Topic 3 SM - 1

Topic 3.
Secondary capital market

Acte legislative şi normative
1. Legea Republicii Moldova privind piaţa de capital, nr. 171 din 11.07.2012. In:
Monitorul Oficial al Republicii Moldova nr. 193-197/665 din 14.09.2012.
2. Legea Republicii Moldova privind Comisia Naţională a Pieţei Financiare [Titlul
modificat prin Legea nr.129-XVI din 07.06.2007, în vigoare 06.07.2007] Nr.192-
XIV din 12.11.98. In: Monitorul Oficial al R. Moldova nr.117-126BIS din
14.08.2007
3. Legea Republicii Moldova privind societăţile pe acţiuni nr. 1134-XIII din
02.04.97.
In: Monitorul Oficial al Republicii Moldova nr.38-39/332 din 12.06.1997
4. Hotărârea CNPF cu privire la aprobarea Regulamentului privind pieţele
reglementate
şi sistemele multilaterale de tranzacţionare nr. 49/2 din 26.08.2015
5. Hotărîrea CNPF cu privire la aprobarea Regulamentului privind serviciile şi
activităţile de investiţii nr. 49/3 din 26.08.2015. In: Monitorul Oficial al
Republicii
Moldova nr.324-329/2295 din 04.12.2015.
6. Directive 2014/65/EU of the European Parliament and of the Council of 15 May
2014 on markets in financial instruments and amending Directive 2002/92/EC and
Directive 2011/61/EU (MiFID II).
1-2
Lucrări metodico-didactice, cărţi, monografii
în l. română
7. ANGHELACHE G. Piaţa de capital. Caracteristici, evoluţii, tranzacţii. Bucureşti:
Editura Economica, 2004
8. PRISACARIU, M. Pieţe şi instrumente financiare. Iaşi: Editura Universităţii
"Al. I.
Cuza", 2008. 445 p.. ISBN978-973-703-391-8
în l. engleză
9. BODIE, Z., KANE, A., MARCUS J. Investments, McGraw-Hill Education, tenth
edition, 2013, 1080 p.
10. BREALEY R., MYERS S., MARCUS A., Fundamentals of Corporate Finance.,
Third Edition., The McGraw-Hill Companies, Inc., University of Phoenix, 2001.
11. HÎNCU R., IORDACHI V., MUNTEANU N., ROŞCA M., BAXAN T.,
CONENCOV O. Basis of capital market’s functioning. Manual. Chişinău: ASEM,
2013. 349 p.
12. FABOZZI, F., DRAKE, P. Finance. Capital Markets, Financial Management, and
Investment Management. John Wiley & Sons, Inc., 2009, ISBN 978-0-470-40735-
6, p. 833
13. MISHKIN, F. S., EAKINS, S.G. Financial Markets and Institutions, 7 th
edition,
2012, The Prentice Hall series in finance
14. ROSS, S., WESTERFIELD, R., JORDAN, B. Fundamentals of corporate finance.
Boston IRWIN. V-XIX editions. 708 p.
1-3
Topic 3. Secondary capital market
3.1. Capital market participants: concept, classification, functions.

3.2. Regulated capital market. Stock Exchange: meaning,
functions, importance.
3.3. Features of the OTC market.
3.4. Stock Exchange information. Stock market indices. Stock
Exchange analysis.
3.1. Capital market participants: concept,
classification, functions
Definition of 'Secondary Market'

A secondary market is the market in which securities issued in the primary market
are
traded by market participants. It provides an exit route to the investors -they
can
sell securities in the secondary market that they had purchased earlier.
A stock exchange is an example of a secondary market. Additionally, many securities
are traded on “over the counter” platforms as well. In this kind of trade
Description: Securities issued by a company for the first time are offered to
the
public in the primary market. Once the IPO is done and the stock is listed, they
are
traded in the secondary market.
The main difference between the two is that in the primary market, an investor gets
securities directly from the company through IPOs, while in the secondary
market,
one purchases securities from other investors willing to sell the same.
A secondary market is one where investors can trade financial products with other
investors. It works like a second-hand market, in that investors buy and sell
used –
rather than new – stock, bonds, options or futures.
Capital market participants:

- Issuers and investors;
- Professional participants;
- Regulators, self-regulatory organization (SRO)
On the capital market a special role is given to capital suppliers – investors in

securities and capital applicants (investment beneficiaries) – issuers of
securities.
Issuers of securities are legal entities (financial institutions, commercial
entities
– JSC, LLC, etc.; public authorities etc.) legally authorized to issue
securities
in order to obtain funds.
Speciality literature defines the issuer in many versions, like :
1. any legal entity that is obliged, legally, to honour the rights granted by the
issued financial asset;
2. entity, appointed as a party resulted from the financial instrument (securities
or payment means), which takes direct or indirect payment responsibilities.
The issuer is that person who places on the capital market a certain type of
product – securities (corporate, state, municipal etc), the quality of which is
identified by the issuer’ standing and financial results of its activity.
On the financial market State is considered the main issuer (it is bond’s
issuer).
State securities have a zero risk degree, as the Government will always fulfil its
obligations to avoid bankruptcy that cannot be stated in case of joint-stock
companies.
The big group of securities issuers is represented by joint-stock companies (there
are
shares and bonds issuers), created both within the privatization process and
the
newly created ones.
In conditions of competitiveness, joint-stock companies are forced to use various
tactics to attract investors.
To get the issuance right, the commercial company should conform to some legal
conditions from the given country
On the securities market the issue is, first of all, appreciated from the point of
view
of the issued securities’ investment attractiveness.
An investor is a person (individual, company and government) who commits capital

