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Thursday, January 29, 2009
Monday, January 26, 2009
Capital Market
Capital Market
(1) Mixing many risky securities.
Portfolio theory has its roots in the management of investors' portfolios of stock exchange investments and fixed interest stocks. The following sections show how the attempt to identify an optimal portfolio for investors has led to a comprehensive but simple theory of how the capital market relates risk and return. This, in turn, will assist us in our attempt to adjust discount rates to allow for risk.
The previous section considered portfolios of two securities. It is easy to expend this theory to cover portfolios of many securities, noting that where returns are assessed in percentage terms:
(a) The expected return of a portfolio is equal to the weighted average of the returns of the individual securities in the portfolio.
(b) The risk of the portfolio depends on:
i. The risk of each security in isolation:
ii. The proportions in which the securities are mixed:
iii. The correlations between every pair of securities in the portfolio.
(2). Efficient portfolios.
It is possible to identify which of these portfolios are really worth holding.
A rational risk -adverse investor would define an efficient portfolio as one that has.
a). A higher return than any other portfolio with the same risk; and
b). A lower risk than any other with the same return.
This simple approach is known as the mean-variance efficiency rule (return = mean or expected return; risk = variance or standard deviation).
So, out of all the possible portfolios which an investor could make out of his chosen securities, which are mean variance efficient? (Put another way, which portfolios would the investor select from, given logical assessment of the mean returns and variances of all those available).
You need to be familiar with the following terminology.
(a). Domination an investment dominates another if it provides a better return for the same risk or less risk for the same return.
(b). An efficient investment is one which is not dominated by any other investment, where as an inefficient investment is one which is dominated.
(c). Investor utility curves (or indifference curves) are curves alone which the investor is indifferent between the combinations of risk and return.
(d). Optimal portfolio- the efficient portfolio that has the highest utility for a given investor. This idea was discussed at the start of the chapter & identifying this portfolio requires knowledge of the investor's indifference curves.
(3). The market portfolio.
The assumptions
A few assumptions are now made, in order to build a simple model:
(a) Investors base their portfolio investment decisions on expected returns, standard deviation and correlations between all pairs of investments.
(b) All investor have the same expectations about future outcomes over a one-period time horizon.
(c) Investors may lend and borrow without limit at the risk-free rate of interest.
(d) There are no market imperfections: investments are infinitely divisible, information is costless, there are no taxes, transaction costs or interest rate charges, and no inflation.
Some of these assumptions are obviously unrealistic, but they greatly simplify the model- building process. Furthermore, even if the assumptions are relaxed, the theory will still hold approximately.
Building the model.
(a) Firstly , consider all the portfolio which could be constructed out of risky securities quoted on the stock market.
(b) Then identify the efficient portfolios from these.
(c) The consider mixing any one of these efficient portfolios, with a risk-free investment, Rf.
Conclusion.
Out of all the possible portfolios that could be constructed from risky investment, only one portfolio is worth considering-portfolio M. A combination of Rf and M produces portfolios which are better than any others in terms of the return which is offered for any given level of risk.
However, given the existence of risk-free investment, investors would choose form those on the revised efficient frontier represented by line RfM.
Portfolios on the line RfM are achieved by mixing portfolio M with risk-free investments. Portfolios on the line M N are achieved by borrowing at the risk-free rate (remember we have assumed that the risk-free rate applies to borrowing as well as lending) and investing our own funds plus borrowed funds in portfolio M.
What is portfolio M.
Because we have assumed that all investors have the same expatiations about the future outcomes of investments, it follows that:
All investors will come to the conclusion that portfolio M is the best portfolio consisting solely of risky investments to hold.
Now, if any quoted share was not in portfolio M, then nobody would with to hold it. It would therefore have not value. We must therefore conclude that:
Portfolio M includes every risky security which is quoted on the market.
Portfolio M is in fact simply a slice of the whole stock market; the proportions of shares held in it are the same as the total market capitalization of the shares on the stock market:
Portfolio M is called the market portfolio.
All rational risk- averse investors will hold the market portfolio, according to the model we have jest constructed. Note that it is not necessary for very investor to hold very share on the stock market. Replicas of portfolio M may be generated by holding as few as fifteen shares. Investment in unit trusts will also achieve the same result.
However, all investors do not have the same attitude to risk. By using the market portfolio, and by either lending or borrowing suitably at the risk-free rate, the investor can choose any level of risk he likes and can predict the return which the market will give him. This return will be the best that he could possibly get for the risk taken.
(4) Constructing the capital market line.
We have already seen that combinations of risk-free and investments give a straight line trade-off between risk and return.
To draw the capital market line we therefore need only two observations,
1. Rf- The risk-free rate of interest, which can be approximated by the return on government stock.
2. Rm and sigma m- The risk and return of the market portfolio. As the market portfolio should contain all risk investments, this can be estimated by using the risk and return on a stock market index such as the Financial times all share index.
