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| Thursday, 15 May 2008 |
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Home  Dar Guide Investing in Dar Series Investing 101 |
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In last month’s article ‘The Opening Bell’ we looked at the Dar es
Salaam Stock Exchange (DSE) in a very general way. Today, and in
several following issues, we will look at the DSE in more detail. While
future articles will talk about how we can evaluate the worthiness of a
specific stock, today we’ll stay at the 30,000 foot view, looking at
why people invest in the stock market instead of something else and
talking about the mechanics of making your first trade.
So, why invest in the stock market? To answer that, we need to explain
a bit more about what the market really is. The stock market is the
place where business owners go to raise capital for improvements (like
new machinery or maybe additional advertising – anything they need to
make their business grow) and they offer a bit of their company,
guaranteed by a ‘stock certificate’, to anyone who is willing to fund
that growth.
“Why don’t they just go to a bank?” you might ask. They could go to the
bank but – like you – they are charged a hefty interest rate and they
need to put up collateral to ensure that they repay their loan. So
rather than go to the bank, these business owners go to the public and
say, “I’ll make you a deal: you give me some money to grow my business
and I’ll pay you back with a return proportionate to my growth.” That
is only fair, of course, since you take all the risk that your funding
will produce real growth. (If it doesn’t and the company’s revenues
shrink, the promise of ‘a return proportionate to growth’ will mean
that you get less than what you paid – possibly much less - though the
stringent requirements for being listed on the DSE are designed to
reduce that risk).
So now we know why the business owners are offering
you their stock, but why is that of interest to you? If you are like
most of us, you probably have the goal of someday owning your own home,
(and if you already do – congratulations! – but read on anyway, the
logic is just as true for you). Saving to buy a home generally takes
years because the property itself will cost at least 300,000 TShs and
sometimes two or three times that, to say nothing of the cost of
materials and labor to build the house. So, even saving 50,000 TShs a
year, that goal is still at least six years away. The question then
becomes what should you do with the money while you are building up
your ‘nest egg’ for the house?
With inflation at about 5%, after six
years you’d be losing 30% of the value of the first shillings you put
away if you hid them in a jar beside your bed, as detailed in the chart
below:
| Year | Stock at 7% | Jar Beside the Bed
| Difference | | 1 | 51,000 | 49,000 | 2,000 | | 2 | 103,020 | 97,020 | 6,000 | | 3 | 156,080 | 144,080 | 12,001 | | 4 | 210,202 | 190,198 | 20,004 | | 5 | 265,406 | 235,394 | 30,012 | | 6 | 321,714 | 279,686 | 42,028 |
*note: All numbers reflect savings of TShs 50,000 per year with annaul loss of buying power of 5% (inflation rate) per year
In the example above, the person who invests in stocks buys the
property a year earlier than the person with the jar beside the bed.
Once again, this is only an example and the return may not 7% (though
that is the average return at the DSE in recent years. Note the word
‘average’ – ‘on average’ some stocks will better than this and others
not as well. We’ll look at ways to determine the winners from the loser
when we take that topic up next month).
So, now are you ready to go out and buy some stock? Probably not…there
is a lot more that you should know. For this month, we’ll just add
three things; dividends, share price and brokers.
Let’s start with price per share: The share price is the price listed
in the newspaper and it is what a share of the company’s stock would
have cost you had you bought it yesterday. That price, multiplied by
the total number of shares that are ‘on the market’, gives you the
company’s ‘market value’. In general, you want to see a low market
value when you buy shares and a high market value when you sell,
reflecting solid growth during the period you held your shares. The
difference between the price at which you buy and the price at which
you sell reflects your profit (or loss) per share.
But share price also
reflects the way the company chooses to repay your investment, because
the company has a couple of options here. The most direct way the
company can repay you is by paying cash dividends. Right now in
Tanzania there is pressure on companies to pay dividends because
shareholders seem to prefer companies that do – and the dividends are
generally around 5% per year. But that 5% comes
right off the company’s bottom line so, when the dividends are paid,
you’ll notice about a 5% drop in the price per share. Dividends let you
see a small return each year rather than making you wait for a
potentially bigger one at the time you decide to finally sell.
The
other option the company has is to forego the dividend payments and
just keep plowing its earning back into the company in the hopes of
further accelerating growth. This approach should result in even bigger
dividends somewhere down the line as well as a higher price per share.
Like most things about investing in the market, this is essentially a
trade-off in which you agree to leave all your money in the company in
hopes of increasing your down-stream price per share. As I say, it is
not a particularly popular approach in Tanzania today, but it certainly
is elsewhere.
So let’s see how this works: say you buy 200 shares of stock at 500
TShs each (100,000 TShs total investment), and the company announces a
5% dividend per share. They will send you a dividend check for about
5,000 TShs every year they pay that dividend. If things go well, they
will do this even as the company’s overall ‘market value’ grows so that
the shares you paid 500 TShs for may be worth 550 TShs after several
years. In other words, in this hypothetical example you get 5% of your
investment in cash payment every year plus 10% when you finally decide
to sell (10% being the difference between the price at which you bought
it – 500 – and the price at which you sell – 550 .)
Clear as mud? Well
don’t worry if it isn’t clear because that’s what stockbrokers are for.
Stockbrokers are specially trained to explain all this murky stuff to
you, to help you to decide what to buy and when to sell and to execute
the trade – that’s why you pay them a commission of 2% on every order
that they trade. The only way into the market is through a licensed
dealer or broker as they are the only people authorized to be on the
trading floor, and here’s the current list:
Licensed Dealer/Broker Company
Phone
Mr. LL Tario Urassa Tanzania Securities Ltd. 211-2807
Mr. Jerry Solomon Solomon Securities Ltd. 211-2874
Mr. Gabinus Maganga
&
Mr. Arphaxad Massambu Rasilimali Ltd.
211-1708
Mr. Rweyunga L Malauri
&
Mr. Gration Kamugisha Orbit Securities Co. Ltd. 211-1758
Mr. Nazir Karamagi
&
Prof. C Inyangete
Vertex International Ltd.
211-0392
Mr. George Fumbuka &
Mr. Charles Bupamba Core
Securities Ltd.
212-3103
Once you select a
broker, he or she will be more than happy to meet with you and explain
which of the listed companies are best suited to your investment
needs…But we’ll talk more about evaluating companies next month. Until
then, remember…Buy Low!
Michael Gehron
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