with
the expectation of a future financial return (or other material benefits).
Investors have
varying risk tolerances, capital, styles, preferences and timeframes.
There are two main types of investors on the capital market:
- individual investors;
- institutional investors.
Individual investors are individuals who allocate capital on their own behalf
and
through their own accounts. Sometimes individual investors are called retail
investors.
Individual investors can use direct or indirect types of investing (figure
1.1.). The
primary difference between these two types of investing is that applying direct
investing
investors buy and sell financial assets and manage individual investment portfolio
by
themselves.
Consequently, investing directly through financial markets investors take all
the risk
and their successful investing depends on their understanding of financial market,
its
fluctuations and on their abilities to analyze and to evaluate the investments and
to
manage their investment portfolio.
.
Contrary, using indirect type of investing, investors are buying or selling

financial instruments of financial institutions which invest large pools of
funds in the financial markets and hold portfolios.
Indirect investing relieves investors from making decisions about their
portfolio.
The risk for investors using indirect investing is related more with the
credibility
of chosen institution and the professionalism of portfolio managers.
In general, indirect investing is more related with the financial institutions
which are primarily in the business of investing in and managing a portfolio
of securities (i.e. investment funds/ banks, private pension funds, insurance
companies).
By pooling the funds of thousands of investors, those companies, named
institutional investors can offer them a variety of services, in addition to
diversification, including professional management of their financial assets
and liquidity.
Institutional investors represent specialised financial institutions which manage

capital
pooled from retail investors and other financial institutions on their behalf,
according
to established objective in terms of risk tolerance, return-maximisation and
maturity
of claims, taking into consideration the peculiarities of their specific
regulatory
constraints, taxation etc.
Based on types of organization, institutional investors can be classified into:
- investment companies (e.g. closed- and open-end mutual funds, unit investment
trusts);
- public and private pension funds;
- insurance companies;
- investment banks;
- endowment funds;
- hedge funds etc.
Investment companies – are financial intermediaries that collect funds from

indivudual
investors and invest those funds in a wide range of securities or other assets.
An investment company invests the received from investors money on a collective
basis,
and each investor shares the profits and losses in proportion to the investor's
interest
in the investment company.
The performance of the investment company will be based on (but it shall not be
identical to) the performance of the securities and other assets that the
investment
company owns.
There are different classifications of investment companies around the world. Thus,
in
the USA, according to the Investment Company Act of 1940, there are three types
of
investment companies: open-end funds, closed-end funds, and unit investment
trusts
(UITs). In the United States, open-end fund is a synonym for mutual fund.
Elsewhere, mutual funds can include other classes.
In European Union, the investment companies are mainly presented by Undertakings
for
Collective Investment in Transferable Securities (UCITS), which are regulated
investment products established and authorized under a common EU legal and
regulatory framework (UCITS Directives etc.) as well as non-UCITS funds.
Law of Republic of Moldova on capital market defines collective investment bodies
in
securities (CIBS)
Open-end fund (or open-ended fund) is a collective investment company, which
attract
investors capital, selling its shares, it has no restriction on the number of
units the fund
issues and is always “open” to new investors.
An investor generally purchases shares in the fund directly from the fund itself
and can
contribute to an open-end fund at any time.
The fund simply increases the number of shares outstanding.
Another feature of open-end funds is that the fund agrees to buy back shares from
investors at
any operational day.
When investors in open-end funds wish to “cash out” their shares, they sell them
back to the
fund at net asset value (NAV).
Mutual fund assets are normally marked-to-market daily.
The managers of the fund calculate the current value of each mutual fund share by
computing
the daily market value of the fund’s total asset portfolio and then dividing
this amount by
the number of mutual fund shares outstanding, which fluctuates up and down daily
with the
amount of share redemptions and new purchases.
The resulting value is net asset value (NAV) of the fund. All shares bought and
sold that day are
traded at the same net asset value.
NAV =
Open-end mutual funds have a couple of advantages that have contributed to the
growth
of mutual funds.
First, because the fund agrees to redeem shares at any time, the investment is very
liquid; this liquidity intermediation has great value to investors.
Second, the open-end structure allows mutual funds to grow unchecked.
As long as investors want to put money into the fund, it can expand to accommodate
them. These advantages explain why 98% of all mutual funds dollars are invested
in
open-end funds.
In a closed-end fund, there is one big initial primary offering of fixed number of
nonredeemable shares, and investors cannot redeem their fund shares for the
underlying value.
Many closed-end funds are exchange traded, so that if a closed-end fund
investor needs cash, he can resell his shares (for example, on Stock
Exchange).
The market price of these shares fluctuates with the value of the assets held by
the funds.
The market value of the shares may be above or below the value of the assets
held by the fund, depending on the market’s assessment of how likely
managers are to pick stocks that will increase fund value.
The problem with closed-end funds is that once shares have been sold, the fund
cannot take in any more investment dollars.
Thus, to grow the fund managers must start a whole new fund.
The advantage of closed-end funds to managers is that investors cannot make
withdrawals and closed-end fund can invest in profitable assets that are less
liquid.
From the point of view of the investor’s implication in the process of managing
assets or
the issuer’s ownership, as well as risk assumption, there are distinguished the
following
types of investors:
- strategic;
- portfolio;
- cautious, conservative (hedgers);
- speculators.
Strategic investor is implied and knows the process of technical investment
management,
assuming the responsibility of participation within the issuer’s ownership
administration. The investor’s decision to leave investment is a negative sign,
as he is
an insider and possesses confidential information related to the issuer.
Portfolio investor does not imply in the issuer’s operative management and as a
result, his
entry or exit right from investment is not restricted, while this
responsibility is limited
to the amounts invested in securities.
Cautious, conservative investor is the person who operates „with” and „for” the
underlying
asset, thus, exercising an influence over its price.
Speculative investor currently, is not involved in the technical exploitation of an
asset; he is
not interested in its operating, instead, a price variation represents an
income source for
him. Speculator assumes risks related to direction and intensity of price
variations,
manifesting a special interest for capital profit by means of immediate
exploitation of
information.
In Republic of Moldova, the activity is performed by various types of investors

