FIN250

CHAPTER 6
CAPITAL MARKET
Learning Outline:
1. Structure of Capital Market

2. Regulatory Bodies

3. Equity Market Operations

4. Equity Market Instruments

5. Bond Market Operations

6. Bond Market Instruments

Learning Outcomes:
1. Illustrate the Structure of Capital Market

2. Explain the Regulatory Bodies

3. Describe the Equity Market Operations

4. Identify the Equity Market Instruments

5. Describe the Bond Market Operations

6. Identify the Bond Market Instruments

 6.1 STRUCTURE OF CAPITAL MARKET

MONEY
MARKET
Common
FOREIGN stocks
Equity
EXCHANGE
market
FINANCIAL MARKET Preferred
MARKETS stocks
FINANCIAL CAPITAL
SYSTEM FINANCIAL MARKET
Government
INSTITUTION
bond
S DERIVATIVES
Bond market
MARKET
Corporate
bond
6.1.1 Capital Market?
▪ Market for raising long term funds i.e. long
term financial market

▪ Comprised of the Equity and the Bond market

o Equity market: Deal with corporate stocks

and shares which have no fixed maturity
period

o Bond market: Deal with public and private

debt securities with maturity more than
one year
6.1.2 How Does A Capital Market Works?

In return,
Borrows it from The money
A firm needs investors gain
individuals by invested in a
money for business profits as well as
operations. issuing equity firm’s shares and
goods and
and bond. bonds.
services.
6.1.3 Functions of Capital Market
• To assist the process of development by mobilizing medium and long-term funds
from investors to finance the public development programs and private
1 investment.

• To help banking system in securitizing their assets.

2

• To provide intermediary services by enabling all business entities to raise funds

from investors and also changing their ownership structure.
3
6.1.4 Types of Market

SECONDARY MARKET
PRIMARY MARKET
The trading of old
The primary market is securities occurs in the
for trading freshly secondary market,
issued securities, i.e., which occurs after
first-time trading. It transacting in the
enables an Initial primary market. Both
Public Offering. It is stock markets and
also known as the new over-the-counter
issues market. trades come under the
secondary market.
6.2 THE REGULATORY BODIES: CAPITAL
MARKET
BURSA MALAYSIA
Bursa Malaysia is the frontline
regulator of the Malaysian
capital market and has the duty
to maintain a fair and orderly
market in the securities and
derivatives that are traded
through its facilities.
SECURITY COMMISSION
Securities Commission Act 1993
(SCA) was established on 1
March 1993 under the
Securities Commission Act 1993
(SCA). The SC are a self-funded
statutory body entrusted with
the responsibility to regulate
and develop the Malaysian
capital market.
CAPITAL MARKET & SERVICE ACT
2007
An Act to consolidate the
Securities Industry Act 1983
[Act 280] and Futures Industry
Act 1993 [Act 499], to regulate
and to provide for matters
relating to the activities,
markets and intermediaries in
the capital markets, and for
matters consequential and
incidental thereto.
6.3 THE EQUITY MARKET OPERATIONS
EQUITY

❖ Equity market refers to the trading of

instruments such as common stock facilitated by
an exchange called Bursa Malaysia under the
supervision of Securities Commission.
❖ Helps companies to raise funds for the first time
by issuing of common stocks (Initial Public
Offerings – IPOs).
❖ Those who buy common stocks are owners to
the company that issues the shares.
❖ The investors are able to claim any return of the
company in the form of dividends and capital
gain.
❖ Ex; Common Stock & Preferred Stocks
6.4 THE EQUITY MARKET INSTRUMENTS
Preferred Stocks

❑ A preferred stock generally receives a stated fixed dividend payment, although the payment is not legally
binding.
❑ The dividend must be paid to the preferred stockholder before common stockholder is paid.
❑ It is said to be riskier than bond but safer than common stock as a form of investment.
❑ A Par Value is RM100
❑ Call Feature - This characteristic is just like bond where the firm has the option to buy back or ‘call’ the entire
preferred stock issue.
❑ There is no fixed maturity date for preferred stock.
❑ Conversion feature - Some companies may issue preferred stocks that may be ‘convertible’ into common
stocks.
6.4 THE EQUITY MARKET INSTRUMENTS
Advantages and Disadvantages for Investing in Preferred Stocks:

Advantages Disadvantages

Marketable on Bursa Malaysia Receive fixed amount of dividend

Receive fixed amount of dividend Not good to hedge against inflation

Not allowed to vote during annual

Offer high return compare to bond general meeting (AGM)

Low risk security compare to Low chances to earn capital gain

common stock
6.4 THE EQUITY MARKET INSTRUMENTS
Common Stocks
Claim on income
▪ Usually in the form of dividends or capital gains.
▪ In case of the residual claim, the common stockholders are the last party that
entitled to the income after all bondholders and preferred stockholders have
received their shares.
▪ If there is nothing left, the common stockholders will receive nothing.
Claim on assets
▪ Similar as claim on income, common stockholders will be the last party to claim on
the assets if the firm is insolvent.
6.4 THE EQUITY MARKET INSTRUMENTS
Voting rights
▪ Since the investors are the owner of the firm, they can select the board of directors.
▪ Voting can be done in person or by means of a ‘proxy’.
*proxy is a legal document that allows a person to act on behalf of another to vote for the
signee at the annual general meeting.

