09.04
M AGUS SUDRAJAT
Financial instruments traded in the Capital Market are long term securities (a period of more than 1 year). They consists of stocks, bonds, warrants, rights, mutual funds, and other derivative instruments (options, futures, etc.).
Capital Market Law Number 8 Year 1995 defines Capital Market as “the activity of trading and offering securities to the public, the activity of a public company with respect to securities it has issued, and the activities of securities-related institutions and professions.”
Capital Market plays an important role in the economy of a country because it serves two functions all at once. First, Capital Market serves as an alternative for a company's capital resources. The capital gained from the public offering can be used for the company's business development, expansion, and so on. Second, Capital Market serves as an alternative for public investment. People could invest their money according to their preferred returns and risk characteristics of each instrument.
Equity
Stock (Share) is one of the most popular securities available. If a company wants to raise capital, one of its options is to issue stock. Stock also offers interesting return rate for its investors. That is why most investors choose stock for their investment.
Stock can be defined as a sign of ownership of an individual or institution in a corporation. The person or institution who owns the stock can claim on the company's earnings, assets, and rights to attend its General Meeting of Shareholders.
Basically, there are two benefits for stock investors:
1. Dividend
Dividend is the earning given to the company's shareholders from the company's income. The amount of dividend paid to the shareholders is decided in the Company's Annual General Meeting. To receive dividend, a buyer of a stock must own the stock for a relatively long period until it passes its ex-dividend date, where he/she will be acknowledged as the shareholder who has the right to obtain the dividend.
2. Capital Gain
Capital gain is the positive different between the purchase price and the selling price of a stock. Capital gain is formed through the stock trading activities in the secondary market. For example, an investor bought ABC’s stock for Rp 3,000 per share and then sold it for Rp 3,500 per share. It means the investor receive capital gain of Rp 500 for every sold share.
However, like other instruments of investment, stock has its own risks:
1. Capital Loss
It is the reverse of Capital Gain. It is a condition when the stock is sold for a price that is lower than its original purchase price. For instance, an investor bought the stock of PT XYZ for Rp 2,000 per share, but aftermath the stock price fell to the level of Rp 1,400 per share. Afraid of continuous declines, the investor sells the shares for Rp 1,400 per share. The investor has retained a capital loss of Rp 600 per share.
2. Liquidity Risk
A Company, whose shares are owned by public, is stated for bankruptcy by the Court or is being dismissed. In this case, the claim of the shareholders' rights will get the last priority after all the company’s liabilities have been settled (through the selling the company’s assets). The rest of the company’s wealth, if exist, will be distributed proportionally to the shareholders. However, if there is no rest left, the shareholders will not receive anything. This is the worst condition a shareholder might go through. Thus, a shareholder needs to monitor every development happens in the company.
In the secondary market or daily stock trading, stock price fluctuates. Stock price is formed by the demand and supply of the stock, while the supply and demand of a stock are influenced by many factors, such as the company and industry’s performance, the macro factors (interest rate, inflation, currency rate), the non-economical factors (social and political conditions), and so on.
Bond
BONDS
A bond is an instrument in which the issuer (debt or borrower) promises to repay to the lender/investor the amount borrowed (principal) plus interest (coupon) over some specified period of time. The issuer may be a corporation or government. The interest is usually paid at specified intervals, such as semi-annually or quarterly. When the bond matures, the investor receives the entire amount invested, or the principal plus coupon. Once issued, bonds can be traded like any other security before its mature without paying penalty which is unlike in average time deposit (ATD).
Type of Bonds traded in Indonesia Stock Exchange:
1. Corporate Bonds: Bond issued by state owned company or private company.
2. Government Bonds: Bond issued by the central government.
3. Municipal Bond: Bond issued by province/district government for financing public utilities project.
4. Retail Bonds: Bond traded in a bourse trading mechanism as applied in stock trading with relatively small nominal value.
5. Sharia Bond: Bond which has yield refers to profit sharing of the bond issuer but not relay on interest based. In term of its yield, there are two type of calculating, as follows:
• Sharia Mudharabah Bond is a sharia bond with initial contract base on profit sharing so that investor may receive income after knowing revenue of the bond issuer.
