1

TOPIC 6

CAPITAL MARKET: EQUITY

BASIC CONCEPT OF CAPITAL

MARKET

The market for trading long-term instruments

(those that mature in more than one year).

Also used in a more general context to refer to

the market for stocks, bonds, derivatives and
other investments.
To serve the public and private sectors need for
financing requirements

DIFFERENCES BETWEEN EQUITY

AND DEBT MARKETS
What Does Equity Market Mean?

The market in which shares are issued and traded,

either through exchanges or over-the-counter
markets.
Also known as the stock market, it is one of the most
vital areas of a market economy because it gives
companies access to capital and investors a slice of
ownership in a company with the potential to realize
gains based on its future performance.

DIFFERENCES BETWEEN EQUITY

AND DEBT MARKETS

This market can be split into two main sectors:

the primary and secondary market. The primary
market is where new issues are first offered. Any
subsequent trading takes place in the secondary
market.

DIFFERENCES BETWEEN EQUITY

AND DEBT MARKETS

What Does Bond/Debt Market

Mean?

The market for trading debt instruments.

The debt market is any market situation where
trading debt instruments take place.
Examples

of debt instruments include mortgages,

promissory notes, bonds, and Certificates of Deposit.

DIFFERENCES BETWEEN EQUITY

AND DEBT MARKETS

The bond market (also known as the debt,

credit, or fixed income market) is a
financial market where participants buy and sell
debt securities, usually in the form of bonds.
Nearly all of the bonds trading takes place
between broker-dealers and large institutions in
a decentralized, over-the-counter (OTC) market.
However, a small number of bonds, primarily
corporate, are listed on exchanges.
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DIFFERENCES BETWEEN EQUITY

AND DEBT MARKETS

Other than definition

Return?
Risk?

EQUITY MARKET INSTRUMENTS:

SHARE/STOCK

Investing in shares of stock

Represents

ownership
a share of stock is a financial security issued to raise
long-term capital for business growth and expansion
The company may issue up to the amount of its
authorized capital
Main classes of shares are ordinary and preference
shares
Companies are said to be going public when their
shares are listed and quoted on the stock exchange
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INVESTING IN SHARES

Reasons why investors invest in shares:

Income

from dividends

Distribution of profits
Depend on dividend policies

Capital

gain from the appreciation of share value

Capital gain is the difference between the purchase price

and the selling price
buy low, sell high
What about if the price keeps going down???

ORDINARY SHARES

Ordinary shares
Owners

of the company, shareholders, also known

as equity capital or equities
Par value (in Malaysia) normally RM1 or RM0.50

The value assigned to a unit of share when it is authorized,

and is much less that its expected market value
Where to get the market value of a share?

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ORDINARY SHARES
Privileges
1.

and legal rights of ordinary shares:

Voting privileges
Statutory voting

Allows using all votes based on the total shares for each of the
vacancies for the board of directors

Cumulative voting

Increases the number of votes that a shareholder can use for

a particular candidate, could be apportioned in any way

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ORDINARY SHARES
Right to information

2.

Reports, audited financial statement, minutes of the

meetings of the board of directors, examine the list of
shareholders

Pre-emptive rights

3.

It is the right of existing shareholders to purchase shares

of a new issue of the company before they are offered to
the public, so that existing shareholders can maintain
proportionate ownership of the company

Issues subscription rights ( no. of shares and price)

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ORDINARY SHARES
Rights to dividends
Limited liability

4.
5.

Limits the liability of shareholders to the capital they own

in the company

Residual claim

6.

