How to make money by investing in the stock market

If the thought of buying shares or investing in the stock market scares you, you are not alone. Individuals with very limited experience in investing in shares can be easily confused and even intimidated by all the technical jargon, terminology, commentary by financial experts, analysts, stockbrokers, and horror stories by other investors.

Regardless of what you know or do not know about investing in shares, and what you have heard from other people who have invested in shares in the past or what you have read on social media, the reality is that investing in shares is a personal choice. That choice depends on your financial situation, risk appetite, personal financial goals, and investment style.

Much of the world’s business activity as we know it today would be impossible without investment and trading in shares and bonds. Shares and bonds are financial instruments that are sold to raise money for starting a new company or for expanding an existing company. Shares and bonds are also called securities, and people who buy them are called investors.

A person who buys shares in a company becomes a shareholder in that company and one of the company’s owners. As an owner, the shareholder is eligible to share in the company’s profits by receiving a dividend. The amount of this dividend may change from year to year depending on the company’s performance. Well established companies try to pay shareholders as high a dividend as possible.

Owning shares in a company implies that you as the shareholder owns a slice of the company. That ownership is equal to the number of shares you hold as a proportion of the company’s total issued share capital.

For instance, an individual or entity that owns 1000 shares of a company with issued share capital of 10,000 shares would have a 10% shareholding of that company.

Owning shares in a company also gives you as a shareholder voting rights as well as a residual claim on the assets of the company. In general, you can make money with shares in two ways, through value appreciation of the company’s shares in form of capital gains and by sharing in the company’s profits in form of dividends.

Securities exchanges or stock markets are where individual and institutional investors come together to buy and sell shares in a public venue. In this case of Uganda this is done on the Securities Exchange (USE). Nowadays these exchanges exist as electronic marketplaces.

Share prices are set by supply and demand in the market as buyers and sellers place orders. Order flow and bid-ask spreads are often maintained by specialists or market makers also known as stockbrokers to ensure an orderly, efficient, and fair market. An efficiently functioning stock market is very critical to economic development as it gives companies the ability to quickly access capital from the public.

It is important to understand that after a company has been listed on the stock exchange through the Initial Public Offering (IPO), it does not buy or sell its shares on the USE, or issue new shares. Likewise, when you sell your shares, in a company listed on the USE, you do not sell them back to the company, but rather you sell them to some other investors.

The day-to-day operations of buying and selling shares on the USE is between the existing shareholders and other existing as well as potential new investors and shareholders.