Transaction Mechanism in the Capital Market
The capital market is one of the most important pillars of today's global economy. Many industries and companies use capital market institutions to secure investment and strengthen their financial position. Capital markets play a crucial role in a country's economy because they serve both economic and financial functions. Capital markets are said to have an economic function because they provide a framework that brings together two interests: those with excess funds (investors) and those in need of funds (issuers). With the existence of capital markets, those with excess funds can invest these funds to earn returns, while issuers (in this case, companies) can use these funds for investment purposes without having to wait for funds to become available. The capital market is a form of capital received from company activities.
The capital market is an economic function because the capital market provides an opportunity for fund owners to receive income according to the characteristics of the chosen investment.
The term capital market generally refers to an organized financial system encompassing commercial banks and all financial intermediaries, as well as all securities in circulation. In the narrow sense, a capital market is a marketplace (a place, such as a building) where stocks, bonds, and other securities are readily traded using the services of brokers and intermediaries.
The transaction mechanism in the capital market depends on the market in question, whether it's a primary or secondary market. Therefore, to understand the transaction mechanism, you can examine the two types of markets that operate in the capital market.
Forms of Transactions in the Capital Market
- Loan term (short-term/long-term). Term debt is a form of financing in the form of units (business units), which is carried out by issuing securities and selling them to financing owners or investors. There are two types of securities in long-term debt financing: bonds, which are obligations issued by an entity (usually a single company) that promise to pay a specified interest rate. Second, other securities, which consist of different securities, are often called credit securities.
- Participation, or equity participation, is a form of capital financing for an entrepreneur, which involves depositing a sum of money with the aim of controlling a portion of the company's ownership. This participation is usually in the form of shares in exchange for capital services; the trader or stockbroker receives a share of the profits, known as dividends.
The Role of Capital Markets
Capital markets play a crucial role in a country, and they share fundamental similarities with each other. The following examines the role of capital markets from a microeconomic perspective:
- We can make transactions between buyers and sellers to determine the price of shares or securities.
- Capital markets provide investors with the opportunity to determine expected returns.
- Capital markets offer investors the opportunity to resell shares or other securities.
- The capital market opens up opportunities for people to participate in economic development.
- Capital markets reduce information and securities transaction costs. From an investor's perspective, investment decisions should be based on the availability of accurate and reliable information. This information cost, which is the cost of seeking information about a company, includes the costs of seeking out the gains and losses of securities.
Although the role of the capital market is seen from a macro perspective, namely:
- The function of savings . Savings can be detrimental to capital owners, but this is because the value of money decreases over time or with inflation.
- Wealth Function. Capital markets are a way to preserve wealth in the long and short term, so that it can be reused when needed.
- Liquidity Function. Assets held in securities can be realized through the capital market with very little risk compared to other assets.
- Credit Function. The capital market's function is to provide credit for consumption and investment. Loans represent debt owed to the public. A country's capital market is a source of development financing from loans collected from the public. The government is encouraging the growth of the capital market to increase the ease and affordability of raising funds.
Capital Market Supporting Institutions
1. Securities Administration Office
The Securities Administration Office is a party that records ownership of securities and the distribution of rights related to securities based on contracts made with the issuer.
2. Depository Bank
A depository bank is an entity that offers securities and other services, including receiving dividends, interest and other rights, conducting securities transactions and representing customer account holders.
3. Asset manager
The manager is a body that represents the interests of bondholders.
The supporting professions of the capital market are as follows:
1. Accountant
KHT experts assist issuers in preparing prospectuses and annual reports so that their presentation complies with Bapepam and capital market regulations.
2. Notary
Notaries participate in the preparation of articles of association and other agreements of issuers, securities participants, and other parties.
3. Legal Consultant
Legal experts assist in carrying out activities in such a way that they comply with and do not violate applicable regulations and other legal considerations.
Transaction Mechanism in the Primary Market
The primary market, also known as an Initial Public Offering (IPO), is the market where companies or issuers first trade shares or other securities to the general public. The process of trading shares and bonds on the primary market can be illustrated in the following diagram.
Referring to the chart, it is clear that in the primary market , the party acting as the seller is the issuer and the buyer is the investor. Do you know what an issuer is?
An issuer is the party conducting a public offering, in this case a company that is going public for the first time, namely selling its capital ownership to the wider public.
The issuer, with the help of underwriters and selling agents, offers its shares to investors. Investors who are interested in the issuer's offer make purchases through the selling agent, resulting in a transaction where funds flow from investors to the issuer and securities or securities flow from the issuer to investors through the underwriters and selling agents.
Companies selling shares to the public are required to prepare a prospectus. According to Bapepam, a prospectus is any written information related to a public offering with the aim of encouraging other parties to purchase securities.
With a prospectus, investors will receive all important and relevant information related to the offering, enabling them to make informed investment decisions. The prospectus should address the following points.
- The prospectus must set out all material details and facts regarding the issuer's public offering.
- The prospectus must be made in such a way that it is clear and communicative.
- The most important facts and considerations should be summarized and disclosed at the beginning of the prospectus.
- Issuers, underwriters, supporting institutions and capital market support professions are responsible for determining and disclosing facts clearly and easily read.