In the case of liquidation

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PREFERENCE SHARES
Typically do not carry voting rights
Entitled to receive dividend before payment is
made to ordinary shareholders

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PREFERENCE SHARES

Rights attached to preference shares:

Before

a dividend can be declared on the ordinary

shares, any dividend obligation to the preference
shares must first be satisfied
The dividend rights are often cumulative
Preference shares may or may not have a fixed
liquidation value or par value
Have a claim on liquidation proceeds in the event of a
company failure
Have a negotiated fixed dividend amount, either
specified as a percentage of par value or as a fixed
amount

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PREFERENCE SHARES

Types of preference shares:

Cumulative

preference shares

Should there be any shortage of the dividend payment, the

arrears are carried forward

Non-cumulative

No rights of dividends in arrears

Participating

preference shares

Will be redeemed later by the company

Convertible

preference shares

In addition to the stated preferential yearly dividend, the

holders possess the right to participate in any further profits
after the ordinary shareholders have received their dividends

Redeemable

preference shares

preference shares

Allow the holders to exchange for a pre-determined number of

the companys ordinary shares

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PREFERENCE SHARES
Unlike interest on debt financing, preference
dividends are not tax deductible
Issuance of preference shares can actually avoid
the threat of bankruptcy that exists with debt
financing

Unlike

interest, unpaid preference dividends are not

the liability of the company and unlike debt holders,
preference shareholders cannot force a company into
liquidation because of unpaid dividends

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TYPES OF STOCKS
1.
2.

3.

4.
5.

6.
7.

Blue chip priced high, low volatility, steady stream of dividends, safe
investment, little room to appreciate because they are so large
Penny low-priced, speculative, very risky, normally issued by
companies with a short and erratic history of revenues and earnings,
popular among small speculators
Income pay higher than average dividends, paid by large and
established companies with stable earnings such as utilities and
telephone companies
Value currently selling at a low price, companies that have good
earnings and growth potential but their stock prices do not reflect it
Defensive prices stay stable when the markets declines, issued by
industries that naturally do well during recessions, e.g. food and utilities
companies
Cyclical move up or down with the business cycle. E.g. housing
industry
Treasury a type of stock that has been bought back by the company
that issued it, may be because the price is underpriced, set aside for
future uses

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PRIMARY MARKET
The new issue market, the market for issuing
new securities
public issue, going public or floatation on
the stock exchange
When we say that a company is doing an IPO
(initial public offering), it means the company is
issuing ordinary shares or shares to the public
for the first time

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PRIMARY MARKET
The stocks can be purchased through brokerage
firms and other parties (some commercial banks
and financial institutions) acting as agents for
investment banks
In IPO, the money flows directly to the company
An IPO is a high risk investment and too
speculative

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PRIMARY MARKET

Why do companies go public?

1.

To obtain more capital to finance growth

2.

To source long-term capital

3.

Can raise additional capital

To allow owners to realize their assets

4.

Fast growing companies

Opens to a wider pool of investors
Often perceived as financially stronger and may enjoy better
credit rating, enabling to borrow at a favorable interest rates

Floatation allows existing shareholders to release some of

their equities as well as raise new capital

To make the shares more marketable

Increase liquidity
The market value can be easily determined
Shares can be used as collateral for loans

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PRIMARY MARKET
5.

To enable payment of managers by stock options

6.

To facilitate growth by acquisition

7.

May encourage foreign investment in the company

To establish good corporate governance practices

10.

Gives an aura of financial respectability, which may encourage new

business contracts

To act as a catalyst for the participation of foreign

partners

9.

Easy to offer own shares for the purpose of acquisition

To enhance the companys image

8.

Incentives to improve performance

Management is accountable to shareholders who ensure that the

company operates in an appropriate manner

To boost employee pride

Make the employees aware of the companys reputation and encourage

them to enhance it

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PRIMARY MARKET

Listing methods
Public

offering

Offering the share capital for sale to the public

Private

placement

A private offering made to a limited number of persons

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PRIMARY MARKET

Public offer for sale

Selling

the shares to the public

A large issue will probably take the form of an offer for
sale during the first time issuance (when companies go
public)
Shares can be offered to the public either at a fixed price
(an agreed price between the company and the lead
investment bank) or by tender (invitation to submit
chosen offer)

Normally all new issues will be sold through an investment bank

Prospectus
For the tender, after all tenders are received, they will be ranked
from the highest downwards and a striking price is established.
The striking price is the price of the last tender which just
clears the issue.

