Topic

Investment
Markets

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the concept of investment;
2. Distinguish between financial assets and real assets;
3. Differentiate between the four types of financial investments;
4. Evaluate the types of financial markets;
5. Assess the major participants in the financial markets; and
6. Describe the types of information needed for financial decision-making.

X INTRODUCTION
What do the Bursa Malaysia, the New York Stock Exchange, the Hong
Kong Stock Exchange and the Tokyo Stock Exchange have in common?
They are all financial markets where firms, households and governments borrow
and lend funds. This topic will provide an understanding of the investment
environment within the local and international financial markets. What makes up
the investment environment will be explained by examining how the financial
markets are classified, the types of securities being traded, the players involved
in financial securities trading, and the relevant regulatory bodies responsible for
overseeing the smooth functioning of the investment activities.

1.1

TOPIC 1

INVESTMENT MARKETS

DEFINITION OF INVESTMENT

Investment actually refers to current commitment of present resources,

mainly money, in the hope of gaining future benefits.

The commitment involves setting aside present resources to allow their value to
increase in the future. Hence, it requires us to postpone present consumption and
wait for some time in the future. For example, you might set aside a sum of
money to purchase shares today instead of spending it on a brand new car. What
you are doing is to postpone your spending today and commit your money in
the investment of shares. It is done in the hope of gaining future benefits such as
dividends earned or an increase in share price.

SELF-CHECK 1.1
What do you understand by investment? Does it refer to the money
kept in your fixed account or to property bought for long-term
investment? What about the shares that you bought from the
financial market?

1.2

TYPES OF INVESTMENT

Before we proceed with further discussion on various types of investment, let us

ponder over our earlier explanation of the definition of investment. Based on the
definition, funds deposited in fixed accounts, property bought for long-term
investment and shares purchased from the share market are all considered
as investment. But, what types of investment are they?
To help you understand the various types of investment, let us look at the
following example.
Let us say you have just won the lottery and you are not sure what to do with the
money. You could use the money to buy a shoplot and the rent collected in the
future will allow you to travel. Alternatively, you could avoid the risk of not
being able to collect your rent from your tenant or having to maintain the
building, by investing your winnings in the shares of a public-listed company.
Through this investment, you will be entitled to receive dividends when the
company makes profits. In addition, you have the opportunity to earn from the
investment if the price of the share appreciates in the future.

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INVESTMENT MARKETS

In the above example, we see that there are two types of assets that we could
invest in:


Real assets

Financial assets

Investment in the shoplot is an example of an investment in real assets. The

shoplot is an asset, a premises used as an office space or business dwelling.
Hence, the capacity of the asset to generate tangible services is the main feature
of a real asset.
Investment in shares or any securities represents a claim on the real assets of a
company. Investments in shares of a public-listed company enable the investor to
have a claim over the real assets of the company. The claim can be in the form of
dividends paid out of the profits earned.
The above example illustrates how real assets can generate net income for the
economy. A financial asset, however, can simply be regarded as the allocation of
income or wealth among investors. Investors can choose between consuming
their wealth today or investing for the future.
When an investor buys the shares from a company, proceeds from the sale
will be utilised by the firm to purchase real assets such as machinery, equipment,
inventories and other real assets in order to generate profits for the firm. Hence,
the ultimate return of the company will come from the income that is produced
by the real assets that were financed by the issuance of the securities. The profits
are then distributed in the form of dividends to the shareholders.

1.3

TYPES OF FINANCIAL INVESTMENTS

Financial assets can be categorised into four distinct types of financial

investment according to the characteristics of the claims:
(a)

Debt Claims

(b)

Equity or Residual Claims

(c)

Derivative Claims

(d)

Hybrid Securities

Now, let us look at the different types of claims found in securities.

