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The capital market

patriot by patriot
January 25, 2021
in Business
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KEABETSWE LIANNA KOORAPETSE

DITHEBE CORNER

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#FINANCIALLYSAVVY

#FINANCIALPLANNING

The process of waiting can be daunting for some of us. The urge to not wait has led many of us to settle and commit to decisions that we have now come to regret. They say patience is key when it comes to solid growth. Together with consistency, success stories have created the winning formula with these components. It is good to read and invest in our personal development. However, no amount of reading can replace hard work and commitment. Therefore, we need to find a balance between fuelling our minds and applying our readings into our daily lives. As part of our financial planning, adequately identifying our long-term goals may take a few days and implementation of mechanisms to achieve these goals may take a few months. Because of the long-term nature of our goals (beyond 5 or 10 years), know that progress will be slow and we will need to exercise patience.   

Our financial planning topic for this week is THE CAPITAL MARKET. This market is also referred to as the bond market. The bond market includes activities surrounding treasury bills and bonds.

A bond is a [low-risk investment] that provides an investor with: fixed interest payments – during the life of the bond; and a fixed principal payment – at the maturity or [redemption] date of the bond.

Bonds are [debt instruments] issued by: governments – such as the Government of Botswana; public corporations and utilities – such as the Botswana Power Corporation (BPC) and Water Utilities Corporation; and listed companies.

Our government, public corporations and public utilities invite us to loan them our money to finance their long-term expenditure and expansion projects. Listed companies in the private sector double efforts to attain funding for long-term investments by inviting us to loan them our money along with the shares we have purchased. Also, as the value of bonds does not fluctuate as frequently as equities, bonds can be used to balance out short-term (less than one year) and medium-term (three to five years) investments. Thus, the duration of this type of investment ranges from six months to over twenty years.

Ownership of bonds

The same concept of direct and indirect ownership of shares and equities also applies to bonds. However, note that the direct ownership of bonds usually does not allow change of ownership from one investor to another. Meaning that once you purchase a bond and receive an ownership certificate or title deed, you will not be able to sell it off to another investor before the bond matures. The direct ownership of any investment or resource is a serious commitment.

Where to buy bonds

The Botswana Stock Exchange (BSE) is also a marketplace for the purchase of bonds. The purchase of these bonds can be made through registered stockbrokers.

Once again, registered stockbrokers are: Imara Capital Securities, Motswedi Securities, Stockbrokers Botswana and African Alliance Botswana Securities

Other players in the capital market

Other than the BSE, there are large players in the capital market that act as deposit takers and use debt instruments as a source of funding. They include: banks – that offer mortgage finance for housing, as well as business loans for capital investments and working capital for companies; and insurance companies – that can use the collected insurance premiums to fund the public sector.

Risk profile

Bonds were previously considered risk-free however, no investment is completely risk free nor 100% guaranteed. This is because investments do not operate in a vacuum thus, there will always be some sort of exposure to risk. Since, most of us associate bonds with being issued by governments, the stability of the government determines the security and level of guarantee we will have for our bond investment returns.

The stability of governments can change in an instant and is usually affected by political conflicts. Because many of us may not be aware that political stability can affect our finances, the risk exposure to government bonds is usually underestimated. Therefore, it is important to be mindful of our responsibility and accountability to make sure that we register to vote and vote at this year’s national elections. Because these rights have raised the stakes on the impact we have on how future investments such as bonds may turn out.

Therefore, bonds in actuality have a very low degree of risk exposure compared to other asset classes. Be mindful that the lower the risk exposure, the lower the rate of return on our investment. Low risk, low rate of return and a long investment period (investment horizon) all produce slow and minimal growth.

The longer the investment period, the less the impact of short-term activities and the more the impact of inflation on investment returns. Together with the stability of governments, the examples of Greece and Zimbabwe illustrate how the stability of a government and inflation can change and affect investors that own bonds.

Once again, as we do not know what the future holds, having a diversity of resources and a diversified portfolio helps spread our investment risk and balance out our rates of return. The different risk profiles (conservative, moderate and aggressive investors) have different percentage allocations for the different asset classes. And the conservative investor risk profile will have a higher percentage of bonds and cash in their investment portfolio.

The reason for investing lies in the goals we have set for ourselves. Investments act as vehicle that drives us to the destination where we will have achieved our goals. Planning for the long-term using bonds is a good investment to undertake as early as possible due to slow and minimal growth. Supplementing our bond returns to a secondary investment mechanism can give us access to the advantages of compound interest. The longer the investment horizon, the more patience we will need to exercise. So, being well informed not only equips you to be able to make better investment decisions, but also assists you with your preparation to follow through with the investment decisions you have made. Remember, every investment decision we make is a step closer or a step further away from achieving our goals.  

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