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PRIMARY MARKET

Private placement
Shares

are offered to clients or other contacts of the

investment bank leading the issue, rather than to
general public
Advantage: the costs of advertising and producing
documentation are reduced
Disadvantage:

Shares being held by a smaller number of more powerful

investors
The discount on the issue is greater than with public offer
(the difference between the price at which the shares are
first sold and the price at which they are subsequently
traded in the market)

Refer

to http://www.klse.com.my/website/bm

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PRIMARY MARKET

The cost of an IPO

Extremely

expensive the costs engaging

underwriters, attorneys, accountants, printing
prospectus, listing fee
The most expensive cost is underwriters discount

Underwriters help determine the price of offering, draft

prospectus, find potential investors

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PRIMARY MARKET

Rights issue
A

company wishing to issue additional new shares

A rights issue is an issue of new shares where
existing shareholders have pre-emptive rights to
subscribe for the shares before other investors

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SECONDARY MARKET
After a share has been sold through the primary
market, the subsequent trading will take place in
the secondary market.
Trading among investors
Shows liquidity of stocks investment
Much larger and much more active than the
primary market
Where the price discovery occurs and liquidity is
created
No additional funds to the company

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STOCK EXCHANGES
A stock exchange is a corporation which provides
a place and facilities for the trading of shares,
unit trusts and other investment products.
On the stock exchange, investors are represented
by brokers
Provide facilities for the issuance and redemption
of securities and act as the clearing house for
each transaction

Eliminate

the default risk

Provide real-time trading information on the

listed securities facilitate price discovery

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STOCK EXCHANGES

Two types of stock exchange:

Physically

located and transactions are executed on a

trading floor using a method known as open outcry
where brokers and traders may submit verbal bids
and offers simultaneously (NYSE)
A virtual kind where it is equipped with network of
computers where trades are conducted electronically
through the actions of traders

Stock market is often considered the primary

indicator of a countrys economic strength and
development
Listing requirements (refer to Bursa Malaysias
website)

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Theamountisinvestedorcontributedbytheinvestors
andthentheyarecollectivelysoldandpurchasedby
neworexistinginvestorsthroughvariousmeanssuch
asbrokersofstockmarket/companiesetc.,thus
directlyorindirectlygivingbirthorusingtheSTOCK
MARKET(ShareMarket).

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What is Stock Market?

A stock market or equity market is a public
entity

for

the

trading

of

company

stock

(shares) and derivatives at an agreed price;

these are securities listed on a stock exchange
as well as those only traded privately.
Function and purpose:
The stock market is one of the most important
sources for companies to raise money. This
allows businesses to be publicly traded, or
raise additional capital for expansion by selling
shares of ownership of the company in a public
market.

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STOCK EXCHANGES

Bursa Malaysia
The

only stock exchange approved by the Minister of Finance

under the provisions of the Securities Industry Act 1983
The public trading started in 1960 under the name of
Malayan Stock Exchange (MSE)
1963 - known as Stock Exchange of Malaysia (SEM)
1965 - became the Stock Exchange of Malaysia and Singapore
(SEMS)
1973 - SEMS split into the Kuala Lumpur Stock Exchange
Berhad (KLSEB) and Stock Exchange of Singapore (SES)
1976 - Kuala Lumpur Stock Exchange (KLSE) took over the
operation of KLSEB
Jan 2004 KLSE became a public company limited by shares
April 2004 changed its name to Bursa Malaysia

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STOCK EXCHANGES

Bursa Malaysia
In

the 1960s, started with only Main Board as the board for
company listing
1988 the establishment of Second Board

For smaller firms that do not meet the requirement of the main
board

August

2009 combines Main Board and Second Board into

a single market known as main market
October 1997 the Malaysian Exchange of Securities
Dealing and Automated Quotation (MESDAQ) was launched
Intended as an avenue for small and medium enterprises in
technology related areas to raise capital
August 2009 changed its name to ACE (Access, Certainty, and
Efficiency)
Provides lower listing requirements and open to companies of all
sectors

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STOCK EXCHANGES

Over-the-counter market
Is

a network of dealers who buy and sell the stocks of

companies that are not listed on the stock exchange
Example: NASDAQ
Reason: unable to meet stock exchange listing
requirements
Stock of listed companies can be traded on the OTC
market

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TRADING PROCESS

Buying and selling of shares are done through

brokerage houses that are members of the stock
exchange
A

stockbroker

A licensed individual registered with the securities

commission

An instruction given to broker to buy or sell is

actually giving an order
Types of orders

1.
2.
3.