• Sharia Ijarah Bond is a sharia bond uses such as leasing contract so that ijarah’s fee (like a coupon) will be in fix rate and it can be known or counted from the initial issued.
The different type of coupon:
1. Zero Coupon Bonds: Bond which has no coupon along the period of its time maturity, but, Bond issuer will pay its principal on the maturity date.
2. Coupon Bonds: Bond which has a coupon which is able to convert in cash money on specified period of time according to the issuer’s provision.
3. Fixed Coupon Bonds: Bond which has fix amount of coupon rate from the time of initial issued until maturity date. Fix coupon bond will be paid at specific period of time.
4. Floating Coupon Bonds: Bond which has coupon rate that is usually keep on adjusting to the reference rate in the market, such as weighted average of interest rate of average time deposit (ATD) in the biggest government bank or private bank.
5. Mixed rate bonds: Bond has a fix coupon rate only for certain period of time (e.g. 1- 3 year) then it will be floating follow the market rate.
The characteristics of Bonds:
• Nominal Value (Face Value) Bond issued by corporation, whether it is a government corporation or private corporation.
• Coupon (the Interest Rate) is the interest value occasionally received by the bondholders (usually every 3 or 6 months). Bond’s coupon is asserted in annual percentages.
• Tenor is the date when the bondholders will receive principal payment of the bond. The maturity date of each bond varies from 365 days to more than 5 years. A bond close to maturity date has lower risk than a bond that is far from maturity. It is because a bond that close to the maturity date is easier to predict. In general the longer the maturity dates of a bond, the higher the coupon/interest.
• Issuer Company knowing the bond issuer well is an important factor in retains bond investing. To measure the default risk (possibility of an issuer failed to make coupon or principal payment on the determined time), an investor should pay attention on the rating of each bond issued by official rating institution such as PEFINDO or Kasnic Credit Rating Indonesia.
Bonds Pricing:
Different to stock’s price that is expressed in currency unit (rupiah amount), bond’s price is expressed in percentages (%) unit that is percentages of its nominal value. There are 3 (three) possibility of the bond’s price offered to the market:
• Par Value Bond’s price is the same as its nominal value. Example: A bond with nominal value Rp 50 million sold at price 100%, the bond’s value is 100% x Rp 50 million = Rp 50 million.
• At Premium Bond’s price is higher than its nominal value. Example: A bond with nominal value Rp 50 million sold at price 102%, the bond’s value is 102% x Rp 50 million = Rp 51 million
• At discount Bond’s price is lower than its nominal value. Example: Bond with nominal value Rp 50 million sold at price 98%, the bond’s value is 98% x Rp 50 million = Rp 49 million
Bond Yield :
Return on bond investment will be stated as yield that is source of income for the investors who allocate their money to buy a retail bond/corporate bond/government bond. One of the important thing that is to be considered before they decide to invest in bond is the amount of bond yield as a measurement tool to know the annually rate of return.
There are two terminologies in calculating yield, current yield and yield to maturity.
• Currrent yield that is yield calculated base on the amount of coupon receive for one year to its bond price.
Current yield = Coupon x 100%
Price
Example:
Bond issuer “PT. XYZ”, gives coupon rate 17% p.a. to their bond holder while bond traded at 98% with nominal value Rp 1.000.000.000, then its current yield as follows:
Current Yield = Rp 170.000.000 or 17% x 100%
Rp 980.000.000 98%
= 17.34%
• While a Yield to maturity (YTM) is return on investment or income will be obtained by investors if they hold bond until its due date. Formula of YTM which is often used by bond participant, as follows:
YTM approximation = C + R - P
n x 100%
R + P
2
Explaination:
C = cupon
n = period of time to maturity (in year)
R = redemption value
P = purchasing value
Example:
Bond XYZ was bought on September, 5-2003 at 94.25% with coupon rate 16% which will be paid quarterly and its maturity date on July, 12, 2007. What is YTM approximation of Bond XYZ?
