Understanding the Capital Market

When you read through any financial blogs or news, you’re bound to come across the term ‘capital market’ somewhere within your reading. While the structure and operation of the capital market can seem daunting to understand and uncover, it is actually not as complicated as it sounds.

It has been reported that despite the challenging environment, the total size of the Malaysian capital market rose by 7% to RM3.4 trillion in 2020 compared to RM3.2 trillion in 2019. If you weren’t interested to understand about the capital market in Malaysia before, now knowing that it’s valued within the trillions may have just piqued your interest.

We asked Mr. Chris Daniel Wong, an Investor Entrepreneur to provide a better understanding to our readers regarding the capital market in Malaysia.

What is capital market?

Capital market can be broadly defined as the market where buyers and sellers engage in trade of financial securities. There are two types of financial securities, one is bonds and the other is stocks.

Bonds are normally what we call debt security and it could be a mid-term bond or a long-term bond. Whereas stocks can be an unlisted company’s equity, which means the company is still a Private Limited or a public company but it is not listed.

On the other hand, stocks are listed company shares from companies that are listed in Bursa Malaysia. Shares can be broken down further into Initial Public Offering (IPO) shares and also secondary market shares.

The buying and selling are undertaken by two types of participants; individual (retail investors or accredited investors) and institutions (e.g. Pension Fund and Mutual Fund).

Are capital markets the same as stock markets?

Capital market is the trading of financial security in a market meanwhile, the stock market or stock exchange is a subset of the capital market.

Stock exchange is publicly traded, therefore as long as you have a trading account (e.g. with an investment bank) you can trade personally. That is actually the stock market.

The capital market, however, is a private market. A private market such as operated by Equity Crowdfunding (ECF) platform. Those are private platforms for you to trade company shares.

The capital market is not stock exchange, but it has various subsets.

In Malaysia, we also have government bonds such as MSIG, sukuk market that issues Islamic bonds, and certain private companies that issue redeemable preference shares or renewable convertible preference shares. These are the subsets of the capital market, so various different platforms offer different financial products.

How is the capital market structured?

The capital market consists of primary and secondary markets. The primary market is for new shares and new securities to be issued, whereas the secondary market deals with previously issued securities among investors and you trade the “secondhand” security.

Is the capital market regulated?

Any capital market in the world is heavily regulated and Malaysia capital market is also regulated by various regulatory bodies.

These past few years, we have seen a lot of Sendirian Berhad (Sdn Bhd) companies that went into the market and conducted fundraising which is actually against the law because you are not supposed to offer your security to the public. You are only allowed to offer to accredited investors and not many people fall under the definition of accredited investors.

Can you briefly explain what due diligence is and the process behind it?

Due diligence means reasonable steps taken by a person or a company to avoid committing a tort or offence that will inquire financial losses to the person or company that will invest in your company. It is a comprehensive appraisal taken by prospective buyers or investors to establish the assets and liabilities, and evaluate the commercial potential of a business.

In simpler words, if you invite me to invest in your company, first things first, I will ask you to show me your profit and loss account (P&L), balance sheet (assets and liabilities), and five years income statement projection. All these will sum up basic due diligence to the investors.

Basically, investors will assess the current situation of the company, then they would want to see your cash flow projection as well and valuation report. It would give them a sense of knowledge and with all the information, only then will they be able to make a decision on whether your business is sustainable going forward or not to be invested in.

Can the same due diligence process also be done for startups or is the process done differently?

It is the same but maybe for startups it could actually be a bit simpler. This is because startups do not have previous years of financial information. The investors will not ask you for past information but they will ask you for future information and comparisons with identical businesses.

What is raising fund in capital market?

Capital fundraising is a subset of capital market. For a business, make sure to always look at due diligence first before going to the market and doing fundraising. The proper term for this is actually capital raising.

After you have done capital raising, you will have to go through what is known as capital deployment. To do capital deployment, a business has to go to the investment term sheet where there will usually be usage of funds spelt out.

Are there different types of fundraising?

There are only two types of fundraising, one is for public listed companies and the other one is for public unlisted companies. Both are subjected to the supervision of regulatory bodies.

Who regulates the fundraising activities done in capital market?

A business that is interested in doing fundraising activities definitely needs to engage with a licensed fund manager or recognised market operator. Businesses have a choice of either going through an Equity Crowd Funding platform or issuing an info memo through the regulated body. For this, you would need someone to help you therefore this is where the service of a licensed fund manager is required.

Another thing that can be done is to list your company in Bursa Malaysia, then you will have your investment bank write the IPO and help your company do fundraising.

Edited by: Farah Alya Faisal