TYPES OF SECURITIES AND MAJOR PARTICIPANTS IN VIETNAMESE CAPITAL MARKET

Hanoi University Faculty of Management and Tourism TYPES OF SECURITIES AND MAJOR PARTICIPANTS IN VIETNAMESE CAPITAL MARKET Tut3 – BA10 Tutor: Ms Khong Thanh Dung Group 4: Doan Van Hien 1004000022 Nguyen Ha Linh 1004000042 Tran Thi Phuong Mai 1004000047 Pham Tra My 1004000050 Tran Thanh Thuy 1004000090 Trinh Thi Yen 1004000102 Group -FM Contents Types of securities and the major participants of Vietnamese stock market Page Group -FM Executive Summary The main purpose of the research is providing both the broad and specific view about the securities market in Vietnam This provides some useful information for people who want to know about securities market in Vietnam The research focuses on the two main parts Firstly, it is the major participant in securities market of Vietnam Secondly, it is the types of securities traded on the Vietnamese capital market In the major participant, we focus on brokers including agency trading and principle trading, fund managers and individual investors In this part, we provide the definition, types of each participant in Vietnam; discussion about advantages and disadvantages as well as the challenges of brokerage in Vietnam, the function of fund managers and some basic errors of individual investors In the second part, the research will show the specific information about types of securities in Vietnam including stocks, bonds and the fund units In Vietnam, two kinds of stocks are common stocks and preferred stock; bond The research also provides some information of the numbers of securities, the value of securities in Hanoi Stock exchange and Hochiminh Stock Exchange in the Appendix In the end of the research, it will provide information about the way to issue stocks through methods, IPO, Auction and underwriting Types of securities and the major participants of Vietnamese stock market Page Group -FM I Introduction: After years of preparation and waiting, on 11-7-1998 the Government has signed Decree No 48/CP about securities and stock market and Vietnam's stock market was formally established In the same day, the Government also decided to sign up Securities Trading Center, located in Ho Chi Minh City and Hanoi Ho Chi Minh City Securities Trading Center (HOSTC) was set up under Decision No 127/1998/QD-TTg on 11-7-1998, came into operation officially and made its first session on 28-7-2000 Hanoi Securities Trading Center (HASTC) was officially born on 08/03/2005 Unlike HCM City Securities Trading Center (which is listed and traded securities of large companies), Hanoi Securities Trading Center will be "playing field" for small and medium enterprises (with capital from to 30 billion) Only in 12 years, stock market was formed and developed significantly with many fluctuations in Vietnam from toddler stage (2000 - 2005) to the breakthrough and outbreak (2006 - 2007) and then the sharp decline in 2008 With the market size in this period, the number of securities companies also grew strongly If the number of securities company listed in stock exchange in Vietnam is only companies in 2000, in 2008 that number jumped to 238 listing companies and increased nearly three times (673 securities companies) in 2011 (Le 2011) The chart is provided in the Appendix From above information, it can be seen that the capital market in Vietnam has achieved the strides in the process of development And the aim of this report is to examine types of securities traded on the Vietnamese capital market and major participants in the market II Discussion of findings: A Major participants in Vietnam stock market: Brokers: A broker is an individual or party (brokerage firm) that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed A broker who also acts as a seller or as a buyer becomes a principal party to the deal Prime responsibility: bring sellers and buyers together Therefore, a broker is the third -person facilitator between a buyer and a seller In general a broker is an independent agent used extensively in some industries 1.1 Types of brokers: Types of securities and the major participants of Vietnamese stock market Page Group -FM Full service brokers: provide full services like trading in securities, lending customers money, giving opinions and consultancy about investment Discount brokers: only provide some service like buying and selling securities  earn less money in commission than full service brokers Commissioned brokers: employees of a stock exchange who are positioned to implement the purchase orders for customers on the trading floors Independent brokers: work for themselves and enjoy commission according to the service they give They spend their own money renting place on the stock exchange like member-securities companies 1.2 Challenges to practice as a broker in Vietnam: In a securities company, brokerage revenue usually brought about 70% of capital income, but now it tends to decline seriously (Bach Huong 2011) The reasons are considered as: Most of the brokers are not well schooled in their job and not everyone is full of regulations and ethics Some people have prejudice against and always cautious of brokers, because in reality, some brokers, called “decoy”, exploit their job to get money by fraud 1.3 Advantages and disadvantages of brokerage in