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Thursday, November 3, 2011
Every market has tradable objects; in this case, the Capital Market has its own uniqueness. Objects traded in the Capital Market are called Securities. They are Stocks, Bonds, Derivative Products, Investment Funds, Asset Backed Securities and Government Debt Certificate (with a time length of more than 12 months).
a. Stocks
Definition and Type
• Common Stocks
Common stock is the most known among other securities traded in the capital market. Common stock is the securities most commonly used by issuers to use to acquire funds from the public. Hence it is clear that common stock is most attractive both by investors and issuers. What is the definition of stocks? A stock is basically a sign of ownership by a person or an organization. A stock is in the form of a paper, which states that the owner of the paper has ownership to the company issuing the stock. Hence it’s similar to depositing money in a bank. Each time person deposits money in a bank they receive a receipt that states the person has deposited an amount of money. When a person buys a stock, that person will receive a receipt that states the person has ownership to the company issuing the stock.
• Preferred Stocks
Preferred stock is a stock that has a combined characteristic of both bonds and common stocks because it is a stock that can generate fixed income (such as bond interest) in the form of fixed dividend. Preference stock is similar to common stock because: they both represent equity ownership, which is issued without a written deadline on paper and they both distributes dividends. There are three similarities between preference stock and bonds: the right to claim income and assets, fixed dividend as long as the life of the stock, the right to convert to common stock. This is the reason that preferred stock is traded based on the return offered to the investor. Hence preference stock can basically be viewed as a securities with a fixed income and compete with bonds in the market. However, bonds’ rights lie above preference stock.
Benefits
Basically, there are two benefits for investors who buy and sell stock:
• Dividend
Dividend is the distribution of income of a company that issues stocks. The dividend is distributed after decided by the Shareholders General Meeting. The investor must hold on to the stock for a certain amount of time before he is recognized as the shareholder to receive dividends. Dividend is one attractive element for a shareholder with a long-term orientation, such as an institutional investor or retirement funds, etc. Dividends that are distributed by the company can be in the form of cash dividend or stock dividend. Cash dividend is the distribution of dividends in the form of cash, specifically an amount of Rupiahs for each share. Stock dividend is the distribution of shares to shareholders and therefore increasing the amount of shares owned by that person/organization.
• Capital Gain.
A capital gain is the difference between the selling and the purchasing price. Capital gain exists when there is stock trading activity in the secondary market. For example, an investor buys ABC stock with a piece of Rp 3000 per share and sells it at a price of Rp 3500. That investor earned a capital gain of Rp 500 for each share sold. Short term oriented investors usually hopes to achieve return through capital gain. An example would be a person who buys stock in the morning and sells it in the afternoon if the stock price increases. Stocks are characterized as high risk - high return. This basically means that stocks are securities that offer the opportunity for high returns but at the same time also has a high risk potential. Stock allows investors to receive high return or capital gain at a short amount of time.
�� Risks
What are the risks investors may face?
• No Dividend Received
An issuer will distribute dividends if the company’s operation results in profit. The company may not distribute any dividend if the issuer’s company operation results in a loss. Hence the potential of an investor to receive dividend depends on the company’s performance.
• Capital Loss
In a stock trading activity, not all investors will achieve capital gain or return on the stock sold. There are time when investors has to sell their stock with a price lower than they were bought, therefore the investor experiences capital loss. For example, an investor holding an Indosat (ISAT) stock with a buying price of Rp 9000 and afterwards later sells at a price of Rp 8000 per stock. That investor therefore experiences a capital loss of Rp 1000 for each stock sold. In stock trading, an investor sometimes sells at a low price to diverge an increasing potential loss because of a continuous decrease in stock. This action is called cut loss. In addition to the above risk, a shareholder still faces other risks:
• The company issuing the stock is declared bankrupt or liquidated
A company that goes bankrupt will definitely have a direct affect to its stocks. In reference to the listing regulations of the stock exchange, a bankrupt or liquidated company will automatically have their stocks delisted from the stock exchange. In a condition where the company is liquidated, the shareholder has a position lower than a creditor or a bondholder. This means that after all the company’s assets are sold, cash is paid to the creditors and the bond holder, and when there is still a remainder, then cash will be distributed to shareholders.