(a)

TOPIC 1

INVESTMENT MARKETS

Debt Claims

Security in the form of debt is normally referred to as bonds. It entitles the

investor (bondholder) to a specific amount of payment in the form of interest
and principal irrespective of whether the firm generates income or not.
Payment of interest rates for this type of debt security depends on the type of
security issued.
A bond can provide returns in the form of a coupon rate which is
determined at the time of issuance. The cash received in the form of coupon
payment is the coupon rate over the par value of the bond. Bonds have a
maturity period which states when the investor will get back the principal
from the firm. If the investor does not wish to hold the bond for the entire
maturity period, he can sell it. The selling price may be higher than the
purchase price and therefore there may be a possibility of a capital gain.
Sometimes a debt security does not have a coupon rate but it is sold at a
discount, which is at a price lower than its par value. The difference
between the par value and the purchase price at the maturity date is the
interest to the investor. Hence, the name fixed-income securities was given
to reflect the mandatory payment nature to the investor. In Malaysia, this
security is also called a private debt security. Examples of these securities
include government and corporate bonds and certificates of deposits.
Bonds provide a stable income to investors, hence, they are called
fixed-income securities.
(b)

Equity or Residual Claims

Investment in equity type securities represents an ownership share in a firm.

Unlike fixed-income securities, investors (equity holders) are not promised
a fixed amount of payment. When the company makes profits, they will
receive dividends if the firm makes a dividend declaration. They will also
have a prorated claim over the companys real assets. If the company is
successful, the value of the equity will increase and vice versa. The
performance of the equity investments is tied directly to the success of the
firm and its real assets. Investments in equity-based securities include
investments in company shares. Investment in equity tends to be riskier
compared with debt securities.

TOPIC 1

(c)

INVESTMENT MARKETS

Derivative Claims

Investment in derivative securities such as options and future contracts is the

latest form of investment.
Income is not directly linked to a specific firm but from the prices of other
assets such as bonds and shares. For example, when investing in call
options or warrants (usually attached to a mother share), the return from
this investment is worthwhile if the price of the mother share appreciates
above the exercise price. The main reason for the increased investment in
derivatives is because firms want to hedge or transfer their risk to other
parties. Do not worry at this point if you are puzzled about derivative
claims. We will discuss them in detail in topic 8.
(d)

Hybrid Securities

Hybrid securities are securities that have the characteristics of an

equity and debt.
An example of hybrid securities is a loan stock. Loan stock is a debt
instrument that can be converted to shares within a maturity period. Until
the loan stock is converted, the holder is entitled to the benefits that are
accrued to a debt holder. The investor will receive interest or coupon
income. Once it has been converted, the holder will then be an equity
holder and will be entitled to all the rights and privileges of a shareholder.
An example of hybrid securities in the Bursa Malaysia is Irredeemable
Convertible Unsecured Loan Stock (ICULS).

TOPIC 1

INVESTMENT MARKETS

ACTIVITY 1.1
In the previous section, we discussed four types of financial investment.
Based on your understanding of these types of financial investments,
list the advantages and disadvantages of each security. You can get
additional information about the securities from newspapers, the digital
library and the Internet.
Types of Security

Advantages

Disadvantages

Debt claims
Residual claims
Derivative claims
Hybrid securities

1.4

FINANCIAL MARKETS

The Bursa Malaysia, the New York Stock Exchange and the Hong Kong Stock
Exchange are examples of financial markets. What is a financial market?
Financial markets provide venues for exchanging and creating value of
financial assets.

It provides the investor with the opportunity to trade financial assets in an

organised manner. In a financial market, both buyers and sellers meet to trade in
either debt or equity securities. There are at least three ways to classify the
financial market. They are:
(a)

The type of financial claim, whether it is for a fixed dollar amount or by a

residual amount.

(b)

Markets can also be classified according to where and when the securities
are acquired.

(c)

Markets can be classified according to the maturity period of the security.

