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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 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: 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: 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: 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.