Vietnam Advantages:  Brokers know their market and have already established relations with prospective accounts Brokers have the tools and resources to reach the largest possible base of buyers  Brokers help customers save much in transactions Without brokers’ assistance, customers could spend 10 times the cost for a successful negotiation  Using a broker might be cheaper in smaller markets, with smaller accounts, or with a limited line of products Disadvantages of the brokerage in Vietnam:  For securities companies: the limit of brokers’ ability and experiences makes their work not satisfy customers’ requirement  For investors: the propaganda missions are not carried out insufficiently comprehensively to convince people to join the securities market  For securities market: Types of securities and the major participants of Vietnamese stock market Page Group -FM o the method of matching – discrepancy is good for investors who are beginners in securities market, but can negatively affects the later transactions or deeply, create an ar tificial supply and demand o Vietnam exchange system just has some particular functions so it can not meet the development requirements of securities market in general and securities companies in particular o The clearing system: some procedures are small-scale leading to mistakes when there are a large number of transactions Fund managers A fund manager is the controlling authority of an individual mutual fund The fund manager is hired by the board of directors who in turn are elected by the shareholders in the fund The individuals involved in fund management (mutual, pension, trust funds or hedge funds) must have a high level of educational and professional credentials and appropriate investment managerial experience to qualify for this position Investors should look for long-term, consistent fund performance with a fund manager whose tenure with the fund matches its performance time period The whole point of investing in a fund is to leave the investment management function to the professionals Therefore, the quality of the fund manager is one of the key factors to consider when analyzing the investment quality of any particular fund Fund management companies are the companies specialized in managing investment funds Fund managers use investment advisors or investment managers to determine what types of securities will be included in the portfolio of the fund The fund manager has full power to manage portfolios, trade in securities in accordance with the investment objectives of the fund 2.1 Type of fund managers: According to Decree No 144/2003/ND-CP dated 28/11/2003 issued on securities and stock markets, fund management companies has the responsibility to manage securities investment funds (Dan tri 2008) Fund managers are structured in two forms: management as closed and open funds A closed fund is the fund of which certificates offered to the public must not be redeemed at the request of investors An open fund is the fund of which certificates offered to the public can be redeemed at the request of investors 2.2 Types of securities and the major participants of Vietnamese stock market Page Group -FM 2.3 Function of fund managers: Indeed, a fund manager’ function is to manage capital assets through the investment in portfolio to increase the effective value of an investment fund Accordingly, fund managers have the following functions: - Asset management: + Offer and manage capital and assets + Concentrate on investment in portfolio - Investment and finance consultancy: + Give advice for clients about investment and management + Support clients to optimize investments through financial instruments + Optimize capital for investors - Research: + Through analyzing market, financial and investment value and supporting the activities of investment management and legal advice activities as mentioned above + State Securities Commission (SSC), the Ministry of Finance and State Bank of Vietnam supervise all activities of fund management companies, funds and investment banks in terms of macro supervision + Banks monitor the implementation of the preservation and deposit of assets fund management companies to protect investors' interests + Fund management companies manage the investment fund portfolio described in the fund's prospectus Investor Investors are people selling or buying shares of a company for a long term with a belief that the company has a strong future prospects 3.1 Categories of investors In Vietnam security, there are two types of investors: individual and institutional investors Individual investor is a person or household having free money sells and buys a small amount of shares, while institutional investor usually sells and buys a large amount Some of professional institutional investors are commercial banks, capital agencies, insurance company The advantages of investing through institutions are: a portfolio can be diversified and decisions are made by experts 3.2 Individual investors The Vietnamese individual investors include domestic and foreign investors a) Domestic investors Types of securities and the major participants of Vietnamese stock market Page Group -FM In the recent two months, it was a good news that the number of domestic investors has increased dramatically It can be seen clearly