that
activate in developed countries. According to Law on capital market, the main
types of investors are:
- investment company or investment fund;
- investment society ;
- qualified investors.
Law of Republic of Moldova on capital market defines collective investment bodies
in securities (CIBS)
as entities that perform activity in base of risk spreading principle and
the
activity of which is to attract and collect funds from natural persons and/or
legal
entities by means of issuing and placing shares or parts from funds for their
further investing into transferable securities and/or other types of financial
instruments or assets
CIBS are investment companies and investment funds, which cumulatively meet
the following conditions:
a) they have a unique scope the mobilization of funds and their placement into
securities, other financial instruments or other assets according to legal
provisions on capital market;
b) shares of investment companies and their units of funds should be redeemable at
the request of holders from assets of given CIBS.
Any CIBS activates in base of the following principles:
a) principle of prevention and risk management related activity;
b) principle of diversification of portfolio securities or other assets held;
c) principle of prudent portfolio management;
d) principle of investor protection;
e) principle of risk spreading.
Investment companies are collective investment bodies in securities having the

status of legal entity and created in form of joint-stock company according to
provisions of Law on capital market and Law on joint-stock companies,
which place and redeem their shares at request of shareholder.
Investment companies issue nominative shares totally payable by money funds
at the moment of subscription. An investment company can be administrated by
a trust management company.
Investment fund represents a collective placement body in securities having no
legal status, created in base of civil society contract, which places and redeems
continuously and with no delay participating titles in form of fund units and
activates according to provisions of Law on capital market and normative acts
of NCFM.
Assets of investment fund are separated from the assets of trust management
company, which administrates this fund, and belong to holders of fund’
stakes. The investment fund has an exclusive activity the placement of financial
resources, obtained exclusively from the issuance and sale of fund’ stakes to
public
Another category of investors on capital market, according to Law of Republic

of Moldova on capital market, is represented by qualified investors.
The quality of qualified investor is obtained at request and can be obtained
from legal entities that meet at least two of the following criteria:
a) the average number of employees should be at least 250 persons;
b) value of total assets should be at least 43 million Euro, converted in Lei and
calculated at the official rate of National Bank of Moldova;
c) gross profit should totalize at least 50 million Euro, converted in Lei and
calculated at the official rate of National Bank of Moldova.
A special role on the capital market is played by professional participants who

perform activity of intermediation with securities between issuers and
investors both on primary and secondary market.
In international practice the following types of professional participants are
mostly activating:
• Subscription companies within securities placement (underwriter);
• Securities companies;
• Investment management companies;
• Compensation, settlement, depository companies (infrastructure);
• Registry keeping companies (infrastructure).
Subscription companies within securities placement are intermediaries within the

process of securities’ issuance and placement on the capital market.
Speciality literature defines these companies as “underwriters”.
Often, in international practice, the underwriter’s activity is accomplished by
investment
banks.
Investment banks are specialized institutions in the process of capital directing
for its
placement into securities issued by state, state’s authorized agencies, joint-
stock
companies and other potential issuers. Intermediation activity can take the
following
forms:
- Guaranteeing the issuance of securities: this operation consists in taking the
risk of
distributing a securities issuance. In this case, investment banks use their
own capital
to take over securities from the issuer.
- Distribution of securities’ issuance: this transaction is performed without
capital
involvement on behalf of the investment bank. The investment bank only attends
the
issuer during the process of securities’ issuance.
Securities companies perform the intermediation transactions with securities made

by
investors, especially (stock exchanges, OTC markets).
According to types of clients that might be related to any company, activities
performed
by them can be:
a) Activities related to clients as natural persons/legal entities, who desire to
invest their
money in securities. These activities refer to:
• intermediation of newly issued securities on the primary market;
• intermediation of selling or/and purchasing of securities on the secondary
market;
• holding the clients’ securities on separate accounts, but on behalf of the
securities
company.
b) Activities related to clients as legal entities, who follow as objective
investment on
the market of the newly issued securities with the aim to increase social
capital or to
get short-term/long-term financing. This category of activities includes:
• Attending joint-stock companies that are willing to place stocks or bonds on
capital
market, by consulting them;
• Efficient intermediating of issuance by means of implying within the process of
securities’ distribution that are placed into circulation;
• Attending privatization transactions.
According to international practice, within the securities companies, stock

exchange agents activate, the activity of which ensures a direct functioning
of the stock exchange mechanism .
According to performed activity, stock exchange agents can be considered:
a) Operative specialists who directly perform stock exchange transactions, and
can be grouped into:
• brokers (stock exchange agents) or stock exchange intermediaries;
• dealers (stock exchange traders).
b) Non-operative specialists. Their role is to perform different studies or
analysis with the scope to render information to clients on investment
juncture and opportunities.
This category includes: financial analysts, stock exchange personnel engaged to
supervise, control, and follow specific operations that take place on the
trading floor, or who are occupied with transmission of information and
preparing the documents.
According to the role of the stock exchange agents on the trading floor and the way
they
are involved in transactions, there are:
a) brokers, who can initiate transactions on the client’s name, account and risk.
They activate on contract-base and can be engaged by a company or can work
independently.
There are distinguished:
• trustees brokers, who are activating on a brokerage company mandate;
• independent brokers, who process orders received from stock exchange agents or
members of some companies that do not own active agents within the given stock
exchange. The latter are called “brokers’ brokers” or “two dollar traders”.
b) dealers (traders), who activate on own name and account and can be:
• market-makers, who have the function of equilibrating demand and supply, as
well as ensuring market liquidity. The market-maker activity represents a type
of
commercial activity, which takes place through a public announcement of
bid/ask prices of securities with the obligation to purchase or/and buy them at
prices announced by the person that practices this activity;
• competing dealers, who are registered and authorized market operators. They
perform transactions inside the stock exchange on own name and account, with
the main objective to get profit from bid/ask price differences of securities;
• odd-lot dealers, who have the role to receive orders that do not accomplish the
standard package requirements of trading on market, to gather them in standard
lots and execute them. A standard lot means a minimal package that can be
traded on the market by one order (generally, 100 assets).
Investment management companies perform their activity according to