• Shares are delisted from Exchange
Another risk faced by the investor is that the stock is delisted from the Stock Exchange, otherwise known as the term "delisted". A stock is usually delisted from the Exchange because of poor performance. An example would be: the stock is not traded in a certain period of time, the company experiences loss for certain years, the company does not distribute dividend for a couple of years, and other conditions that do not conform to the listing regulation of the exchange. A stock delisted from the exchange is no more traded in the stock exchange; however the stock can still be traded out of the exchange with a consequence of an unclear price range, even a price much lower than before.
b. Bonds
�� Definition and Type
A bond is a securities or a certificate containing a contract between the lender (in this case the investor) and the borrower (in this case the issuer). Hence a bond is a piece of paper stating that the owner of the paper has bought an obligation from the company issuing the bond. The issuer pays interest on its bonds periodically and finally passes the threshold of the obligation’s value on the maturity value and pays back the total bond’s value plus interest to the bondholder. This instrument generally pays a fixedamount of interest periodically. If the interest in the economy falls, the bond’s value increases and if the interest in the economy rises, the bond’s value decreases.
• Straight bond
• Serial bond
Acquittance stages
− No. 1-100 (A series) ; paid at the end of the 5th year
− No. 101 - 200 (B series) ; paid at the end of the 6th year, and so on.
• Callable bond
− Issuers have the right to pay in full before the bond is matured, usually in a certain premium value.
• Convertible bond
In a glance, a convertible bond is no different than a usual bond. For example: they both offer a fixed coupon value, have a maturity date and a face value. The difference lies on convertible bond’s uniqueness that is it can be exchanged to a common stock. The requirement of conversion is always stated on a convertible bond. For example, each convertible bond can be exchanged to 3 shares of common stock after January 1st 2005. This requirement of course differs for different convertible bonds. Bondholders have the right to convert to stock in a future time.
• Sinking fund bond
Issuers must store some of their earnings to disburse their bonds. Earnings are stored at a Trustee.
• Secured bond
Firms must store some of their pledge, for example, land, building as warranty. Bond holders have the right to take over and sell the warranty if the firm can not pay the credit + interest.
Secured bond include:
Ø Mortgage bond: guaranteed by real estate
Ø Collateral trust bond: guaranteed by securities (stocks, for example) and stored at a third party (trust company).
Ø Equipment trust certificate: in USA, this is usually released by the Railway Company (paid annually).
• Unsecured bond (Debenture)
Issuers that have good "credit rating" will no need guarantee. In Indonesia, if the guarantee is insufficient, there will be provided a Guarantor, usually a bank besides a trustee.
�� Benefits and Risks
What is the benefit of buying bonds?
Bonds are recognized as fixed income securities, in the form of interest o coupon that is paid in a given fixed amount (for example 16% per year) every given period (for example: every 3 months, 6 months or once a year). Bonds also offer capital gain that is the difference between the selling price and buying price.
What is the risk of buying bonds?
The problem of determining a bond’s return is the unpredictability of interest rates. The bond’s price depends extremely on interest rate. If bank interest rate increases, the bondholder will experience loss since bond price will decrease. In addition to unpredictable interest rates, bondholders face callability risk, which is the completion of payment before maturity date. That is why it is fortunate for a bondholder that receives a fix amount at a time when interest rates are falling. Unfortunately this condition would not last for long. Many bonds issued by the issuer are called upon before maturity date.
c. Derivative Products (rights, warrant, option, etc.)
