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CHAPTER 2

CHAPTER 2. Investment Market and Transaction. Learning Goals. Differentiate between primary market and secondary market Basic types of transaction How to buy and sell shares Malaysian Security Market Regulations. Introduction.

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CHAPTER 2

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  1. CHAPTER 2 Investment Market and Transaction

  2. Learning Goals • Differentiate between primary market and secondary market • Basic types of transaction • How to buy and sell shares • Malaysian Security Market Regulations

  3. Introduction • Securities markets are forums that allow suppliers and demanders of securities to make financial transactions. • How firms issue securities?

  4. Primary Market • New stocks, bonds or other securities that offered to the public by investment bankers • Two types of primary market issues of common stock • Initial Public Offering • Public offering • Private placement • Seasoned New Issued • Public offering • Private placement • Right offering • Stock splits

  5. IPO Process • First, obtain the approval of it current shareholders • Auditors and lawyers must also must certify that all documents for the company are legitimate. • Then, finds an investment bank who willing to underwrite the offering. • The company files a registration statement with the SC (Security Commissioner), which includes PROSPECTUS that describes the key aspects of the issue, the issuer, and its management and financial position. • After SC approves the registration statement, the price of the offered to the public securities will be announced. • The investment bankers and company executives promote the company’s stock offering through a road show, a series of presentations to potential investors around the country and sometimes overseas.

  6. Reason for getting listed • Higher Profile • Confidence • Additional Funds • Expansion

  7. Secondary Market • Once securities are issued to the public, investors may trade them among themselves in the secondary market. The secondary market will provide liquidity to the sellers. • is an organized exchange which securities are traded after they have been issued.

  8. Development of the Malaysian Securities Industry • 1930 - Singapore Stockbrokers’ Association – the first formal organization in the securities business in Malaysia. • 1937- Re-registered as Malayan Stockbrokers’ Association, but still no public trading of shares. • 1960- Malayan Stock Exchange formed and public trading of shares began on 9 May. • 1964- Stock Exchange of Malaysia formed. • 1965- With the secession of Singapore from Malaysia, the common stock exchange continued to function but as the Stock Exchange of Malaysia and Singapore (SEMS).

  9. 1973- With the termination of currency interchangeability between Malaysia and Singapore, the SEMS was separated into The Kuala Lumpur Stock Exchange Bhd (KLSEB) and The Stock Exchange of Singapore (SES). Malaysian companies continued to be listed on SES and vice-versa. • 1973- A new company limited by guarantee, The Kuala Lumpur Stock Exchange (KLSE) took over operations of KLSEB as the stock exchange. In 1994, re-named Kuala Lumpur Stock Exchange. • 2004- Kuala Lumpur Stock Exchange became a demutualised exchange and was re-named Bursa Malaysia.

  10. Regulatory Structure • Securities Industry Act 1983 • Securities Industry (Central Depositories Act) 1991 • Securities Commission Act 1993 • Companies Act 1965

  11. Types of Securities Traded on Bursa Malaysia • Share Capital • A share is a security which represents a portion of the owner's capital in a business • Different types of shares: • Ordinary shares • Preference shares

  12. Fixed Income Securities • Debentures/Debenture Stocks • Loan Stocks • Unsecured loan stocks • Convertible loan stocks • Notes • Bonds

  13. Others • Warrants/Transferable Subscription Rights (TSRs) • Call Warrants • Property Trusts • Closed-end Funds

  14. Bursa Malaysian Derivatives Exchange (MASDEQ) • Launched on 11 Jun 2001 as Integrated Malaysian Derivate Exchange. It offers varieties of derivative products and services including option and futures of KLSE Composite Index, Crude Palm Oil Futures and KLIBOR (Kuala Lumpur Inter Bank Offer Rate) futures.

  15. Main Board • Listing requirement • Minimum paid up capital of RM 60 million consists of ordinary share valued 10 sen per share, • At least 25% of paid up capital and issued upon listing must be hold by the public share holders, • Up to 5% of the issued and paid-up capital which held by the employees; and • Up to 10% of the issued and paid-up capital of the company which is held by the Bumiputra investors for the purpose of compliance with the National Development Policy (could make up the 25% public spread).

  16. The company is required to have, upon listing the following minimum number of public shareholders holding not less than 1,000 shares each as follows; Nominal value of Issued Minimum number of shareholders and paid-up capital RM 40 million to less than 750 RM 60 million RM 60 million to less than 1,000 RM 100 million RM 100 million and above 1,250

  17. Second Board • Listing requirement • Minimum paid-up capital of RM 40 million consists of ordinary shares valued 10 sen per share, • At least 25% of paid up capital and issued upon listing must be hold by the public share holders, • Up to 5% of the issued and paid-up capital which held by the employees; and • Up to 10% of the issued and paid-up capital of the company which is held by the Bumiputra investors for the purpose of compliance with the National Development Policy (could make up the 25% public spread).

