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CAPITAL MARKETS
What is a Capital Markets
A market in which equity and debt instruments are traded. Capital markets channel savings
between suppliers of capital such as retail investors and institutional investors, and users of
capital like businesses, government and individuals. Capital markets are vital to the functioning
of an economy, since capital is a critical component for generating economic output.
Products Offered by Capital Markets Institutions and intermediaries
Financial instruments can be defined as promises to pay money in the future in
exchange for present funds. Financial instruments are created to satisfy the needs
of financial system participants and also as a result of financial innovation in the
borrowing and financial intermediation processes. The financial market consist of
the foreign exchange market, money market, bond and long term market, equity
market as well as the commodities market. The bond and long term debt market
together with the equity market make up the Capital Market.
The Financial Market
Capital
Market
Foreign
Money
Exchange
Market
Market
Bond and
Long term
debt market
Equity
Commodities
market
market
Equity and Long term debt products common in Swaziland
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Ordinary shares
Bonds
Ordinary shares
Ordinary shares have no maturity date. Shareholders liquidate their investments in
the shares of a company only by selling them to another investor. Ordinary
shareholders have a claim on the income and net assets of a company only after
obligations to creditors, bondholders, and preferred shareholders have been met.
Ordinary shareholders have voting rights at annual general meetings and they have
the right to first option to buy new shares. The most an ordinary shareholder can
lose if a company is wound up is the amount of their investment in the company.
Returns to ordinary shareholders consist of:
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Dividends: a proportion of the company’s profits. They are not guaranteed
until declared by the company’s board of directors.
Capital gains: arise through changes in a company’s shares. As a company
grows in size and profits, so does the value of its shares.
Bonds
The majority of bonds traded in Swaziland are issued by the government. Fincorp
is also becoming a major issuer of bonds. Bonds carry credit risk, which is the
likelihood that the bond issuer may fail to pay interest or to repay the capital
according to the agreed terms. It is institutional investors such as retirement funds
that tend to buy into bonds.
Trading on the Capital Markets
Bonds and long term debt instruments are traded on organized exchanges, such as
the Swaziland Stock Exchange or over-the-counter (OTC).
Previously issued bonds and long term debt instruments are traded on the
secondary market, whereas the primary market is where new bonds and long term
debt instruments are issued.
Intermediaries in the Capital Market
To facilitate the saving and investment process in any economy, financial
intermediaries must exist. The financial intermediary is essentially a middleman
who pools funds from savers and channels them on to those in need of them.
Financial intermediaries are specialists in their line of businesses and thus, heavily
relied upon by their clients to make good investment decisions on their behalf or
provide professional financial advice to them.
The capital markets have a wide range of intermediaries performing various
functions. These include:
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Investment Advisers
Stock brokers/Dealers
Collective Investment Scheme Managers
Securities Exchanges
Trustees and Custodians
Central Securities Depositories (Clearing houses)
Nominees
Regulating the Markets
While there is a lot of give and take in the capital markets, with supply and
demand setting the prices for securities, it’s not a total free-for-all. There must be
an independent body to regulate this industry. In Swaziland, the Capital Markets
Department (CMD) within the Financial Services Regulatory Authority (FSRA) was
created to perform such a supervisory role, drawing its power from the Securities
Act, 2010.
The Capital Markets Division
The CMD has the mandate to:
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protect the investors;
Reduce systemic risk;
Develop all aspects of the capital market in Swaziland; and
Implement a system that will create, maintain and regulate a capital market
whose participants are self-regulating and where securities can be traded in
an orderly, fair, efficient and transparent manner.
The CMD discharges its duties by monitoring the activities of capital market
participants, based on principles of good market conduct and prudential
regulation.