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Question:

Discuss about the Singapore Stock Exchange.

 

Answer:

History of Singapore Stock Exchange:

The Singapore stock exchange was formed in the year, 1973 when the currency exchange between Singapore and Malaysia face a halt and thus terminated. After such termination, the stock exchange if Singapore was inaugurated independently. Later on, on 1 December, 1999, it merged or amalgamated with the Singapore International Monetary Exchange to form the Singapore Exchange. Such an amalgamation has led to the integration of Singapore domestic equity market with external markets (An empirical analysis of stock market integration). As the word ‘Stock Exchange’ suggests, the Singapore stock exchange facilitates the trading in securities, derivatives and options, thereby providing a global access to the foreign investors and traders. The Singapore exchange was the first to witness a  complete electronic exchange, being floorless. In the year 2000, Singapore exchange became the second exchange in the Asia Pacific to listed through public offer and private placement.

 

Working of Singapore Stock Exchange:

Singapore stock exchange offers a variety of products or indices which include bonds, warrants, equity index futures, other futures, depository receipts, etc.  These products are traded via a computer screen as the medium by The Singapore stock exchange. All the operations carried out by the Singapore stock exchange are fully entertained by electronic means, and it soon became the first stock exchange in history to have incorporated a 100 percent electronic platform for the trading of securities. The Singapore stock exchange requires all its securities to be listed in either of the two groups, namely the Singapore stock exchange Main board or the Singapore stock exchange SESDAQ. The former requires the companies to fulfill all the quantitative requirements and other criteria prescribed by the Singapore stock exchange. The later has lesser legal formalities and requirements and it is the most favorable listing for new and fresh companies. The companies already listed prior can change the group in which they are listed by drafting and application and fulfilling all such criteria as required by the Singapore Exchange. The stock exchange provides the investors and the potential investors useful information about the recent changes in exchange rates (Singh Foo & Rahman). The Singapore Stock exchange has the following trading hours as per their local time:

 

Start Time

End Time

Pre- open time

08:30 a.m.

08:59 a.m.

Market time

09:00 a.m.

05:00 p.m.

Pre- close time

05:00 p.m.

05:05 p.m.

Close time

05:06 p.m.

The Singapore stock exchange analyses the foreign exchange rates, interest rates and international stock exchanges rates both during the crisis period or pre/post crisis period (Determinants of Singapore stock exchange).  The Singapore stock exchange anticipates the market and the demand and supply moves f the bonds, equities and derivatives and fairly estimates the probable stock price. The Singapore stock exchange also provides various other services which include securities clearing services, technological services and other data and information services. The development of the Singapore stock exchange rests on its ability and competence to attract new securities and foreign trades. The more the security base of the Singapore stock exchange, higher is the level at which the stock exchange operates (Review of Pacific basin financial markets and policies). From a recent study, it is witnessed that the domestic funds of Singapore continue to be the main source of funds invested in Singapore’s stock market. It has to continuously attract more foreign funds and listing companies, to become a regional financial centre (Rationale and strategy for expansion of Singapore Stock market).

 

Products Offered by Singapore Stock Exchange:

Some of the most featured and primary products offered by Singapore Stock Exchange include the following:

