Limping Economy – Part II
In my previous article, I pointed out that there is a surplus of capital on one side of the river and a lack of capital on the other side. If we manage to create financial infrastructure that will serve as a bridge connecting the two sides of the river, we will be able to fix our limping economy and experience rapid development.
Then what environment needs to be formed in order to develop the capital market?
Necessary conditions
A market not only needs products, but also subjects of the economy who are willing to sell and buy those products. Securities serve the role of products in a capital market. These may include all types of stock (common, preferred, and so on), debt securities (bonds, mortgages and savings certificates), and their derivatives.
Securities markets can be divided into two groups: primary and secondary. The primary market refers to the market where securities are created, whereas the secondary market is the market where previously issued securities are bought and sold. The revenue generated by selling securities in the primary market goes to the company that issued those securities, while the same revenue in the secondary market goes to the seller.
Buyers and sellers of securities include individuals, companies and investment funds. The biggest players in the securities market are public and private pension funds, insurance companies and joint funds. The organizations that link the buyers with the sellers are called broker-dealers.
Securities can be traded online or on a stock exchange. The infrastructure of the Mongolian Stock Exchange is technically on par with the London Stock Exchange. However, when it comes to over-the-counter (OTC) trading, which includes online transactions, Mongolia needs to be cautious about its security issues.
The capital market allows huge transactions to take place in a very short amount of time. Therefore, it goes without saying that there should be laws that fully regulate the activities of entities within the market.
Sufficient conditions
An essential part of keeping the capital market efficient is the prevention of insider trading. Insider trading is the trading of a company’s stock by individuals who secretly use non-public information to gain profits. The Mongolian Association of Securities Dealers proposed including clauses regulating insider trading, and its penalty, in the draft securities law. However, there have been complaints that the proposal was discarded when the draft law was developed.
For example, the Financial Regulatory Committee issued a resolution to split one Tavan Tolgoi company stock into 100 units on June 30, 2011. Nevertheless, even after this resolution was issued, a whole day was spent trading the stock at its former unit. On that day, five times as many transactions as that of a normal day took place when news of splitting the stock spread. The Financial Regulatory Committee denied the existence of a “secret trader” who knew that the price of stock would rapidly go up when it was split. It is said that the “secret trader”, who exploited non-public information, gained a profit of 70 percent.
For starters, the capital market will be able to attract capital when its tax environment is the same as that of the money market. However, Mongolia does not impose tax on bank savings, but is still imposing tax on dividends that may or may not be collected. This is one of the reasons why the capital market is not thriving in our country. Furthermore, it is not the best idea to collect tax from capital gains while ignoring the lost shares of an investment portfolio.
The capital market can only operate normally when information regarding stocks is disseminated to everyone at the same time. Also, all information related to a shareholding company has to be accurate, and in order to ensure that, there should be third-party supervision that approves the accuracy of provided information. In addition, shareholding companies must produce their financial reports regularly, and the reports should be approved by a signature from the CEO or the board director. These conditions, as well as the other similar prerequisites, have to be formed in order to provide sufficient conditions for the capital market to develop.
Benefits of a capital market
Capital market development will bring about a greater amount of money in circulation and an expansion of the economy. It will also allow companies to improve their governance and raise money from the capital market. When that happens, companies will no longer be required to acquire loans, which will reduce interest rates on bank loans. Furthermore, infrastructure investments can be made as long-term capital is raised.
On top of that, the capital market plays a significant role in equally distributing the benefits of economic growth. Therefore, development of the capital market will reduce the inequality that is strongly emerging in our society today.
Mongolia is a country that benefitted from the socialist experiment, as many great changes occurred in education, health and hygiene. Our country is ranked very well in terms of literacy and the youth comprises 75 percent of our population. Therefore, we can develop our capital market a lot faster than other developing countries. Let us have our younger generation understand the stock market fully, and seize the opportunity to buy and sell shares of any company in the world using only a mobile phone.
If a high school teacher from California is able to buy Oyu Tolgoi shares through his pension fund, then how come Mongolians cannot do the same? A person who owns shares has capital, and a person who owns capital has a sense of responsibility.
If we manage to properly develop our capital market, it will serve as a shortcut to development. Mongolia can become the first country to fully realize that and rapidly develop by making the best of technological advances.