�� Definition, Benefits and Risks
The nature of Securities derivatives is what is derived from Securities ers to buy ights issue is one effort of issuers to add the number of stock uy stock, if an investor exercises released by an issuer that gives the right to a Securities to other party a number of d. Mutual Fund Unit of Investment d is used to gather funding from the public to be invested in is a /or �� orms of Mutual Fund ual Fund are Issuers that collects and sell stocks and • tual Fund nt type Mutual Funds are contracts the e pe is always an open-ended fund. Base e divided into two categories: is a Mutual Fund that can not buy stocks back after
whether it is debt or equity securities such as option and warrant. Rights issue is the right appointed to a stock that enables its hold
new securities including stock, Securities convertible to stock and warrant, before being offered to other party. The right must be able to be transferred. To exercise r
distributed in public to gain corporate capital. By issuing new stocks, investors must expend more to buy the right; this is an income for the company and adds its capital. Because of the nature of rights, investors are not obliged to buy. This is different from stock bonus and stock dividend which routinely received by stockholders. Buying a right means buying the right to b
his/her right; he/she had bought the stock. At this point the benefit of buying a right is the same as benefits of buying a stock, which are dividend and capital gain. Consequently, there are risks facing investors, whether they had exercised their right or not, which is the decrease of stock price and dividend per share. Warrant is Securities
holder to order stocks from the issuer at a certain price in a 6 months time or more from the date of issuance of the Warrant. Option is the right of an investor to buy or sell
Securities at a certain price and certain time.
�� Definition
Mutual Fun
Securities Portfolio by Investment Managers. In other words, Mutual Fundmedia to collectively invest based on policies of Investment Managers. Investment Fund activity can be put in many Securities, in financial and
capital market. It can also be placed on Securities representing industrial sectors such as, manufacturing, finance, infrastructure, etc. In some countries, Mutual Funds are placed in Securities instrument in anothercountry.
F
• Corporate type Mut
Corporate type Mutual Funds
invest its earnings on several types of Securities traded in Capital and Financial Markets. Contractual type Mu
Contractual collective investme
between Investment Managers and Custodian Banks that represents legality of the unit’s holders or investors. The contract represents the authority of Investment Manager to manage the Collective Investment Portfolio, and the authority of Custodian Bank to act as Custodian for thfund. This ty
d on the characteristics, Mutual Funds ar
• Closed-End Fund
Closed-End Fund
being sold to investors. In other words, stockholders can not buy their shares back to their Investment Managers. If stockholders were to sell back their shares, it must be done through Stock Exchange where the Mutual Fund is listed.
• Open-End Fund
Mutual Funds that can offer and buy stocks back from investors until the same amount of capital invested is achieved.
Share/unit holders can sell back their stock/unit at anytime. Investment Managers are obligated to buy according to NAV per share at that time.
�� Types of Mutual Fund
According to Bapepam Rules No. IV.C.3 Guide on Open-End Mutual Fund Daily Net Asset Value Announcement, Mutual Funds are categorized based on its portfolio differentiation:
• Financial Market Mutual Fund is a Mutual Fund that only invests in debt Securities with less that 1 year of maturity.
• Fixed Income Mutual Fund is a Mutual Fund that invests in at least 80% of assets in debt Securities.
• Stock Mutual Fund is a Mutual Fund that invests in at least 80% of assets in equity-based Securities.
• Combined Mutual Fund is a Mutual Fund that invests in both debt- and equity-based Securities with no smallest amount of percentage as point b or c.
�� Benefits and Risks
Investors can gain benefit in investing in Mutual Fund, such as:
• First, an investor can diversify their investment in securities even if they do not have much fund, hence risk can be reduced. As an example, an investor with limited funds can invest in a portfolio of bonds which is almost impossible to be done without a large amount of funds. Through mutual funds, the fund collected will be significantly large enough that a diversification can be done, both through the money market and capital market, such as in instruments such as stocks, bonds or deposits.
• Second, mutual funds simplify investors to invest in the capital market. Identifying well performing shares that is worth buying is not an easy job. It requires specific knowledge and skills, and not all investors have these capabilities.
• Third is time efficiency. Through mutual fund investment where the funds are managed by professional investment managers, the investors does not need to monitor their investment portfolio’s performance because this is all managed by the investment manager.