Value of the Capital market line.
The capital market line tells us for a given level 0 risk the return an investor should expect on the stock exchange. It is often referred to as giving the market price of risk. That is if we choose to take a given level of risk on the stock exchange then we can expect a given level of return. If this is less than that offered by the project, it is tempting to say that the project should be accepted. However, there is a flaw in this logic.
The problem with this analysis is not in determining the capital market line but in determining the risk of an individual investment.
(1) Mixing many risky securities.
Portfolio theory has its roots in the management of investors' portfolios of stock exchange investments and fixed interest stocks. The following sections show how the attempt to identify an optimal portfolio for investors has led to a comprehensive but simple theory of how the capital market relates risk and return. This, in turn, will assist us in our attempt to adjust discount rates to allow for risk.
The previous section considered portfolios of two securities. It is easy to expend this theory to cover portfolios of many securities, noting that where returns are assessed in percentage terms:
(a) The expected return of a portfolio is equal to the weighted average of the returns of the individual securities in the portfolio.
(b) The risk of the portfolio depends on:
i. The risk of each security in isolation:
ii. The proportions in which the securities are mixed:
iii. The correlations between every pair of securities in the portfolio.
(2). Efficient portfolios.
It is possible to identify which of these portfolios are really worth holding.
A rational risk -adverse investor would define an efficient portfolio as one that has.
a). A higher return than any other portfolio with the same risk; and
b). A lower risk than any other with the same return.
This simple approach is known as the mean-variance efficiency rule (return = mean or expected return; risk = variance or standard deviation).
So, out of all the possible portfolios which an investor could make out of his chosen securities, which are mean variance efficient? (Put another way, which portfolios would the investor select from, given logical assessment of the mean returns and variances of all those available).
You need to be familiar with the following terminology.
(a). Domination an investment dominates another if it provides a better return for the same risk or less risk for the same return.
(b). An efficient investment is one which is not dominated by any other investment, where as an inefficient investment is one which is dominated.
(c). Investor utility curves (or indifference curves) are curves alone which the investor is indifferent between the combinations of risk and return.
(d). Optimal portfolio- the efficient portfolio that has the highest utility for a given investor. This idea was discussed at the start of the chapter & identifying this portfolio requires knowledge of the investor's indifference curves.
(3). The market portfolio.
The assumptions
A few assumptions are now made, in order to build a simple model:
(a) Investors base their portfolio investment decisions on expected returns, standard deviation and correlations between all pairs of investments.
(b) All investor have the same expectations about future outcomes over a one-period time horizon.
(c) Investors may lend and borrow without limit at the risk-free rate of interest.
(d) There are no market imperfections: investments are infinitely divisible, information is costless, there are no taxes, transaction costs or interest rate charges, and no inflation.
Some of these assumptions are obviously unrealistic, but they greatly simplify the model- building process. Furthermore, even if the assumptions are relaxed, the theory will still hold approximately.
Building the model.
(a) Firstly , consider all the portfolio which could be constructed out of risky securities quoted on the stock market.
(b) Then identify the efficient portfolios from these.
(c) The consider mixing any one of these efficient portfolios, with a risk-free investment, Rf.
Conclusion.
Out of all the possible portfolios that could be constructed from risky investment, only one portfolio is worth considering-portfolio M. A combination of Rf and M produces portfolios which are better than any others in terms of the return which is offered for any given level of risk.
However, given the existence of risk-free investment, investors would choose form those on the revised efficient frontier represented by line RfM.
Portfolios on the line RfM are achieved by mixing portfolio M with risk-free investments. Portfolios on the line M N are achieved by borrowing at the risk-free rate (remember we have assumed that the risk-free rate applies to borrowing as well as lending) and investing our own funds plus borrowed funds in portfolio M.
What is portfolio M.
Because we have assumed that all investors have the same expatiations about the future outcomes of investments, it follows that:
All investors will come to the conclusion that portfolio M is the best portfolio consisting solely of risky investments to hold.
Now, if any quoted share was not in portfolio M, then nobody would with to hold it. It would therefore have not value. We must therefore conclude that:
Portfolio M includes every risky security which is quoted on the market.
Portfolio M is in fact simply a slice of the whole stock market; the proportions of shares held in it are the same as the total market capitalization of the shares on the stock market:
Portfolio M is called the market portfolio.
All rational risk- averse investors will hold the market portfolio, according to the model we have jest constructed. Note that it is not necessary for very investor to hold very share on the stock market. Replicas of portfolio M may be generated by holding as few as fifteen shares. Investment in unit trusts will also achieve the same result.
However, all investors do not have the same attitude to risk. By using the market portfolio, and by either lending or borrowing suitably at the risk-free rate, the investor can choose any level of risk he likes and can predict the return which the market will give him. This return will be the best that he could possibly get for the risk taken.
(4) Constructing the capital market line.
