The Role and Size of Share Market in Thailand Essay

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In Thailand, stocks are traded in the Stock Exchange of Thailand (SET). The market, which is situated in Bangkok, had 541 companies listed for share trading by 2007. By then, the collective market capitalisation was $ 280 billion. The stock exchange uses three indices to assess the performance of the shares, including SET100 index, SET50 index, and SET index. Development of the modern stock exchange market has gone through two historical stages. From 1962 to early 1970s, the stock market operated as a privately owned entity. Between 1967 and 1971, the Security Exchange of Thailand was established, with the aim of accumulating funds for economic development and industrialisation. Although some other stock markets had existed before, this was the first one to be officially approved and supervised (Kurihara et al. 2008).

The Stock Exchange of Thailand undertakes a number of primary roles, including trading of the listed securities, and facilitating security trading through provision of the necessary framework. In addition, the market undertakes any other important business, which is associated with trading of securities, including registration, provision of depository centre and clearing house, and any other task that may be endorsed by the SEC (Sherman & Titman 2002).

The ministry of finance is charged with administration of the share market in Thailand. Share market supervision under this ministry is governed by the Security Exchange Commission (SEC), which is solely responsible for overseeing the regulation of the country’s capital market. SEC is made up of representatives from the government, who forms the ex-officio membership. They include the permanent secretary of the ministry of finance and commerce, and four to six experts appointed from the cabinet, upon recommendations by the ministry of finance. Three experts, who are proficient in legal, accounting, and finance fields, are appointed. Notably, Thailand has not gone through another substantial Initial Public Offer (IPO), similar to that of 2006. All in all, Asian stocks are regaining momentum with time, and indeed the Thailand’s SET index has risen to 14% recently. This suggests that IPOs could have gained a full-swing once again (Dybvig & Stephen 1985).

Risk and return in equity market

The common rule is that a high risk is synonymous with increased returns. On the other hand, low risk is coupled with low prospective returns. Considering the principle of risk-return trade off, invested funds can only generate higher returns if the possibility of incurring loss is relatively high. That means that it is very important for the investors to be mindful of their level of risk tolerance when selecting their investment portfolio. Both international and domestic investors experience a variety of risks in their investments (Bodie, Kane, & Marcus 2009).

One of those risks is the default risk, which happens when either the interest or the principal, or both are defaulted. This is especially common with investments that do not have collateral. The other type of risk is the business risk, which means that the market value of a particular portfolio can be affected by the performance of the company that the financier has invested. For instance, if the company in question performs poorly, then the share market value can drop drastically (Christopherson, Wayne, & Andrew 1999).

Liquidity is also a risk factor to consider. Liquidity means the readiness of the availability of funds at any given time. This means that the investors should not only consider the profitability of a particular portfolio, but should also consider whether it is reasonably liquid. If the investment cannot be converted into cash easily and with minimal loss in worth, then it is not reasonably liquid. The risk that results from inflation cannot go without being mentioned. Inflation here means having a lot of money, which is worthless. This usually results from increase in price level, which causes a drastic decline in the value of money (Kurihara et al. 2008)

Investors in stocks also face interest rate risk. This type of risk is actually very common in the current economy, which is deregulated and hence causing interest rates fluctuation to be a very common occurrence, all over the world. This situation impacts very negatively on investments returns and values. Interest rate risk has a very strong impact on fixed income securities. This risk occurs due to the change in value of a particular asset, which is caused by interest rates fluctuation (Squires 1995).

Interference of the government in the economy causes political risk, especially when laws that affect certain companies are introduced. It can also result from introduction of laws that offer relief of debts to some parts of the community, which affects the prices of the property. Changes in governments also results to changes in economic and political ideologies, which has strong impacts on investments. In the course of these changes, many companies experience radical changes as well. Essentially, political risk is mainly caused by changes in government policies. Finally, the investors also experience market risk. This risk results from the factors that affect the whole market, such as natural disasters (Barber & Terrance 2000).

Investment analysis is commonly done by capital asset pricing and the Beta models. Beta usually represents an asset’s volatility, relative to the benchmark used to compare the asset in question. CAPM model shows the relationship between the expected returns and the risk. The model is used to price securities with high risk. The drawback of this model is the fact that Beta is based solely on the market prices, which means that business fundamentals or economic developments are overlooked (Reilly & Brown 2011).

Evidence presented by Banerjee (1990) on the relationship between the expected return and systematic risk of large mutual funds suggests that CAPM might provide an adequate description of the relationship between risk and return. On the other hand, evidence presented by Bodie et al. (2009) indicates that the model does not provide a complete description of the structure of security returns.

References

Banerjee, B 1990, Financial Policy and Management Accounting, PHI Learning Pvt. Ltd., London.

Barber, BM, & Terrance, O 2000, ‘Too Many Cooks Spoil the Profits: Investment Club Performance.’ Financial Analysts Journal, vol. 56, no. 1, pp. 17–25.

Bodie, Z, Kane, A, & Marcus, J 2009, Essentials of Investments, McGraw-Hill Irwin, New York.

Christopherson, J A, Wayne, EF, & Andrew, L 1999, ‘Performance Evaluation Using Conditional Alphas and Betas.’ Journal of Portfolio Management, vol. 26, no. 1, pp. 59–72.

Dybvig, PH, & Stephen AR 1985, ‘The Analytics of Performance Measurement Using a Security Market Line.’ Journal of Finance, vol. 40, no. 2, pp. 2-56.

Kurihara, Y, Takaya, S, Harui, H, & Kamae, H 2008, Information Technology and Economic Development, Idea Group Inc (IGI), London.

Reilly, FK, & Brown, KC 2011, Investment Analysis and Portfolio Management, Cengage Learning, New York.

Sharpe, WF 1992, ‘Asset Allocation: Management Style and Performance Measurement.’ Journal of Portfolio Management, vol. 18, no. 2, pp. 56-89.

Sherman, A & Titman, S 2002, ‘Building the IPO order book: under-pricing and participation limits with costly information’, Journal of Financial Economics, vol. 65, no. 1, pp. 3-29.

Squires, J 1995, Performance Evaluation, Benchmarks, and Attribution Analysis, Va: Association for Investment Management and Research, Charlottesville.

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