As other forms of investment, besides providing profitable opportunity it also contains risks, such as:
• Risk of Decreasing Value of Funds. This is a risk that is determined by the fall of securities prices (shares, bonds, and other securities) that are elements of the mutual funds’ portfolio. Liquidity Risk. This is the risk faced by
• investment managers when a majority of fund holders exercises redemption on the units they hold. Default Risk. This is the worst risk of all which emerges when th
• e insurance company insuring the mutual fund does not pay the full amount expected when default takes place. For example: default from related institutions such as brokers, custodian banks, payment agents, and other conditions that influences the fall of mutual fund’s net asset value.
e. Indonesian Depository Receipt Indonesian Depository Receipt
is a Security providing the right for a Primary Security deposited collectively at a Custodian Bank that has Bapepam’s approval. Public Offering of Indonesian Depository Receipt which main Securities are Indonesian Legal entity Securities must fulfill the requirements of the existing Public Offering.
f. Asset Backed Securities
�� Definition
Securities is a legal document, a debt acknowledgment letter, commercial letter, stock, bond, bank note, collective investment contract unit, other securities and its derivatives.
Asset is a substance owned by an individual which creates value without having to work to earn it (for example: deposits, land, gold, stock, mutual fund, etc).
From those definitions, Asset-Backed Securities is an investment unit from a collective investment contract which portfolio contains financial assets such as billing from commercial letters, lease, termed trade agreement, installment credit agreement, credit card charges, credit grant including housing or apartment, government-guaranteed debt securities, credit enhancement/cash flow, and other related financial asset.
Objectives of Asset-Backed Securities
Objective of Asset-Backed Securities is to transform illiquid assets to securities and tradable in capital market.
�� Benefits and Risks
The benefits of Asset-Backed Securities are:
Originator:
1. Assets are set off balance sheet and replaced with cash. It reduces assets and liabilities in a company that owned the asset credit enhancement. It will result in a larger leverage;
2. Originator do not need to wait until he/she receives payables to run the business and obtain new payables;
3. Asset-Backed Securities issued is rated higher by international rating agency to reduce costs to obtain fund;
4. Winning the competition. Asset securitization reduces assets without selling business ideas and can gain more income from it.
Investors:
1. Asset-Backed Securities gives high rate of return;
2. High credit quality. In general, Asset-Backed Securities has AAA (triple A) from international credit rating agency which makes it the most secured investment. It differs from existing bonds, Asset-Backed Securities has collaterals which ensures payment of interest and principles;
3. Risk diversification. Assets secured includes many business sectors;
4. Predictable cash flow. Asset-Backed Securities has stable and predictable cash flow which assures investors that principles and interest will be paid on time;
5. Least risk in rating decline. Asset-Backed Securities is guaranteed by secured assets so there is less risk in rating drop or decline like those in corporate bonds.
Economy:
1. Capital Market enhancement with high quality Securities in the market;
2. Source of income for banks, this budgeting company can enhance its budgeting activity;
3. Potential source of income for infrastructure projects such as highways.
�� Risks
Credit Risks:
Credit risks may occur if Asset-Backed Securities issuer (distinctive company) cannot pay interest and principles to investors.
Interest Risks:
Price of Asset-Backed Securities changes according to changes of interest rates.
Currency Risks:
It occurs when asset advanced on Securities based on devaluated currency.
Liquidity Risks:
There are possibilities that there is no funding to pay principles and interest on maturity date.
g. Government Debt Securities
�� Definition
Government Debt Securities is a legal document, a debt acknowledgment letter in the currency of Rupiah or other foreign currency guaranteed by payments of interest and principle by the government of the Republic of Indonesia, according to its validation.
�� Benefits and Risks
For the government
1. Pays out for Government Income and Expenditure;
2. Covers short term cash caused by imbalanced income and expenditure cash flow of Government Cash Account in an annual budget;
3. Manages government debt portfolio.
For investors
Government Debt Securities is a Fixed Income Securities or legal document that provides fixed income in interest or coupon payable in a fixed amount at predetermined time, for example, once every 3, 6, 12 months. It also offers capital gain, difference between selling and buying price.
