Stock market is the place where shares are issued and traded at an agreed price among investors in the organized exchanges and over-the-counter markets. It is also an equity market which contributes to the market economy by providing companies with access to capital and investors are granted with ownership of the company and dividend based on the company's overall performance. The stock market mainly consists of the primary and secondary market. The primary market is also known as initial public offering where the company issues new shares to raise funds from investors. The subsequent trading among investors will take place in the secondary market.
Why stock market exists in financial system?
Stock market exists in financial system as it provides company an alternative to raise funds by issuing shares in the public market for expansion or acquisition of other businesses. It is crucial for company to finance its businesses in long run as issuing bonds and borrowing bank loans will incur a cost disadvantage to the company due to the high interest rate repayment over time.
From the perspective of investors, stock market is a high liquidity market where they can buy and sell shares quickly and easily at any instance. As a result, investors will have lower default risk as compared to bond market and money market. Besides, by channelling their funds into the company, investors gain the benefit of company ownership where they have voting rights in appointing Board of Director to manage the company. Besides, investors have the rights to claim on the assets of the company when the company is insolvent. However, there is still a risk that shareholders will not claim anything from the company as they are the residual claimant. Creditors, bondholders and preference shareholder are given priority on the claim of asset before ordinary shareholders during insolvency of a company.
From the economic point of view, shares price influences the household's wealth and consumption. Hence, it is important for central bank to control the stock market behaviour to sustain financial stability in smooth operation of financial system. The central bank acts as the clearinghouse for each transaction where it collects and delivers shares to guarantee payments to the seller. As the implication, there is a lower default risk on transaction, attracting more companies to issue shares in the stock markets to raise funds for their businesses which then facilitates the economic growth, promotes production and employment.
Question 3 What are the major developments of stock market in Malaysia?
The major weakness in Malaysian stock market that needs to be dealt with is its poor institutional structures. The judiciary power to enforce contracts is not stringent and shareholders' rights are not exercised, due to concentrated ownerships. As a result, these poor institutional structures would cause the stock market to be less developed and would eventually retard the domestic economic growth (Castaneda 2006).
The capital market has to be well positioned to support national economic growth and to face regional competition and globalisation. A comprehensive plan is therefore needed. Malaysia achieves this through the Capital Market Masterplan (CMP) which determines the direction of the Malaysian capital market over the next 10 years.
Implementation of CMP
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Strengthen domestic
capacity, and develop
strategic and nascent
sectors
Further
strengthen key
sectors and
gradually
liberalise market
access
Further expansion and strengthening of
market processes and infrastructure towards
becoming a fully-developed capital market,
and enhancing international positioning in
areas of comparative and competitive
advantage
Phase 1
Phase 2
Phase 3
Objective 1: To be the preferred fund-raising center for Malaysian companies
Development: New fund raising framework and board structure
In 2009, The Main and Second Boards were merged to form the Main Market, while the MESDAQ Market will also be transformed into ACE Market (Access, Certainty and Efficiency).
MESDAQ
ACE
Confined to high growth and technology based companies
Allows eligible corporations from all economic sectors
Minimum requirements on operating history, size and track record
No minimum requirement on operating history, size and track record
Disallowed offer for sale
Allows offer for sale for applicants with operating profit , subject to moratorium
Minimum issue price of 50 cents
No minimum issue price
Other listings - structured warrants allowed
Other listings - structured warrants, SPACs or incubators are not allowed
The new board structure clearly defines the platform to raise capital, which will enhance efficiency, access and certainty in the fund raising process as well as protecting investor. Streamlining rules and processes result in greater certainty, shorter time-to-market and lower regulatory costs. This makes the equity fund raising process efficient and cost effective.
However, since sponsors will take over the Securities Commission's function as gatekeeper to evaluate the suitability of applicants as well as to oversee the due diligence process, there might be conflict of interest acting as both advisors and regulators to the ACE Market companies.
Objective 2: To promote an effective investment management industry and a more conducive environment for investors
Development: Multi-currency securities framework
In 2009, multi-currency securities framework was formed to support listing, trading, clearing and settlement of securities in non-Ringgit.
Benefits:
It supports the growing interest amongst domestic and foreign issuers to list Asian regional Exchange Traded Funds (ETFs) in a common global currency such as US Dollar or Euro. Investment in multi-currency securities allows for better diversification and hedging. Exporters could leverage on this by equitising their foreign currency holdings into non-Ringgit securities.
Objective 3: To enhance the competitive position and efficiency of market institutions
Development: Launch of FTSE Bursa Malaysia Palm Oil Plantation Index Series in 2009
Bursa Malaysia and FTSE launched the FTSE Bursa Malaysia Palm Oil Plantation Series to further strengthen Bursa Malaysia's position as a key centre for commodity trading. it strengthens our crude palm oil futures market as it bridges between the cash and derivatives markets for hedging and arbitraging opportunities. It gives information on the performance of listed companies which derive substantial revenues (at least 25% of their revenue) from palm oil related activities. According to Paul Hoff, Managing Director, Asia Pacific for FTSE Group, the growing interest in agricultural/commodity investment is the main reason of this cooperation.
Development: Listing of foreign IPOs
The first foreign IPOs was seen in November 2009, and Malaysia has the largest listing in South East Asia for the year when Maxis Berhad floated its shares on Bursa Malaysia and raised some RM11 billion.