We have already seen that combinations of risk-free and investments give a straight line trade-off between risk and return.
To draw the capital market line we therefore need only two observations,
1. Rf- The risk-free rate of interest, which can be approximated by the return on government stock.
2. Rm and sigma m- The risk and return of the market portfolio. As the market portfolio should contain all risk investments, this can be estimated by using the risk and return on a stock market index such as the Financial times all share index.
Value of the Capital market line.
The capital market line tells us for a given level 0 risk the return an investor should expect on the stock exchange. It is often referred to as giving the market price of risk. That is if we choose to take a given level of risk on the stock exchange then we can expect a given level of return. If this is less than that offered by the project, it is tempting to say that the project should be accepted. However, there is a flaw in this logic.
The problem with this analysis is not in determining the capital market line but in determining the risk of an individual investment.
Capital market
Capital Market is the market in which long term financial instruments, such as bonds, equities, mutual funds and derivative instruments, are traded. Capital Market serves as an alternative for a company's capital resources and public investment. It also facilitates the infrastructures needed for the seling and buying process and other related activities.
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.
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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.
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Sunday, January 25, 2009
Syariah Product
Introduction
Syariah-based Capital Market can be defined as the capital market that implements the principles of Islamic Canon Law in business activites and is not involve in things prohibited by the Islamic Law such as usury, gambling, speculation, etc.
Syariah-based Capital Market is officially established on March 14, 2003 together the signing of MOU between the BAPEPAM and the National Syariah Board of Indonesian Council of Ulama (DSN-MUI).
Eventhough it was established on 2003, the instrument of syariah capital market has existed in Indonesia since 1997. It is marked by the launching of Syariah-based Mutual Fund on July 3, 1997 by PT. Danareksa Investment Management. The Jakarta Stock Exchange then cooperated with PT. Danareksa Investment Management to launch the Jakarta Islamic Index (JII) on July 3, 2000. The purpose is to facilitate the investors who want to invest according to the Islamic principles.
In the next development, new instrument of syariah-based investment is added by the issue of Syariah-based Bonds by PT. Indosat Tbk in the beginning of September 2002. It was the first of other syariah-based bonds issued. In 2004, syariah-based bonds with rent agreement system, or known as syariah ijarah, is issued, and in 2006, Mutual Fund Index is formed, in which the index used as the underlying index is the JII.
Syariah-based Shares
Share is commercial paper that represents the equity participation in a company. In syariah-based capital market, the equity participation can be done in companies, which business activities are not against the Islamic principles such as gambling, usury, and manufacturing prohibited things in Islamic Law like beer, etc.
In Indonesia, the principles of syariah-based investment are not presented in syariah or non syariah-based individual shares. Instead, it is forming shares index that fulfilled the syariah principles. JSX has JII that consist of 30 shares, which fulfill the syariah criteria set by the National Syariah Board. The JII Index is prepard by the JSX together with PT Danareksa Invesment Management.
Jakarta Islamic Index is intended as a benchmark to calculate the performance of syariah-based shares investment. Hopefully, through this index, we can develop the the investor’s trust on syariah equities.
Jakarta Islamic Index consists of 30 choosen shares that are in accordance with the Islamic syariah. The criteria used in choosing the shares in JII are determined by the Syariah Overseer Council of PT Danareksa Invesment Management.
Shares that included in the Syariah Index are shares from issuers whose business activities do not against the Islamic law as below:
*
Gambling business and any games that include gambling or prohibited trading.
*
Conventional financial institution, including conventional banking and insurance.
*
Businesses that produce, distribute, and trade food or drink that are prohibited by Islamic Law.
*
Businesses that produce, distribute, and/or provide products and services that destroy morality and harmful.
Besides the criteria above, the process of shares selection in the JII by the JSX also considering the aspects of liquidity and financial condition of the issuers, such as:
1.
the business activity of the issuer is not against the Islamic law and the share is listed in the Exchange for more than 3 months (except if the shares include in the 10 biggest capitalization list)
2.
the company’s annual financial report or its mid-year financial report have the ratio of Obligation Assets for maksimum of 90%
3.
Included in the top 60 shares based on its last year average of market capitalization.
4.
Included in the top 30 shares based on its last year average of liquidity in regular market.
Re-evaluation will be held every six months by considering the index components at the beginning of January and July on each year. The changes in issuer’s line of business will be monitored all the time based on the public data available.
Syariah-based Bond
According to the Decree of National Syariah Board No. 32/DSN-MUI/IX/2002, “Syariah Bond is long term commercial paper that is based on syariah principles issued by an issuer to syariah bondholder, and obligates the issuer to pay an amount of margin/fee to the bondholder and to repay the bond fund on its maturity date.”
Not all issuer can issue syariah-based bonds. To be able to issue the syariah bonds, the company needs to fulfill the requirements below:
1.