What are its risks?
Investing in Government Debt Securities has very low risks considering its guaranteed interest and principle payment by the Government of the Republic of Indonesia.
a. Stocks
Definition and Type
• Common Stocks
Common stock is the most known among other securities traded in the capital market. Common stock is the securities most commonly used by issuers to use to acquire funds from the public. Hence it is clear that common stock is most attractive both by investors and issuers. What is the definition of stocks? A stock is basically a sign of ownership by a person or an organization. A stock is in the form of a paper, which states that the owner of the paper has ownership to the company issuing the stock. Hence it’s similar to depositing money in a bank. Each time person deposits money in a bank they receive a receipt that states the person has deposited an amount of money. When a person buys a stock, that person will receive a receipt that states the person has ownership to the company issuing the stock.
• Preferred Stocks
Preferred stock is a stock that has a combined characteristic of both bonds and common stocks because it is a stock that can generate fixed income (such as bond interest) in the form of fixed dividend. Preference stock is similar to common stock because: they both represent equity ownership, which is issued without a written deadline on paper and they both distributes dividends. There are three similarities between preference stock and bonds: the right to claim income and assets, fixed dividend as long as the life of the stock, the right to convert to common stock. This is the reason that preferred stock is traded based on the return offered to the investor. Hence preference stock can basically be viewed as a securities with a fixed income and compete with bonds in the market. However, bonds’ rights lie above preference stock.
Benefits
Basically, there are two benefits for investors who buy and sell stock:
• Dividend
Dividend is the distribution of income of a company that issues stocks. The dividend is distributed after decided by the Shareholders General Meeting. The investor must hold on to the stock for a certain amount of time before he is recognized as the shareholder to receive dividends. Dividend is one attractive element for a shareholder with a long-term orientation, such as an institutional investor or retirement funds, etc. Dividends that are distributed by the company can be in the form of cash dividend or stock dividend. Cash dividend is the distribution of dividends in the form of cash, specifically an amount of Rupiahs for each share. Stock dividend is the distribution of shares to shareholders and therefore increasing the amount of shares owned by that person/organization.
• Capital Gain.
A capital gain is the difference between the selling and the purchasing price. Capital gain exists when there is stock trading activity in the secondary market. For example, an investor buys ABC stock with a piece of Rp 3000 per share and sells it at a price of Rp 3500. That investor earned a capital gain of Rp 500 for each share sold. Short term oriented investors usually hopes to achieve return through capital gain. An example would be a person who buys stock in the morning and sells it in the afternoon if the stock price increases. Stocks are characterized as high risk - high return. This basically means that stocks are securities that offer the opportunity for high returns but at the same time also has a high risk potential. Stock allows investors to receive high return or capital gain at a short amount of time.
�� Risks
What are the risks investors may face?
• No Dividend Received
An issuer will distribute dividends if the company’s operation results in profit. The company may not distribute any dividend if the issuer’s company operation results in a loss. Hence the potential of an investor to receive dividend depends on the company’s performance.
• Capital Loss
In a stock trading activity, not all investors will achieve capital gain or return on the stock sold. There are time when investors has to sell their stock with a price lower than they were bought, therefore the investor experiences capital loss. For example, an investor holding an Indosat (ISAT) stock with a buying price of Rp 9000 and afterwards later sells at a price of Rp 8000 per stock. That investor therefore experiences a capital loss of Rp 1000 for each stock sold. In stock trading, an investor sometimes sells at a low price to diverge an increasing potential loss because of a continuous decrease in stock. This action is called cut loss. In addition to the above risk, a shareholder still faces other risks:
• The company issuing the stock is declared bankrupt or liquidated
A company that goes bankrupt will definitely have a direct affect to its stocks. In reference to the listing regulations of the stock exchange, a bankrupt or liquidated company will automatically have their stocks delisted from the stock exchange. In a condition where the company is liquidated, the shareholder has a position lower than a creditor or a bondholder. This means that after all the company’s assets are sold, cash is paid to the creditors and the bond holder, and when there is still a remainder, then cash will be distributed to shareholders.
