CHAPTER II Summary of Capital Market Instruments in Indonesia

Instruments Definition Benefits Risks

CAPITAL MARKET INSTRUMENTS
· Capital Loss.
· Capital Gain.
A certificate that · No dividend
What kind of Instruments do we have? Stocks · Dividend.
represents a company’s · Liquidation risk.
· Ownership of
ownership · Delisted from the
This Chapter explains the instruments of Capital Market companies.
exchange.
currently available in Indonesia; It focuses on the benefits · Fixed Interest Income.
and risks occured by having those instruments. · Capital Gain.
A certificate which · Can be converted
declares that the into common stock · Default
1. Stock/Share Bonds bondholders have lent a (for convertible bonds) · Capital Loss
certain amount of money · Have preference · Callability
to the company. over stockholders
A. Definition of Stock in the payment of
liquidated assets.
Stock or share is a certificate that represents a company’s
· Capital Gain with big
ownership by which stockholder is entitled to claim the Preemptive right to · Capital Loss with
leverage when the
company’s earnings and assets. subscribe new stock at rights are exercised.
big leverage.
Rights · Capital Loss from
prestated price during the · Capital Gain from
specified period. trading on
B. There are 2 types of stock: trading on secondary
secondary market.
market.
a. Common Stock is the securities most commonly used · Capital Gain with big
Sweetener attached on
by issuers to obtain funds from the public, and the leverage when · Capital Loss with
Stock or Bond issuance
most popular among other securities traded in the warrants are big leverage.
which give the right to
Capital Market. This stock has the following
Warrant exercised. · Capital Loss from
purchase a common stock
· Capital Gain from trading in
characteristics: at a specified price & at a
trading in secondary secondary market
- Last Claim on company’s assets in proportion to given period.
market.
number of stocks held.
- Proportionate voting power in the election of Contract to sell or buy an · Hedging instrument.
Stock Index underlying asset at a fixed · Speculation with big · Capital loss with
Directors and other decisions determined on Futures time in the future at leverage. big leverage.
shareholders’ meeting. predetermined price · Arbitrage.
- Right to earn dividends upon approval by
A pool of stocks, bonds, · Potential return.
shareholders’ meeting. or other securities · Professional. · Capital Loss.
- Preemptive Right to subscribe the additional stocks Mutual Funds purchased by a group of Management will · Liquidity risks on
offerings before they are available to the public. investors and managed manage the fund. Closed End.
by a professional · Liquidity.
b. Preferred Stock has its own characteristics as follows: investment company.
- Pays dividend at a specified rate. (Reference) Placement of a specific
· Lower Interest rate
· Interest
- Has preference over common stocks on the Time Deposit fund for a specific period
in Comparison to
· No Capital Loss the bonds.
liquidation of assets. of time in the Bank.
· No Capital Gain.
- Can be converted into common stock.
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 C. Benefits of investing in stock are: b. Capital Gain
The investors will enjoy capital gain when difference
a. Dividend
between buying and selling price is positive.
Dividend is part of company’s profit, which is distributed
to the shareholders. For example: Investor A bought stocks of PT. X, which
The amount of dividends is proposed by the Board of has been listed in Stock Exchange a year ago at Rp
Director and finally approved by the shareholders’ 3,500. Now, the price of PT. X increases to Rp 3,750.
meeting. If investor A would like to sell his/her stocks at this
price, he/she will enjoy Capital Gain of Rp 250 per
Types of Dividend: stocks (excluding fee and tax).
· Cash Dividend, should the issuer distribute dividend
in the form of cash to investors for each share they
owned.
· Stock Dividend, should the issuer distributes
dividend in the form of new stocks, which finally
increase the number of stocks owned by the
investors. However, percentage of ownership
remains the same.

D. Risks of Investing in Stock/Shares are:

a. No dividend distributed
Should the issuer was unable to record profit within
the current year or decided not to flow out any cash
due to anticipated business expansion, there will be
no dividend distributed to the shareholders.

b. Capital Loss
The investors would experience capital loss when the
difference between buying and selling price is negative.
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 For example: Investor A bought stocks of PT. X a year
ago at Rp 3,500. Now, the price of PT. X decrease to
Rp 3,100. That means Investor A suffers a Capital Loss
amounting to Rp 400 (excluding fee and tax).
c. Liquidation risks
Should the issuer goes bankrupt and liquidated, the
shareholders would have the last right to claim on
company’s assets after all company’s obligation are
paid. The worst is if there were no asset left, the
shareholder would loss some or even all of their
investment.
d. Stocks are delisted from stock exchange
Due to a certain reason, listed stocks shall be delisted
from the Stock Exchange as result investors will not
be able to sell the stocks.
2. Bond and Convertible Bond
A. Definition and Type
Bond is a certificate that contains a contract between
investor and company, which declares that the bond
holder/investor has lent a certain amount of money to the
company. As the consequences, the company who issue
the bond has the obligation to pay interest regularly within
a certain interval of time and the principal amount (face
value) of the loan on the maturity date.
Bond issued by a company is the Corporate Bond, while
bond issued by government is the Government Bond.
Meanwhile, there is also Municipal Bond, which is issued
by state or local government to finance certain projects
within their jurisdiction.
The price of a bond moves in an opposite direction to the
change of the market interest rate. If the market interest
rate shows a decreasing trend, then the value of bond
will increase, since the investors prefer to invest their
money in Bond.
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Likewise, if the market interest rate shows an increasing
trend, the value of bond will decrease due to the fact that
the investors prefer to invest their money in other
investment alternatives available in the market.
Upon buying any Bond, it’s advisable to all investors that
they refer to the rating of the bond, which is the method of
evaluating the default possibility by the issuer. Currently
there are two rating agencies in Indonesian namely, PT.
PEFINDO, and PT. Kasnic Duff & Phelps Credit Rating
Indonesia (DCR). These particular institutions are entitled
to analyze the financial strength of each bond’s issuer,
either a corporation or government body. Their ratings
ranges from AAA (highly unlikely to default) to D (in default).
Bonds rated BB or below are not Investment Grade. (See
the explanation on Chapter IV: Credit Rating).
Convertible Bond is a bond that is exchangeable for a
set number of common stocks at a prestated price. From
the issuer’s standpoint, the convertible feature is usually
designed as a sweetener to enhance the marketability of
the bond.
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 B. Benefit of investment in Bond c. The first right to claim
If the issuer goes bankrupt, bondholders as creditors
a. Interest have preference over stockholders in the payment of
Interest is paid periodically until the maturity date. It is liquidated assets.
expressed as an annual percentage of face value. For
example, a bond with a 10% coupon will pay Rp 10
per Rp 100 of the face amount per year, usually in the
form of installments payment every 3 or 6 months.

