Discuss about the Capital Market for Nonmarketable Financial Assets.
How to manage risks from investing in Nonmarketable financial assets
Investors are quite concerned about the inflation rate that effects in rising federal spending and debts value of money, to understand and address inflation uncertainty of risk. It is required to prepare unexpected inflation with two-basis strategy. First, one is inflation by allocating short-term bonds that frequently updated and second one is attempt to earn a total return that investing equities and treasury inflation protecting sectors. Inflation protected securities are good inflation hedge as their principle is adjusted for changes in consumer price to provide good way to diversify to determine the operation in proper manner (D’Amico, 2016). However, in short term holding the volatility helps to determine the inflation rate to manage the diverse of the financial condition in proper manner.
Despite availability of short-term bonds, inflation hedge is one of the important aspects to control the risk related investments in market to large extent. An inflation hedge is an investment that helps to consider protection against purchasing power to develop the loss of its value due to rise of price accordingly. Besides that, against hedging inflation intended to protect the investors with real value of money (Swanson, 2014). In general, commodities and negative correlated with both stocks and bonds to determine the operation accordingly. Therefore, these are two way to determine the process and provide the best approach to handle the high inflation rate in investments operation.
How to manage risks from investing in Capital Market Securities
Securitization is the one of the important tool that helps to manage the capital marketing securities in effective manner. The progress of over managing risk provide the instruments in investors approach to analysis the limited operation to analysis the condition to analysis the risk related issues in proper manner (DeAngelo, 2014). There is different type of bonds that helps to protect as well as provide the experience to analysis the condition and handle the interest to provide the best approach in proper manner.
It is important to analysis the cash flow and maintain the proportion in reliable manner. It needs to provide the best approach to handle the derived and maintain the quality of overall rate of return to get tier to over the growth of the firm through investment operation (Stiglitz, 2015). It is important to determine the threshold, risk related distribution to generate the total return, and provide the higher growth rate accordingly. This helps to build up revenue to provide cash flow income in determine the growth condition in proper manner. Therefore, this helps to determine the total returns to manage the bases to expect the situation accordingly.
Derivatives can be used for risk management by hedging positions to prevent the risk of adverse changes in assets. Hedging is the act of offsetting a related security, which mitigate against unfriendly value developments. A derivative is a financial instrument in which the price relies upon the underlying asset. A derivatives is a contractual agreement between the parties that indicates which party is committed to purchase or offer the underlying security and which party has the privilege to purchase or offer the underlying security.
Hedging occurs when the individual or institution has access to the asset for a specific period of time and can then hedge based on futures contracts at a specific price in the future. This enables the individual or institution to hold the benefits of an asset, while diminishing the risk that the future selling price will deviate unexpectedly from the market’s present evaluation of the future value of the asset.
Derivatives allow the transfer of price-related risks of related assets, such as commodities from one party to the other. For example, a wheat farmer and a miller could sign a futures contract to exchange a certain amount of cash for a certain amount of wheat in the future. Both parties have reduced a future risk that the uncertainty of the price for the wheat farmer, and the availability of wheat for the miller. However, wheat may not be available as a result of occasions unspecified by the contract.
Capital market securities are securities which are issued in the capital market to raise funds for long term financial source. These securities are raised for money in use in long term interest of the business. Long term Securities can be either debt securities or equity securities. Capital market is a platform where companies search their investors seeking capital either through equity or debt securities from various investment holding public (Stowell, 2017). Also, capital marketable securities trade in secondary market where securities are traded and exchanged at market prices. Securities helps to open the channel from small and institutional investors to corporates, so that their money can be efficiently and productively used. To invest in capital market means investing in share securities or debt securities. Capital market plays a crucial role in building constructive role in the development of nation. Many investors want high level income and also have lump sum capacity to invest. Some investors are more interested in long term growth of the shareholding.
Share is a source of finance of funds for a company. Investing in equity can be more profitable as the market is maturing market and has the ability to attract more people today or in the coming future. More demand of shares will increase the market price of the share. People who have already purchased the equity shares before will get the benefit of increased price of the share. Shares can be either issued or traded and also exchanged over-the-counter. Over the counter can be helpful to companies when they don’t think of funding through other sources accept shares. When owners of the company offer friend or relative to buy the stock without the interference of financial institution. A stock or bulk of share is sold to friend or relative at a price which is lower than market price (Bekaert and Harvey, 2017). Malaysia is always benefited due to its geographical area. CEO of Malaysia capital market says that Malaysian market is maturing market with highest growth rate in ASEAN (Association of Southeast Asian Nations) (Lee, 2015). Investing in the largest listed banks in Malaysia- Maybank and CIMB group which has market value of around 101.4 billion (Capitalmarketsmalaysia, 2017). IHH Healthcare is the second largest healthcare listed company (Edgemarkets, 2018). Maybank has share priced 9RM. Profit attributable has increased from 6,552 RM`000 in 2013 to 752 RM`000 in 2017 and also the market capitalisation has increased from 88088 `RM million in 2013 to 105671 `RM million in 2017 (Annual report, 2017a). For IHH Healthcare company majority of share capital is equity. Out of 51, 20,860 share capital, total equity holding is 33, 69,744, which is a good sign to invest. As the company is not more dependent on debt. So, majority of profit is either distributed in shareholders or retained in reserves (annual report, 2017b). These two companies also has blue chip shares. IHH Healthcare is 6RM priced in market. The companies are also listed in FBM KLCI (a group of 30 best companies in Malaysia). The key profitability Return on assets has increased to 4.21 from 1.27 as tasking base of 2012. The return of equity is also consistence to 4% from 2014 to 2017. It is a good sign, it means company is considering its reserves important for further expansion (Morning star, 2018).