international practices, being grouped in two big categories:
0) investment funds management companies;
1) investment management companies, made by individual investors.
Investment management companies are created to ensure the professional
management of securities’ portfolios, in which monetary resources
concentrated by means of these funds are invested.
Clearing, settlement, depository companies, are professional participants

whose effective activities consist in:
• comparing the terms of transactions concluded by securities companies,
according to types of traded securities;
• establishment and settlement of transactions by delivering securities and
payment of cash;
• account registration of transactions, using the services of a registry company;
• rendering depositor, trust services (safe keeping) of securities;
• insurance access to the register’s data.
Registry companies, in international practice, are specialized in:

a) records of securities traded on an organized and supervised secondary market,
both
according to each issuer and according to each holder;
b) transmission of account statements to securities’ holders;
c) transmission, at the request of the issuant company, of the records on
securities’
holders;
d) registering the ownership transfer as a result of transactions on secondary
market;
e) granting the possibilities to securities companies to check the existence of
securities
on the clients’ accounts, who give ask orders;
f) offers the possibility, by the consent of the holder, for securities registered
on his
name to be landed to another participants within transactions on secondary
markets
that expressed the intention to use them;
g) preparing periodical reports for supervision authorities of the capital market,
which
allow making necessary inspections for the insurance of transactions’ accuracy.
In the Republic of Moldova, for the activity on the capital market, National
commission
of Financial Market issues the following licences and authorizations to persons
who
meet the requirements stipulated by Law on the capital market and by normative
acts
of NCFM:
a) investment company license;
b) market operator license;
c) central depository license;
d) registry company license;
e) other authorizations provided by law on capital market.
According to Law of Republic of Moldova on capital market, the investment society
is a
legal entity the activity of which is to render investment services and/or
investment
activities on a professional basis.
Investment societies are empowered to perform the following investment

services and activities:
a) reception and transmission of orders in relation to one or more financial
instruments;
b) execution of orders concerning financial instruments on behalf of clients;
c) trading on own account;
d) portfolio management;
e) investment consulting;
f) brokerage underwriting of financial instruments and / or placing of financial
instruments on a firm commitment basis;
g) placing of financial instruments without a firm commitment;
h) operating a MTF.
In addition to investment services and activties previously mentioned, investment

societies can render the following auxiliary services:
a) trust investment management;
b) granting of credit or loan to a customer to enable a transaction with one or
more
financial instruments involving investment society granting the credit or loan;
c) consulting rendered to joint-stock companies on capital structure, industrial
strategy and related matters, services related to mergers and acquisitions of
companies;
d) exchange operations, in case if these operations are directly related to
rendering
investment services;
e) investment research and financial analysis or other forms of general
recommendation relating to transactions in financial instruments;
f) brokerage services related to underwriting of financial instruments;
g) investment services and activities and auxiliary services mentioned on
derivatives
if they are related to the provision of investment or auxiliary services.
On the capital market of Republic of Moldova, NCFM issues the market operator
license
to legal entities created as joint-stock companies that require the market
operator
license from NCFM and correspond to provisions of art. 61 of the Law on capital
market. NCFM can grant authorities to market operators for the establishment and
operation of a regulated market and/or a multilateral trading system (MTF).
• Regulated market represents a multilateral system, which is administrated and
operated by a market operator who insures or facilitates confrontation, in
accordance
with its non-discretionary rules, of multiple orders for the sale of financial
instruments received from third parties in a manner that results in a contract
concerning financial instruments admitted to trading, according to its norms
and
which is authorized and functions regularly in accordance with the Law on
capital
market.
• Multilateral trading system (MTF) is a multilateral system, operated by an
investment company or a market operator, which ensures confrontation, in
accordance with its non-discretionary rules, of multiple orders for the sale of
financial instruments received from third party.
NCFM grants license for the activity on the capital market as central depositary.
Central depositary is a legal person established in the legal form of a joint
stock company, which carries out disposal of securities and any related
activities of securities storage. Central Depository is entitled to carry out,
activities CNPF:
a) depository operations of financial instruments;
b) activities that relate to keeping the register of holders of financial
instruments;
c) clearing and settlement operations of financial instruments;
d) other activities determined by NCFM.
In accordance with the Law on capital market authorization is granted by NCFM for
the
activity on capital market as registry company to legal entity whose main
activity is
maintaining the register of holders of securities and other related activities.
Registry
company is empowered to perform on exclusive basis the following activities on
capital market:
a) maintaining the register of securities holders;
b) consultancy and corporate relations.
For the domestic capital market, a special interest is represented by trust
management
companies, who are investment societies that possess the B or C category
license,
issued by NCFM, the activity of which is to render specific services related to
assets
management on a contract basis, according to provision of law on capital market
and
normative acts of NCFM, as these entities should administrate investment
activities
on capital market of the collective investment placement bodies in securities
(CIPBS).
Other categories of participants of capital market that are subjected to regulation