Translated by B.AMAR
Short URL: http://ubpost.mongolnews.mn/?p=4324
Then what environment needs to be formed in order to develop the capital market?
Necessary conditions
A market not only needs products, but also subjects of the economy who are willing to sell and buy those products. Securities serve the role of products in a capital market. These may include all types of stock (common, preferred, and so on), debt securities (bonds, mortgages and savings certificates), and their derivatives.
Securities markets can be divided into two groups: primary and secondary. The primary market refers to the market where securities are created, whereas the secondary market is the market where previously issued securities are bought and sold. The revenue generated by selling securities in the primary market goes to the company that issued those securities, while the same revenue in the secondary market goes to the seller.
Buyers and sellers of securities include individuals, companies and investment funds. The biggest players in the securities market are public and private pension funds, insurance companies and joint funds. The organizations that link the buyers with the sellers are called broker-dealers.
Securities can be traded online or on a stock exchange. The infrastructure of the Mongolian Stock Exchange is technically on par with the London Stock Exchange. However, when it comes to over-the-counter (OTC) trading, which includes online transactions, Mongolia needs to be cautious about its security issues.
The capital market allows huge transactions to take place in a very short amount of time. Therefore, it goes without saying that there should be laws that fully regulate the activities of entities within the market.
Sufficient conditions
An essential part of keeping the capital market efficient is the prevention of insider trading. Insider trading is the trading of a company’s stock by individuals who secretly use non-public information to gain profits. The Mongolian Association of Securities Dealers proposed including clauses regulating insider trading, and its penalty, in the draft securities law. However, there have been complaints that the proposal was discarded when the draft law was developed.
For example, the Financial Regulatory Committee issued a resolution to split one Tavan Tolgoi company stock into 100 units on June 30, 2011. Nevertheless, even after this resolution was issued, a whole day was spent trading the stock at its former unit. On that day, five times as many transactions as that of a normal day took place when news of splitting the stock spread. The Financial Regulatory Committee denied the existence of a “secret trader” who knew that the price of stock would rapidly go up when it was split. It is said that the “secret trader”, who exploited non-public information, gained a profit of 70 percent.
For starters, the capital market will be able to attract capital when its tax environment is the same as that of the money market. However, Mongolia does not impose tax on bank savings, but is still imposing tax on dividends that may or may not be collected. This is one of the reasons why the capital market is not thriving in our country. Furthermore, it is not the best idea to collect tax from capital gains while ignoring the lost shares of an investment portfolio.
The capital market can only operate normally when information regarding stocks is disseminated to everyone at the same time. Also, all information related to a shareholding company has to be accurate, and in order to ensure that, there should be third-party supervision that approves the accuracy of provided information. In addition, shareholding companies must produce their financial reports regularly, and the reports should be approved by a signature from the CEO or the board director. These conditions, as well as the other similar prerequisites, have to be formed in order to provide sufficient conditions for the capital market to develop.
Benefits of a capital market
Capital market development will bring about a greater amount of money in circulation and an expansion of the economy. It will also allow companies to improve their governance and raise money from the capital market. When that happens, companies will no longer be required to acquire loans, which will reduce interest rates on bank loans. Furthermore, infrastructure investments can be made as long-term capital is raised.
On top of that, the capital market plays a significant role in equally distributing the benefits of economic growth. Therefore, development of the capital market will reduce the inequality that is strongly emerging in our society today.
Mongolia is a country that benefitted from the socialist experiment, as many great changes occurred in education, health and hygiene. Our country is ranked very well in terms of literacy and the youth comprises 75 percent of our population. Therefore, we can develop our capital market a lot faster than other developing countries. Let us have our younger generation understand the stock market fully, and seize the opportunity to buy and sell shares of any company in the world using only a mobile phone.
If a high school teacher from California is able to buy Oyu Tolgoi shares through his pension fund, then how come Mongolians cannot do the same? A person who owns shares has capital, and a person who owns capital has a sense of responsibility.
If we manage to properly develop our capital market, it will serve as a shortcut to development. Mongolia can become the first country to fully realize that and rapidly develop by making the best of technological advances.
Translated by B.AMAR
Short URL: http://ubpost.mongolnews.mn/?p=4324
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