These are institutions that deal in the trade of long term financial products such as shares, bonds and debentures.
b). Explain the major players of capital markets
i. Brokers/ Dealers .These are licensed financial professional authorized to buy and sell shares on behalf of their clients. They receive a commission for the work well done.
ii. The Registrar.This is the person in charge of keeping records in respect of stocks and shares of a floated company.
NB. A floated company is one which goes public by issuing its shares to the general public.
iii. Investment advisor.. These are licensed persons who advise their clients about whether it is advisable to invest, purchase or sell securities.
i. shareholders. These are individuals or companies that subscribe capital in a business through buying shares.
ii. Uganda securities exchange. This is the market place in Uganda where securities are traded.
iii. Custodians. These perform the actual role of holding or safe keeping the assets or securities including cash on behalf of investors, buying shares.etc.
iv. Capital Markets Authority (CMA). This is a government established body, which ensures the regulation and development of the capital market industry.
Qn. What is the role of capital markets?
i. Raising funds. This is done through sale of shares which finance business activities.
ii. Provision of market to sell and buy shares. Capital markets always provide a platform where the interested persons buy and sell shares.
iii. Attraction of inflow of international capital. Investors always develop trust in capital markets before investing.
iv. Encouraging full disclosure and sharing to better accounting and management practices of companies.
v. Promoting sowing and investment in the country. This leads to better standards of living.
vi. Controlling money in circulation. This is done through buying and selling of securities by the central bank.
vii. Help in determining company performance. They help shareholders to determine the performance of their companies by looking at the price of their shares in the market.
viii. Promotion of better standards of living. This is due to increased incomes which come as a result of increased savings.
ix. Promotion of investment. This is due to increased savings which lead to better economic growth.
x.Creating employment opportunities to people who work with capital markets like brokers, registrars etc.
b). Explain the types of instruments / financial products used in capital markets.
i. Bond: This is an agreement between a borrower e.g company or government and a lender e.g the public acknowledging that that the borrower received money from the lender and will pay it back at certain time with interest.
ii. Share: This is unit of capital and whoever buys it becomes part of the owner of the company.
iii. Debenture: This is a unit of loan. The company pays a fixed rate of interest for this loan after a long period of time.
iv. Commercial paper:This is a short term unsecured promissory note issued by a company or bank. Commercial papers can be sold quickly at a lower cost than bank loans.
v. Treasury bills: These are short term government instruments issued regularly with a maturity period of less than one year.
c). Outline the problems facing capital markets
1. Low levels of investment in Uganda. This lowers demand for capital market services.
2. High illiteracy levels among Ugandans.
3. Political instabilities in the country. This discourages investment.
4. Unfavourable government policies like high taxes charged.
5. Under developed capital and money markets to transact the sale and buying of financial products.
6. Challenge of risks by players. E.g fluctuation in value of shares.
7. Limited sensitization and inadequate information about activities of capital markets.
8. Under developed financial institutions to lend funds for buying financial products.
9. Inflation. This affects the value of shares.
10. Limited supply of skilled personnel.
11. Dishonesty and lack of integrity among people who acc
.
Qn. Suggest the solutions to overcome the above challenges
- Creation of investment opportunities.
- Sensitizing the masses about capital markets and their role.
- Ensuring political stability.
- Creation of favourable government policies like tax reduction.
- Promotion of money and capital markets.
- Insuring risks to insurance companies like loss of profits.
- Establishment of financial institutions in the country like banks.
- Promotion of price stability. This reduces inflation.
- Training of personnel.
- Asking securities before giving loans to people.
Qn. What are the benefits of shareholders in capital markets.
1. Creation of income in form of dividends.
2. Promotes capital gain. This is due to increase in value of the shareholders share.
3. Enables the shareholders to access other loans. This is through using share certificate as a collateral security.
4. Participates in decision making of a company.
5. Creates on opportunity to share holder to transfer his shares to another person at a profit.
6. Participates in voting during AGM (Annual General Meeting)
7. Claim ownership in the company.
b). What are the challenges of being a shareholder.
· If the share prices fall, their value lessens and a shareholder is subjected to losses.
· Rule of majority determines major decisions. This unfairly treats individual shareholders.
· Some shares are not freely transferable most especially those ones bought in a private limited company.
· Fluctuation in the value of share capital.
· Limited direct control in business activities.
· Collapse or insolvency of the company, shares become worthless.
· If the company is liquidated, shareholders are to be paid last. This demoralize them.
· Decline in the company’s profits lowers the amount of dividends. This lowers shareholders income.
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