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INVESTMENT MARKETS

ACTIVITY 1.2
1. Open your newspaper and look at the business section. What do
these places have in common  the Bursa Malaysia, the New York
Stock Exchange and the Hong Kong Stock Exchange?
2. Visit the Bursa Malaysia website at http://www.bursamalaysia.
com and get more information about the main board and second
board. Then, identify at least three companies listed under the
main board and second board. Why are these companies listed on
the main board or the second board?
3. Get more information on the criteria to determine which board
shares can be listed from the Securities Commission website at
http://www.sc.com.my.
Now, let us look at various types of markets available.
(a)

Debt Market versus Equity Market

As explained in the financial investment section, a bond which is a debt
instrument is traded in the debt bond market. In Malaysia, trading of this
type of debt security is done in the private debt securities markets (PDS).
Equity type of security is normally traded in the stock or equity market. In
Malaysia, however, both these markets are located in the Bursa Malaysia.
Transactions in the Bursa Malaysia can be further categorised into the Main
Market and the ACE Market. Shares of firms traded will qualify under a
particular board according to criteria set by the Securities Commission.

(b)

Primary versus Secondary Markets

In order to obtain funds for operation purposes, firms can issue securities to
the public. However, issuance of the firms shares can only be done after all
requirements and regulations of the Securities Commission and Bursa
Malaysia have been fulfilled. If it is the first time the firm is issuing the
security, the trade will occur in the primary market.

A primary market is the market for new issues.

It is sometimes called the Initial Public Offering (IPO) market. IPO is also a
means taken up by firms for the purpose of listing shares in the share

TOPIC 1

INVESTMENT MARKETS

market. Firms will still have to go to the primary market if they intend to
issue additional securities. This additional issue is known as a seasoned
public offering.
Issues of shares that have been taken up in the IPO market can
change hands among investors in the s econdary market.

Investors can buy shares from the share market if they were not able to do
so from the primary market. In the secondary market, shares are acquired
from other investors. Investors will have to go through a stockbroking firm
and will be charged a transaction cost. Hence, subsequent purchase and
sale of shares are done in the secondary market. Bursa Malaysia provides
the venue for such trading activities.
(c)

Money versus Capital Markets

Financial assets are also traded according to their maturity periods.

Short-term securities that mature in less than one year are normally traded
in the money market.

The short maturity period is a feature of the security that makes the money
market more liquid. Treasury bills, certificate of deposits and Bank Negara
notes are some examples of securities that are traded in the money market.
Institutional investors comprising mostly financial institutions will
normally dominate this money market.
Assets that mature in more than one year will be traded in the capital
markets.

In this market, both long-term debt and equity securities are traded. The
long-term nature of these securities makes this market less liquid. Investors
in this market are willing to wait longer for the profits of their investments.
Investors in Cagamas Bonds that mature in 20 years will be receiving
interest payments from year one to 20. They have to wait 20 years before
their original principal investment is collected.

TOPIC 1

1.5

INVESTMENT MARKETS

MARKET PLAYERS

Players in any financial market consist of three major participants. They are:
(a)

Firms
Firms are the net borrowers who issue debt or equity securities if they
require funds. The funds generated from the issuance of these securities
will be invested in real assets in order to provide returns to investors.

(b)

Household
Households are typically the providers of funds and are normally the net
savers. They purchase the securities issued by firms that need to raise
funds.

(c)

Governments
Governments are institutions that can be either borrowers or lenders
depending on the status of their tax revenue and expenditures.
Governments facing a budget deficit will normally borrow to finance their
activities. Alternatively, any surplus will be invested in various types of
securities.

1.6

TYPES OF INFORMATION

There is a wide variety of information to help investors make decisions.

Generally, we can categorise information into two forms.
(a)

Analytical Information
Analytical information includes opinions on economic forecast, projections
on the effects on the share market and recommendations to buy or sell
certain stocks. Typically, a good broker will provide this service. You can
sometimes obtain share market analyses from columnists in the
newspapers.

(b)

Descriptive Information
Descriptive information is that which gives historical and current data on
the market. Here you can obtain past information on the economy,
industry and companies. Newspapers carry a lot of such information.