Market order
Limit order
Stop loss order

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TRADING PROCESS
Market order a request to buy or sell shares at
the best price available when the order reaches
the marketplace
Limit order a request to buy or sell shares at a
specified price (the limit) or better
Stop loss order an order to sell a particular
stock at the next available opportunity after the
price of the stock reaches a specified amount. To
prevent further losses.

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TRADING PROCESS

Buying stock on margin

Buying

shares but does not pay the full amount. A

part of the amount is financed through buying on
margin.
Must have a margin account with the broker
Will need to pay interest on the borrowed amount
Investors buy on margin because the financial
leverage provided by borrowing money can increase
the return on investment
But, in a declining market, buying on margin can be
a risky strategy
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TRADING PROCESS

Selling short
A

way for investors to make money in a declining

stock market by borrowing rather than buying stocks
Steps involved:
1.
2.

3.
4.

Borrow shares from a broker

Sell the borrowed shares, assuming the price of similar
shares will drop in a reasonably short period of time
Purchase similar shares at a lower price
Replace the shares borrowed with the purchased shares

How well you can forecast?

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SOME IMPORTANT TERMS RELATING TO

STOCK MARKET

Market Capitalisation:
Marketcapitalizationisthemeasureofcorporate sizeofa
country.Itshowsthecurrentstockprice multipliedbythe
numberofoutstandingshares.It iscommonlyreferredtoas
Marketcap.

Capital Structure:
Capitalstructuremeanstheproportionofdebtandequityusedfor
financingtheoperationsofabusinessoranenterprises.
Thecapitalstructureshouldbesuchwhichincreasesthevalueof
equitysharesormaximizethewealthofshareholder
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CONT

Speculation:

Speculation is the practice of engaging in risky financial transactions in an

attempttoprofitfromshortormediumtermfluctuationsinthemarketvalueof
atradablegood.

Speculationcaninprincipleinvolveanytradablegoodorfinancialinstrument.

Speculators:

Manyspeculatorspaylittleattentiontothefundamentalvalueof
asecurityandinsteadfocuspurelyonpricemovements.

FourkindsofspeculatorsoperateinBursaMalaysia.Theyare
knownas:
Bull
Bear

Stagand

Lameduck

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Bull:
ABullisanoperatorwhoishopefulofpriceriseinthenear
future.Inanticipationofpricerisehemakespurchasesofshares
andothersecuritieswiththeintentionofsellingthemathigher
pricesinfuture.
Hebeingaspeculatorhasnointentionoftakingdeliveryof
securitiesbutdealsonlyindifferenceofprices.

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Bear:
Abeardoesnothavesecuritiesatpresentbutsellsthem
athigherpricesinanticipationthathewillsupplythem
businesspurchasingatlowerpricesinthefuture.

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Stag:
Astagisthattypeof
speculatorwhotreadshispath
verycarefully.Heappliesfor
sharesinnewcompaniesand
expectstosellthemata
premiumifhegetsan
allotment.Heselectsthose
companieswhosesharesare
mostindemandandarelikely
tocarryapremium.Hesells
thesharesbeforebeingcalled
topaytheallotmentmoney.

LameDuck:
ALameDuckisnothingbutastressedbear.When
abearfindsitdifficulttocompletehispromisehe
islabeledasalameduck.

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STOCK BROKER:

Astockbrokerisaregulatedprofessionalindividual,
usuallyassociatedwithabrokeragefirmorbroker
dealer,whobuysandsellssharesandothersecurities
forbothretailandinstitutionalclients,throughastock
exchangeoroverthecounter,inreturnforafeeor
commission.