Its core business is not against the Islamic Law and the substantion of the Decree of National Syariah Board No. 20/DSN-MUI/IV/2001. The Decree stated that business which against the Islamic Law includes: (1) Gambling business and any games that include gambling or prohibited trading; (ii) Conventional financial institution, including conventional banking and insurance; (iii) Businesses that produce, distribute, and trade food or drink that are prohibited by Islamic Law; (iv) Businesses that produce, distribute, and/or provide products and services that destroy morality and harmful.
2.
The investment grade: (i) has strong business fundamental; (ii) has strong financial fundamental; (iii) has a good image on the society.
3.
Additional benefit if the shares are included in the JII component.
There are 2 schemes of Syariah Bond in Indonesia: syariah mudharabah and syariah Ijarah bonds.
Syariah Mudharabah bond is syariah bond that uses the agreement of share profit, so that the investor’s income on the bonds is gained after having the information of the issuer’s income.
Syariah Ijarah is syariah bond that uses the rent agreement, so that the amount of coupon (ijarah fee) received is steady, and can be calculated since the first time the bond is issued.
Syariah-based Mutual Fund
Syariah Mutual Fund is Mutual fund that allocates all of iths fund/ portfolios into the syariah instruments such as in the shares that joined the JII, Syariah bond, and other syariah financial instrument.
Decrees and the Regulations of Syariah Capital Market
The operational provitions of syariah capital market are regulated by the National Syariah Board of Indonesian Council of Ulama (DSN-MUI) and regulations of BAPEPAM-LK below:
1.
No.20/DSN-MUI/IX/2000 on the Guidelines of Syariah Mutual Fund Investment.
2.
No.32/DSN-MUI/IX/2002 on Syariah-based Bond.
3.
No.33/DSN-MUI/IX/2002 on Syariah Mudharabah Bond.
4.
No.40/DSN-MUI/IX/2003 on Capital Market and General Guidelines of Syariah Principle Implemetation in the Capital Market.
5.
No.41/DSN-MUI/III/2004 on Syariah Ijarah Bond.
6.
BAPEPAM-LK Regulation No. IX.A.13 on the Issuing of Syariah Securities.
7.
BAPEPAM-LK Regulation No. IX.A.13 on Decrees Used in the Issuing of Syariah Securities in Capital Market.
[Printer friendly version]
Syariah-based Capital Market can be defined as the capital market that implements the principles of Islamic Canon Law in business activites and is not involve in things prohibited by the Islamic Law such as usury, gambling, speculation, etc.
Syariah-based Capital Market is officially established on March 14, 2003 together the signing of MOU between the BAPEPAM and the National Syariah Board of Indonesian Council of Ulama (DSN-MUI).
Eventhough it was established on 2003, the instrument of syariah capital market has existed in Indonesia since 1997. It is marked by the launching of Syariah-based Mutual Fund on July 3, 1997 by PT. Danareksa Investment Management. The Jakarta Stock Exchange then cooperated with PT. Danareksa Investment Management to launch the Jakarta Islamic Index (JII) on July 3, 2000. The purpose is to facilitate the investors who want to invest according to the Islamic principles.
In the next development, new instrument of syariah-based investment is added by the issue of Syariah-based Bonds by PT. Indosat Tbk in the beginning of September 2002. It was the first of other syariah-based bonds issued. In 2004, syariah-based bonds with rent agreement system, or known as syariah ijarah, is issued, and in 2006, Mutual Fund Index is formed, in which the index used as the underlying index is the JII.
Syariah-based Shares
Share is commercial paper that represents the equity participation in a company. In syariah-based capital market, the equity participation can be done in companies, which business activities are not against the Islamic principles such as gambling, usury, and manufacturing prohibited things in Islamic Law like beer, etc.
In Indonesia, the principles of syariah-based investment are not presented in syariah or non syariah-based individual shares. Instead, it is forming shares index that fulfilled the syariah principles. JSX has JII that consist of 30 shares, which fulfill the syariah criteria set by the National Syariah Board. The JII Index is prepard by the JSX together with PT Danareksa Invesment Management.
Jakarta Islamic Index is intended as a benchmark to calculate the performance of syariah-based shares investment. Hopefully, through this index, we can develop the the investor’s trust on syariah equities.
Jakarta Islamic Index consists of 30 choosen shares that are in accordance with the Islamic syariah. The criteria used in choosing the shares in JII are determined by the Syariah Overseer Council of PT Danareksa Invesment Management.
Shares that included in the Syariah Index are shares from issuers whose business activities do not against the Islamic law as below:
*
Gambling business and any games that include gambling or prohibited trading.
*
Conventional financial institution, including conventional banking and insurance.
*
Businesses that produce, distribute, and trade food or drink that are prohibited by Islamic Law.
*
Businesses that produce, distribute, and/or provide products and services that destroy morality and harmful.