Benefits of investing in share (especially equity).
A bond is a form of long-term debt in which the borrower (issuing company) assures to pay the principal amount on the particular date. Till the day of payment of principal amount, a fix rate of interest is paid to the bond owners monthly or half-yearly. Irrespective of profits generated in a fiscal year, a fixed expense is incurred as an interest payable to the lender. It generally depends on willingness of the investor whether they wish to get a fix amount as income of interest or they want to enjoy the unexpected return of growing economy in form of capital gain and dividend (Emery, 2018). A bond is a typical type of loan this is given or secured only by a physical asset. Investing in bonds loses the opportunity to get the benefit of growing economy. Some investors prefer to be daring with the bond allocation. Some of the safe bonds are- treasury securities, High-quality corporates and mortgages. Some core plus strategies involves more risk and interest rate risk (Houweling and Zundert, 2017). The core plus strategies can be more income-oriented such as Low quality bond, which can provide potential return but brings a huge risk. Some of the highly rated bonds such as- Dodge & Cox Income DODIX, Loomis Sayles Core Plus bond NERNX can gives high rate of interest as the annual expense ratio is below 0.5. Even these bonds are given after the gold asset is mortgaged and also they are highest rated. The tenure of receiving these bonds is also long. They will give the returns for long (Wallace, 2018). Similarly, Blackrock Total Return MAHQX, the resulting performance is quite good with annual expense ratio of 0.45. But the mortgage physical asset is silver with lowest tenure which means it will not give returns for longer (Wallace, 2018). The formation of portfolio should be balanced investment strategy to allocate the resources, which aims balancing both risk and return. Portfolio`s investment is divided in both equity and fixed-income security. Bonds are profitable to those who want continuous return because investing in equity is a game of patience. Equity is owner holding and long term investment. But to invest totally only in Stocks will be very risky because the share price is very fluctuating. A combination of both bonds and stocks can be more suitable for most investors. By diversifying the investment in both. This can ensure safety and also will leave some opportunity for above average returns in stock investment. There are various factors affecting in choosing bond- the type- secured or unsecured. The maturity and also interest rate. The advantage of lending bonds can be converting the lender to owner. It depends on the number of shares issued as per conversion. A convertible has the features of both bond and shares (Mosaid and Boutti, 2014). This bond allows the converting of the nominal worth to considerable number of shares of equal value.
A debt is generally long term also known as debenture. A debt is only secured by issuer`s promise to pay the interest and the principal. A debt which is long term instrument, but it is not by physical assets or any collateral. Debenture is one of the important capital market item. For issuing debenture a company has to disclose material information like tax provisions, also includes whether the issuer will be responsible for TDS (Tax deductable at source) on payment made to debentures. The company has to issue prospectus through Securities Commission Malaysia to make announcement to public about the requirement of fund in the company. The prospectus should also include a credit rating of a debenture by different credit rating agencies (Prospectus, 2017). Debentures are generally issued by considering the reputation and creditworthiness of the corporate. For issuing debentures- there are various factors to be considered- the time of redemption, interest rates. The issuing of debenture by a listed company is undertaken by Capital Markets and services Act, 2007 in Malaysia. Debentures are sometimes also known as revenue bonds because fund raised through debentures are generally used for expansion and also they are expected to pay out the interest of the debentures from the proceeds of expansion or new project. Debentures are not asset backed. The debt of CIMB group is 16266399 RM` 000 which includes both one year 2965293 in 2017 and more than one year 13301106 RM`000 in 2017. The short term loans are decreased from 3237336 in 2016 and increased the medium and long term debt from 4398448 RM`000 in 2016 to 13301106 RM`000 in 2017 in just 6 months. The company is also confident for the 2nd half of 2017. It will more focus on quality of asset. The share capital is more than long-term debt which is a good sign as the company is not totally depending on its debts. It`s share capital is around 21215448 RM`000 at June, 2017. Even after a huge long term debt, the company is able to meet 22,087,100 RM`000 as reserves and surplus at June, 2017 (CIMB Group Holdings Berhad, 2017).
After covering the evaluation of every aspects of securities like debt, bond and share of capital market. The Malaysian market is maturing and growing. It has the scope to increase the worth of capital by expanding. Today, everyone wants higher earnings as well as long-term growth of the organisation in which they are holding their capital. Among shares, bonds and debt. Shares are most suitable to invest in a country like Malaysia. Greater the risk, more the profits. Shares provides authorised rights to shareholders to affect the decision of the organisation. Raise in share price of the investment due in increase in demand will make a good investment amount of the shareholders in future with addition to right shares and bonus shares also.
Conclusion
Through primary market, organisations can issue shares and bonds for the first time to raise capital through IPO (initial public offer) to either start the business or to expand the existing business. Secondary market provides the platform to trade between the existing securities. In the above research and analysis, the most preferred securities is shares. As shares offers direct ownership in the organisation. Equity market is less risky than derivative and options and also it is very attractive (Foong, and Lim, 2016). Companies provides various benefits to equity holder in form of bonus share and right share. One generally don’t have a huge investment in one take, so they try to attract the public to assist them by holding a part of capital in the total capital.
References
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