Capital markets structure, how they work

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Securities and Exchange Commission of Zimabwe
The purpose of capital markets is to match the demand for funds with the supply of funds. Capital markets fuel economic growth by allocating capital that can be used to create jobs, build infrastructure and finance innovative ideas.

What is the capital market?
The capital market is a market that links investors and companies seeking to raise long term capital. The company receives money from investors in exchange for shares i.e. part-ownership of the company.
This process is facilitated by market intermediaries (stock exchanges, brokers, custodians, transfer secretaries, investment managers, financial advisors, CSD amongst others) under the watchful eye of the Securities and Exchange Commission of Zimbabwe (SECZ).

Issuing of shares
The investment process starts with the issuing company seeking capital to fund its existing and new projects. The issuing company approaches the financial advisor licensed by the Commission for financial advice.
The company, with the help of the financial advisors, lawyers and accountants prepares a prospectus with all the necessary documentation.
The Lawyers will ensure that the company complies with the relevant laws whilst the accountants will confirm that the issuing company’s financial statements and other disclosures comply with Zimbabwe Stock Exchange (ZSE) and SECZ standards.

Prospectus
The Prospectus contains all the relevant information about the company such as its strategy and prospects, the amount of capital required, the number of new shares to be raised, the price to be paid for each share and how the capital raised will be used.
The issuing company engages a sponsoring broker who, is a member of the stock exchange, can guide and advise on the application of the Listings Requirements to ensure that correct and complete documentation is submitted to the ZSE. Once the document is in place, the sponsoring broker will file the document with to the ZSE for approval. The Exchange will ensure the prospectus conforms to all the listing requirements. Upon approval, the prospectus is published and marketed to members of the public.

Initial Public Offering (IPO)
The raising of capital is an open process where the investing public participates through an Initial Public Offering (IPO) if the company is raising funds from the public for the first time. Basically, the company will be inviting members of the public to purchase its shares. Through IPOs companies can raise long term capital from members of the public. In return members of the public become shareholders in the company.
The SECZ and the ZSE supervise this process to make sure that prospective investors are given all the relevant information they need to decide on investing.
Specific information supplied include the company’s historical financial performance, its top management and governance structures, forward looking financial statements, its current owners and description of operations.
Companies that have raised funds from the public are listed on exchanges where their shares are traded by stockbrokers. Investors who own the shares can purchase more shares or sell shares amongst each other which is called secondary trading.

Investors with money to invest
Investors who want to buy or sell shares in the stock market go through securities dealers also known as stockbrokers. The stockbrokers are licensed and regulated by SECZ. Their role is to facilitate investor buying and selling of shares in a secure environment.
Once investors buy shares of a listed entity they become ordinary shareholders of that company and their shareholding will be proportional to money invested.
The returns on their investment come in the form of dividends paid by the company and capital gains when the share price goes up, or capital loss when the price goes down. Capital gains and losses only occur when the investor sells the shares.

The Securities Exchange or Stock Exchange
Currently, there are two licensed securities exchanges, the Zimbabwe Stock Exchange (ZSE) and Financial Securities Exchange (FINSEC) which is an Alternative Trading Platform.
Once the company issues its shares to the public through an IPO, the shares are subsequently listed on the Stock Exchange. The exchange provides a centralised platform (an Automated Trading System) through which stockbrokers further trade shares on behalf of the investors.
The exchange will bring together stockbrokers who are looking for shares to purchase and those that are selling on behalf of their investors, thus providing a market place for trading of shares.
Stock Exchanges also play a critical role of policing listed companies through enforcement of Listing Rules which place minimum reporting and disclosure standards to be adhered to by all publicly traded companies. For example, listed companies are required to publish half year and full year financial statements.
To gain access to the stock exchange, investors must go either through securities dealers (stockbrokers) or Investment Managers (Asset Managers).

Securities Dealers or  Stockbrokers
They act as trading agents of the investors. To purchase and, or sell shares, investors first approach a stockbroker/securities dealer to open an Investor’s Trading Account. An investor can also choose to have his account opened by a Custodian. After account opening, the investor then engages the services of the securities dealer for the actual buying or selling of shares.
In order to buy shares, the investor deposits money through normal banking channels and gives instructions to the stockbroker to buy the required shares. In the case of a sell, the investor deposits his shares to the Central Securities Depository.