Pre-emptive rights
▪ Have rights but not an obligation to purchase the new issues before they are offered to the
new stockholders.

Limited liability
▪ In case of bankruptcy, the common stockholders’ liability is limited to the amount of their
shares value or investments.
6.4 THE EQUITY MARKET INSTRUMENTS
Advantages and Disadvantages for Investing in Common Stocks:

Advantages Disadvantages

Marketable at Bursa Malaysia

High risk security

Better hedge against inflation

Have residual (last) claimant position

Can vote during AGM Return of dividend is uncertain

Entitle for pre-emptive rights Dividend received is taxable

6.5 THE BOND MARKET OPERATIONS
BOND

❖ A debt instruments issues by the BOND

companies to provide finance (short term
as well as long term) for their growth,
investments and future planning. PEFERRED
❖ Comes with an agreement to repay the STOCK
same within the stipulated time period.
❖ Bondholders (investor) receive fixed return COMMON
periodically in the form interest income.
❖ It also has priority claim as compared to STOCK
equity.
❖ Ex; Government & Corporate Bond
6.4 THE BOND MARKET INSTRUMENT
Advantages and Disadvantages for Investing in Bonds:

Advantages Disadvantages

Receive a series fixed amount of interest Return on bond is lower compare to

common stock

Has high liquidity Has no control power over the issuer

Bondholder has priority claim over assets and Cannot vote during the annual general
income of the issuer meeting (AGM)

Principal investment is remain safe Subject to a call risk

Not good to hedge against inflation

Can add to diversify portfolio
 At the end of agreement, company will repay a fixed amount of
3
principle at maturity to the bondholder

In return, company agrees to

pay FIXED income payment for
2
a specified period

Issuer Lender
COMPANY BOND
(to raised MARKET
funds) INVESTOR

1
Pay investment amount of
bond to company (Principle)
6.5.1 The Bond Market Regulatory Bodies
1. BNM
- Concerned with credit allocation to private sector.

2. Securities Commission
- Concerned with capital market development.

3. Companies Commission of Malaysia

- Requires issuers to register prospectuses and provide information in the
prospectus that complies with BNM.
6.5.2 The Bond Features
❑ An instrument that has a maturity date which is the date that the bond matures and the
issuer will have to refund the principal to the investor as promised.

❑ A par value RM1,000 - Par value is the amount that the bond issuer needs to pay
to the investors at the maturity period.

❑ A coupon rate is also stated – the rate that investors will receive periodically (yearly)
until its maturity date. The rate is fixed.

❑ Yield to maturity (YTM) – the actual rate of return if the bond is kept until maturity.
6.6 THE BOND MARKET INSTRUMENTS
Malaysian Government
Securities (MGS)
• These are interest-bearing
long term securities issued
by Malaysian Government
with interest payable semi-
annually.
• Having a tenor of normally
more than a year.
• Funds raise will be used for
the national development
expenditure.
Malaysian Treasury Bills
(MTBs)
• Issued by BNM on behalf of • These are long term and
the government to finance
national expenditure.
• Maturities of 3-months, 6
month, and 1 year.
• Bills are sold at discount
through competitive
auction.
Government Investment
Issues (GII)
short erm non-interest
bearing government
securities, respectively,
issued based on Islamic
principles by the
government of Malaysia.
6.6 THE BOND MARKET INSTRUMENTS

Malaysian Islamic Bank Negara Monetary

BNM bills (BNB)
Treasury Bills (MITB) Notes-I (BNMN-i)
• Issued by Malaysian • Islamic securities • Maturity not exceeding
Government based on issued by BNM 1 year.
Islamic Principles. replacing the existing • Issued on discounted
• Both conventional and Bank Negara basis.
Islamic institutions can Negotiable Notes. • Often purchased by
buy and trade MITB • The purposes is to financial institutions to
• Maturity is 1 year. managing liquidity in meet their liquidity and
the Islamic financial statutory reserve
market. requirement.
• The maturity is 3 years.
6.6 THE BOND MARKET INSTRUMENTS

Cagamas Commercial Papers Medium Term Notes

Corporate Bonds
Instruments (CPs) (MTNs)
• These instruments • An instruments • Tenors no more • Instrument issued
are related to the similar to MTBs than one year but by corporations,
housing loans. where the tenors not exceeding 5 Islamic or
• An interest bearing are no less than years. conventional, fixed
instrument issued one month but not • The issued can be or floating or can
by Cagamas more than 12 conventional or be issued without
Berhad, a National months. Islamic based and interest (zero
Mortgage the mode of issuing coupon)
Corporation. is either direct • Interest payment
placement or by can be quarterly,
tender. semi-quarterly, or
annually.
END OF CHAPTER 6
THANK YOU
Study Questions
1) Briefly differentiate between the equity and the bond market?
2) Describe any three (3) instruments in bond market.
3) Explain how does capital market works?
4) Describe the bonds operation.
 List of Reference
• Ibrahim Abdul Rahman & Siti Norbaya Mohd Rashid, Financial Market and
Banking Operations.
• Norhafizah Nordin; Norzalina Ahmad; Nur Hafizah Mohammad Ismail; and
Sabariah Nordin, Financial Markets and Institutions in Malaysia, 2022, ISBN
978-967-2486-97-8.
• Bank Negara Malaysia website (www.bnm.gov.my)