Besides the criteria above, the process of shares selection in the JII by the JSX also considering the aspects of liquidity and financial condition of the issuers, such as:
1.
the business activity of the issuer is not against the Islamic law and the share is listed in the Exchange for more than 3 months (except if the shares include in the 10 biggest capitalization list)
2.
the company’s annual financial report or its mid-year financial report have the ratio of Obligation Assets for maksimum of 90%
3.
Included in the top 60 shares based on its last year average of market capitalization.
4.
Included in the top 30 shares based on its last year average of liquidity in regular market.
Re-evaluation will be held every six months by considering the index components at the beginning of January and July on each year. The changes in issuer’s line of business will be monitored all the time based on the public data available.
Syariah-based Bond
According to the Decree of National Syariah Board No. 32/DSN-MUI/IX/2002, “Syariah Bond is long term commercial paper that is based on syariah principles issued by an issuer to syariah bondholder, and obligates the issuer to pay an amount of margin/fee to the bondholder and to repay the bond fund on its maturity date.”
Not all issuer can issue syariah-based bonds. To be able to issue the syariah bonds, the company needs to fulfill the requirements below:
1.
Its core business is not against the Islamic Law and the substantion of the Decree of National Syariah Board No. 20/DSN-MUI/IV/2001. The Decree stated that business which against the Islamic Law includes: (1) Gambling business and any games that include gambling or prohibited trading; (ii) Conventional financial institution, including conventional banking and insurance; (iii) Businesses that produce, distribute, and trade food or drink that are prohibited by Islamic Law; (iv) Businesses that produce, distribute, and/or provide products and services that destroy morality and harmful.
2.
The investment grade: (i) has strong business fundamental; (ii) has strong financial fundamental; (iii) has a good image on the society.
3.
Additional benefit if the shares are included in the JII component.
There are 2 schemes of Syariah Bond in Indonesia: syariah mudharabah and syariah Ijarah bonds.
Syariah Mudharabah bond is syariah bond that uses the agreement of share profit, so that the investor’s income on the bonds is gained after having the information of the issuer’s income.
Syariah Ijarah is syariah bond that uses the rent agreement, so that the amount of coupon (ijarah fee) received is steady, and can be calculated since the first time the bond is issued.
Syariah-based Mutual Fund
Syariah Mutual Fund is Mutual fund that allocates all of iths fund/ portfolios into the syariah instruments such as in the shares that joined the JII, Syariah bond, and other syariah financial instrument.
Decrees and the Regulations of Syariah Capital Market
The operational provitions of syariah capital market are regulated by the National Syariah Board of Indonesian Council of Ulama (DSN-MUI) and regulations of BAPEPAM-LK below:
1.
No.20/DSN-MUI/IX/2000 on the Guidelines of Syariah Mutual Fund Investment.
2.
No.32/DSN-MUI/IX/2002 on Syariah-based Bond.
3.
No.33/DSN-MUI/IX/2002 on Syariah Mudharabah Bond.
4.
No.40/DSN-MUI/IX/2003 on Capital Market and General Guidelines of Syariah Principle Implemetation in the Capital Market.
5.
No.41/DSN-MUI/III/2004 on Syariah Ijarah Bond.
6.
BAPEPAM-LK Regulation No. IX.A.13 on the Issuing of Syariah Securities.
7.
BAPEPAM-LK Regulation No. IX.A.13 on Decrees Used in the Issuing of Syariah Securities in Capital Market.
[Printer friendly version]
Equities
Share (stock) is one of the most popular financial instruments. Issuing stock is one of the choices for company’s funding. Moreover, stock is investors' most favourite investment instrument because it offers them an interesting return rate.
Stock can be defined as a sign of capital participation of an individual or institution in a company or corporation. By investing in a company, the party has the claim for the company’s income, assets, and right to attend the General Meeting of Shareholders.
Basically, there are two benefits the investor can get by buying or having stock:
1.
Dividend
Dividend is profit sharing given by company and comes from the income. Dividend is given after getting the agreement from shareholders in the General Meeting. If an investor wants to receive dividend, he/she must own the stock for a relatively long period, until the ownership term is in the period where he/she is acknowledged as the shareholder who has the right to obtain the dividend.
2.
Capital Gain
Capital gain is the different between buying price and selling price. Capital gain is obtained through the trading activities carried out in the secondary market. For example, an investor buys ABC’s shares at Rp 3,000 per share and then sells it at Rp 3,500 per share. It means the investor gets capital gain of Rp 500 for every sold share.
As investment instrument, stock has risks:
1.
Capital Loss
It is the reverse of Capital Gain. It is a condition when the investor sells his/her shares at lower price than its buying price. For instance, PT XYZ’s shares are bought at Rp 2,000 per share, but aftermath the stock price experiences decrease to the level of Rp 1,400 per share. Afraid of continuous declines, the investor sells the shares at price of Rp 1.400. The investor has retain 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 claiming rights of shareholders get the last priority after all the company’s liabilities are settled (by gathering the fund from selling the company’s assets). If there is an amount of rest of the company’s wealth, it will be shared proportionally to the shareholders. But, if there is no rest left, the shareholders will not receive anything out of the liquidation. This is the worst condition that might happen to shareholders. For that reason, a shareholder needs to observe every development in the company, which shares are owned.