Trading
The securities dealer will then trade the shares on the Stock Exchange’s Automated Trading System (ATS). Once the order has been executed, the broker advises the investor through issuing a brokers’ note which contains the name and number of securities (shares) bought / sold, date on which the order was executed, the price at which the shares were bought / sold, the ‘consideration’ (value of securities purchased / sold) and total costs of the transaction.
The investors’ account will be credited with the shares that have been bought. In the case of a sell, the account is credited with the amount raised. Besides trading through the securities dealers, investors can also invest in shares through Investment Managers.

Investment Management Companies or Asset Managers
Investors can also make use of investment managers to invest in the capital market. An Investment Manager manages investors’ funds by investing in a wide range of securities in line with instructions or mandate from the investor.
Investment Managers also manage Collective Investment Schemes or Unit Trusts where they pool funds from numerous investors and invest according to the scheme’s investment style.
Investors receive investment returns after deduction of the investment manager’s fees. The Investment Manager’s aim is to maximise the return on all assets contained in their portfolios while keeping investment risk within the limits determined by the client.
Investment Advisors are responsible for giving advice to both individual and institutional investors on securities investments. They also give advice to companies on how to raise capital in the stock market.
Securities Custodians, facilitate the opening of CSD investor accounts, manage and safe-keep customer’s securities such as shares and bonds. They also keep track and ensure the safety of investments under a custodial arrangement, preparing required disclosures, as well as regulatory filings, when applicable.
In addition, they provide information on the securities and their issuers such as annual general meetings and related proxies and settle trades done on behalf of the client investors.
Securities Transfer Secretaries-manage and maintain updated share registers for companies listed on the Stock Exchange, and perform the allocation of dividends, rights issues, bonus issues to shareholders. In other words, they manage secretarial aspects of corporate actions.

Central Securities Depository (CSD)
All capital market investors are mandated to open CSD investor accounts through either the Stockbrokers or Custodians. The CSD holds securities on behalf of investors in uncertificated (electronic/dematerialised) form to enable book entry transfer of securities.
Physical securities are immobilized (placement of physical certificates in a CSD to reduce the movement of physical securities in the marketplace and dematerialised (captured into electronic form).
The Dematerialisation Process of converting physical securities into electronic form and facilitate book entry transfers. Dematerialisation, which is done at no cost, requires investors to open securities with either the stockbrokers or custodians and deposit their securities.
The role of the Securities and Exchange Commission of Zimbabwe (SECZ)
The whole investment process is regulated by SECZ. The Commission aims to protect investors and maintain fair, orderly and efficient markets. It also advocates for stronger protection and a healthier market place;
The SECZ believes it is every investor’s right to be protected against misleading, manipulative or fraudulent practices by market players. Investor protection is therefore mandatory and automatic once an investor participates in the capital markets.
As far as the Commission is concerned, investor protection is a combination of diverse but closely integrated measures which include market regulation and enforcement; registration and licensing of key capital market players; information disclosure and accessibility; compensation schemes and consumer education among others.
Investor Protection Fund (IPF)
The SECZ facilitated the establishment of the Investor Protection Fund. The Fund is meant to provide an additional layer of protection for investors and offer some reimbursement for financial losses suffered as a direct result of a participant firm becoming insolvent. It is an investors’ fund since they themselves contribute to it through a levy on trades; and is administered by an independent board of Trustees.
Major investors in shares and bonds
Many institutions hold substantial investments in capital market traded securities such as listed shares. These institutions include; Pension funds; Insurance companies; Life offices/ life assurance companies; private corporations, trusts and foundations; international investors; and investment companies.

Join us next week as we continue our journey to financial inclusion as we talk about how the markets work in Zimbabwe. If you have any queries, comments or want to tell us about your hustle, go to the MyZimHustle facebook page, visit @MyZimHustle on Twitter or whatsapp 0775 574 587 (whatsapp only)

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