Some important parts of the prospectus that deserve the attention of potential investors are:
- Number of shares offered;
- Nominal value and offering price;
- Business fields;
- Brief history of the company;
- Purpose of going public (planned use of funds);
- Business activities and processes;
- Business risk;
- Dividend policy;
- Company financial performance; and
- Selling agents.
The prospectus also usually contains several things related to the public offering schedule, including:
- Effective date, which is a date that indicates the time of issuance of the effective statement letter by Bapepam, based on this letter the company can make a public offering to the public.
- The offering period is the period during which a public offering of securities to be offered to the public is conducted. This offering period is at least three business days.
- The allotment deadline is the date on which the final results of the securities allotment process will be announced to the public. Allotment occurs when the number of securities ordered exceeds the number of securities offered.
- Order refund date is the date on which refunds are made to customers whose orders are subject to quotas or whose orders are not fully fulfilled.
- The listing date is the date on which a security begins to be listed or registered on a stock exchange, which means that from that date the security can be traded on the secondary market.
Investment in the Capital Market
People or parties who buy and sell securities on the capital market are called investors. Their activity is investment.
Do you know what benefits you can gain from investing in the capital market?
If you buy securities (shares) on the capital market, there are two potential benefits: dividends and capital gains.
Dividend
Dividends are a distribution of profits paid by a stock-issuing company (issuer) based on the profits generated by the company. Dividends are paid after receiving approval from shareholders at a General Meeting of Shareholders (GMS).
Capital Gain
Capital gain is the difference between the purchase price and the selling price. Capital gains arise from stock trading on the secondary market.
While there are several benefits to be gained from participating in the capital market, there are also several risks that investors can face when purchasing shares on the stock market, as follows.
- Not Getting Dividends
- Capital Loss
- Bankrupt or Liquidated Company
- Shares Delisted from the Stock Exchange (Delisting)
Transaction Mechanism in the Secondary Market
The secondary market is the market that trades securities after the EPO or after the primary market. Trading occurs only between investors. These transactions are inseparable from the stock exchange's function as a trading facilitator in the capital market . Purchases in this market are limited to shares already in circulation, based on established market rules. The process of trading stocks and bonds on the secondary market can be illustrated in the following diagram.
Referring to the chart above, it is clear that in the Secondary Market, the parties acting as sellers are selling investors, and the parties acting as buyers are buying investors through selling and buying brokers who meet on the stock exchange. Do you know what a stock exchange is? A stock exchange is a party that organizes and provides a system and/or means to bring together offers to buy and sell securities from other parties for the purpose of trading securities between them.
What is a selling broker? A selling broker is a party that acts as an intermediary for selling investors to offer their securities to buying investors through buying brokers on the stock exchange, while a buying broker is a party that acts as an intermediary for buying investors to purchase a number of securities from selling investors through selling brokers on the stock exchange. The interaction between buying and selling investors through their respective brokers results in a transaction that causes securities to change hands from selling investors to buying investors, and funds to flow from buying investors to selling investors.
In the secondary market, a buying investor must contact a buying broker (brokerage firm A) if they wish to purchase securities. Broker A will then forward the buying investor's request to Broker B (another brokerage firm). The buying instruction is entered into an automated trading computer system directly from the brokerage firm into the Jakarta Automated Trading System (JATS). This computer system uses a bidding system, so that buying transactions are based on the highest price and selling transactions on the lowest price. The same mechanism applies to selling investors who wish to sell shares they already own.
In terms of transaction mechanisms in the secondary market, there is a term known as Remote Trading, a remote trading system where every transaction order made at a broker's office (securities firm) is sent directly to the stock exchange's trading system (JATS), without the need for order entry from the trading floor. Thus, orders can be placed at the broker's office, anywhere as long as they are connected to the stock exchange's trading system . The benefits of remote trading for investors include the following.
- The transaction process becomes faster;
- Information becomes faster; and
- Orders from investors outside the city can be executed directly through the stock exchange's trading system. This is expected to increase investor engagement outside major cities.
Transactions in both primary and secondary markets on the Indonesia Stock Exchange (IDX) are conducted on working days, known as trading days, and are divided into two sessions.
Session 1 Monday-Thursday 09.30-12.00 and Friday 09.30-11.30 WIB.
Session 2 Monday-Thursday 13.30-16.00 WIB and Friday 14.00-16.00 WIB.
Settlement of stock transactions takes three trading days.
This settlement period is known as T+3. T stands for transaction plus three days for settlement. An investor will receive their rights on the fourth day after the transaction occurs.
Based on this description, can you deduce the difference between the primary and secondary markets?
Conclusion
The term capital market refers to a generally organized financial system that encompasses commercial banks and all financial intermediaries and all securities in circulation. In a narrow sense, a capital market is a marketplace (a place, such as a building) where stocks, bonds, and other securities are readily traded using the services of brokers and intermediaries.
Forms of business in the capital market
- Term debt (short-term/long-term). Term debt is a form of financing in the form of units (business units), which is carried out by issuing securities and selling them to financing owners or investors. There are two types of securities in long-term debt financing: bonds, which are obligations issued by an entity (usually a single company) that promise to pay a specified interest rate. Second, other securities, which consist of various securities, are usually called credit securities.
- Share capital, or participation, is a form of capital financing provided by an entrepreneur through the deposit of a certain amount of money with the aim of controlling a portion of the company's ownership. This participation is usually in the form of shares in exchange for capital services; the trader or stockbroker receives a share of the profits, known as dividends.