TOPIC 6

CAPITAL MARKET: EQUITY

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BASIC CONCEPT OF CAPITAL MARKET
The market for trading long-term debt 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

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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.

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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.

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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
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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?
DIFFERENCES BETWEEN EQUITY AND DEBT
MARKETS
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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???
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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?
ORDINARY SHARES
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Privileges and legal rights of ordinary shares:
1. 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
2. Right to information
Reports, audited financial statement, minutes of the
meetings of the board of directors, examine the list of
shareholders
3. Pre-emptive rights
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)

ORDINARY SHARES
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4. Rights to dividends
5. Limited liability
Limits the liability of shareholders to the capital they own in
the company
6. Residual claim
In the case of liquidation

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ORDINARY SHARES
PREFERENCE SHARES
Typically do not carry voting rights
Entitled to receive dividend before payment is made
to ordinary shareholders
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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 preference shares
No rights of dividends in arrears
Participating 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
Will be redeemed later by the company
Convertible 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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PREFERENCE SHARES
TYPES OF STOCKS
1. Blue chip priced high, low volatility, steady stream of dividends, safe
investment, little room to appreciate because they are so large
2. Penny low-priced, speculative, very risky, normally issued by
companies with a short and erratic history of revenues and earnings,
popular among small speculators
3. Income pay higher than average dividends, paid by large and
established companies with stable earnings such as utilities and
telephone companies
4. Value currently selling at a low price, companies that have good
earnings and growth potential but their stock prices do not reflect it
5. Defensive prices stay stable when the markets declines, issued by
industries that naturally do well during recessions, e.g. food and utilities
companies
6. Cyclical move up or down with the business cycle. E.g. housing
industry
7. 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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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
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
2. To source long-term capital
Can raise additional capital
3. To allow owners to realize their assets
Floatation allows existing shareholders to release some of
their equities as well as raise new capital
4. 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
Incentives to improve performance
6. To facilitate growth by acquisition
Easy to offer own shares for the purpose of acquisition
7. To enhance the companys image
Gives an aura of financial respectability, which may encourage
new business contracts
8. To act as a catalyst for the participation of foreign
partners
May encourage foreign investment in the company
9. To establish good corporate governance practices
Management is accountable to shareholders who ensure that
the company operates in an appropriate manner
10. 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
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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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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PRIMARY MARKET
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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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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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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STOCK EXCHANGES
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. Market order
2. Limit order
3. Stop loss order
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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. Borrow shares from a broker
2. Sell the borrowed shares, assuming the price of similar
shares will drop in a reasonably short period of time
3. Purchase similar shares at a lower price
4. Replace the shares borrowed with the purchased shares
How well you can forecast?
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TRADING PROCESS
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. Broad-base index
2. Price-weighted index
3. Market-value weighted or capitalization-weighted
index
4. Market-share weighted index
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1. Broad-base index
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
2. Price-weighted 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
3. 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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STOCK MARKET INDEXES
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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THE ROLE OF SECURITIES COMMISSION (SC)
Securities Commission (SC)
Established 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:
1. Supervising exchanges, clearing houses and central
depositories;
2. Registering authority for prospectuses of corporations
other than unlisted recreational clubs;
3. Approving authority for corporate bond issues;
4. Regulating all matters relating to securities and futures
contracts;
5. Regulating the take-over and mergers of companies

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5. Regulating all matters relating to unit trust schemes;
6. Licensing and supervising all licensed persons;
7. Encouraging self-regulation; and
8. 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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THE ROLE OF SECURITIES COMMISSION (SC)
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
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Islamic financial
markets
Islamic banking
Islamic money
market
Islamic capital
market
Islamic
deposits
Islamic
financing
Equity
funds
Sukuk
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
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Main categories of Islamic funds:
1. 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 cab 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
Equity funds can be divided into:
a. Regular income funds
Earn profit through dividends paid by investee companies
Regular income stream
Risk averse investors
Example: CIMB Equity Income Fund, RHB Islamic Equity Fund
b. Capital gain funds
Earn profit through capital gain from frequent sale and purchase of
Shariah compliant stocks
Better return
Example: AmIslamic Growth Fund
c. Aggressive funds
Invest in high risk securities to generate abnormal profits
Example: CIMB Aggressive Equity Fund
d. Balanced funds
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
Such funds are used to purchase assets for the
purpose of leasing. Rentals received are distributed
among subscribers.
3. Commodity funds
Funds used to purchase different commodities for the
purpose of resale.
4. Murabaha funds
closed-end funds, not negotiable in the secondary
market. No tangible assets involved.
5. 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
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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 non-compliant
securities and other activities deemed non-permissible
according to Shariah

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ISLAMIC CAPITAL MARKET: EQUITY
Islamic equity fund investors
Main investors are from the Gulf countries

http://www.klse.com.my/website/bm/products_and_
services/islamic_capital_market/ICM_Shariah.html
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ISLAMIC CAPITAL MARKET: EQUITY