In secondary market or daily shares trading activities, stock prices fluctuate, either increase or decrease. Prices are formed from the demand and supply of the stock. In other words, prices are formed by supply and demand. Supply and demand are influenced by many factors, either by specific factors such as the company and industry’s performance where the stocks exist or macro factors such as the interest rate, inflation, currency rate, and non-economical factors like social and political conditions, and so on
[Printer friendly version]
Stock can be defined as a sign of capital participation of an individual or institution in a company or corporation. By investing in a company, the party has the claim for the company’s income, assets, and right to attend the General Meeting of Shareholders.
Basically, there are two benefits the investor can get by buying or having stock:
1.
Dividend
Dividend is profit sharing given by company and comes from the income. Dividend is given after getting the agreement from shareholders in the General Meeting. If an investor wants to receive dividend, he/she must own the stock for a relatively long period, until the ownership term is in the period where he/she is acknowledged as the shareholder who has the right to obtain the dividend.
2.
Capital Gain
Capital gain is the different between buying price and selling price. Capital gain is obtained through the trading activities carried out in the secondary market. For example, an investor buys ABC’s shares at Rp 3,000 per share and then sells it at Rp 3,500 per share. It means the investor gets capital gain of Rp 500 for every sold share.
As investment instrument, stock has risks:
1.
Capital Loss
It is the reverse of Capital Gain. It is a condition when the investor sells his/her shares at lower price than its buying price. For instance, PT XYZ’s shares are bought at Rp 2,000 per share, but aftermath the stock price experiences decrease to the level of Rp 1,400 per share. Afraid of continuous declines, the investor sells the shares at price of Rp 1.400. The investor has retain 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 claiming rights of shareholders get the last priority after all the company’s liabilities are settled (by gathering the fund from selling the company’s assets). If there is an amount of rest of the company’s wealth, it will be shared proportionally to the shareholders. But, if there is no rest left, the shareholders will not receive anything out of the liquidation. This is the worst condition that might happen to shareholders. For that reason, a shareholder needs to observe every development in the company, which shares are owned.
In secondary market or daily shares trading activities, stock prices fluctuate, either increase or decrease. Prices are formed from the demand and supply of the stock. In other words, prices are formed by supply and demand. Supply and demand are influenced by many factors, either by specific factors such as the company and industry’s performance where the stocks exist or macro factors such as the interest rate, inflation, currency rate, and non-economical factors like social and political conditions, and so on
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forward by CEO
Coinciding with the 30th Anniversary of the Capital Market Re-Activation in Indonesia, Surabaya Stock Exchange was merged into Jakarta Stock Exchange. This merger created a new entity in Indonesia’s capital market, namely Indonesia Stock Exchange.
In the Extraordinary General Meeting of Shareholders held on 30th October 2007, all shareholders of both Exchanges have agreed to the merger planning and the forming of Indonesia Stock Exchanges (IDX). The legitimizations of the legal aspect and the company’s articles of association by the Minister of Justice and Human Rights of Indonesia have been completed. Thus, effective on the 1st December 2007, Indonesia Stock Exchange will act as a single Bourse that facilitates equities, fixed incomes, and derivative instruments trading. The existence of this Bourse will certainly strengthen our capital market and attract more people to invest in Indonesia.
We also believe that this merger will improve Indonesia’s market efficiency. Since Indonesia Stock Exchange facilitates all market segments, securities firms and issuers will only need to be listed in one Bourse. IDX will also have an integrated trading infrastructure that facilitates all the traded instruments. As a result, our market capitalization will certainly grow and be able to compete in regional scale. With this merger, we hope to establish a stronger capital market that could serve as an alternative investment and act as a mirror of the national economy.
One important aspect that we are facing right now is the information distribution to the capital market participants and public community. If in the past, the information were distributed through two Bourses, now IDX will become the central of all information distribution and disclosures. For that reason, we will gradually unite the information available in the two Bourses’ Websites into the Indonesia Stock Exchange’s Website.
To achieve this purpose, we need to make some adjustments, such as the unison of two infrastructures, systems, databases, contents, and other additional features. This process will definitely takes time. So, with deep gratitude, we kindly hope that users of our website could understand if, currently, this transitional website is far from what they might have expected.
With the support of many people, we hope that all the efforts we are doing now could work out successfully, as scheduled, and are able to fulfill the needs of many people for faster and accurate information as a reference in making decisions for their investment.
In this opportunity, we also would like to state our commitment to improve the image of Indonesian Capital Market by setting a series of strategic programs such as increasing the number of our local investors and issuers, implementing Good Corporate Governance (GCG), and adding new instruments of investment, and many more.
