1. What is a financial market?

A financial market is broad by defined as consisting of all institutions and procedures for
bringing buyers and sellers of financial instruments together.

They are a mechanism that allocates scarce financial resources between users of the resources
(borrowers) and the suppliers of these resources (lenders).

2. Types of financial markets.

These are two major types of financial markets that a firm can raise funds from.

(a) Securities market

A security is a contract that signifies acclaim of ownership e.g a share certificate of a company
bond or treasury bill. Therefore, the movement where trading takes place is called security
market.

Securities can further be categorized according to how long the lenders are willing to make their
savings available to borrowers.

i. Money market; here, lenders are only willing to make their savings available to
borrowers for a period not more than one year. Securities under here are treasury bills,
commercial paper, and certificate of deposit.
ii. Capital markets; channel savings from lenders to borrowers for longer periods in excess
of one year. Financial instruments under this include bonds, common shares.
iii. Primary market; is a segment of either money or capital market where securities are
bought wholesale by underwriters or investment brockers and sold on a tail basis to
individuals and institutions.
iv. Secondary market; is a segment of money and capital markets where lenders can convert
their investment into a security back to cash by selling it to another willing lender. Such a
sale can take place at stock exchange.

B. Non-securities market

This second type of financial market is characterized by channeling of savings to borrowers

without the trading in security from one lender to another.

Non-securities markets make use of non-negotiable contracts such as fixed deposit and saving
accounts. They are regulated by the central bank. They further have two categories.

i. Banking institutions; are characterized by the banking of deposits, making loans and
exchange of cheques in a clearing house.
ii. Non-banking institutions; these are normally direct savings through periodic payments
such as insurance premium, pension fund contributions etc.
2. The Uganda securities exchange (USE)

What is Uganda’s security exchange?

USE is a public limited company where large and small investors buy and sell securities (shares,
and bonds) through stock brokers.

It was incorporated on May 5 1997 and its members are financial firms of institutions.

What are the securities traded

Trading securities are investments in debt or equity that management plans to actively trade for
profit in the current period.

There are majorly two types of securities traded in the stock exchange and these are equity
securities and Debt securities however, other authors give the 3rd type of derivatives.

i. Equity securities; this refer to stocks of a share of ownership in a company which is

possessed by a shareholder. They do earn dividends to shareholders. Examples of equity
securities are common stock, commercial paper etc.
ii. Debt securities; these involve borrowed money and the selling of a security. They are
issued by an individual, company or government with a promise of payment plus interest
Examples
Bonds
Bank notes
Derivatives
Are slightly different type of security because their value is based on an underlying asset that is
then purchased and repaid with the price interest and maturity dates all specified at the time or
the initial transaction.
Examples are forwards
Future, options and swaps
Companies that are listed (locally listed and cross listed)
Companies participate in security trading at stock exchange

(a)Local listed companies are those companies whose shares are quoted on stock exchange.

Examples
Umeme
British American Tobacco (BAT)
Bank of Baroda
Dfcu
New vision printing and publishing co ltd.
National insurance corporation.
Alpha quality chemical industries ltd.
(b) Cross listed companies.
East African breweries ltd
Kenya airways
Equity bank ltd
Kenya commercial bank
Nation media group
Centum listed in 2011
Uchumi
4. The listing requirements
These are certain requirements that a company must meet in order to qualify for listing on the
exchange and they entirely depend on the following:
Minimum stated capital
Minimum public float
Nature of payment of shares
Period of existence
Profitability record
For the case of USE, the following are requirements a company must have to qualify to be listed
in the exchange stock.
 A minimum stated capital of shs 500m for tier 1.
 A minimum of shs 250m for 2nd tier.
 Field audited accounts for at least 5 years for the first tier and 3 years for the 2nd tier.
 A good record of profitability or evidence of a strong potential to be profitable.
 There must have been continuity in the management of a company.
 Sound character and integrity of the directors.
5. Advantages and disadvantages of listing
Advantages
 Additional financing is made easier through subsequent issuing of shares.
 The exchange creates a market place where the securities of all listed companies can be
bought and sold. This in turn adds value to the securities since the purchase is assured or
ready market for the shares.
 There is improved liquidity for shares through exposure to a large market base.
 The governance or and by managers improve because of the high standards that must be met
and maintained by listed companies.

Disadvantages of listing
 Listing might enable speculators to drive upon up or drive down prices at their will. The
violent fluctuations in share prices affect genuine investors.
 In case of excessive speculation, share prices might not reflect its fundamentals. The stock
markets may fail to be the true economic barometer of an economy’s performance.
 In case of bear markets, share prices might be hammered down and the standing of a
company might be lowered in the eyes of the investors.
 Listing of securities may induce the management and the top level employees to indulge in
insider trading, this is due to getting access to important information.
 Listing requires disclosing important sensitive information to stock exchanges such as plans
for expansion.
 Outsiders might acquire substantial shares in the company threaten to take over the company.
6. Challenges facing the USE
 It faced with a challenge of ensuring that a liquid secondary market is developed.
 There is also a challenge of attracting listing of securities.
 Lack of marketability and information.
 Unawareness of local investors abroad the listing requirements on USE.
 Insider dealing in public affairs.
 Low volume of trade activity.
 Structural buttleneeks.

Solutions
 Massive advertising in order to make public know about the stock exchange.
 Ensuring close supervision to reduce the insider trading in public affairs.
 Commercialization of firms should also be put in mind to reduce the substantial nature of the
firms.
 Increment in production should be advocated in order to increase the volumes of trade
activity.

Capital market authority (CMA)

In 1996, the capital market authority (CMA) statute was passed. This was a stage formed to the
development of a stock market in the country.
CMA is charged for the following roles:
It regulates and promotes the development of the securities industry in Uganda.
It plays a critical role in the economy by facilitating mobilization of capital resources to finance
long term productive investments.
It approves prospectuses and other offering documents under which securities are offered.
It develops all aspects of the capital markets with particular emphasis on the removal of
important investments in Pd time enterprise.
It creates, maintains or regulates through implementation of a system in which the market
securities can be issued and traded.
It cooperates with providers information to about the stock exchanges, conducts investigations or
inquiry for better services.
It implements regional and informational standards and best practice in securities markets.
It operates the investor’s compensation fund established by section 81.