CHAPTER 1

1. INVESTMENT
2. FINANCIAL MARKET
 CHAPTER 1

1. INVESTMENT
 Definition of Investment

• The commitment of current resources with the

expectation of receiving a larger amount of
resources in the future.
• It involves the sacrifice of current money with
the hope of receiving larger amount in the
future.
• It involves the element of risk and time.
• The hope of receiving larger amount in the
future is not guaranteed.
• Investment involves the purchase of assets that
will generate certain return proportional to the
amount of risk assumed over a period of time.
 Type of Assets

• Assets can be classified as:

– Real Assets
• Assets which contribute directly to the productive
of an economy by produce good or services that
can be
– Tangible
» eg.: land, buildings and machines
– Intangible
» eg.: knowledge
– Financial Assets
• It is a claim on real assets or on the income they
generate. Eg.:stocks & bonds
 Type of Financial Assets

• There are 3 broad classes of

financial assets:
–Equity
–Fixed Income Security
–Derivatives
 Equity

• Equity or common stock is considered as

ownership share in a company.
• The common stock holder is part-owner
and is entitled to receive dividends the
company may declare.
• The performance depends on the
success of the firm and the income
generated by its real assets.
• Quite risky
 Fixed Income Security

• A fixed income security promises a

certain amount of return on a regular
basis which can be constant amount or
vary depending on term agreed upon.
• It also has a fixed maturity date when
the principal amount will be paid by the
issuer.
• Eg.: Bonds.
 Derivative

• A derivative security is an asset

where its value is determined
by or derived from the value of
another investment vehicle.
• Eg.; Futures & options
 Market Participants

• Participants in the financial

market can be divided into 3
groups:
– Providers of fund
– Users of fund
– Financial intermediaries
 Fund Providers

• Fund providers are households who earn

more than they consume (net savers).
• They can be investors, which will
purchases securities issued by firms which
needed funds.
• The investors can be further classified as;
– Retail
• Individual
– Institutional
• Provident and pension funds, investment companies,
insurance companies, banks
 Fund Users

• The users of fund are business firms and

the government.
• However, the government can be either act
as:
– Lender
• When its budget is surplus (total revenue is larger
than total expenditures)
– Borrower
• When its budget is deficit (total expenditure is more
than total revenue)
• The government borrows from the public through the
issue of Treasury bill (TB) and Malaysian
Government Securities (MGS).
 Financial Intermediaries

• Financial intermediaries are institutions that

bring lenders and borrowers together and
can be regarded both as a provider and as
users of funds.
• The financial intermediaries also act as
underwriters, which means that any
shares not bought by investors will be
bought by the banker, to ensure the
corporation receive the total amount of
funds it wants to raise.
 Investment Process

• The investment process involves five

basic steps;
– Setting investment objectives
– Establishing investment policy
– Selecting a portfolio strategy
– Selecting the assets
– Measuring and evaluating
performances
 Setting Investment Objectives

• Objectives are goals that investors want to achieve

in their investment.
• The objectives must be clearly defined such as the
type of return, his investment horizon and the
amount of risk that can be tolerated.
• For example;
– Some investors may want safety of principal,
stable income and low risk.
– Some investors may be more interested in high
return and can undertake high risks.
• These objectives must be reasonable and
attainable.
 Establishing Investment Policy

• The investment policy is a written document which

states the asset allocation decision and the
constraints of the investors in satisfying the
investment objectives.
• Asset allocation decision involves determining
the proportion of funds to be invested in major
assets classes, such as; stocks, bonds and real
estates.
• Some investors face constraint that will affect their
asset allocation decision, such as; life insurance
companies can only invest about 10% of their
portfolio in the stock market.
 Selecting a Portfolio Strategy

• The investor has to decide on the type of

investment strategy, either;
– active
• The investors or investment manager actively
manages the investments by changing the proportion
of assets in the portfolio.
• The investors always searching for new information
in identifying undervalued securities (current
market price is lower than its intrinsic value or
expected price)
or
– passive
• The investors invest in a well-diversified portfolio
without find the miss-priced securities
 Selecting Assets