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STOCK MARKET INDEXES

Refer to the movement of the prices in a market
or a section of a market
Each of the indexes tracks the performance of a
specific basket of stocks considered to represent
a particular market
Types of stock market indexes:

1.
2.
3.
4.

Broad-base index
Price-weighted index
Market-value weighted or capitalization-weighted
index
Market-share weighted index

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STOCK MARKET INDEXES

1.

Broad-base index

2.

Price-weighted index

3.

represents the performance of a whole stock market and by

proxy reflects investor sentiment on the state of the economy.
Example: KLCI, Hong Kong Hang Seng Index
an index in which each stock influences the index in
proportion to its price per share. Stocks with higher price will
be given more weight and will have greater influence over the
performance of the index. Example: American Dow Jones
Industrial Average

Market-value weighted

A type of index whose individual components are weighted

according to their market capitalization, so that larger
components carry a larger percentage weighting. A relatively
small shift in the price of stock price of a large company will
heavily influence the value of the index.

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STOCK MARKET INDEXES

4.

Market-share weighted index

Price is weighted to the number of shares, rather

than their total value. All outstanding shares are
included.

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PARTICIPANTS IN THE EQUITY

MARKET
In an economic system, there units with excess
funds and units with deficits.
These units will meet in the capital market to
satisfy each other needs. Those who have excess
cash will invest or give loans to those who need
cash.
All these units include households, corporations,
financial institutions, government and foreigners
Besides the units, there are also intermediaries
that act on behalf of the units such as brokers
and investment banks

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MAJOR PARTICIPANTS:

Individual Retail Investors

Institutional investors such as mutual funds, banks,

insurance companies and hedge funds, and also publicly
traded corporations trading in their own shares.

50

THE ROLE OF SECURITIES

COMMISSION (SC)

Securities Commission (SC)

Established

1.
2.
3.
4.
5.

on 1 March 1993 under the Securities

Commission Act 1993, the SC is a self-funding statutory
body with investigative and enforcement powers. It reports
to the Minister of Finance and its accounts are tabled in
Parliament annually. The SC's many regulatory functions
include:
Supervising exchanges, clearing houses and central
depositories;
Registering authority for prospectuses of corporations
other than unlisted recreational clubs;
Approving authority for corporate bond issues;
Regulating all matters relating to securities and futures
contracts;
Regulating the take-over and mergers of companies

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THE ROLE OF SECURITIES

COMMISSION (SC)
5.
6.
7.
8.

Regulating all matters relating to unit trust schemes;

Licensing and supervising all licensed persons;
Encouraging self-regulation; and
Ensuring proper conduct of market institutions and
licensed persons.

Underpinning all these functions is the SC's

ultimate responsibility of protecting the investor.
Apart from discharging its regulatory functions,
the SC is also obliged by statute to encourage and
promote the development of the securities and
futures markets in Malaysia.
Website: www.sc.com.my

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ISLAMIC CAPITAL MARKET: EQUITY

Islamic financial framework

Islamic

money market, capital market, forward

market, limited foreign exchange

Instruments and operating procedures are

different
Operates

in an interest-free environment
Different principles

Derived from Shariah (Islamic Law)

Sources are from Holy Quran and Sunnah which
condemn riba-based transactions as sinful

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ISLAMIC CAPITAL MARKET: EQUITY

Islamic financial
markets

Islamic
money
market

Islamic banking

Islamic
deposits

Islamic
financing

Islamic capital
market

Equity
funds

Sukuk

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ISLAMIC CAPITAL MARKET: EQUITY

Basic concept is permissible in Shariah
Key components of Islamic capital market are
Shariah-compliant stocks, Islamic funds and
Islamic investment certificates known as Sukuk
Islamic funds:

>200

mutual funds of various categories Shariah

compliant investment facilities
Operates in Saudi Arabia, the United Arab Emirates,
Bahrain, Kuwait, Qatar, Pakistan, Malaysia, Brunei,
Singapore, Germany, Ireland, UK, US, Canada,
Switzerland and South Africa
Most of Islamic funds are equity funds

55

ISLAMIC CAPITAL MARKET: EQUITY

1.