Despite the above challenges to solve and many works to do, we are positive that we could pass this transition period successfully and reach our goal to become a world credibility Exchange that facilitates a wider and more efficient market. With the spirit of togetherness and hard work, I believe we could meet these hopes and goals.
Jakarta, December 1, 2007
Erry Firmansyah
The President Director of Indonesia Stock Exchange
In the Extraordinary General Meeting of Shareholders held on 30th October 2007, all shareholders of both Exchanges have agreed to the merger planning and the forming of Indonesia Stock Exchanges (IDX). The legitimizations of the legal aspect and the company’s articles of association by the Minister of Justice and Human Rights of Indonesia have been completed. Thus, effective on the 1st December 2007, Indonesia Stock Exchange will act as a single Bourse that facilitates equities, fixed incomes, and derivative instruments trading. The existence of this Bourse will certainly strengthen our capital market and attract more people to invest in Indonesia.
We also believe that this merger will improve Indonesia’s market efficiency. Since Indonesia Stock Exchange facilitates all market segments, securities firms and issuers will only need to be listed in one Bourse. IDX will also have an integrated trading infrastructure that facilitates all the traded instruments. As a result, our market capitalization will certainly grow and be able to compete in regional scale. With this merger, we hope to establish a stronger capital market that could serve as an alternative investment and act as a mirror of the national economy.
One important aspect that we are facing right now is the information distribution to the capital market participants and public community. If in the past, the information were distributed through two Bourses, now IDX will become the central of all information distribution and disclosures. For that reason, we will gradually unite the information available in the two Bourses’ Websites into the Indonesia Stock Exchange’s Website.
To achieve this purpose, we need to make some adjustments, such as the unison of two infrastructures, systems, databases, contents, and other additional features. This process will definitely takes time. So, with deep gratitude, we kindly hope that users of our website could understand if, currently, this transitional website is far from what they might have expected.
With the support of many people, we hope that all the efforts we are doing now could work out successfully, as scheduled, and are able to fulfill the needs of many people for faster and accurate information as a reference in making decisions for their investment.
In this opportunity, we also would like to state our commitment to improve the image of Indonesian Capital Market by setting a series of strategic programs such as increasing the number of our local investors and issuers, implementing Good Corporate Governance (GCG), and adding new instruments of investment, and many more.
Despite the above challenges to solve and many works to do, we are positive that we could pass this transition period successfully and reach our goal to become a world credibility Exchange that facilitates a wider and more efficient market. With the spirit of togetherness and hard work, I believe we could meet these hopes and goals.
Jakarta, December 1, 2007
Erry Firmansyah
The President Director of Indonesia Stock Exchange
Indonesia Stock Exchange
Indonesia Stock Exchange
HISTORI
The capital market in Indonesia has actually exist long before the Independence of Indonesia. The first stock exchange in Indonesia was established on 1912 in Batavia during the Dutch colonial era. At that time, the Exchange was established for the interest of the Dutch East Indies (VOC).
During those era, the capital market grew gradually, and even became inactive for a period of time due to various conditions, such as the World War I and II, power transition from the Dutch government to Indonesian government, etc.
Indonesian government reactivated its capital market in 1977, and it grew rapidly ever since, along with the support of incentives and regulations issued by the government.
Below is the brief history of Indonesia Stock Exchange:
December 14, 1912
The first Stock Exchange in Indonesia was built in Batavia (currently known as Jakarta) by the Dutch East Indies.
1914 – 1918
The Batavia Stock Exchange was closed during the World War I.
1925 – 1942
The Batavia Stock Exchange was re-opened, and new stock exchanges were established in Semarang and Surabaya.
Early 1939
Due to the political issues on World War II, the stock exchanges in Semarang and Surabaya were closed.
1942 – 1952
Jakarta Stock Exchange (JSX) was re-closed during the World War II.
1952
JSX was re-activated by the issue of the Capital Market Emergency Regulations 1952 by the Minister of Justice of Indonesia (Prof. Dr. Sumitro Djojohadikusumo). The only product traded in the Exchange at that time was the Indonesian Government bond (1950).
1956
Due to the nationalism programs on Dutch’s companies by the Indonesian Government, JSX became stagnant.
1956 – 1977
During this period, JSX became inactive.
August 10, 1977
The Exchange was re-activated by the President Soeharto. It was supervised under the management of the Capital Market Supervisory Agency (Badan Pengawas Pasar Modal, or BAPEPAM). The re-activation of the capital market was also marked by the go public of PT Semen Cibinong as the first issuer listed in the JSX. July 10th is celebrated as the anniversary of the Capital Market in Indonesia.
1977 – 1987
The activity of stock trading in JSX was dull. There were only 24 listed companies in JSX. Most people prefered to invest their money in Banks rather than the Capital Market.
1987
PAKDES 87 (December Package 1987) was issued to give ways for companies to go public and foreign investors to invest their money in Indonesia.
