The Capital Markets at a glance

The Malaysian capital market plays a significant role in financing the nation's economic growth and keeps the wheel of commerce rolling. Billions of Ringgit change hands everyday. What makes our capital markets tick? Read on to find out.

The capital market is where individuals, institutions or corporations with surplus funds invest in. It is also an arena where those constituents requiring funds raise capital, in the form of equity, debt or both. These securities are commonly issued in the form of shares or bonds. An efficient capital market is where this exchange of funds is regulated and all parties involved can transact fairly.

Equity Market

The capital market has 2 main segments, namely equity and fixed income. Equity comprises listed shares which are traded on the Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange). There are currently over 1000 companies listed (referred to as 'counters'). These are shares issued by corporations which have been screened by the authorities, namely the Securities Commission. In theory, these companies are those with quality management, profitable operations and promising growth that offer potential gains for investors. Investors buy shares in these companies, anticipating returns in the form of increases in share price or possible dividends. Every year, there are many new counters approved for listing. These new listings are referred to as IPO's (Initial Public Offering).

Investment banks play a critical role in this share issuance process. They advise the issuer, package the deal and sometimes underwrite the issue. Approved stockbrokers also perform similar roles.

Companies listed on the Bursa Malaysia come under three categories. The Main Board is made up of companies with large capital and very sizeable operations. Companies listed on the Second Board have moderate share capital, and operate on a relatively smaller scale. The MESDAQ is generally made up of small, high-growth companies, usually with a slant towards IT and biotechnology businesses. In 2004, the number of applications approved for listing on the MESDAQ jumped significantly from 22 previously to 38. This is in line with the direction of Malaysia embracing the K-economy (knowledge-based economy).

Bond Market

If the share market offers the investing public the chance to own shares in listed companies, the bond market provides the opportunity for them to 'lend' monies by buying bonds.

Companies issue bonds with the promise to pay regular interest (called coupons) and the original principal upon maturity of the bonds. The tenure and coupon rate of these bonds vary from one issue to another, depending on the requirement of the companies needing these funds. For example, trading and services companies usually issue one or two year notes (a type of bond). On the other hand, infrastructure companies may issue a 15-year bond as their operations have longer gestation periods.

Similar to share issuance for public listing, bond issuance is also subject to approval by the relevant authorities. In addition to that, bonds offered in the capital market are also subject to a rating process performed by rating agencies like Rating Agency Malaysia Berhad (RAM). The rating agencies will grade bonds based on the perceived ability of the issuers to honor their payment obligations. They take into account the issuer's credit history, business model, management quality and future prospects. The best-graded bonds (AAA) will command good prices for the issuer in terms of the lowest interest rate. Government-issued bonds, being of the highest grade, command even better prices.

Contrary to shares, the investing public can only buy bonds in much bigger denominations, or parcels. Currently, the smallest parcel is RM 5 million maturity value.

Investors and Methods of Investing

Investors (individuals or corporations) with excess funds can choose many modes of investing. A relatively safe or low-risk way of investing is through deposits in financial institutions. Investors are assured of receiving a fixed interest in addition to their original deposit.

An indirect way of saving is through contributions in pension funds, like the Employees' Provident Fund (EPF). Contributions by employees and employers are mandatory, and it is a form of long-term savings, which can be withdrawn in the future, or for stipulated circumstances (like buying a home).

Besides that, insurance companies also mobilise long-term savings by offering financial security in exchange for a premium contribution. Individuals 'save' via various life policies, which now also incorporate new annuity and investment-linked products. This is a boon for the insurance industry well as consumers as it offers investors a wider range of 'products' to invest in.

The monies mobilised through savings via the methods mentioned above will ultimately find its way to the capital market. They are either directly invested through the purchase of shares and bonds or indirectly invested via bank deposits which are ultimately lent to businesses.

a) Fund or Asset Managers

Some investors, especially high net-worth ones, deposit monies with asset or fund managers. Asset managers manage funds of corporations, individuals or from a collective pool (like unit trusts or pension funds). This provides a platform for ordinary investors to tap the professional expertise of fund managers when investing their funds, for a specified management fee.

Fund managers make investment decisions based on certain guidelines and principles. They have the means and the resources to source for pertinent information about the market, economic and industry outlook which may significantly impact their investment decisions. This type of information is usually not available to investors, especially individual ones, as one would need to subscribe to real-time news sources, like Bloomberg and Reuters.

Intermediaries

How do investors and the security issuers find middle ground to meet each other's needs? Enter the marketplace intermediaries.

Intermediaries facilitate capital market transactions by performing two roles. Firstly, they provide expertise in packaging transactions in a manner suitable for all kinds of investors. Secondly, they serve as a reliable counterparty whereby the seller can deal with an unknown buyer with complete confidence of delivery of the settlement.

For example, the seller of a particular share can place the share for sale on the stock exchange. Once the trade is completed, the settlement of payment will be arranged for by the stockbroker which is an intermediary. In reality, the seller can be certain that the settlement will be made even if the buyer is unknown to him (which is normally the case). In a way, there is an implied guarantee that when a transaction is made, the intermediary guarantees settlement on both sides. It acts as a buyer to the seller, and as a seller to the buyer. Without their presence, the smooth operation of the capital market is impossible.

A well-organised capital market is monumental in the development and growth of a nation's economy. This is because it fast-tracks the fund-raising and investment process to enable efficient delivery of information and funds. Access to capital is also made easier as businesses can choose to raise funds directly from the investing public, resulting in financial benefits on both sides. Furthermore, it encourages the injection of foreign funds into our country, thus promoting the competitiveness of the Malaysian capital market and encouraging economic growth.

© GTI Specialist Publishers. Reproduced with permission.