• Shares are delisted from Exchange
Another risk faced by the investor is that the stock is delisted from the Stock Exchange, otherwise known as the term "delisted". A stock is usually delisted from the Exchange because of poor performance. An example would be: the stock is not traded in a certain period of time, the company experiences loss for certain years, the company does not distribute dividend for a couple of years, and other conditions that do not conform to the listing regulation of the exchange. A stock delisted from the exchange is no more traded in the stock exchange; however the stock can still be traded out of the exchange with a consequence of an unclear price range, even a price much lower than before.
b. Bonds
�� Definition and Type
A bond is a securities or a certificate containing a contract between the lender (in this case the investor) and the borrower (in this case the issuer). Hence a bond is a piece of paper stating that the owner of the paper has bought an obligation from the company issuing the bond. The issuer pays interest on its bonds periodically and finally passes the threshold of the obligation’s value on the maturity value and pays back the total bond’s value plus interest to the bondholder. This instrument generally pays a fixedamount of interest periodically. If the interest in the economy falls, the bond’s value increases and if the interest in the economy rises, the bond’s value decreases.
• Straight bond
• Serial bond
Acquittance stages
− No. 1-100 (A series) ; paid at the end of the 5th year
− No. 101 - 200 (B series) ; paid at the end of the 6th year, and so on.
• Callable bond
− Issuers have the right to pay in full before the bond is matured, usually in a certain premium value.
• Convertible bond
In a glance, a convertible bond is no different than a usual bond. For example: they both offer a fixed coupon value, have a maturity date and a face value. The difference lies on convertible bond’s uniqueness that is it can be exchanged to a common stock. The requirement of conversion is always stated on a convertible bond. For example, each convertible bond can be exchanged to 3 shares of common stock after January 1st 2005. This requirement of course differs for different convertible bonds. Bondholders have the right to convert to stock in a future time.
• Sinking fund bond
Issuers must store some of their earnings to disburse their bonds. Earnings are stored at a Trustee.
• Secured bond
Firms must store some of their pledge, for example, land, building as warranty. Bond holders have the right to take over and sell the warranty if the firm can not pay the credit + interest.
Secured bond include:
Ø Mortgage bond: guaranteed by real estate
Ø Collateral trust bond: guaranteed by securities (stocks, for example) and stored at a third party (trust company).
Ø Equipment trust certificate: in USA, this is usually released by the Railway Company (paid annually).
• Unsecured bond (Debenture)
Issuers that have good "credit rating" will no need guarantee. In Indonesia, if the guarantee is insufficient, there will be provided a Guarantor, usually a bank besides a trustee.
�� Benefits and Risks
What is the benefit of buying bonds?
Bonds are recognized as fixed income securities, in the form of interest o coupon that is paid in a given fixed amount (for example 16% per year) every given period (for example: every 3 months, 6 months or once a year). Bonds also offer capital gain that is the difference between the selling price and buying price.
What is the risk of buying bonds?
The problem of determining a bond’s return is the unpredictability of interest rates. The bond’s price depends extremely on interest rate. If bank interest rate increases, the bondholder will experience loss since bond price will decrease. In addition to unpredictable interest rates, bondholders face callability risk, which is the completion of payment before maturity date. That is why it is fortunate for a bondholder that receives a fix amount at a time when interest rates are falling. Unfortunately this condition would not last for long. Many bonds issued by the issuer are called upon before maturity date.
c. Derivative Products (rights, warrant, option, etc.)