• It involves selecting individual

companies or securities within each
asset class.
• Security analysis is required. For eg.:
– Fundamental Analysis
• Economy analysis
• Industry analysis
• Company’s financial position
 Monitoring & Evaluating
Performance
• In this step, the return on the
portfolio is measured and
compared against a
benchmark, such as;
–Kuala Lumpur Composite
Index (KLCI)
–EMAS Index
 Risk & Return

• In general, there is a positive

relationship between risk & return.
• Investment with high risk tend to give
high expected return and vice versa.
Return Speculative stocks
Blue-chip stocks
Unit Trusts
Bonds
T bills

Risk
2. FINANCIAL MARKET
 Financial Market

• The financial market refers to the means

by which financial resources are
transferred from fund surplus units to
fund deficit units.
• It enables fund deficit units, such as
government & business entities, to raise
funds for investment purposes and
facilitate growth.
• It also used for buying and selling
securities from one investor to another.
 Functions of the Financial
Market
• Transfer financial resources through time
– An investor with surplus funds may buy securities for the
time being and liquidate them later as and when the
need arises.
• Information dissemination
– The financial market makes information on instruments
which can be traded in the market available to all buyers
and sellers.
• Price setting mechanism
– The financial market receive buy and sell orders, and
match the orders.
• Offers liquidity
– The market makes it easy to buy and sell securities.
 Classification of the Financial
Market

• The financial market can be

divided into:
–Primary market
–Secondary market
 Primary Market
• Whenever firms need to raise funds, they
will issue common shares, bonds and
other securities to the investing public.
• The primary market involve:
– Unseasoned issues (IPO)
• The first sale of securities to the public to enable a
company to be listed on the stock exchange.
• The company can sell new shares or offer existing
shares known as an offer-for-sale.
– Seasoned issues
• The new issues of shares made by firms which are
already listed on the stock exchange.
• Firms can raise funds by creating new shares through
right issues, private placement & special issues.
 Secondary Market

• The secondary market involves the

buying and selling of shares and bonds
from one investor to another.
• Investors who bought securities in the
primary market will be able to sell them
and obtain liquidity.
• The secondary market consist of:
– KLSE (currently known as Bursa Malaysia)
• Main Board
• Second Board
– MESDAQ (Malaysia Exchange of Securities
Dealing & Automated Quotation)
 Reasons For Listing

• Advantages:
– Publicity to stimulate growth & attract new business.
– Market value of company can be easily determined.
– Investors have more confidence in company.
– Constant monitoring by KLSE forces management of
company to be more careful and efficient.
– Easy to obtain further capital from the market.
– Easy to expand overseas due to recognition via publicity.
• Disadvantages:
– Restrict freedom of action due to KLSE restriction.
– High cost of listing.
– Weakening of ownership since at least 25% of issued
and paid up must be in hands of public.
 Market Indices

• A market index is used to measure the

overall performance of the stock market
and as a benchmark to evaluate the
performance of investors’ holdings of
shares.
• 2 criteria in constructing the stock market
index:
– Select the stocks to be included in the index
– Weighting scheme
• Weighted by market value
• Equal weighting
 Market Indices

• Value-weighted Indices (VWI)

VWI = Current Aggregate Market Value X 100

Base Aggregate Market Value

• Equal-weighted Index (EWI)

EWI = Current Average Price
X 100
Base Average price
 Market Indices

• Example:
Stocks P0 (RM) Q0 P0Q0 P1(RM) Q1 P1Q1
A 1.20 10,000 12,000 1.60 12,000 19,200
B 1.10 20,000 22,000 2.00 30,000 60,000
C 1.60 30,000 48,000 1.80 67,500 121,500
Total 82,000 200,700

• What are the VWI and EWI?

 Market Indices

• Value-weighted Indices (VWI)

VWI = ΣP1Q1 X 100 = 200,700 X 100

ΣP0Q0 82,000
= 245

• Equal-weighted Index (EWI)

EWI = ΣP1/n X 100 = 1.80 X 100
ΣP0/n 1.30
= 138
Questions & Answer
Thank You…