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FIN204

Lecture 2

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Chapter 3

Investing In Mutual
Funds and ETFs

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Mutual Funds
A mutual fund is a professionally-
managed type of collective investment
scheme that pools money from many
investors to buy securities.
A mutual fund has a fund manager that
trades (buys and sells) the fund's
investments in accordance with the
fund's investment objective.

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Mutual Funds
The price of a unit reflects its total Net Asset
Value, commonly referred to as NAV (the
funds assets less its liabilities, divided by the
number of units in issue).
Unlike stocks, whose prices are subject to
change at each trade, the funds NAV is
calculated only at the close of each days
trading. Hence the funds unit price is quoted
in major newspapers on the following
Business Day.

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Mutual Funds in Malaysia
Also called Unit Trust in Malaysia
Mutual fund industry is regulated in Malaysia
by Securities Commission under the
Securities Commission (Unit Trust Scheme)
Regulations 1996.
There are currently more than 500 funds in
Malaysia managed by 39 fund management
companies: Eg: Public Mutual, RHB
Investment, OSK-OUB, TA Investment.

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Benefits of Investing in Mutual Funds

Diversification

Professional Fund Management

Liquidity

Hassle Free

Affordability

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Exchange Traded Funds (ETF)
An investment fund listed and traded on a
stock exchange.

ETF combines the features of an index fund


and a stock.

Generally, there are three types of ETFs:


Equity ETF
Fixed income ETF
Commodity ETF

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Why invest in ETF?

Diversified Exposure

Cost Effectiveness

Simplicity

Transparency

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Why invest in ETF?
Diversified Exposure:

Unlike individual shares, ETF holds a basket of securities


with the objective of mimicking performance of an index.
This basket can be made-up of shares, bonds or
commodities, depending on the index that the ETF is
based on.

Instead of having to search and hold a few stocks or


bonds that would otherwise be cost excessive and
complex, investors can use ETFs for exposure to a
diversified basket of stocks or bonds.

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Why invest in ETF?
Cost Effectiveness:
Lower annual management fees for ETFs as compared to
unit trusts makes ETFs more economical to buy and
maintain in the long run.

Liquidity:
ETFs are listed on the Main Market of Bursa Malaysia.
Just like trading stocks, buying and selling ETF units are
done on its current market price with one transaction.
Trades can be done online or through stock brokers.

Transparency:
Investors know exactly which stocks or underlying
assets is held in the ETF by visiting the ETFs website,
provided by its manager.

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Open End Fund vs Closed End Fund

Open-end investment companies: Shares


continue to be sold to the public at Net Assets
Value (NAV) after initial sale that capitalizes
the company
Shares may be sold back to company at NAV
Company size constantly changes
Popularly called mutual funds
NAV can only be computed at end of trading day

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Open End Fund vs Closed End Fund

Closed-end investment companies:


No additional shares sold after initial public offering
Listed on stock exchange
Prices determined by demand and supply in the
stock market.
So far, only 1 in Malaysia - iCapital

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Performance of Funds
Reported on a regular basis in the popular press
and websites
Example: Personal Money Magazine

www.fundsupermart.com.my

Measured over a given time period as a percent


of initial investment
Total returns include reinvested dividends and

capital gains
Average annual return reflects the mean

compound growth rate of investment over a


given time period

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Hedged Fund
An aggressively managed portfolio of investments that
uses advanced investment strategies such as
leveraged, long, short and derivative positions in both
domestic and international markets with the goal of
generating high returns

Typically open to a limited range of investors who pay a


performance fee to the fund's investment manager.

Usually set up as private investment partnerships that


are open to a limited number of investors and require a
very large initial minimum investment.

Investments in hedge funds are illiquid as they often


require investors keep their money in the fund for at least
one year.

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Chapter 4

Financial Markets

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The Role of Financial Markets

Help firms and governments raise cash


by selling claims against themselves
Provide a place where investors can act
on their beliefs
Help allocate cash to where it is most
productive
Help lower the cost of exchange

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Markets in New Securities

New securities are issued in a primary


market
Initial public offerings
Issue facilitated by investment banker
Specialists in advice, design, and sales
Intermediaries between issuer and investor

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Investment Banking

Client advice includes type and features


of security, offer price, and timing of
sale
Underwriting services: Risk of selling to
investors assumed from issuer
Coordinates marketing by helping
issuer register securities, issue
prospectus, and sell securities

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Secondary Markets

Markets where investors trade


previously issued securities

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Stock Exchanges

NYSE is a secondary market in equity


shares
Not-for-profit organization of members
Listing requirements for traded firms

AMEX and regional exchanges list


smaller firms, have less volume than
NYSE

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NASDAQ
An American stock exchange
The world's first electronic stock market and
the first stock market in the world to start
trading online.
It has more firms listed than NYSE
The most popular electronic exchange in the
world. More trading volume than any other
electronic stock exchange in the world
Famous companies listed on Nasdaq includes
Apple, eBay, Dell, Microsoft, Yahoo, Facebook

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Stock Exchanges in Malaysia
Bursa Malaysia is the only stock exchange in
Malaysia.
Bursa Malaysia has over 1,000 listed
companies
Companies are either listed on Main Market or
ACE Market.
Main Market for larger capitalized companies
ACE Market for high growth and technology
companies.