  18. The company is required to have, upon listing the following minimum number of public shareholders holding not less than 1,000 shares each as follows; Nominal value of Issued and paid-up capitalMinimum number of shareholders RM 40 million to less than 750 RM 60 million RM 60 million to less than 1,000 RM 100 million RM 100 million and above 1,250

  19. MESDAQ • Malaysian Exchange of Securities Dealing and Automated Quotation Bhd (MESDAQ) is a wholly owned exchanged. It was launched on 6 October 1997 as the subsidiaries of KLSE and SCAN. MESDAQ will cater for technology based companies and companies with strong growth potential but which do not have a profit track record. MESDAQ can be expected to make an important capital market contribution to the development of Multimedia Super Corridor (MSC). • The minimum requirement for paid up capital at least RM2 million for technology and non-technology company and RM20 million for technology incubator company that comprising ordinary shares of RM1.00 each, no historical performance etc. as long as the company is being recognized as technology based company with strong growth potential and have the contribution to the development of MSC.

  20. Over-The-Counter (OTC) • Is a trading that is not traded on organized exchanged. It consists of a network of thousands of dealers in particular industries. • Trading System • Since May 1989, KLSE has started a semi-automated and become fully automated in October 1992. The system was enhanced in 1994 and in 1995; all stock broking companies were equipped with the KLSE’s latest computerized broker front-end system known as WinSCORE system • Trading Activity • KLSE is not a place to trade. Trading activity was done in a stockbroking company • There are two (2) trading sessions on any market day: Morning Session : 9.00 a.m. - 12.30 p.m. Afternoon Session : 2.30 p.m. - 5.00 p.m.

  21. Types of Orders • Limit order –to be executed at the entered price or better - Order to buy at or below a specified price or to sell at or above a specified price - If price limits are not met, order is not filled • Market order – to be executed at any price within the upper and lower limit. - Orders to buy or sell stock at best price available when order is placed -Fastest way to fill order

  22. How to Buy & Sell Shares

  23. Transaction Costs • Brokerage Rates • Clearing Fee • Stamp Duty • Registration Fee

  24. Minimum Bids • Allowed changes offered to the purchased price if it is more than the trading price Market price of sharesMinimum bids < than RM1.00 ½ cents RM1.00 to RM 2.99 1 cents RM3.00 to RM 4.98 2 cents RM5.00 to RM 9.95 5 cents RM10.00 to RM 24.90 10 cents RM25.00 to RM 99.75 25 cents > than RM 100.00 50 cents

  25. Clearing and Settlement • Securities Clearing Automated Network Service Sdn Bhd (SCANS) offered clearing service to the stock broking company • Clearing system of T+3. • Force Buying: force buying automatically will be done to the brokerage firm who failed to pay the purchase price on the third (3) trading day of the contract date. • Force Selling: If the buyer failed to pay for the securities bought before 12.30 pm on the third (3) trading day after the contract date, force selling will be done on the fourth (4) day of that contract date.

  26. Basic Types of Transactions • Long Purchase • a transaction (on a cash basis) in which investors buy securities in the hope that they will increase in value and can be sold at a later date for profit • E.g.: Maybank currently sell at RM11.00 per share, and will expect to be increased in value over the next few years. On your analysis, you expect the stock price to rise to RM20 per share. You place an order and buy 100 shares of Maybank for RM11 per share. If the share price rises to, say RM20 per share, you will get profit from your long purchase. If it drops below RM11 per share, you will experience a loss on the transactions.

  27. Margin Trading • is where borrowed funds were used partly to buy shares • E.g.: Anita wishes to buy the shares of TNB, which is currently selling for RM9 per share. Assuming the margin requirement is 60%, thus Anita has to put up: Equity contribution 60% x RM 9 x 1,000 shares = RM 5,400 Borrowed fund 40% x RM 9 x 1,000 shares = RM 3,600 RM 9,000 • Contra Transaction • the buyer paid the broker or the broker paid the buyer on the different price between buying and selling price.

  28. Short Selling • First, you sell and then you buy the shares. A short sale allows investors to profit from a decline in a security’s price • Eg: Suppose you are bearish (pessimistic) on TNB stock, and its market price is RM10 per share. You tell your broker to sell short 1,000 shares. The broker borrows 1,000 shares either from another customer account’s or from another broker. The RM 10,000 cash proceeds from the short sale are credited to your account

  29. Snapshot of Market Information

  30. Kuala Lumpur Composite Index • Introduced in 1986. It is a value weighted index • Composite Index • EMAS Index • Second Board Index • Industrial Index

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