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By Nick – Narantuguldur Saijrakh, Asia Pacific Securities LLC.
Established in 1991, the Mongolian Stock Exchange was awarded the title of the best performing market in the world in 2010, for its rise of over 135 percent in domestic currency (165% in US dollars). Sri Lanka’s market was a runner-up with over 120 percent rise.
In spite of carrying such an honorary title, the Mongolian stock market remains one of the smallest in the world (in fact, it was the smallest until the beginning of 2011. Now this description belongs to Laos, specifically, it’s newly opened securities exchange, Laos Stock Exchange, with only 2 companies listed) with combined market capitalization of a little over 1 billion US dollars for all 336 listed companies.
With the market poised to grow even more remarkably in 2011 (London Stock Exchange Group was selected to take over the management of the Mongolian Stock Exchange and implement drastic reform in the system and infrastructure), investors are all excited and eager to invest, however the skepticism and obstacles are still dragging many wary of investment. It is a mystery for many potential investors, and current ones for that matter, how it is possible to invest into this market, provided that the typical trading day is one hour and a half, and that the 50,000 US dollars worth of trade is considered a “good” day.
Well, wonder no more, because here is some insightful information about transacting on the Mongolian Stock Exchange, as well as a handful of tips on how to properly invest into the market with as little impact to the market as possible.
STEP BY STEP PROCESS:
In order to trade on the Mongolian Stock Exchange, you have to open an account with the Mongolian Securities Clearing House & Central Depository Co.Ltd (SCHCD), an affiliate of the Mongolian Stock Exchange, which acts as both custodian bank and clearing and settlement agency for the exchange. SCHCD, however, does not allow anyone to open the account directly. You have to go through one of the Mongolian brokerage firms licensed by the SCHCD which will help to prepare necessary documents and forms needed to be submitted to the SCHCD. Individuals are required to complete and submit only three documents: Account Opening Agreement, Signature Authorization Form (notarized by a local notary public), and notarized copy of your national passport or ID. For corporate accounts - in addition to the same as above, institutions also must provide notarized copy of the Certificate of Incorporation of the company or Company Registration Certificate. Different brokerage firms may also require additional documentations; therefore it is best to consult with the firm directly. Once all the documents are ready, it takes only 2-3 working days for the account to be open and ready for funding. Since the account is with the SCHCD, the brokerage firm does not hold the funds.
The advantage of holding your money in the account with the SCHCD is that in the event your brokerage firm crashes, your account still remains together with all your money and you are still able to continue trading with another brokerage firm. Disadvantages, nevertheless, are that the SCHCD does not pay interest for the idle cash in the account and that the risk of losing the account entirely is with the government.
WHAT TO EXPECT WHEN PLACING TRADE ORDERS:
Not once I had to remind investors the basics of stock exchange: somebody with money willing to buy particular stock for particular price creates demand and somebody on the opposite side creates supply. For an undeveloped market, such as the Mongolian Stock Exchange, this holds true more than anything. With so few people actively in the market, no wonder liquidity is an issue in the Mongolian Stock Exchange, and many investors stay puzzled how they can fully invest their 25,000 US dollars or more when there is literally no one out there willing to sell them stocks for the prices they wish to buy. Notwithstanding, there are many people with a portfolio well over 100 grand US dollars still managing to actively trade their funds.
The trick is choosing the right brokerage firm or broker which or who can execute your orders fully. This means that the broker in the firm has to literally call other brokers or his/her clients off trading hours and find you liquidity, both sellers and buyers of the particular stock. This also means that during such negotiation the prices negotiated can be not the current prices listed on the Mongolian Stock Exchange website. This comes as no surprise, since spreads of stock prices can be as high as 30% of the current price. So, even with the best brokers, investor has to expect skewed prices of their stocks.
Another possible assurance of successful and prompt execution of a trade is diversification. Split your initial fund into several stocks, so you would have less of every stock but higher chances of actually buying them for the prices close to what it appears on the Mongolian Stock Exchange website. Regardless, still expect some 5 – 10% difference of what the current price tells you.
All in all, careful select your broker and learn to trust him/her, as he/she will be eventually calling the shots of what prices might be suitable to buy that particular stock you want so much.
You have chosen your broker, you have opened your account and you have funded that account, now of course the most difficult part comes – selecting the stocks to buy or sell. Although the Mongolian Stock Exchange has 334 listed companies, only a handful of 30 – 40 stocks are somewhat actively traded on the Mongolian Stock Exchange and in fact worth of any attention. With only a few dozens of companies worthwhile of analyses, it does make sense to just simply analyze these companies by traditional standard of measurement, such as P/E, POA, DCF, NAV and etc., whichever your favorite is. Unfortunately, Mongolian Stock Exchange is not an ideal market and therefore ideal solutions are simply out of place here. Most of the companies are majority owned by an individual or a private company, hence are reluctant to comply with full disclosure, making it nearly impossible to do any kind of reliable financial analyses. The whole market, therefore, runs on speculation mostly. Ergo, if you have decided to trade on the Mongolian Stock Exchange, then you are betting on Mongolia as a whole. A basket of stocks will do just that.