according to Law on Republic of Moldova on capital market are: professional
clients, qualified investors, investment companies, investment funds.
If participants holding a license or authorization for capital market activities,
do not
comply with the mandatory law of the Republic of Moldova on the capital market
and the regulations in this field, NCFM applies them as a form of punishment:
a) warning;
b) public warning;
c) suspension or revocation of certificates of qualification issued by NCFM;
d) suspension or withdrawal of the person in charge;
e) suspension or prohibition of capital market activity of the individual;
f) suspension of license;
g) revoking the license or authorization;
h) a fine of up to one million lei.
Upon withdrawal of licenses or permits previously issued, NCFM oversees the way of
execution of obligations by licensed or authorized persons obligations to their
clients.
For its execution, NCFM is entitled:
a) to require the Court to initiate insolvency process on licensed or authorized
person
ordering the necessary measures to ensure and / or
b) to require a court the dissolution of the authorized or licensed person and
appointment of the liquidator, and / or
c) to suspend the accounts of banking operations of the licensed or authorized
person
and / or
d) to strike, with prohibition of alienation, financial instruments held by
licensed person
on own account and / or on behalf of clients.
Regulatories bodies on the Capital market and the capital market legal framework
will be
discussed during our next lessons
A self-regulatory organization (SRO) is an entity such as a non-governmental
organization, which has the power to create and enforce stand-alone industry
and
professional regulations and standards on its own.
In the case of financial SROs, such as a stock exchange, the priority is to protect
investors by establishing rules, regulations, and set standards of procedures
which
promote ethics, equality, and professionalism.
Although SROs are private organizations, they are still subject to government-
imposed
regulation to a degree. However, the government does delegate some aspects of
the
industry oversight to self-regulatory organizations.
Originally started in the 1970s as an association of dealers, NASDAQ grew to be one
of
the largest exchanges in the world.
3.2. Regulated capital market. Stock Exchange:
meaning, functions, importance
The stock exchange is a market, where, according to a specific exchange procedure,

either commodities or financial instruments are offered and sold.
The appearance and the development of stock exchanges represent a natural
consequence and proof of the progress registered by the society, within its
evolution, in the economic and market organization domains.
Regarding the definition of the stock exchanges, within the legal frame of the
countries with exchange traditions similar approaches can be found, having
different shades either in legal and institutional, or functioning plans.
According to the classical approach, the stock exchange supposes the existence of
an institution which disposes places for transactions, where the demand and
supply for securities are concentrated, and negotiation, conclusion, and open
execution of contracts are performed, according to a known regulation.
Another approach reduces the stock exchange concept to a specialized and
organized market which functions under the control and supervision of the state
through competent bodies.
Various types of securities can be sold and bought on the stock exchange.
Being viewed in terms of activities’ contents, stock exchanges represent the most
important segment of the secondary capital market.
The stock exchange is a component of the secondary capital market, whose activity
is based on public regulations, and where listed securities are negotiated.
The stock exchange is an institution which disposes spaces organized for
transactions’ performance, where the demand and supply for commodities and
securities are concentrated, leading, on the basis of negotiations, to the
conclusion of transactions and execution of contracts transparently, on the
basis
of known and accepted rules.
In order to ensure the well-functioning, the stock exchange implies the existence
of
a mechanism of transactions’ centralizing, allowing the direct and permanent
access of the investors to the market information and operations’ execution.
Usually, this centralizing system was reached by means of concentrating the selling
and buying orders within a limited place, called the stock exchange ring, and
performing all the transactions by certain specialized persons, called stock
exchange agents.
Specialty literature states a lot of definitions for the term of Stock exchange.
These
definitions contain common elements, as well as many differences, such as:
1. The stock exchange is a secondary securities market. The exchange negotiations
refer
to securities that have already been placed;
2. The stock exchange is designated to operations with securities or „stock
exchange
securities”, and namely transactions with nominative or bearer securities
(shares,
bonds, etc.) issued by commercial societies or state entities. The stock
exchange is
simultaneously the market for securities and the place where intermediaries
that
perform securities’ selling and buying operations meet.
3. The stock exchanges represent the centre of the financial life, where sales /
purchases
of securities are made (shares, treasury bonds etc.). In the same time, on the
stock
exchanges can be performed operations with currencies, precious metals, and
bills as
well. Lately, in the transaction system of these institutions new exchange
products
were included, such as: options, future contracts on stock exchange indexes
etc. The
stock exchanges perform major functions within the circuit of economic capital,
being a general indicator of the business environment within the national and
international economic space.
The Moldova Stock Exchange represents a joint-stock company, which performs stock
exchange activity on the securities market according to the Stock Exchange
Regulation.
The stock exchange represents a series of specific features, such as:
The stock exchange is a public market;
The stock exchange is a regulated market;
The transactions performed on the stock exchanges are of great importance for the
entire
economy, which sights both public and private economy. This kind of transactions
can
render really strong effects on the economic life and over the financial
credibility of
issuers, and, thus, can not be left to the free activity of participants. These
transactions
make the object of precise regulations, including:
- the way of establishing and publishing market prices;
- the means of control on keeping the regulations;
- sanctions on the detected irregularities.
The stock exchange is one of the most important institutions of a market economy.
The stock exchange is a segment of the financial market, an organized secondary
market,
transparent and supervised, where there are performed transactions on securities,
their
derivatives, currency.
Generally, stock exchanges play in the contemporary world a special role.

