Stock market (securities market)

What is the stock market?

The stock market (the securities market), which is part of the financial market, basically handles operations with such securities as shares and bonds (equity and debt securities). These operations are conducted by the Moscow Exchange (moex.com) and the National Settlement Depository (nsd.ru), which are responsible to market participants for uninterrupted trade in securities, transaction settlements and securities safekeeping.

A joint-stock company, a share, shareholders’ rights

The activities of companies are financed through the funds of entrepreneurs who risk their money to derive profit. In order to expand their business, entrepreneurs may attract additional funds from investors, i.e. from any citizens or organisations who have uncommitted funds and are ready to share market risks with entrepreneurs. The word “share” is translated as “aktsiya” into Russian. This term is derived from the Latin “actio” - the intention to perform “an act for achieving the goal” - and denotes a security, which confirms the right of a certain person (a shareholder) to receive a part of a company’s profit or participate in its management.

A business whose authorised capital was formed through the placement of its shares among investors is called a joint-stock company. All strategic decisions on the company’s development are made considering each shareholder’s opinion, which is taken into account through the procedure of a secret ballot vote on the issues of the agenda of a general shareholders’ meeting. The voting is based on the “one share- one vote” principle.

The issuance of shares has the following stages:

  • a general meeting of shareholders or the board of directors makes a decision on the placement of shares;
  • pursuant to this decision, the board of directors approves a document containing information on the placement of shares, shareholders’ rights, the terms and the procedure for the placement of shares – a Decision on the Placement of Shares;
  • equity securities (shares) are subject to a compulsory procedure – the state registration of the issue of securities with the Bank of Russia.

Shares are divided into ordinary shares and preferred stock.

Ordinary shares give the right to vote at a general shareholders’ meeting. Ordinary stock holders participate in the distribution of a company’s profit only after the company replenishes its reserves and pays dividends on preferred shares. That is why, dividend payment on ordinary shares is not guaranteed as it depends on the company’s operating activities and the amount of its profit. Upon liquidation of a company, an ordinary share gives a shareholder the right to a part of the company’s assets after settlements with creditors and preferred stock holders.

Preferred shares give their shareholders the priority right to receive dividends at a fixed rate irrespective of the size of profit derived by a joint-stock company over the reporting period. Preferred stock holders also enjoy the priority right to receive a part of the assets of a joint-stock company upon its liquidation. At the same time, preferred stock holders have limited participation in the management of a joint-stock company.

The par value of a share is determined by dividing the authorised capital of a joint-stock company into the number of its issued shares. Shares are paid at their par value when a joint-stock company is established. The par value of a share is the basis for determining its issue and market price (i.e. its price on the stock exchange and on the over-the-counter market), and also for calculating dividends. The market price of a share depends on the balance of demand and supply, which in turn is determined by the size of dividends on shares, the stock market situation, the effect of advertising and many other factors.

The rules for protecting investors’ rights are set forth in Federal Law No. 46-FZ, dated 5 March 1999, ‘On Protecting Investors’ Rights and Lawful Interests in the Securities Market’. A special procedure for information disclosure on public joint-stock companies aims to protect investors’ rights and furnish current and prospective investors with information for making investment decisions. Public joint-stock companies are required to disclose such most essential documents for investors as their annual and quarterly reports and annual financial statements.

Bonds are another type of equity securities. By the issuer type, bonds can be divided into three basic categories: corporate (including exchange-traded bonds), government (federal loan bonds) and regional (bonds issued by Russian constituent entities and municipalities). Bonds have their maturity date and upon its expiry a bondholder has the right to receive the bond’s par value from the bond issuer together will all the earnings on the bond stipulated in the Issuance Prospectus. Corporate bonds are required to undergo the procedure of state registration at the Bank of Russia, government and regional bonds are to be registered at the Finance Ministry of Russia and exchange-traded bonds are to be registered on the Moscow Exchange.

Professional securities market participants

Federal Law No. 39-FZ, dated 22 April 1996, ‘On the Securities Market’ defines intermediary activity carried out by brokers, dealers and trust managers in the securities market. A broker performs transactions in the securities market on the client’s instructions: on the client’s behalf and for the client’s own account or on its behalf and for the client’s own account. A dealer concludes deals with securities on its behalf and for its own account. A trust manager assigns a personal broker for managing the client’s securities.

All transactions on the stock exchange for the purchase and sale of securities are performed only by brokers. Any Russian citizen has the right to conclude an agreement with a broker, open a broker account with it and invest funds in securities, giving instructions to a broker and paying a fee for broker services. It is important to know that a broker only executes the client’s instructions and bears no responsibility for the success of the client’s operations. By contrast, a trust manager is responsible to the client for efficiently managing and performing operations intended to increase the value of assets assigned for trust management.

Special organisations called depositories maintain records of shareholder rights and hold securities for safekeeping. The register (list) of shareholders of joint-stock companies is held by registrars – organisations authorised to engage only in this type of activity and holding a special license issued by the Bank of Russia.

Collective investments

The stock market offers quite a reliable scheme of capital management in the form of collective investment. At present, the collective investment industry in Russia allows investing in shares, bonds, real estate assets, works of art and other items.

A prospective investor who lacks knowledge of investment in securities, time to manage a securities portfolio or money required to receive a trust manager’s individual services, may turn to a unit investment fund (UIF). This investment scheme offers an investor to purchase a certain number of units of an investment fund managed by a management company. Its activity is licensed and controlled by the Bank of Russia and is set forth in a special document open for all prospective investors – the Rules of Unit Investment Funds.

The existing types of funds can meet the requirements of both very cautious, conservative investors and investors ready to take increased risks.

Stock market risks and protection of consumer rights

Investments in securities may yield considerably higher revenues than bank deposits but may also generate losses. Compared with bank deposits offered by banks participating in the deposit insurance system, your money in the accounts of brokers and management companies is not insured.

The Bank of Russia keeps the protection of investors’ and shareholders rights in the stock market under its scrutiny, regulating the activities of professional participants in this market and compliance with the standards of their work with clients. These functions are performed by the Bank of Russia Service for Protection of Financial Services Consumers and Minority Shareholders. Nevertheless, this does not make investors immune from market risks related to constant fluctuations in the value of securities of different issuers – this value either rises or falls under the impact of numerous factors. You need to be aware of these risks and understand to what extent they are acceptable for you. Otherwise, you need to seek advice from financial consultants and intermediaries but before that you should necessarily make sure that they are licensed by the Bank of Russia for this type of activity.

Tax privileges

Federal Law No. 39-FZ, dated 22 April 1996, ‘On the Securities Market’, allows investors from 1 January 2015 to open individual investment accounts with any broker company and receive both financial results from securities transactions and a tax deduction in the amount of 13% p.a.

Limitations on the amount of funds that a citizen may place in an individual investment account:

  • the maximum possible sum is no more than 400,000 rubles per year;
  • investment maturity with the right to retain the option of a tax deduction is 3 years;
  • a citizen may open only one individual investment account.
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