Main categories of Islamic funds:

Equity funds invest in the shares of joint stock
companies and returns are in the form of capital
gains and dividends which are distributed on a
pro rata basis among investors neither the
principal nor a rate of profit can be guaranteed.
What Does Pro-Rata Mean?
Used to describe a proportionate allocation. A
method of assigning an amount to a fraction,
according to its share of the whole.
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ISLAMIC CAPITAL MARKET: EQUITY

1.

Equity funds can be divided into:

Regular income funds

a.

Earn profit through dividends paid by investee companies

Regular income stream
Risk averse investors
Example: CIMB Equity Income Fund, RHB Islamic Equity Fund

Capital gain funds

b.

Earn profit through capital gain from frequent sale and purchase of
Shariah compliant stocks
Better return
Example: AmIslamic Growth Fund

Aggressive funds

c.

Invest in high risk securities to generate abnormal profits

Example: CIMB Aggressive Equity Fund

Balanced funds

d.

Invest in high quality securities with less risk and give the investors a
regular income stream based on div and capital gains
Example: AmIslamic Balanced Fund

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ISLAMIC CAPITAL MARKET: EQUITY

2.

Ijarah funds

3.

Commodity funds

4.

Funds used to purchase different commodities for

the purpose of resale.

Murabaha funds

5.

Such funds are used to purchase assets for the

purpose of leasing. Rentals received are distributed
among subscribers.

closed-end funds, not negotiable in the secondary

market. No tangible assets involved.

Mixed funds

The subscription employed in different type of

investments.

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ISLAMIC CAPITAL MARKET: EQUITY

Equity stocks included in the equity funds need

to be compliant with Shariah guidelines
Decided

by Shariah boards
Some screening criteria:

The capital structure of the investee company must be

predominantly equity based (debt less than 33%)
The investee company is prohibited from investing in
interest-based financial institutions and involve in areas of
gambling, alcohol production etc.

The most widely used Islamic index to measure

Shariah compliant investable equities is the Dow
Jones Islamic Market indexes
59

ISLAMIC CAPITAL MARKET: EQUITY

In Malaysia, companies are classified as Shariah

non-compliant securities if they are involved in the
following core activities:
Financial

services based on interest

Gambling and gaming
Manufacture or sale of non-halal products or related
products
Conventional insurance, entertainment activities that
are non-permissible according to shariah
Manufacturing or sale of tobacco-based products or
related products
Stock broking or share trading in Shariah noncompliant securities and other activities deemed nonpermissible according to Shariah

60

ISLAMIC CAPITAL MARKET: EQUITY

Islamic equity fund investors

Main

investors are from the Gulf countries

http://www.klse.com.my/website/bm/products_an
d_services/islamic_capital_market/ICM_Shariah.
html

61

FSMP AND CMMP

The Financial Sector Master Plan (FSMP) launched in
March 2001 outlines the medium and long-term strategies
for the development of the financial sector. The objective of
the FSMP is to develop a competitive, resilient and
dynamic financial system, based on international best
practices, which would provide an enabling environment
for the long- term economic expansion.
The Capital Market Master Plan was launched in
February 2001 with the objective of setting the strategic
position and future direction for the Malaysian capital
market. There was some progress made in the area of the
consolidating of the stockbroking industry and the stock
exchange, disclosure-based regulation and corporate bond
market development.

62

WHY DO THE PRICES OF SHARE INCREASE OR DECREASE IN THE MARKET?

Thereisonemajorfactorthatcausesthemovementof
themarketandthisisBUYER/BUYERS.
Themorebuyersforagivensecurity,thehigherthe
priceofthatsecuritywillgo,iftherearenobuyers,the
priceofthesecuritywilldrop.
Companiescanhavethegreatestproduct/serviceinthe
worldbutifnoonewantstobuy,the
priceofthestockwillgono
whereandifitdoesmoveitwill
movedown.

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