SGX Securities: Share Buybacks and Certificates

Dr. Clemen Chiang
Dr. Clemen Chiang

Spiking continues its bird’s eye view of Securities on the Singapore Exchange. This week, we’ll be taking a look at Share Buybacks and Certificates. Though share buybacks relate more to the companies that issue shares rather than those who buy them, it’s good for individual investors to be aware of how share buybacks work on the SGX, particularly since individual investors are shareholders themselves.

What are share buybacks?

Very simply, share buybacks take place when a company that issues shares for sale on the stock market, buys back its own shares. A company can’t just do this on a whim, however. There are rules that govern share buybacks for the good of investors. There are also a number of ways companies can go about it. We’ll check each of these out in turn, as well as why a company would want to buy its own shares back in the first place.

Big Fat Purse lays out the SGX’s rules for share buybacks (which, as it points out, the SGX may amend sometime in the future):

  • A company can only buy its own shares back if it has the approval of its shareholders. It can obtain this approval during the annual general meeting.
  • An SGX-listed company cannot buy more than 10% of the total number of issued ordinary shares.
  • A company cannot buy the shares back at higher than 5% of the average closing market price.

The market purchase method is how a company that is listed on the SGX can buy its own shares back specifically through the Exchange. The Legal 500 describes other ways a listed company can buy back its shares, such as an off-market purchase. Another way, the contingent purchase, involves a company’s purchase of its own shares under contract.

Why would a company buy back its own shares?

Now there are many reasons why a company would want to buy back its own shares. Among the reasons shared by Lexology are:

  • The shares are undervalued. Buying back the shares at a lower cost and then selling them again once the price has gone back up allows a company to raise more funds.
  • The shares will be easy to re-access. The shares a company buys back can be held in treasury instead of getting cancelled, which means they can be re-accessed right away instead of having to get a second approval from both the shareholders and the SGX.
  • The number of shares increases. Having treasury shares means the company will have more shares it can use during fundraising without having to get shareholder approval. The shareholders themselves also end up owning a greater portion of the company, which means more voting rights and earnings.
  • Financial metrics such as earnings per share improve, when share prices go up during a share buyback.

What are certificates?

We now move on to certificates which, because of the mix of their underlying assets, are a great way for investors to diversify their portfolios (which Spiking has discussed in a previous post). Certificates are usually issued by a financial institution like an investment bank.

With certificates, investors have a variety of investment opportunities to suit their opinions or preferences. They can invest according to how they think the market is behaving (or is going to behave), or according to the price trends of different equities. Investors can also use certificates to invest in a certain theme.

Investors need to remember that how well a certificate does on the market is directly proportional to the performance of its underlying assets. Money Sense and Big Fat Purse describe the different kinds of certificates, which include:

  • Participation certificates, which give investors easy access to assets such as overseas stocks (which Spiking has also discussed in a previous post) and investment themes such as eco-friendly and luxury lifestyle.
  • Range accrual certificates, which give investors a lock-in amount during a certain term if the assets perform within a given range. If the assets do not perform within that range, the investors do not receive the lock-in amount.
  • Discount certificates, which may be purchased at a discounted price, but come with a “cap strike” or maximum profit an investor may receive. An investor will not be able to receive profit above that maximum even if the assets continue to rise.

Discount certificates are ideal for investors who think the market isn’t going to spike anytime soon. These investors gain if, when the certificate expires, the market price is higher than the discount price at which they purchased the certificate.

Why should investors be careful investing in certificates?

Every investment comes with risk and certificates are no exception. SG Market Watch lists the risks of investing in certificates, which include:

  • leverage risk
  • issuer risk
  • market risk
  • liquidity risk
  • foreign exchange risk

Investors should also be aware that a certificate might have different features every time it is issued. It could also happen that two different issuers might offer two different certificates with the same name, each having different features, which in turn come with different risks. Investors should make sure of these features before purchasing a certificate.

How can Spiking help investors at the SGX?

An investor with shares in a company buying back its own shares, or shares in a company covered by a certificate he has invested in, needs to be in constant touch with updates from these companies.

Spiking provides investors with verified, up-to-the-minute updates straight from the SGX. These include updates from SGX-listed companies, which investors can follow in much the same way companies and personalities are followed on social media.

These updates also include the buying and selling activities of more than 8,000 sophisticated Singaporean investors, which may influence the performance of certain stocks on the bourse. This way, investors can track every stock spiking on the SGX, and make better-informed investment decisions.

Find out more about how Spiking can give investors the edge at the SGX. Visit the Spiking app homepage today.