�� Definition, Benefits and Risks
The nature of Securities derivatives is what is derived from Securities ers to buy ights issue is one effort of issuers to add the number of stock uy stock, if an investor exercises released by an issuer that gives the right to a Securities to other party a number of d. Mutual Fund Unit of Investment d is used to gather funding from the public to be invested in is a /or �� orms of Mutual Fund ual Fund are Issuers that collects and sell stocks and • tual Fund nt type Mutual Funds are contracts the e pe is always an open-ended fund. Base e divided into two categories: is a Mutual Fund that can not buy stocks back after
whether it is debt or equity securities such as option and warrant. Rights issue is the right appointed to a stock that enables its hold
new securities including stock, Securities convertible to stock and warrant, before being offered to other party. The right must be able to be transferred. To exercise r
distributed in public to gain corporate capital. By issuing new stocks, investors must expend more to buy the right; this is an income for the company and adds its capital. Because of the nature of rights, investors are not obliged to buy. This is different from stock bonus and stock dividend which routinely received by stockholders. Buying a right means buying the right to b
his/her right; he/she had bought the stock. At this point the benefit of buying a right is the same as benefits of buying a stock, which are dividend and capital gain. Consequently, there are risks facing investors, whether they had exercised their right or not, which is the decrease of stock price and dividend per share. Warrant is Securities
holder to order stocks from the issuer at a certain price in a 6 months time or more from the date of issuance of the Warrant. Option is the right of an investor to buy or sell
Securities at a certain price and certain time.
�� Definition
Mutual Fun
Securities Portfolio by Investment Managers. In other words, Mutual Fundmedia to collectively invest based on policies of Investment Managers. Investment Fund activity can be put in many Securities, in financial and
capital market. It can also be placed on Securities representing industrial sectors such as, manufacturing, finance, infrastructure, etc. In some countries, Mutual Funds are placed in Securities instrument in anothercountry.
F
• Corporate type Mut
Corporate type Mutual Funds
invest its earnings on several types of Securities traded in Capital and Financial Markets. Contractual type Mu
Contractual collective investme
between Investment Managers and Custodian Banks that represents legality of the unit’s holders or investors. The contract represents the authority of Investment Manager to manage the Collective Investment Portfolio, and the authority of Custodian Bank to act as Custodian for thfund. This ty
d on the characteristics, Mutual Funds ar
• Closed-End Fund
Closed-End Fund
being sold to investors. In other words, stockholders can not buy their shares back to their Investment Managers. If stockholders were to sell back their shares, it must be done through Stock Exchange where the Mutual Fund is listed.
• Open-End Fund
Mutual Funds that can offer and buy stocks back from investors until the same amount of capital invested is achieved.
Share/unit holders can sell back their stock/unit at anytime. Investment Managers are obligated to buy according to NAV per share at that time.
�� Types of Mutual Fund
According to Bapepam Rules No. IV.C.3 Guide on Open-End Mutual Fund Daily Net Asset Value Announcement, Mutual Funds are categorized based on its portfolio differentiation:
• Financial Market Mutual Fund is a Mutual Fund that only invests in debt Securities with less that 1 year of maturity.
• Fixed Income Mutual Fund is a Mutual Fund that invests in at least 80% of assets in debt Securities.
• Stock Mutual Fund is a Mutual Fund that invests in at least 80% of assets in equity-based Securities.
• Combined Mutual Fund is a Mutual Fund that invests in both debt- and equity-based Securities with no smallest amount of percentage as point b or c.
�� Benefits and Risks
Investors can gain benefit in investing in Mutual Fund, such as:
• First, an investor can diversify their investment in securities even if they do not have much fund, hence risk can be reduced. As an example, an investor with limited funds can invest in a portfolio of bonds which is almost impossible to be done without a large amount of funds. Through mutual funds, the fund collected will be significantly large enough that a diversification can be done, both through the money market and capital market, such as in instruments such as stocks, bonds or deposits.
• Second, mutual funds simplify investors to invest in the capital market. Identifying well performing shares that is worth buying is not an easy job. It requires specific knowledge and skills, and not all investors have these capabilities.
• Third is time efficiency. Through mutual fund investment where the funds are managed by professional investment managers, the investors does not need to monitor their investment portfolio’s performance because this is all managed by the investment manager.
