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Understanding The Capital Markets

What is a capital market? The capital market is not a physical market like the Suva Municipal Market.  It refers to the buying and selling of medium to long term
27 Jun 2018 14:50
Understanding The Capital Markets
Reserve Bank Of Fiji

What is a capital market?

The capital market is not a physical market like the Suva Municipal Market.  It refers to the buying and selling of medium to long term debt and equity securities as well as units. 

Debt securities traded in our capital markets include bonds and convertible notes while equity securities include shares of listed companies and units issued by Managed InvestmentSchemes (MIS) i.e. our unit trust companies.

Who regulates and develops the

capital markets?

Under the Companies Act (2015), the Reserve Bank of Fiji is responsible for the regulation and development of Fiji’s Capital Markets.

The Reserve Bank has the responsibility for developing our capital markets and to regulate and supervise all the capital markets intermediaries as well as activities that take place within the markets.

The Reserve Bank also regulates the banking, insurance and foreign exchange industries in Fiji but these industries are more developed than our capital markets sector.

What are the different markets that make up Fiji’s capital markets?

The word “market” refers to a public place or platform where buyers and sellers transact either directly or through licensed intermediaries.  More information about licensed intermediaries is covered later on in the article.

There are three different types of markets operating within the capital markets industry in Fiji and each market operates on either the primary or secondary level or both:

i) Equity market – in this market, the South Pacific Stock Exchange (SPSE) provides a market, called a stock market, for trading of shares of companies listed on the securitiesexchange. 

There is also an over-the-counter (OTC) registry provided by Kontiki Stockbroking Limited for companies that are not listed on the securities exchange.

ii) Debt market – includes bonds and hybrid products such as convertible notes.

iii) Managed funds market – this includes the unit trust market or the buying and selling of units through the Unit Trust of Fiji and Fijian Holdings Unit Trust.

What are the broad categories of capital markets in Fiji?

Each of these markets operates under two main broad categories:

i) The primary market – At this level, companies raise funds directly from investors by issuing shares, bonds and other securities such as convertible notes. 

Here, debt and equity securities are created and bought by investors from the issuing company or organisation.

Investors who buy bonds are called bondholders while investors who buy shares in a company are referred to as shareholders of the business and investors who buy units are called unitholders.

In addition, the first time that a company issues a debtor equity security is referred to as an Initial Public Offering (IPO) e.g. when a listed company issues new shares which is subsequently purchased by an institutional investor.

ii) The secondary market – Once a company has issued securities (shares, units, bonds or convertible notes) in the primary market, investors can trade (buy more or sell) their shares, bonds and other securities with other investors on the secondary market by using a licensed stockbroker.

A simple way to distinguish between the two markets is that in a primary market, the investor purchases the security from the issuer whereas in a secondary market, an investor purchases a security from another investor.

In Fiji, the SPSE provides a secondary market for companies listed on the securities exchange.

For public companies that are not listed on the securities exchange, investors can trade their shares directly with the company or by using an OTC facility if one is provided. 

Companies like Fiji Gas, Kontiki Finance, Global Harvest Holding Limited and Yatu Lau are examples of companies that trade their shares via OTC services provided by licensed stockbroking firm, Kontiki Stockbroking Limited. 

At present, only the SPSE OTC facility is regulated by the Reserve Bank of Fiji.

How do the capital markets work?

Capital markets provide both new and existing companies access to capital to pay for a company’s growth and provide an opportunity for investors to be part of the company as shareholders.

As companies increase in size, so will their demand for funds. Capital markets can help meet a company’s need for more funds by also providing them with access to capital.

In doing so, the capital markets channel the flow of funds from saving entities (investors) to borrowing entities (companies).

Capital markets provide a system which enables companies to raise funds directly from investors. 

The funds raised are medium to long-term funds that are usually borrowed for more than one year and in most instances are used for capital expenditure of the company.

For example, Company X needs money to fund the expansion of its business (referred to as capital). 

Currently, Company X does not make enough profits to fund the expansion, and so it needs to borrow some money to do this. 

Company X can obtain the capital it needs to expand the business in two main ways:

i) Borrow indirectly from investors through a commercial bank.  Company X can borrow directly from a commercial bank.  The money the bank will lend to Company X are monies belonging to customers who deposit their money at that bank so Company X is in fact, borrowing indirectly from the bank’s customers;

ii) Borrow directly from investors in the capital markets.  Company X can also borrowdirectly from investors by:

ν Issuing “equity securities”, such as shares, to investors who become shareholders in the company.  These investors include ordinary “mums and dads”. The cost of this method to the business is the dividends that are paid to shareholders out of profits; or

ν Issuing “debt securities”, such as bonds or convertible notes, to investors.  These investors become lenders to the business. 

The cost of this method to the business is the interest that is paid to holders of the debt securities.

The unit trust market provides “mum and dad” investors, ordinary investors like you and I, the opportunity to easily diversify our investment portfolios across a variety of different investments.

This is achieved through the pooling of your funds with other investors.  These funds are then invested in a variety of products, companies and sectors by a licensed fund manager.

The returns paid to the fund manager from the investments they have made are distributed to unit holders as dividends.

The Unit Trust of Fiji (UTOF) and Fijian Holdings Unit Trust (FHUT) have investment portfolios that include investments in listed companies, unlisted companies, bonds, term deposits and other local and overseas managed funds.

By investing in a managed fund like UTOF and FHUT, unit holders get an opportunity to invest in a portfolio of investments that they could otherwise not afford.

Benefits of the capital markets

A thriving and efficient capital markets can be a major contributor to equitable and sustainable economic growth in any country. 

Developed and efficient capital markets assists in the creation and expansion of businesses by channelling savings, or surplus funds, from savers to businesses that require funds for development and growth. 

This in turn creates employment and increases wealth including job creation through the creation of new businesses and expansion of existing businesses, economic growth and technological innovation.

The capital markets channel investors’ funds to their most productive uses by providing a range of products that:

ν allow companies in Fiji to obtain the capital they require from savers at home and abroad;

ν make it easier for savers to achieve their financial goals and accumulate wealth through investing; and

ν help savers and companies better manage the risks they face.

Investing in the capital markets

Members of the public who wish to participate and invest in the capital markets must ensure that they deal only with licensed companies and individuals. 

The Reserve Bank licenses all participants and intermediaries in the capital markets so members of the public are advised to verify that the person that they are dealing with has been approved by the Reserve Bank before parting with any of their funds.

Feedback:  maraia.vula@fijisun.com.fj

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