks and other financial institutions, which results in an interest rate of about 16% to 23% in favour of the banks and other financial institutions.
b) On the contrary, the Stock Exchange performs the exact role of raising the capital of the firm without subjecting the entire firm to interest charges against it. Thus, the firm listing the securities with the DSE does so with the minimum risk of losing its capital.
c) The listed companies also experience improved product marketing.
d) Listed companies are generally considered to be good performers and, therefore, are perceived to have the potential to provide a good return to investors. Thus, listed companies experience other benefits.
e) Listing enables firms and individuals to realise the company’s value through the interplay of the demand and supply of the company shares at the DSE. Usually, assessing oneself can be a tricky and sometimes challenging task. The difficulties arise because self-assessment means valuing yourself using the same criterion set. Nevertheless, listed companies can quickly know their value through the interplay of the markets. This can be termed as facilitating open assessment as opposed to self-assessment. Since the market assigns value to the company, the evaluation is conducted openly and by professionals, businesspeople, firm representatives, and the general public.
f) Listing shares facilitates economic growth and improves people’s standard of living. The wealth enjoyed by a few people who established the business or firm would benefit all shareholders of the particular firm. This is a key to improving people’s income growth. Most people who used to deposit their finances with banks confessed that shares listed at the DSE have allowed them to gain between 100 and 2500 per cent in three years. The benefits supersede the gain resulting from the bank’s interest by far. Generally, in Tanzania, banks provide an interest rate of 2 to 3 per cent on deposits. The trend is similar worldwide.
g) Listing shares lowers the financing cost of the enterprises. This could be associated with raising capital without incurring any substantial fees, such as interest. Thus, the company’s burden would be reduced.
INVESTMENT
• Investment: The money you earn is partly spent, and the rest is saved for meeting future expenses. Instead of keeping the savings idle, you may want to use them to earn a return in the future.
• One needs to invest to
1. Earn a return on your idle resources
2. Generate a specified sum of money for a specific goal in life
3. Make a provision for an uncertain future
TYPES OF INVESTORS
i. Speculators
ii. Hedgers
iii. Arbitrageurs
WHEN TO START INVESTING
•The sooner one starts investing, the better. By investing early, you allow your investments more time to grow, increase your income by accumulating the principal and the interest or dividend earned on it, year after year.
• The three golden rules for all investors are:
1. Invest early
2. Invest regularly
3. Invest for the long term and not the short term
WHERE TO INVEST
• One may invest in:
1. Physical assets, like real estate, gold/jewellery, commodities, etc.
2. Financial assets, such as fixed deposits with banks, small savings instruments with post offices, insurance/provident/pension fund, etc., or securities market-related instruments like shares, bonds, debentures, etc.
CONCLUSION
As discussed and narrated in this article, listing securities has many benefits. The sustenance of these benefits depends on many other factors, one of which can be summarised as the firm’s fidelity to all business transactions.
Rules and regulations that benefit investors are one thing, and fidelity in observing the rules and regulations set by the firms is another. Both the CMSA and the DSE monitor market trading activities to detect potential market malpractices, including false trading, market manipulation, insider dealing, short selling, and other similar activities.
The DSE is responsible for on-the-line/on-site surveillance, while the CMSA is responsible for online/off-site surveillance. The DSE can suspend any time offers and bids deemed suspicious (DSE, Ibid).
Observing the rules and regulations as disclosed by CMSA and the DSE could reduce the need for monitoring and/or supervision efforts. The emphasis on fidelity assumes that market performance implies both an intuitive sense of crowd psychology and a fundamental understanding of the context in which the game is played.
Trading is more than arithmetic concerns in economics, accountancy, and market models. There is an art to it as well.
REFERENCES
•DSE (2007). DSE Annual Report. Dar es Salaam Stock Exchange, Dar es Salaam
• DSE (2008). DSE Handbook. Dar es Salaam Stock Exchange, Dar es Salaam
•Norman, A (2010).The Role of the Dar es Salaam Stock Exchange in safeguarding Securities investors in Tanzania International Business Management. 4.222 – 228.
