Our coverage of African stock markets have generated considerable interest among readers who wish to participate in the markets for the first time. However, many of them have written in to say that they do not quite understand how the markets work and how they can earn dividends by buying and selling shares. Our stock market correspondent, Andrew Album provides a easy-to-follow introduction to the African market and explains some of the terminology used in the bourses.
According to World Money magazine, Africa now has 16 active bourses (markets where traders meet to buy and sell shares) with a total capitalisation between them of over $260bn i.e. the monetary value of the stocks and shares offered in these markets. Three further exchanges are planned for Uganda, Tanzania and Madagascar, whilst there are also plans for a unified West African bourse.
They range in size from South Africa's huge $225bn exchange, to the market in Botswana, which has a value of under $400m and are spread across the continent, from Egypt, Morocco and Tunisia in the north, through Cote d'Ivoire and Nigeria, to Namibia, Botswana, Zimbabwe and South Africa in the south.
Whilst many have only been established in the last decade, a few have longer histories, the oldest being Egypt's Cairo exchange, which was originally set up in 1881. As these markets have grown, so have the returns. Gains of 107.5%, in dollar terms, were attained by Kenya in 1994, whilst the Ghanaian market grew by 65.39% in the same year.
The reason for this recent development is two fold. Firstly, with economic development has come increasing prosperity for some Africans. This has created a domestic base of savers, looking to protect their money against the effects of inflation and to achieve a capital return.
For investors with surplus capital, any where in the world, there have always been a choice of areas in which to invest. The first is what is described as "real assets", such as gold, precious metals, commodities, land and property. The second is interest-bearing investments such as bonds (certificates issued by governments or companies in order to raise debt on which interest is paid until the redemption date, when the notes are repurchased for their face value) and bank deposits. The third is what is known as "asset-backed" investment, which is principally shares or equities.
The second reason for the development of stock markets across the region is also linked to economic development. For less advanced economies, most businesses in private ownership are usually small, family owned concerns. Most growth and investment is financed internally, or from loans made by banks or other lending institutions.
As businesses grow, they reach the stage where they are simply too large to remain under family ownership or where needs for capital to fund expansion cannot simply be provided by banks. For instance, projects may be of a longer term nature, where the company cannot meet interest payments out of immediate cash flow, or where the investment is considered too risky by lending institutions which are traditionally cautious by nature.
Such companies then have to look for new sources of capital. The easiest way to do this is to issue shares, thereby giving the lender the potential to benefit from the profits yielded by investment and expansion. Stock exchanges provide the means by which investors can find companies in which to invest and to give them the opportunity to sell their stake whenever desired.
With the development of African economies and the emergence of larger businesses, there has arisen a greater need for investor capital and, accordingly, the establishment of a number of bourses across the continent. An efficient stock market is a prerequisite for economic development in modern times, allowing companies to expand, invest and develop, as well as enabling shares to be traded and priced easily.
There are two principal ways in which investors can buy equities in companies. …