  • Exchange traded funds (ETFs): An exchange traded fund consists of a set of stocks, commodities, futures and bonds and it acts like an investment fund, which is traded on the Singapore Stock exchange. An ETF can be transacted and traded only by authorized users. This form of investment facilitates the investor to purchase or sell such equity traded funds at its Net Asset Value at the end of each trading day. An exchange traded fund combines the valuation feature of a mutual fund with the tradability feature of a close ended fund. ETFs ensure lower transaction costs as compared to the other investment alternatives and greater tax benefits.
  • Units of Real Estate Investment Trusts (REITs): The working of a Real estate investment trust is much similar to that of a mutual fund, the similarity being the professionalism maintained in managing the funds and investing in the desired set of securities. REIT provides investors an opportunity to invest in a diversified portfolio of real estates, and ensures a regular supply of income, in the form to dividends to the investors. The dividends distributed to the investors mainly arise out of the rental incomes if such real estate has been rented and capital gains, in case these have been sold. The Singapore REIT models are combined with the Business trust models, with the objective of facilitating investment in real estate projects (The rise of Singapore’s Real estate investment trust market).
  • Securities: The Singapore stock exchange is a platform wherein different Singapore companies get itself listed and then the securities, in the form of shares, bonds, debentures are then traded electronically on the exchange. Everyone who holds a share in a company can be referred to as a person who owns a part of the company. In other words, A stock represents ownership of a company, as well as a claim on the company’s assets and earnings. (Singapore Stock exchange)
  • Derivatives: The Singapore exchange also largely transacts in various derivative instruments, which include options, futures, forward contracts, swaps and many more. Some of the most dealt with derivative instruments by Singapore stock exchange are elaborated as follows:
  1. Stock index Futures: Futures can be referred to as a standardized forward contract which is traded on a stock exchange with immense liquidity, stringent margin requirements and mark to market feature. In case of futures, the Singapore stock exchange acts as a clearing house amongst the two parties and become a buyer for every seller and a seller for every buyer. Stock index futures enable a speculation of the overall market rather than a particular stock.
  2. Options: One of the major products traded at the Singapore Stock exchange is options, put options or call options. The buyer of a call option has the right but not the obligation to buy an agreed quantity of a particular commodity from its seller at a certain time in future for a certain price, which is often termed as the strike price. The owner of the put option has the right to sell an asset at a specified price on any pre determined future date. Options can either be American options or European options.
  3. Forward contracts: The Singapore stock exchange also deals in forward contracts or agreements, wherein the investor enters into a contract to borrow/ invest a specified amount of money at a specified interest rate, at a specified point of time in future for a specified period of time.
 

Manner in Which Investment Managers Manage their Respective Portfolios:

Portfolio means a combination of different securities, in which the investor invests. Investing in a portfolio of securities rather than an individual security is less risky comparatively and also fetches greater returns than an individual security. The investment managers need to carefully analyze the returns generated from the portfolio of different securities and the risk associated with such investment. Only those portfolios should be taken up, in which the expected returns are greater than the risks associated with such investment (Risk aversion, capital asset allocation, and Markowitz portfolio- selection model).  The most optimum portfolio is the one which has the highest expected utility. Utility is the positive function of return and a negative function of risk. Statistically, return would be measured in terms of mean and risk will be measured in terms of variance or standard deviation. Hence, the investment managers should carefully study the risk return relationship of various securities in the portfolio and eliminate those securities which have higher risks as compared to its returns.

 

Why Singapore Stock Exchange?

The Singapore stock exchange was the first to witness a complete electronic platform for trading of securities, bonds, derivatives. In the year 2000, Singapore stock exchange became the second stock exchange in the Asia Pacific to get listed through public offer and private placement. Singapore’s monetary system is aimed to promote price stability and provide a proper base for sustainable growth and development. Singapore companies are well renowned for their dedication to quality and such high commitment and reliability makes the Singapore stock exchange more favorable than the other stock exchanges. Also, the Singapore stock exchange operates a managed float regime for the Singapore dollar. The Singapore stock exchange accommodates all the short- term foreign exchange fluctuations and is very flexible and not rigid. Also, the interest rates in Singapore are based on the prevailing foreign exchange rates and the investor’s estimate of the fluctuations in Singapore dollar in the probable future. Singapore stock exchanges are more favorable because they offer trading in securities besides trading in futures and derivatives. A complete electronic platform for trading in securities, rather than roaming around in the supermarkets is very convenient for investors as well as potential investors.

 

References:

Foo, Tee Sing and Rahman, S. ‘Portfolio balance approach to exchange rate determination in Singapore’, Singaporean Macroeconomic Issues,2, pp. 155-169.

Koh, L.Y. and Wu, Y. (1998) ‘Determinants of the Singapore Stock exchange – A VAR Anlaysis’, East Asian Economic Issues, pp. 107-123.

Carpentier, Cecile, L’Her, J.-F and Suret, J.-M (2008) ‘Review of Pacific basin financial markets and policies’, Posted online, 11(2), pp. 255-286.

Sing, T.F. (2009) ‘The rise of Singapore’s Real Estate Investment Trust (SREIT) market’ The Singapore Economic Review, 54(02), pp. 217-232.

Yi, Z. (2009) ‘An empirical analysis of stock market integration: Comparison study of Singapore and Malaysia’, The Singapore Economic Review, 54(02), pp. 217-232.

Wang, K. (2000) ‘Rationale and strategy for expansion of Singapore stock market’, Review of Pacific Basin financial markets and policies, 03(01), pp. 45-58.

Risk aversion, capital asset allocation, and Markowitz portfolio- selection model (2012), Security analysis, portfolio management, and financial derivatives, pp. 265-311.

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