in the number of buying and selling commands in the market During six months from October 2011 to the beginning of February 2012, the amplitude of deviation between these two commands was low in both HSX and HNX There was time between February and March that the market had over 100, 000 buying commands and 95, 000 selling ones (increased by 4.5 times compared to the last four months) (Bao Moi 2012) However, in investment of capital, return always goes along with risk The higher the expected return, the higher the risk and vice versa Therefore, the domestic investors should consider the way to invest so that it is appropriate with their abilities as well as their risk accepted level If not, they will make some basic mistakes such as: - They usually make decisions based on rumors: The various sources of information in the market combines with their lack of knowledge make them tend to follow the rumors without consideration Normally, the investors consult the brokers of the securities company and this has some bad points namely: subjective opinions, not accurate and selective information - Besides based on rumors, they also base on majority that lead to consequences First, they give up their personal expectation to follow the market one leading to minimize the strategic investment gap Second, it also reduces the liquidity of the market - They have no personal investment expectation or in other word they don not know exactly what they want when entering the market except high return Besides, the investors are manipulated by the market - They just focus on only profit but knowledge Most of individual investors don not have enough fundamental knowledge so they not really pay attention to management and risk diversification of their fund b) Foreign investors Compared to domestic investors, the foreign ones are independent and separated from the majority They have knowledge about the market so they can analyze how the market operate and invest according to their analysis Along with the increase in domestic investors, the number of foreign also rose Until March 2012, there were 13, 896 foreigners given the exchange code (Gafin 2012) Time Number of Accumulated exchange code Mar 2012 26 13, 879 Feb 22 13, 871 Types of securities and the major participants of Vietnamese stock market Page Group -FM Jan 13, 849 Dec 2011 13, 846 Nov 20 13, 837 Oct 22 13, 817 Sep 21 13, 795 Aug 31 13, 775 Although the foreigners invest more in Vietnamese capital market, they are still restricted by the laws For example, the foreign investors are required to have the exchange code which is a complicated to get if they invest directly from abroad, or they must directly complete the vouchers or indirectly by authorizing for a domestic brokerage agency which is risky if the transaction does not succeed Types of securities and the major participants of Vietnamese stock market Page Group -FM B Type of securities in Vietnam Stocks: 1.1 Common stocks Common share is a form of corporate equity ownership It is called “common “to distinguish it from preferred stock In the event of bankruptcy, common stock investors receive their funds af ter preferred stock holders, bondholders, creditors, etc On the other hand, common shares on average perform better than preferred shares or bonds over time Founding members of company can freely transfer to other ordinary members within years from the issuing date of certificate of business registration and others if so approved by shareholders’ meeting All restrictions imposed on common shares of founding shareholders will be void after three years from the issuing date of certificate of business registration Some of company that offer the biggest shares in the market in Vietnam: In Hanoi Stock Exchange Company Number of shares Asia Commercial Bank (ACB) 937, 696, 500 Saigon Hanoi Bank (SHB) 481, 083, 361 Habubank (HBB) 405, 000, 000 Navibank (NVB) 297, 669, 552 (source: HNX 2012) In Hochiminh Stock Exchange: Company Number of shares Eximbank (EIB) 1, 235, 522, 904 Sacombank (STB) 1, 073, 967, 664 Bao Viet (BVH) 680, 471, 434 Vietcombank (VCB) 530, 393, 960 (source: HSX 2012) It has a clear evidence to say that in Vietnam, banks’ stock is the majority in stock market 1.2 Preferred shares Preference share is a certificate proving ownership of a company, and allows the preferred shareholders entitled to certain rights with priority over ordinary shareholders Dividends of preferred Types of securities and the major participants of Vietnamese stock market Page 10 Group -FM shares is determined in advance and is usually determined by a fixed percentage over par value of shares or dollar amount per share in certain votes Preference share has advantage only on entitling to dividend, but they are limited dividends before the division of income for common shareholders However, preference share also has disadvantage When the company is thriving, dividends that they receive is not increased The price of preferred stock is tied to interest rate levels, it tends to decrease if interest rates go up and increase if interest rates fall Bonds 2.1 Corporate bond Corporate bond is a debt security issued by a corporation and sold to investor  Convertible bond In Vietnam, the most popular type of corporate bond is convertible bond which can be converted and exchanged for