C = 16%
n = 3 year, 10 month, 7 day or equal to 3.853 year
R = 94.25%
P = 100%
YTM approximation = 16 + 100 – 94.25
3.853
= 100 + 94.25
2
= 18.01 %
Process of Going Public
Companies have many alternatives of financing source, internal or external. Alternative internal financing generally comes from the retained earning, while external financing can come from creditors in form of debt, other forms of funding or by issuing debenture papers, and even financing by participating in stock (equity). Financing by participation mechanism is usually done by selling company’s stocks to the public or often known as going public.
To go public, companies have to make internal and documents preparation in accordance to the requirements needed for going public, and fulfill all the requirements stated by the Bapepam. Public offering or go public is the activity of stock or other marketable securities offering by an issuer (going public firm) to the public based on the procedures arranged in the Capital Market Law and its Implementation Rules.
Public offering accommodates these activities:
• Primary Market Period, when stocks are offered to investors by underwriter through selected Selling Agent;
• Shares subscriptions, the allocation of investors’ securities order according to the available amount of securities.
• Stock allotment at the Exchange, when stocks are traded in the Exchange.
Stocks public offering procedures can be categorized into these 4 steps:
1. Preparation Step
In this step, the company has to prepare everything needed the public offering process. First, the company, who will issue the stocks, holds Shareholder General Meeting and asks the approval from shareholders. After the approval, the issuer will appoint the underwriter, market institutions and supporting professions that consists of:
• Underwriter. Underwriter is the party who has the most involvement in assisting the issuer to go public. Underwriter’ has to prepare all the documents, prospectus, and giving the guarantee of the issuing process.
• Public accountant (Independent Auditor). Public accountant is responsible to audit or check the income statement of the issuer.
• Appraisal Company for appraising the fixed assets owned by company and accounting proper value of the fixed assets.
• Law consultant for giving legal opinion.
• Notary for making amendments of the company’s basic budget and various agreement underlying the public offering, and notes of meeting.
2. Registration-Statement Submitting Step
In this step, the company will complete the registration by giving supporting documentations to the Bapepam until the Bapepam states that the Registration Statement is effective.
3. Shares Offering
In this step, the issuer offers its stock to the investors’ society. Investors can buy the shares through their appointed selling agents. Offering period is usually about three trading days. Worth to notice, that not all of the investors’ desires are fulfilled in this level. For instance, 100 million shares are released in the market, while the amount of shares that the investors want to buy is 150 million shares. If the investors could not get the shares at the primary market, they can buy it in secondary market after the stock is listed in exchange.
4. Shares Listing in the Exchange
After selling the shares in primary market, the stocks are listed in the Exchange. In Indonesia, the stocks could be listed in the Indonesia Stock Exchange (IDX), Surabaya Stock Exchange, or even in both exchanges.
Listing
Stock listed in the Indonesia Stock Exchange is classified into 2 listing boards: Main Board and Development Board. The placement of the Issuer and prospective Issuer’s Listing depends on the fulfillment of the initial listing requirements on each Board.
Main Board is intended for listed big companies that have track records, while the Development Board is intended for companies that have not yet fulfill the listing requirements of the Main Board, including prospective companies that have not produce any profits, and companies that are on the state of reorganization.
General Requirement Listing on the Jakarta Stock Exchange
Issuers can list their stocks in the Exchange if they have already fulfilled the following requirements:
1. Registration statement has been stated effective by the Bapepam
2. The issuer is not in lawsuit that could influence the existence of the company
3. Its business field is directly or indirectly not prohibited by the prevailing law of Indonesia
4. Particularly for issuers in manufacturing field, they are not in pollution problem (this is proved by the AMDAL certificate) and for issuers in forestry field must have ecolabelling certificate
5. Especially for issuer in mining field, it must have a managing license that is still valid at least for 15 years; have at least 1 Mining Authority Contract or Regional Mining License; one director with technical skill and experience in mining field; and have had a proven deposit or equivalent
6. Especially for business that needs managing license (like highway construction, forestry), it must own the license at least for 15 years.
7. Subsidiary and/or holding company of a listed company in Jakarta Stock Exchange that contribute 50% of its consolidation income to the listed company cannot be listed in the Exchange
8. Financially related requirements of the initial listing must base on the last audited annual financial report.
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