b. Capital Gain
d. In case of holding Convertible Bond, the investors
Outstanding Bonds prior to its maturity are usually
can convert the bond into stocks at a predetermined
traded on the secondary market of Bond. Therefore,
price, and will be entitle to have any benefits as stocks
there would be a possibility for bondholders to earn
ownership.
capital gain as stocks are traded, which is the difference
between buying and selling price on the secondary
market of bond, when difference is positive. Capital
Gain also can be obtained if the investor buys the STOCKS
BOND CONVERTED
bond with a discount (lower than its face value) and PT.X PT.X
on the maturity date, the investors receive the face
value of the bond.

C. Risks of investing in Bond

a. Default
Failure of the issuer to make timely payments of interest
and principal as they come due or to meet other provision
of bond indenture.

b. Capital Loss
The bonds are sold prior to its maturity at the price lower
than the buying price.

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 c. Callability In case of right holders do not exercise and/or sell their
Redeemable by the issuer prior to bond’s scheduled rights, their ownership will be “diluted” or decrease
maturity. The issuer must pay the bondholders a premium proportionally to the total number of stocks issued.
price if such a security is retired earlier. Bonds are usually
called when market interest rates fall so significantly. On
the other hand, the bondholders miss the opportunity to
gain the price hike on the secondary market of bond as
opposed to declining market interest rate.

3. Derivatives

Derivatives consist of any security that “derives” a value from

another instrument called the underlying. There are several kinds
of Derivatives in Indonesia, such as rights, warrants, and futures
contracts.
b. The benefit of having Rights:
Derivatives can be a very risky instrument if they are not used
(a) Investors have a privilege to subscribe new stocks
properly.
at predetermined price with big leverage by
exercising the rights at exercise date. In this case
investor can take benefit by buying new stocks with
A. Rights
less capital.
a. Definition Example: An investor buys the rights at market
In accordance with the Indonesian Capital Market Law, during trading period at Rp 200 each, with exercise
The Right is defined as the preemptive right to subscribe price of Rp 1,500. At exercise date, company X’s
the new stock at prestated price during the specified stock price assumed has jumped to Rp 2,000 per
period. The Rights are issued upon the secondary stock. He/she can buy company X stock at Rp
offering (Right Issue) in which new stocks shall be 1,700 only, which are Rp 1,500 exercise price +
offered to the only existing stockholders proportionately Rp 200 buying price of right. He/she enjoys a
to their stockholdings. Rights also are traded on the capital gain of Rp. 300, which is derived from the
market which usually within a very short period. difference between market stock price of Rp. 2,000
and his/her total cost of Rp 1,700 (excluding fee
and tax).
(b) Since rights can be traded in the exchange, right
holder would enjoy capital gain when difference
between buying price of rights and its selling price
is positive.

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 c. The risks of rights: Since warrant is an option, warrantholders may or may
(a) If the price of the underlying stock drops during not exercise their warrant during the exercise period.
the exercise period and become lower than the Warrantholder can exercise his/her warrant at least
exercise price, then he/she would not exercise the after 6 months of its issuance. Price of warrant fluctuates
right. However the investor would loss his/her initial during its trading period.
cost of the right.
Example: An investor buys the right at secondary
market at Rp 200 during trading period with exercise
price of Rp 1,500. Then, at the exercise date,
assumed company X’s stock price has dropped to
Rp 1,200 per stock. He/she would not convert the
right, since if it is converted, he/she must spend
Rp 1,700 = Rp 1,500 exercise price + Rp 200
buying price of right. As a result he/she suffer all
of his/her initial cost of Rp 200 (excluding fee and
tax).
(b) Since rights can be traded in the exchange, right
holder would suffer capital loss when difference
between purchase price of rights and its selling price
is negative.

B. Warrant
a. Definition
Warrants are usually attached - as a sweetener - with
stocks or bonds when they are being offered to public
upon IPO. As a sweetener, usually the exercise price will
be lower than market price of the stock. After the stocks
and/or bonds listed in the exchange, warrants will have
their own trading mechanism.
b. Benefit of having Warrant:
In addition, trading period for warrant is longer than (a) Warrant holders have a privilege to subscribe new
the right, which is between 3 to 5 years. stocks at lower price than the market price by
exercising the warrant when the market price of
underlying stock exceeds the exercise price.

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