common stock of issuing firm These bonds represented about 20% of bond market structure In the primary bond market, the main issuance method is floating rate notes Nevertheless, there is no standard interest rate to be used as a reference rate Therefore, issuing associations often use the reference rate which equals the average rate of large commercial banks: BIDV, Vietcombank, Vietinbank and Agribank Other issuing houses use basic interest rate or ceiling rate of appropriate bonds instead As for secondary market of corporate bond, in Vietnam, banks often make the transactions of short-term bonds while the long-term ones are normally traded by insurance companies The liquidity of this market is low owing to the lack of discrepancy and information for investors  Coupon bond Coupon bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures Coupon bond is an effective tool in the capital market Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond's face value Not all bonds have coupons Zero-coupon bonds are those that pay no coupons and thus have a coupon rate of 0% Such bonds make only one payment: the payment of the face value on the maturity date To compensate the bondholder for the time value of money, the price of a zero-coupon bond will always be less than its face value on any date before the maturity date The difference between the price and the face value provides the bondholder with the positive return that makes purchasing the bond worthwhile  Mortgage bond Types of securities and the major participants of Vietnamese stock market Page 11 Group -FM A mortgage bond is a bond backed by a pool of mortgages on a real state asset such as a house More generally, bonds which are secured by the pledge of specific assets are called mortgage bonds Mortgage bonds can pay interest in monthly, quarterly or semiannual periods 2.2 Government bonds Government bond is the debt securities issued by the Vietnamese government and local authorities, accounted for more than 80% of bond market structure Government bonds have a lower risk than shares Other special properties, there are too many types of bond with small-scale issuance, discrepancy in maturity, interest rate and dealing practice Although the Government devolved and empowered the local government in issuing bonds, these bonds still had not been attracted by investors  Treasury bond (T-bond) Treasury bond is a marketable, fixed-interest government debt security with a maturity of more than 10 years Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level  Local government bond Local Government bonds are obligations undertaken by local public entities to raise financing The maturity date is years (HNX 2012)  Government guarantee bonds : In Vietnam, this bond has the maturity date from to years with the interest rate between to 12.2% (HNX 2012) Fund unit Fund units are securities certifying the ownership of investors for a capital contribution of public funds Public funds are investment funds formed from the stock of capital contributed by investors, with the intention to get profit from the diversification of investments in securities or other forms of capital assets distributed to various risks, including investors have no control over daily decisions for the fund’s investment Fund management companies issue certificates of the fund, investors buy fund units which confirm their contribution of capital to the fund In Ho Chi Minh stock market, there are four fund units are listed including MAFPF1, VFMVF1, PRUBF1, VFMVF4 However, investors are not interested much in them (Baomoi.com 2009) Types of securities and the major participants of Vietnamese stock market Page 12 Group -FM The total securities in the market in both Hanoi Stock Exchange and Hochiminh Stock Exchange are listed in the table and in the Appendix C Process of issuing securities: Method of issuance the securities: • Private placement: offered to a relatively small number of select investors as a way of raising capital Ex: investment banks, investment funds and insurance companies • Public placement: Offered to the whole market rather than to selected investors Each of the method has its own advantage and disadvantage Public placement cost more expensive than private placement, but it can obtain widen investor Choosing the methods to make sure the company is good enough to issue the securities to the whole market (TTO, 2007) IPO IPO (initial public offering) : the company offers securities to the market for the first time In Vietnam, according to law amendment in 2010, the criterion that the company need to have to get IPO: • Capital > 10 billion VND • Operation with profit in the last two consecutive years • Feasible plan for the use of capital collected • Having underwriting organization • Clear financial statement Major step in IPO: • Approve issuing securities with private investors • Auditing financial statement from SSC • Choosing underwriter • Preparing a registration statement • Operating through auction Types of securities and the major participants of Vietnamese stock market Page 13 Group -FM Underwriting: Underwriting is the process that the underwriter to help the issuer complete procedures before offering securities to buy some or all of securities of the issuer for resale or purchase of securities remaining be