As other forms of investment, besides providing profitable opportunity it also contains risks, such as:
• Risk of Decreasing Value of Funds. This is a risk that is determined by the fall of securities prices (shares, bonds, and other securities) that are elements of the mutual funds’ portfolio. Liquidity Risk. This is the risk faced by
• investment managers when a majority of fund holders exercises redemption on the units they hold. Default Risk. This is the worst risk of all which emerges when th
• e insurance company insuring the mutual fund does not pay the full amount expected when default takes place. For example: default from related institutions such as brokers, custodian banks, payment agents, and other conditions that influences the fall of mutual fund’s net asset value.
e. Indonesian Depository Receipt Indonesian Depository Receipt
is a Security providing the right for a Primary Security deposited collectively at a Custodian Bank that has Bapepam’s approval. Public Offering of Indonesian Depository Receipt which main Securities are Indonesian Legal entity Securities must fulfill the requirements of the existing Public Offering.
f. Asset Backed Securities
�� Definition
Securities is a legal document, a debt acknowledgment letter, commercial letter, stock, bond, bank note, collective investment contract unit, other securities and its derivatives.
Asset is a substance owned by an individual which creates value without having to work to earn it (for example: deposits, land, gold, stock, mutual fund, etc).
From those definitions, Asset-Backed Securities is an investment unit from a collective investment contract which portfolio contains financial assets such as billing from commercial letters, lease, termed trade agreement, installment credit agreement, credit card charges, credit grant including housing or apartment, government-guaranteed debt securities, credit enhancement/cash flow, and other related financial asset.
Objectives of Asset-Backed Securities
Objective of Asset-Backed Securities is to transform illiquid assets to securities and tradable in capital market.
�� Benefits and Risks
The benefits of Asset-Backed Securities are:
Originator:
1. Assets are set off balance sheet and replaced with cash. It reduces assets and liabilities in a company that owned the asset credit enhancement. It will result in a larger leverage;
2. Originator do not need to wait until he/she receives payables to run the business and obtain new payables;
3. Asset-Backed Securities issued is rated higher by international rating agency to reduce costs to obtain fund;
4. Winning the competition. Asset securitization reduces assets without selling business ideas and can gain more income from it.
Investors:
1. Asset-Backed Securities gives high rate of return;
2. High credit quality. In general, Asset-Backed Securities has AAA (triple A) from international credit rating agency which makes it the most secured investment. It differs from existing bonds, Asset-Backed Securities has collaterals which ensures payment of interest and principles;
3. Risk diversification. Assets secured includes many business sectors;
4. Predictable cash flow. Asset-Backed Securities has stable and predictable cash flow which assures investors that principles and interest will be paid on time;
5. Least risk in rating decline. Asset-Backed Securities is guaranteed by secured assets so there is less risk in rating drop or decline like those in corporate bonds.
Economy:
1. Capital Market enhancement with high quality Securities in the market;
2. Source of income for banks, this budgeting company can enhance its budgeting activity;
3. Potential source of income for infrastructure projects such as highways.
�� Risks
Credit Risks:
Credit risks may occur if Asset-Backed Securities issuer (distinctive company) cannot pay interest and principles to investors.
Interest Risks:
Price of Asset-Backed Securities changes according to changes of interest rates.
Currency Risks:
It occurs when asset advanced on Securities based on devaluated currency.
Liquidity Risks:
There are possibilities that there is no funding to pay principles and interest on maturity date.
g. Government Debt Securities
�� Definition
Government Debt Securities is a legal document, a debt acknowledgment letter in the currency of Rupiah or other foreign currency guaranteed by payments of interest and principle by the government of the Republic of Indonesia, according to its validation.
�� Benefits and Risks
For the government
1. Pays out for Government Income and Expenditure;
2. Covers short term cash caused by imbalanced income and expenditure cash flow of Government Cash Account in an annual budget;
3. Manages government debt portfolio.
For investors
Government Debt Securities is a Fixed Income Securities or legal document that provides fixed income in interest or coupon payable in a fixed amount at predetermined time, for example, once every 3, 6, 12 months. It also offers capital gain, difference between selling and buying price.
What are its risks?
Investing in Government Debt Securities has very low risks considering its guaranteed interest and principle payment by the Government of the Republic of Indonesia.
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