With recent developments in information technology, a lot of the above

information can also be obtained through the Internet.

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1.6.1

TOPIC 1

INVESTMENT MARKETS

Broad Market Measures

Sometimes a quick indication of the condition of a market is needed. This is

particularly helpful when appropriate timing is required to enter the market.
Two measures of the market can be used to show the general market condition.
An Index measures the current performance of a selected group of shares.
It is usually obtained by taking the current price of the selected shares and
comparing it with a base value. This base value would have already been set
earlier.

The FTSE Bursa Malaysia KLCI Index (FBMKLCI) is an example. It comprises 30

shares from the Bursa Malaysia. Apart from the FBMKLCI, the Bursa Malaysia
also produces sectorial indices and the syariah index.
Another measure is an average.
Averages are obtained by taking the arithmetic average price of a selected
number of shares at a given point of time.

The most famous is the Dow Jones Industrial Average (DJIA).

1.6.2

Price Information

Let us look at some basic information that you can get from a newspaper. As
mentioned earlier, most of the information is descriptive in nature. Some analysis
is provided by columnists.
The Bursa Malaysia price data are reported based on sectors. Shares are listed
according to their sectors. This classification is based on the principal activity of
a company. However, this can be quite ambiguous since a company may have a
lot of different activities.
A daily newspaper price report on each share will normally consist of the
company share code and its name. Three kinds of prices will be reported. They
are the highest and lowest prices for the year and the closing price. The closing
price is the last price traded the day before. The report will also include any price
changes from the day before yesterday. Lots traded is the number of lots that
changed hands between investors. One lot is equal to 200 units of shares. The

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INVESTMENT MARKETS

W 11

term Div Yield refers to dividend yield. This measure is obtained by taking the
dividend divided by the price. It shows the share returns in terms of its
dividends. The Price Earnings (PE) ratio is the earnings divided by price. The
next figure beside the PE ratio is the market capitalisation figure. This is obtained
by taking the number of shares times the price. Topic 5 of this module will
discuss the usage of dividend yields and PE ratios.
In the loans and debentures section, you will see some information on
outstanding bonds and debentures. The majority of them are loan stocks. The
report will show the closing price as well as the years highest and lowest prices.
A bond normally has a par value of RM100. Therefore, a closing price of
RM104 means that the bond is traded at a premium. A closing price below
the par value is a discount bond. The report also shows the date of issue and the
maturity date. The rate quoted in the report is the coupon rate. The yield is the
return required by investors from the bond. The coupon rate may not be the
same as the yield. If the closing price is higher than RM100, then the yield is
lower than the coupon rate. You will see this relationship in Topic 7 of this
module.
The report also shows the date you can get your coupon payment.
In the unit trust section, you will see information like buy, sell, NAV, initial
charge and annual fee.
(a)

The price listed under the column Buy is the price the unit trust will buy
back from the unit holders.

(b)

Under the column Sell is the price you have to pay if you want to buy the
unit trust.

Notice that the buy price is lower than the sell price. NAV is the net asset value.
It is obtained by taking the market value of the trust less expenses divided by the
number of units. Market value of the trust will represent the market value of
shares or bonds held by the trust.

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TOPIC 1

INVESTMENT MARKETS

Test your understanding by attempting the questions below.

EXERCISE 1.1
1. Differentiate between financial and physical assets.
2. List three examples of financial assets.
3. Explain what debt instrument being a claim on the firms assets
means.
4. Explain the returns that you can get from a share.

Investment refers to current commitment of present resources, mainly

money, in the hope of gaining future benefits.

There are four categories of financial investments:

(a)

Debt Claims;

(b)

Equity or Residual Claims;

(c)

Derivative Claims; and

(d)

Hybrid Securities.

The financial markets provide venues for exchanging and creating value of
financial assets and the players involved are firms, households and
governments.

Investors require analytical information and descriptive information in

investment decision-making.