Objective 4: To develop a strong and competitive environment for intermediation services
Development: Launch of Direct Market Access (DMA) Equities for the securities market
This 2009 initiative is a 'zero-touch electronic trading' solution which allows market participants to install their own servers in the Exchange's data centre where faster order management can be processed and lower latency when trading. Market participants will be able to enjoy greater connectivity and more control of their orders. It will significantly reduce the time for orders to be sent and matched from the previous average of 3 seconds per transaction to a fraction of a second. It provides greater access to international investors as Bursa Malaysia allows 'Sponsored Access' for institutional investors. This will attract new segment of trading participation.
Development:Liberalisation of Foreign Exchange Administration Policy
Prior to liberalisation, there is a 30% equity requirement for acquistion of interest, mergers and takeovers by local and foreign under the FIC guidelines. In 2009, the major liberalisation is the removal of 30% Bumiputera equity requirement for 27 services' subsectors. This is announced by Datuk Seri Najib Tun Razak in line with the New Economic Model to reinforce the competitiveness of Malaysian stock market.
Development: Demutualisation
In 2004, Kuala Lumpur Stock Exchange was renamed Bursa Malaysia Berhad, following the demutualization exercise, the purpose of which was to enhance competitive position and to respond to global trends in the exchange sector by making themselves more customer-driven and market-oriented.
Objective 5: To establish Malaysia as an international Islamic capital market centre
Development: Launch of Bursa Suq Al-Sila'
In 2009, Bursa Malaysia launched Bursa Suq Al-Sila', the world's first end-to-end Shari'ah compliant commodity trading platform to facilitate Islamic financing. This includes interbank placements, customer deposits and financing, and sukuk issues, amongst others. The commodity being offered at present is crude palm oil, and research and development initiatives are being undertaken to admit other commodities for trade. Bursa Suq Al-Sila' was awarded the 'Most Outstanding Islamic Finance Product' by KLIFF Islamic Finance Awards in 2009.
Question 4
The comparison between the Malaysian stock market and a foreign stock market in terms of structure, types of stock and the trend of stock indexes.
Types of stock
Currently, there is total number of 962 and 774 companies listed in Bursa Malaysia and Singapore Exchange respectively. All of these listed companies can be categorized into different sectors such as industrial product sector, finance sector, mining sector, construction sector, technology sector and others. Generally, both of the stock markets consist of similar sector stocks, however, different in percentage of stocks in each sector.
The highest percentage of sector stocks listed in Bursa Malaysia is sector industrial products stocks, followed by sector trading& services stocks, and sector loan stock. While some sector stocks with lower percentage listed in Bursa Malaysia are mining sector, hotel sector, ETF and closed end fund. On the other hands, the highest percentage of sector stocks listed in Singapore Exchange is sector transportation stocks, followed by sector manufacturing stocks, and sector finance stocks. While Singapore Exchange has very low percentage of sector stocks for sector electricity/gas/water stocks, sector mining stocks, sector construction stocks.
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Established sectors in Singapore Stock Exchange market
Established sectors in Bursa Malaysia Stock Exchange Market
Trend of stock indexes
The FTSE Bursa Malaysia KLCI is the headline index of the FTSE Bursa Malaysia Index Series representing the top 30 companies by market capitalization on Bursa Malaysia Main Market. The FTSE Bursa Malaysia Index Series is reviewed semi-annually in June and December to ensure the Indices remain representative of the underlying Malaysia market. The FTSE Bursa Malaysia KLCI Reserve List contains the next 5 highest ranked companies by full market capitalization - Hong Leong Financial Group, IJM Corp, Gamuda, Parkson Holdings and Lafarge Malayan Cement.
The Straits Times Index is the main equity index of the stock market of the country and it is compiled by a newspaper of the same name. This index came into force in 1998 and it lists 55 of the top companies in the exchange. This index is a modified version of value weighted index. The market value of the companies listed in this index amounts to about 60% of the total market value of all trading in the SGX. The index is reviewed at least once a year. The Singapore stock index is all set to experience a major overhaul in December. The component stocks will be reduced to 30 as per recommendations.
The current index of KLCI is at 1437.78, while the current index for Straight Times Index (STI) is at 3022.28. Based on the stock chart, both of KLCI and STI generally have the same trends for the past few years. Both of KLCI and STI were facing an upward trend of stock index since mid 2003 until the global financial crisis in 2008. The global financial crisis was mainly caused by economic crisis in US. Economic crisis in US was inflicted when US borrowers fail to make payment for loans made previously. When too many of them couldn't afford to make their payments, it causes these lenders to suffer from liquidity issue and to sit on more foreclosures than they could sell. This incident caused investment firms like Lehman Brothers to suffer and the insurer, AIG who insured these bad mortgages was not excluded from the trouble.
The financial crisis in US severely affected most Asian countries, including Malaysia and Singapore. Exports and the industrial production index were the two indicators that show the impact of this financial crisis in Malaysia and Singapore. Exports fell tremendously due to huge drop in demand from US and Japan. Since most of the manufacturing sector is driven by the growth of exports, the industrial production index reflects the poor export conditions of the global environment and has been sinking since September 2008. This downward slopping of stock indexes for both countries began from mid 2008 until Jan of 2009. The lowest index of KLCI and STI during the financial crisis was 858 and 1513 respectively. The stock indexes for both KLCI and STI slowly recover since Jan of 2009 and the upward trend continued until today.
The interactive charts of stock indexes for KLCI and STI