The existence and functioning of the stock exchanges is determined by both issuance
and
usage of securities as financial assets, as well as the variety of stock products,
by their
feature of instruments of placement of the disposable capital and risk coverage.
Among the main functions of the stock exchange, the following should be stated:
- Concentration of demand and supply of securities in a certain place and at a
certain
moment of time, thus being accomplished a direct link between the owners of
disposable
capital and financing necessities of economic agents, state, public authorities
etc.;
- Performance of transactions with securities, according to the customers’ orders
and
with respect to the exchange’s regulations, offering the possibility to transform
the
securities held into cash;
- Reflection of the market condition at the moment for the economic space which it
represents;
- Continuous and systematic observation of the securities’ market price, which, by
means of the trading price at a given moment, supplies information on the market
values of the securities’ issuing companies.
Regarding the specific functions, stock exchanges satisfy three types of

necessities, such
as:
• Macroeconomic necessities (for a state’s economy);
• Microeconomic necessities (for companies);
• Individual necessities (for shareholders and for those who dispose money for
investments).
Conformable to these necessities, the functions of the stock exchange are:

Macroeconomic functions:
• The stock exchange ensures a shorter and more efficient circuit between long term
economies (of private entities) and financing necessities of entrepreneurs and
public
communities. In such a way, the stock exchange has become a strong competitor of
the banking system, an alternative for bank loans for economy financing.
• The exchange represents and instrument for ensuring liquidities within an
economy.
• The information provided by the stock exchange, expressed in the form of stock
prices, represents the practical basis for evaluation of the market value of the
capital
(in terms of market capitalization).
• Stock exchanges represent the support and basic instrument necessary for
important
sector’s reorganization. The mobility of capital gives birth to opportunities to
identify
the best investments at the moment. Collecting the disposable capital and its
investment into the most active sectors of the economic life, is one of the most
important functions of the stock exchange.
Microeconomic functions:
• The exchange facilitates the amplification or diminishing of the notoriety of the
listed
companies, and, in such a way, influences the motivation of the entrepreneurs to
sell
or purchase securities.
• The exchange allows the increase of the companies’ own capital. The new companies
entering the market can increase their capital only indirectly, by means of new
shares’ issuance, which will be sold through the exchange.
The exchange stimulates a better management of companies, with the goal of assets’
value amplification, which will generate an increase in shareholders’ profits.
This
management is invoked especially by the initiators of the stock exchanges in
emerging countries.
Individual functions:
• The exchange facilitates getting cash by the shareholders, and intermediates,
as
well, an evaluation of personal wealth.
• The shareholders can, anytime, sell, the securities they own, in exchange for
an
acceptable market price.
• Securities’ owners are supposed to have the possibility, at any time, to know
the
level at which securities they invested in are officially quoted.
Arising from the functions mentioned, it can be stated that the exchange represents
the barometer of economic and financial activity at the national level, and a
sensitive
indicator of the evolution and prospect of the business world at the international
level.
Stock exchanges can be classified according to different criteria, as follows:

a) according to the form of organization, there can be distinguished:
• State (public) exchanges – which, at the moment of their foundation, imply the
intervention of bodies of public administration. State stock exchanges are non-
profit
institutions, organized and managed by the state. Usually, these provide free
access
for any intermediary, who meets the conditions set by the regulations in force.
In case
of non-profit exchanges, their members do not receive dividends on invested
capital.
These investors obtain their profit through the activity of brokerage agencies
they
own;
• Private exchanges, which appeared exclusively on private initiative. Private
exchanges are non-profit institutions (for example, US stock exchange, NYSE,
TSE)
or for-profit institutions (for example, stock exchanges in Great Britain,
Germany).
The access is limited to a certain number of places (members), the first
condition for
an intermediary who wants to participate in the respective market being the
ownership of a place for trading. For-profit exchanges provide to its associate
members the possibility to receive dividends on the invested capital;
• Mixed exchanges – both public, as well as private (for example, exchanges in
Switzerland).
b) according to the object of transaction, there are:

• General exchanges, where operations with various commodities, securities,
currencies are negotiated;
• Specialized exchanges, where transactions on a determined range of commodities
or
only on securities take place;
c) according to the number of members (the criterion of participants’ admission)
there
can be:
• Closed exchanges, where the number of founder members is limited. The
affiliation
(for a new member) can be achieved only by exchange (with an old member), by
inheritance, purchase or rental. The access to the stock exchange is granted
only to its
members or to those who obtained the authorization from the exchange’s
governing
body;
• Opened exchanges, where the amount of members can be supplemented by a certain
proportion. The participation on the exchange is unlimited under the condition
of
internal legal frame’s keeping. The access might be either free or charged with
an
attendance fee;
d) according to the way of communication for transactions’ conclusion, there are:
• Open outcry exchanges, where transactions are concluded vocally, being the oldest
way
of communication. Auction-based exchanges such as the New York Stock Exchange
allow traders and brokers to physically and verbally communicate buy and sell
orders;
• Electronic exchanges, where transactions are performed by means of modern
communication technologies (telephone, fax, internet). Electronic exchanges take
place on
electronic platforms, so they don't require a centralized physical location for
trades.
Electronic communication networks connect buyers and sellers directly by bypassing
market
makers;
e) according to the way of price formation, exchanges can be classified as follows:
• Auction exchanges, which presume the presence of a specialist who holds the
trading
session, the most characteristic being the fact that at a certain given moment,
for a
certain security, just one single price can exist at the transaction’s
conclusion;
• Negotiation exchanges, where, at the moment of price formation, direct
negotiations
between participants are used, the main peculiarity being the fact that at a
certain
moment of time, for the same security several transaction conclusion prices can
exist,
due to the possibility of existence of several simultaneous negotiations for
the respective
security;
f) According to the trading discipline:

• order-driven market, within which the market price is formed based on the orders
introduced in the system by intermediaries (these are also called double
auction
markets);
• quote-driven market, which imply the existence of some intermediaries – market-
makers, who post firm bids and offers for a certain security;
g) according to the form of organization, exchanges can be founded as:
• joint-stock company;
• trade association.
The Regulation of the stock exchange, generally, comprises specific provisions

regarding:
- Securities listing (admission, listing conditions, information to be supplied
regarding
national or foreign securities)
- Trading mechanism (types of transactions performed, negotiation procedure, way of
formation and display of the market price)
- Stock exchange agents’ activity.
Listing means the formal admission of securities of a company to the trading

platform of the Exchange.
It is a significant occasion for a company in the journey of its growth and
development.
It enables a company to raise capital while strengthening its structure and
reputation.
It provides liquidity to investors and ensures effective monitoring of compliance
of the issuer and trading of the securities in the interest of investors.
When securities are listed in a stock exchange, the company has to comply with
the requirements of the exchange.
The Moldova Stock Exchange operates as a joint-stock company with a share capital
of not less
than 500 thousand lei. The National Commission of Financial Market has the
right to require
the augmentation of the Stock Exchange’ share capital.
The governing bodies of the stock exchange are:
• General Meeting of Shareholders;
• Stock exchange Council;
• executive body;
• auditing commission.
Entities, who associate to found a stock exchange, become members of the exchange,
quality
that invests to them certain rights and obligations.
Exchange’s members (exclusively) have the right to perform direct
transactions with
securities. The quality of an exchange’s member brings the following rights:
• To be present, directly or through representatives, at the exchange, and to
perform stock
exchange transactions, on their own account and / or for third parties;
• To participate at the elaboration and / or the amendments to the charter and
regulation of the
stock exchange;
• To take part in the administering of the exchange institution, to elect and be
elected to the
governing bodies.
• According to Law on capital market that will enter into force in September 2013,
investment
societies can be members of regulated market. Detail information on members of
regulated
market is given in art. 65 of the Law on capital market nr. 171 from 11.07.2012
According to the Law of the capital market,

Chapter IV
CAPITAL MARKET INFRASTRUCTURE
Section 1. Market operators
General provisions on market operators and regulated markets
• The regulated markets can be created, managed and operated by market operators,
in
accordance with this Law and regulations of the National Commission;
• The regulated market can be itself a market operator;
• The market operator is entitled to create in it one or more regulated markets
and /or
MTF which are not a legal persons.
• The National Commission regulates and supervises the business of market
operator
and of regulated markets, including activities related to management and
operation of
regulated markets
Rules of the regulated market
(1) The regulated markets shall develop and apply the rules of regulated market
which establish
transparent, non-discriminatory and non-discretionary rules on:
• trading in financial instruments;
• price determination and execution of orders;
• requirements and conditions of obtaining, suspension and withdrawal of a member
and
participant of a regulated market, also the rights and obligations of members
and participants of
the regulated market;
• financial instruments types and requirements to the issuer and financial
instruments necessary for
admission to trading; trading suspension and withdrawal of financial
instruments admitted to
trading, and the rights and obligations of issuers admitted to trading;
• clearing and settlement conditions for trading in financial instruments carried
out in the regulated
market,
• types of transactions and orders concerning the financial instruments traded;
• system activity of the regulated market;
• examination and arbitration of disputes between members and/ or regulated market
participants;
• examination of admitted infringements by members and participants of a regulated
market and by
the issuers whose financial instruments are admitted to trading;
• management of the regulated market by the market operator, including the decision
making in
relation to regulated market;
• the manner of approval and amending the regulated market rules;
• the disclosure of information.
Articolul 65. Members of the regulated market

(1) The investment firms may be members of the regulated market, in accordance with
the regulated market rules;
Admission of financial instruments to trading on regulated markets
• Financial instruments may be admitted to trading on a regulated market with the
issuer request of these securities.
• In case where financial instruments are admitted to trading on initiative of
the
members on the regulated market, within one month after admission, the
regulated
market will inform the issuer about it.
• The financial instruments that have been admitted to trading on some trading
market
or MTF can subsequently be admitted to trading on other regulated markets or
MTF.
The regulated market or MTF which admit the financial instruments informs the
issuer about this fact.
• Only financial instruments that correspond to the requirements of this law and
to the
regulated market rules may be admitted to trading on regulated markets.
Section 3. Multilateral Trading Facilities (MTF)

Articolul 72. General provisions on MTF
(1) MTF can be created, and operated by investment firms licensed in C category and
by
market operators (hereinafter – system operators), in accordance with
provisions of
this law.
(2) System operators are entitled to create one or more MTFs.
(3) Any natural or legal person, except the system operator is not entitled to use
terms
like “MTF”, “trading system” and its derivatives, referring to the financial
instruments in their own names, to created trading systems, marks and its
promotional materials.
Articolul 73. MTF authorisation