1988 – 1990
Deregulations packages in Banking and Capital Market were made. JSX welcomed foreign investors. The activities of JSX were improving.
June 2,1988
Indonesia Pararel Bourse started to operate and managed by the Securities and Money Trading Organization. It consisted of brokers and dealers.
December 1988
The government issued PAKDES 88 to give ways for companies to go public, and some other regulations that brought positive impacts on the capital market growth were made.
June 16, 1989
Surabaya Stock Exchange started to operate and was managed by the Surabaya Stock Exchange Inc.
July 13, 1992
JSX was privatized, and as a result, the functions of BAPEPAM changed to become the Capital Market Supervisory Agency (BAPEPAM-LK). This date is celebrated as the anniversary of Jakarta Stock Exchange.
May 22, 1995
JSX introduced its computerized Jakarta Automatic Trading System (JATS).
November 10, 1995
The Government of Indonesia issued Regulations No. 8 year 1995 on capital market. This regulation was effective on January 1996.
1995
Indonesia Pararel Bourse was merged into Surabaya Stock Exchange.
2000
Scripless trading system was introduced for the first time in Indonesia’s Capital Market.
2002
JSX started to implement the remote trading system.
2007
Surabaya Stock Exchange was merged into Jakarta Stock Exchange. As a result, JSX changed its name into the Indonesia Stock Exchange.
HISTORI
The capital market in Indonesia has actually exist long before the Independence of Indonesia. The first stock exchange in Indonesia was established on 1912 in Batavia during the Dutch colonial era. At that time, the Exchange was established for the interest of the Dutch East Indies (VOC).
During those era, the capital market grew gradually, and even became inactive for a period of time due to various conditions, such as the World War I and II, power transition from the Dutch government to Indonesian government, etc.
Indonesian government reactivated its capital market in 1977, and it grew rapidly ever since, along with the support of incentives and regulations issued by the government.
Below is the brief history of Indonesia Stock Exchange:
December 14, 1912
The first Stock Exchange in Indonesia was built in Batavia (currently known as Jakarta) by the Dutch East Indies.
1914 – 1918
The Batavia Stock Exchange was closed during the World War I.
1925 – 1942
The Batavia Stock Exchange was re-opened, and new stock exchanges were established in Semarang and Surabaya.
Early 1939
Due to the political issues on World War II, the stock exchanges in Semarang and Surabaya were closed.
1942 – 1952
Jakarta Stock Exchange (JSX) was re-closed during the World War II.
1952
JSX was re-activated by the issue of the Capital Market Emergency Regulations 1952 by the Minister of Justice of Indonesia (Prof. Dr. Sumitro Djojohadikusumo). The only product traded in the Exchange at that time was the Indonesian Government bond (1950).
1956
Due to the nationalism programs on Dutch’s companies by the Indonesian Government, JSX became stagnant.
1956 – 1977
During this period, JSX became inactive.
August 10, 1977
The Exchange was re-activated by the President Soeharto. It was supervised under the management of the Capital Market Supervisory Agency (Badan Pengawas Pasar Modal, or BAPEPAM). The re-activation of the capital market was also marked by the go public of PT Semen Cibinong as the first issuer listed in the JSX. July 10th is celebrated as the anniversary of the Capital Market in Indonesia.
1977 – 1987
The activity of stock trading in JSX was dull. There were only 24 listed companies in JSX. Most people prefered to invest their money in Banks rather than the Capital Market.
1987
PAKDES 87 (December Package 1987) was issued to give ways for companies to go public and foreign investors to invest their money in Indonesia.
1988 – 1990
Deregulations packages in Banking and Capital Market were made. JSX welcomed foreign investors. The activities of JSX were improving.
June 2,1988
Indonesia Pararel Bourse started to operate and managed by the Securities and Money Trading Organization. It consisted of brokers and dealers.
December 1988
The government issued PAKDES 88 to give ways for companies to go public, and some other regulations that brought positive impacts on the capital market growth were made.
June 16, 1989
Surabaya Stock Exchange started to operate and was managed by the Surabaya Stock Exchange Inc.
July 13, 1992
JSX was privatized, and as a result, the functions of BAPEPAM changed to become the Capital Market Supervisory Agency (BAPEPAM-LK). This date is celebrated as the anniversary of Jakarta Stock Exchange.
May 22, 1995
JSX introduced its computerized Jakarta Automatic Trading System (JATS).
November 10, 1995
The Government of Indonesia issued Regulations No. 8 year 1995 on capital market. This regulation was effective on January 1996.
1995
Indonesia Pararel Bourse was merged into Surabaya Stock Exchange.
2000
Scripless trading system was introduced for the first time in Indonesia’s Capital Market.
2002
JSX started to implement the remote trading system.
2007
Surabaya Stock Exchange was merged into Jakarta Stock Exchange. As a result, JSX changed its name into the Indonesia Stock Exchange.
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