There are currently campaigns encouraging Rwandans to invest on the stock market as the country moves to strengthen savings and financial inclusion. As the government pushes for more people to invest and raise development finance on the securities market, which is a component of the financial market sector, where shares can be bought and sold, the majority of the population still doesn’t understand the benefits it presents them.

Securities market defined

The securities market encompasses equity markets, bond markets and derivatives markets, where prices can be determined and participants both professional and nonprofessionals can meet. Equities refer to the amount of ownership you buy into a company and can be purchased in the form of stock and dividends. Debt securities or bond markets refer to a type of loan in which an investor lends an institution money which it will repay with interest at a given time. Bonds can be issued by corporate institutions, government agencies and public authorities with the initial lending amount agreed to be repaid at a later date. Bonds are a reliable securities investment because they generate a fixed form of income through interest. Derivative contract securities derive their value from direct securities in the form of futures, swaps, options and index options.

The two markets

There are two types of markets to consider when investing in securities: primary and secondary. In the primary market, the money for securities is received from investors through an initial public offering (IPO), where interested investors buy shares in a company and become part owners. On the secondary market, the securities are assets held by investors who then sell the shares to other investors wherever need arise. They can sell wholly or part of their stake in any given listed firm. Therefore, secondary market must exist for the primary market to thrive because holders of securities are able to sell them for cash on the secondary market to other investors. For this reason, investing in securities comes with organised and licensed exchanges to maintain and run both primary and secondary markets smoothly.

Business on the secondary market is conducted throug licensed market intermediaries called stock brokers. A broker’s primary role is to serve as a vehicle of buying and selling securities for others (stock market investors).

Stock brokers also advise clients about stocks they should buy to add to his financial portfolio, and always looks for the lucrative counters. To carry out this task well, the stock broker research on listed companies to be able to give a beneficial advice to clients.

Securities market like any market has advantages. Investing in stock is often risky, which draws attention to the huge gains and losses of some investors. If you manage the risks, you can take advantage of the stock market to secure your financial position and earn money.

Why invest in shares

Investing on the securities market has the following advantages:

Higher rate of return

The securities market is not trading market, but a market for long-time investment. This means that a patient investor who holds stocks as a long-term investment earns a higher rate of return. As the company grows and becomes more profitable, the value of the shares increases.

Capital gains and dividends

Investors in stocks can earn money two ways: capital gains and dividends. Companies pay shareholders a cash dividend. The big payment for stock investors is the capital gain, which is the difference between the value of the stock when it is sold, and the value when it was bought.

Ownership

Buying shares of listed firms gives you an ownership stake in the company. This means that investing in the stock market also brings benefits that come with being one of the business owners. Owning shares in the company you work for expresses loyalty, and ties your personal finances to the success of the business as a whole.

Diversification

For people that prefer to put money into different types of investment projects, the stock market provides them diversified products, which presents high opportunities of acquiring more profits, thanks to the diversified investment markets on the market.

Investment is not like gambling, whereby the participants understand that they could gain or lose. Every investment has a return. Therefore, for those that need to earn hustle-free cash, investing on the stock market is the best option, especially for those that target long-term investment vehicles. So, the market presents every Rwandan a huge opportunity to save and invest for a rainy day as well as for any planned future projects.

For businesses and institutions, the exchange provides a platform to raise cheap development finance to recapitalise and expand your enterprise or start-up another venture altogether. The exchange is regulated by the Capital Market Authority (CMA), while the Rwanda Stock Exchange (RSE) is the trading platform for securities.

The writer is the CMA legal and corporate affairs manager

nchristine@cma.rw