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Market ins n outs
Exploring the Capital Market - An introduction
How bonds are brought to the market
As with for shares, there are primary and secondary markets for
bonds. A big difference between the stock market and the bond market is
the active participation of the Government in addition to companies.
| Securities -
The term is used very simply to mean stocks, bond and other
investment products.
In Sri Lanka, the Securities
and Exchange Commission defines it formally as “debentures,
stocks, shares, funds, bonds or notes issued, or proposed to be
issued, by any Government or of any body, whether corporate or
unincorporated, including any rights, options or interests
(whether described as units or otherwise) therein or in respect
thereof or any other instruments commonly known as securities,
but does not include bills of exchange or promissory notes or
certificate of deposits issued by a bank.” |
The reason for this is that a Government cannot sell part ownership
of it to a single person or a company through the issuance of shares.
The Government issues bonds to raise money for many of its developmental
initiatives and projects
 when
its income sources are not adequate.
The primary market
The process of borrowing money in the capital market through the
issuance of bonds is very much similar to the issuance of shares. When
you buy bonds as opposed to shares you become a lender instead of a
shareholder.
The issuer, who is the corporate or government which issues bonds
promises to repay the money that you lend at a given date. The amount
you lend is generally known as the ‘principal’. Meantime till the
principal is paid, the issuer promises to pay interest on a regular
basis, either once or twice a year or even quarterly.
The secondary market
An investor is not required to keep the bond until it matures. He can
sell this at any time to someone who is willing to buy in the secondary
market. The price you will fetch for your bonds will depend on a number
of factors, including the interest rate movement at the time and the
credit rating of the issuer amongst others. The secondary market for
bonds is not a physical place like an exchange, but known as an ‘Over
The Counter’ market. This is not a physical place but comprises dealers
who trade over the computer or telephone.
Knowing which to buy
The bottom line is there is no simple answer as to what an ideal
portfolio would be. A mix of debt, equity and a portion of cash is
usually believed to form a balanced portfolio. However an in-depth
analysis needs to be conducted to decide on which company’s shares and
bonds should be bought.
Provided by the Securities and Exchange Commission of Sri Lanka
Initial Public Offering ABCs
An Initial Public Offering or IPO for short is when a company issues
shares to the public for the first time. An initial public offer
constituting of newly issued shares is called an Offer for Subscription.
When the company’s shareholders offer existing shares to the public it’s
called an Offer for Sale.
The issuing company may obtain the assistance of specialised firms,
most often investment banks, to act as a Manager to the Issue. The
Managers to the Issue helps the company determine what type of shares to
issue, best issue price and the most appropriate time to bring the
shares to market, inter-alia.
Here are some selected IPO and market related terms.
Aftermarket
Trading of an offering on or after the date the shares of the company
enter the official list of the relevant stock exchange (ie. the listing
date)
Allocation/Allotment
The number of shares given to an investor through an offering. The
term Allocation applies to the number of shares given to an investor
through an Offer for Sale, whereas the term Allotment applies to shares
given via an Offer for Subscription.
Beauty contest
Investment banks compete for an issuing company’s IPO business during
a process known as the ‘beauty contest’ (or ‘bake-off’), in which they
present their credentials to the issuing company’s board and assess a
preliminary valuation of the company.
Beauty contests are the norm for selection of Managers to the Issue
in developed markets.
Book building
Book Building is a process of determining the price at which shares
are issued to the investors. It constitutes a method of generating a
book or collection of price and quantity data related to investor demand
for an IPO. It is a mechanism where, during the fixed period for which
the IPO is open, bids are collected from investors at various prices,
between a floor (minimum) price and the cap (maximum) price. The final
issue price is not determined until the end of the process when the book
has ‘closed’.
Book building is a common practice in most developed countries and
has recently been used in developing countries as well, including India.
In Sri Lanka a somewhat similar process was used to price the large IPOs
Dialog Telekom and Lanka IOC.
Buyer’s market
A market where buyers determine the price, usually because of an
oversupply of stock.
Closing price
The final transaction price for a share on a particular trading day.
Delisting
Removal of a company from trading on the stock exchange usually
because of reorganisation, merger or insolvency.
Disclosure
The reporting of financial statements, management shareholdings and
other information that can be used for making investment decisions.
Dividend
The amount of money distributed to shareholders out of net profits.
Due diligence
The process of verifying information about a company, including
financial statements, management, market share, legal matters and risks.
To be continued . . .
(Provided by Bank of Ceylon) |