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Equity Market Indicators

Provide a composite report of market


behavior on a given day
Dow Jones Industrial Average
Composed of 30 blue-chip stocks
Price-weighted index: Essentially adds the
prices of 30 stocks, divides by 30
Adjusted for stock splits, stock dividends
Oldest, most well-known measure

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Equity Market Indicators

Standard & Poors Composite Index


Composed of 500 large firm stocks
Expressed as index number relative to a
base index value of 10 (1941-43)
Value-weighted index: Prices and shares
outstanding considered
Indicates how much the average equity value of
the 500 firms in the index has increased relative
to the base period

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Equity Market Indicators
NYSE and NASDAQ Composite Indices
Value-weighted indices of broad markets
Nikkei 225 Average
Price-weighted index of 225 actively-traded stocks
on the Tokyo Stock Exchange
FBM KLCI
Consist of 30 largest eligible companies by market
capitalisation
Computed based on free float adjusted market
capitalisation.
This means a stock with higher free float will gain
greater weightage in the index.

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Operating Hour Bursa Malaysia
Pre-Opening 8:30 am
Opening and Continuous Trading 9:00 am
Close 12:30 pm

Lunch

Pre-Opening 2:00 pm
Opening and Continuous Trading 2:30 pm
Pre-Closing 4:45 pm
Trading at Last 4:50 pm
Close 5:00 pm
Pre-Opening
Morning Session: 8:30am to 9:00am
Afternoon Session: 2:00pm to 2:30pm

During the Pre-opening:


Can enter, modify and delete orders
No order matching is done
Theoretical Opening Price (TOP) based on
order entered is calculated and displayed
Opening and Continuous Trading
Morning Session: 9:00am to 12:30pm
Afternoon Session: 2:30pm to 4:45pm

During the continuous trading phase:


Can enter, modify and delete orders
Orders are matched real time based on
price-time priority during continuous
trading
Pre-Closing
Time: 4:45pm to 4:50pm
Can enter, modify and delete orders

During Pre-Closing:
Orders accepted will be displayed however
matching will not be done:
Matching will be done at 4:50 during Trading At
Last based
Theoretical closing price (TCP) based on
orders entered will be calculated and
displayed
Trading at Last
Time: 4:50pm to 5:00pm

During Trading at Last:


Orders can be entered and matched at last
done price (TCP) only
It is the last opportunity to buy or sell for the
day
Open an Account

Open a trading account and a Central


Depository Account (CDS) with a stock
broking company
You will then be engaged with a licensed
dealer (or a remisier)
Your trading will be done thru your
Trading Account.
CDS Account

CDS account is similar to a safe deposit


box except that CDS will only hold your
shares.
In actual fact, there is no physical shares
under the CDS. Instead, the CDS uses a
simple book entry system to keep track of
the movement of shares which arise from
trades affected on Bursa Malaysia.
Minimum Bids

Market Price of Share Minimum Bids


Below RM1.00 1/2 sen
RM1.00 up to RM99.99 1 sen
RM100.00 and above 2 sen
Board Lot

Shares are normally traded in specific


amounts called Board Lots of 100 units.

Any amount less than board lots are


called odd lots.
Upper Limit Price

For securities price below RM1.00:


The highest price such securities can be
traded shall be thirty (30) sen above the
reference price

For securities price equal to or above


RM1.00:
The highest price such securities can be
traded shall be 30% above the reference
price.
Lower Limit Price

For securities price below RM1.00:


The lowest price such securities can be
traded shall be thirty (30) sen below the
reference price

For securities price equal to or above


RM1.00:
The lowest price such securities can be
traded shall be 30% below the reference
price.
Trade Confirmation
Once the order is confirmed, a contract note will be sent
to the client by the stockbroking house.

The contract will give the following detail on the Share


purchased (or sold):
Name of the share

Number of Share

Amount

Commission

Clearing Fees

Stamp Duty

Total Amount Due

Due Date
The End

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Tutorial Questions

Chapter 3
Questions: 1, 2, 3, 9, 12

Chapter 4
Questions: 2, 14, 15 16

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