(1) The creation and operation of a MTF is carried out by a system operator based
on the
authorisation as a MTF issued by the National Commission.
3.3. Features of the OTC market
An OTC market is a decentralized market where non-listed securities are traded by

the
market participants.
There is no centralized place to make the trade. Instead, the market consists of
all the
participants trading among themselves.
Examples of OTC markets are spot forex and many debt markets. This also happens for
stocks, and deals are done directly between broker/dealers who make two-way
prices
to each other in the stocks that they are trading in.
Most countries with a market economy, besides an official exchange, also have an
off-
exchange market, which successfully complements the investment process on the
capital
market. The off-exchange or interdealer market is also call the „over-the-counter”
(OTC)
market.
Companies that are not listed on the exchange (companies that are new founded or
of
regional interest) represent the object of the transactions over the counters of
dealing
companies.
• The OTC market is part of secondary exchanges, and represents the second
echelon as
importance over the economy. The off-exchange is a secondary market for
negotiations between the bid for and offer of securities, the liquidity being
ensured by
the competition between a big amount of securities’ dealers.
The off-exchange is an electronic market which imitates, measurably, exchange

trading
techniques and requirements. On the OTC market transactions are carried on
distance,
from intermediation headquarters by a large number of companies, through the
simplest
access.
The securities traded on the OTC market are issued by societies, which are either
new, or
have a local importance, or do not have the level of development which would
permit
them to enter the initial listing (stock exchange).
An important feature of the stock exchange is the lack of geographic localization,
similar to
the official exchange, being a diffuse market. Initially, trading took place at
the counters
of the brokerage agencies (securities companies), which concentrated the bids
and
offers of the securities.
Together with the development of computers, telecommunications, informatics and
telematics, OTC has transformed into an electronic market.
Today, OTC is a real alternative to the stock exchange that should not be
neglected, while,
on the one hand, it has adopted most of the techniques, methods and regulations
of the
official exchange, thus increasing the confidence of the investors, and, on the
other
hand, took the features of the old organization: the possibility for a big
amount of
companies to be listed, the lack of excessive restrictions on market access,
intermittent
trading of a security, remote negotiation, simple access to the system etc.
The functional structure of the OTC market is, generally, similar to the one
specific to
the stock exchange. Speaking about the organizational structure, differences
related
to traders involved in the trading process as employees of intermediation
companies
arise.
The distinctive features of stock exchanges and OTC markets are shown in table.
The world undisputable leader of the OTC markets is the North-American capital
market
NASDAQ, which, through the reached level and importance on the North-American
capital market, has imposed a standard in this domain.
There is a poorly developed off-exchange in the Republic of Moldova. Thus, on the
domestic off-exchange, sale and purchase transactions can be performed only with
securities obtained during the privatization process.
As on the domestic off-exchange the sale and purchase transactions are of low
proportions, it is currently weakly developed. Nevertheless, for the domestic
off-
exchange, a certain trend of developing is characteristic.
Risks of Over-the-Counter Markets

While OTC markets function well during normal times, there is an additional
risk, called a counter-party risk, that one party in the transaction will
default
prior to the completion of the trade or will not make the current and future
payments required of them by the contract.
Lack of transparency can also cause a vicious cycle to develop during times of
financial stress, as was the case during the 2007–08 global credit crisis
Table 1. The main differences between the stock exchange and the OTC
market
Diversification Stock exchange
OTC market
criteria
According to the Localization of the transactions, respectively the
Absence of a localization or a building,
place of trading existence of a limited space within a building with a
transactions being performed in the offices of
negotiation room where exclusively transactions on financial
companies that act as dealers
securities are performed
According to the The direct access on the market is limited to the There
is a larger access for both clients and
access on the market stock exchange members and to securities accepted
securities, implying the existence of a lot of
on the exchange market
makers
According to the Contracts’ negotiation and execution is performed

Transactions are performed upon direct
way of contract by a specialized personnel through different trading
negotiations between the buyer and the seller,
execution systems based on public auctions the
counterpart role being delivered to the dealer
According to the Transaction performance is subordinated to fixed

Transactions’ regulation is not that strict or
regulation rules, set by the Law and exchange’s regulation. The ample,
usually being formed by dealers’
exchange agents shall respect certain liabilities
associations
According to the Due to the concentration of trading mechanism Due to

the fact that prices are set upon
price and order, a unique price for traded securities is isolated
transactions, these can vary from one
formed company
to another
End of TOPIC 1

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Topic 3.

Secondary capital market

3.1. Capital market participants: concept, classification, functions.

Definition of 'Secondary Market'

Capital market participants:

On the capital market a special role is given to capital suppliers – investors in

An investor is a person (individual, company and government) who commits capital

Contrary, using indirect type of investing, investors are buying or selling

Institutional investors represent specialised financial institutions which manage

Investment companies – are financial intermediaries that collect funds from

In Republic of Moldova, the activity is performed by various types of investors

Investment companies are collective investment bodies in securities having the

Another category of investors on capital market, according to Law of Republic

A special role on the capital market is played by professional participants who

Subscription companies within securities placement are intermediaries within the

Securities companies perform the intermediation transactions with securities made

According to international practice, within the securities companies, stock

Investment management companies perform their activity according to

Clearing, settlement, depository companies, are professional participants

Registry companies, in international practice, are specialized in:

Investment societies are empowered to perform the following investment

In addition to investment services and activties previously mentioned, investment

Other categories of participants of capital market that are subjected to regulation

The stock exchange is a market, where, according to a specific exchange procedure,

Generally, stock exchanges play in the contemporary world a special role.

Regarding the specific functions, stock exchanges satisfy three types of

Conformable to these necessities, the functions of the stock exchange are:

Stock exchanges can be classified according to different criteria, as follows:

b) according to the object of transaction, there are:

f) According to the trading discipline:

The Regulation of the stock exchange, generally, comprises specific provisions

Listing means the formal admission of securities of a company to the trading

According to the Law of the capital market,

Articolul 65. Members of the regulated market

Section 3. Multilateral Trading Facilities (MTF)

Articolul 73. MTF authorisation

An OTC market is a decentralized market where non-listed securities are traded by

The off-exchange is an electronic market which imitates, measurably, exchange

Risks of Over-the-Counter Markets

According to the Contracts’ negotiation and execution is performed

According to the Transaction performance is subordinated to fixed

According to the Due to the concentration of trading mechanism Due to

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