distributed by the issuer or support the distribution of securities to the public (HNX, n.d) There are three purpose of the underwriting process First of all, it can stabilize the stock price Secondly, it protect the public by frequently evaluating the issuing company to check whether the company has the intention of making money or just want to make profit on the offering of its stock price Lastly, it helps young investors to research good companies and make long-term investments (teen analyst, n.d) Auction: In Vietnam, the auctioning decision can be classify in two cases: • Buying by bidding price from highest to lowest • In case of equal bidding price: securities each want Securities each get = Securities remaining X total securities bought with equal price In the case of not divisible, the largest investor will get the remaining (HNX, n.d) Appendix: 1.The chart illustrates the develop in Vietnam stock market: Types of securities and the major participants of Vietnamese stock market Page 14 Group -FM Types of securities and the major participants of Vietnamese stock market Page 15 Group -FM Number of the company listed : Table 1: (in HSX) All Stocks Fund units Bonds Total Listed Shares 337 284 48 Percent (%) 100 84.27 1.48 14.24 Listed Volume(1000 shares) 13, 127, 382.6 12, 758, 232.2 276, 099.29 93, 051.09 Percent (%) 100 97.19 2.1 0.71 Listed Value (mil VND) 140, 521, 423.94 127, 582, 322 2, 760, 992.9 10, 178, 109 Percent (%) 100 90.79 1.96 7.24 Types of securities and the major participants of Vietnamese stock market Page 16 Group -FM Table (in HNX): All Stocks Bonds Number of Listed Securities 889 379 510 Percent (%) 100 42.63 57.64 Total Listed Volume 8, 575, 075, 925 6, 883, 339, 305 1, 691, 736, 620 Percent (%) 100 80.27 Total Listed Value 238, 007, 055, 050, 00068, 833, 393, 050,169, 000173, 662, 000, 000 Percent (%) 100 28.92 19.72 71.08 Types of securities and the major participants of Vietnamese stock market Page 17 Group -FM References: Hanoi Stock Exchange (HNX), 2012, Danh sách cổ phiếu, [online] Available at URL :http://hnx.vn/Danhsach_TCDKGD.asp? pgCurr=2&actType=12&menuup=402000&TypeGrp=1&menuid=114120&menulink=114120&menu page=danhsach_TCDKGD.asp&stocktype=2&searchtype=1&txtSearch=&txtCompanyName=&txtSto ckName=&FROMDATE= (Accessed on April, 2012) TTO, 2007, Phát hành niêm yết chứng khoán, [online] Available at URL:http://tuoitre.vn/Kinhte/Tai-chinh-Chung-khoan/Tu-van-Chung-khoan/209851/Phat-hanh-va-niem-yet-chungkhoan.html(Accessed on April, 2012) Teen analysis, n.d, Underwriting a Stock, [online] Available at URL:http://www.teenanalyst.com/stocks/underwriting.html (Accessed on 20 March, 2012) Hanoi Stock Exchange (HNX), n.d, Thuật ngữ, [online] Available at URL:http://hnx.vn/Thuatngu.asp?actType=1&stockType=2#17 (Accessed on 20 March, 2012) Hanoi Stock Exchange (HNX), n.d, Hướng dẫn đấu giá, , [online] Available at URL: http://hnx.vn/default.asp? actType=1&menuup=303000&TypeGrp=1&menuid=102140&menulink=300000&menupage=Huong dandaugia.asp&stocktype=2 (Accessed on 20 March, 2012) Hochiminh Stock Exchange (HSX), 2012, Danh sách cổ phiếu, [online] Available at URL: http://www.hsx.vn/hsx/Modules/Danhsach/Chungkhoan.aspx(Accessed on April, 2012) Le, H 2011, Thị trường chứng khốn Việt Nam: số đóng góp tác động, National Economics University, Hanoi Articles base n.d, ‘Types of Securities and your rights as a Shareholder’ [Online] Available at URL: http://www.articlesbase.com/day-trading-articles/types-of-securities-and-your-rights-as-ashareholder-1740427.html (Accessed March 20, 2012) Bao Moi 2009, ‘Vì chứng quỹ hấp dẫn?’ [Online] Available at URL: http://www.baomoi.com/Vi-sao-chung-chi-quy-kem-hap-dan/127/3006854.epi (Accessed March 23, 2012) Types of securities and the major participants of Vietnamese stock market Page 18 Group -FM Dan Tri 2008, Cơng ty quản lí quỹ thực nhiệm vụ gì, [Online] Available at URL: http://dantri.com.vn/c0/s0-233459/cong-ty-quan-ly-quy-thuc-hien-nhung-nhiem-vu-gi.htm (Accessed March 23, 2012) Bach Huong 2011, Môi giới chứng khốn thất thế, Dân Trí, , [Online] Available at URL http://vnexpress.net/gl/kinh-doanh/chung-khoan/2011/06/moi-gioi-chung-khoan-that-the/ (Accessed March 23, 2012) Bao Moi 2012, Nhà đầu tư cá nhân tích cực tham gia vào thị trường, [Online] Available at URL:http://www.tinmoi.vn/nha-dau-tu-ca-nhan-da-tich-cuc-tham-gia-vao-thi-truong-04840792.html (Accessed on April, 2012) Gafin 2012, Tháng 3, thêm 54 nhà đầu tư nước ngồi cấp mã số giao dịch chứng khốn, [Online], Available at URL:http://gafin.vn/20120404032317644p0c31/thang-3-them-54-nha-dau-tunuoc-ngoai-duoc-cap-ma-so-giao-dich-chung-khoan.htm (Accessed on April, 2012) Types of securities and the major participants of Vietnamese stock market Page 19 ... develop in Vietnam stock market: Types of securities and the major participants of Vietnamese stock market Page 14 Group -FM Types of securities and the major participants of Vietnamese stock market. .. the aim of this report is to examine types of securities traded on the Vietnamese capital market and major participants in the market II Discussion of findings: A Major participants in Vietnam... the securities market  For securities market: Types of securities and the major participants of Vietnamese stock market Page Group -FM o the method of matching – discrepancy is good for investors