Topic 1 Introduction To Investment 1.1 Investment Concept and The Differences Between Investment, speculation and Gambling 1.1.

.1 The Concept Of Investment Definition of investment:i. The commitment of fund to one or more assets that will be held over some future time period. Charles P. Jones. ii. The exchange of cash for an asset with the hope that the asset will yield regular future income and/or an increase in the value of the asset such that the sum of the income and the eventual value of the asset is greater than its purchase price Neoh soon Kean. Financial Asset Pieces of paper evidencing a claim on some issuer such as Federal Government or Corporation. Real assets Physical assets such as gold, real estate etc. 1.1.2 Differences Between Investment And Speculation Study the following cases: Case 1: Johan bought 1,000 units of Public Bank shares at RM3.00 a share and intends to hold them for the long term because he thinks that Public Bank would be able to pay good dividends and the price of the shares would increase in the future. Case 2: Salleh bought 5,000 units of KIG shares at RM0.27 a share and intends to sell them as soon as the price rises to RM0.35 a share. Case 3: Kam Soo bought 1,000 lottery tickets at RM3.00 a ticket with the hope of striking the first prize plus bonus of RM9 million.

Case 4: Rodney deposits RM100 every month in his savings account with Maybank so that he can use the money as down payment for a car in two years time. How do we categorise the 4 cases given above: savings, investment, speculation or gambling?

Case 1 is categorised as investment. This is because Johan is committing his funds for long term with the expectation of deriving income from dividends which would be paid by Public Bank as well as the expectation of capital gain derived from price increase in the share. Case 2 is categorised as speculation. This is because Salleh is committing his funds for the short term with the hope of getting capital gain when the price rises from RM0.27 to RM0.35 a share. Besides this, he is buying penny stock, that is, a low priced counter with the hope of reaping a high return from it. The risk involved is also higher. Case 3 is categorised as gambling. This is because Kam Soo is taking a very high risk whereby he may lose his RM3,000 or he may be able to strike it very rich if he wins the first prize or he may be able to win a small prize of RM100. The commitment of funds is very short term and the risk is very high. Case 4 is categorised as savings. This is because Rodney just put aside the money so that he can use it in the future as down payment for a car. Besides this, if Rodney needs the money in case of an emergency, he can also withdraw the amount from the bank. Thus the time preference of money is short and the risk involved is very low. 1.Rationally based on the knowledge of past share price behavior. It is possible to compute the probability of future return e.g PER or DY.

Investor can predict the likelihood of its price in the future. Purely based on the hope that the future price will be higher rather than anything tangible. 2.Requires an investor to do some work before hand and decisions are made based on known facts and figures such as estimating future level of EPS and computing the past range of the Per and also comparing the present price and future price etc. Usually based on wild rumours and unsubstantiated hearsays which cannot be checked for accuracy. It is much easier than investment. 3.Made for the long term (i.e 2 years or more) based on the idea that one is much more certain when one is trying to predict the cumulative results of many daily movements. One invests with the knowledge that over the long run , the real investors will always make a gain. Usually made for the short term (i.e +3 months or less) based on the idea that certain events may result in a rise in price (e.g bonus, rights, takeover etc ) 4.Over a long period of time, true investment tends to produce a positive result. Based on research (in US and Europe) long term investment consistently produced much higher return than fixed deposit . It is not based on anything concrete , its result is not at all predictable. It can occasionally produce very high gains just as it can produce very high losses. It is likely to lead to many sleepless nights and anxious days since its result is uncertain. Speculators must be alert and take quick action to catch the right moment. The difference between Investment and Gambling.

1.One can expect to make profit over the long run. Always result in a loss over the long run although the gambler may not know it. How about Savings ? Saving is a part of investment. It is a non-marketable security with very low risk and very safe. Its liquidity is very high. 1.2 Types of Marketable and Non-Marketable Securities.1. Direct Investment a) Non-Marketable Securities Saving deposits Certificates and time deposits Money market accounts

b) Marketable Securities i. Money Market- Treasury Bills- Negotiated Certificates Of Deposits- Commercial Paper- Eurodollars- Repurchase Agreements- Bankers Acceptances ii. Capital Market- Fixed Income/Bonds- Equities (Common Shares) iii. Other Types- Options- Warrants- Convertibles- Future Contracts 2. Indirect Investment It involved Investment Companies either Open end or closed end investment companies. Definitions Of Key Words. Fixed income securities Securities with specified payment dates and amounts. Treasury Bond Long term bonds sold by the government. Federal agency Securities Securities issued by federal credit agencies. Municipal Bonds Securities issued by political entities other than the federal government and its agencies .e.g. states and city. Corporate Bonds Long term debt securities of various types sold by corporations. Preferred Stock An equity security with an intermediate claim (between the bondholders and the stockholders) on a firms assets and earnings. Liquidity Securities The non-debt securities of a corporation representing the ownership interest. Equity Derivative securities Securities that derive their value in whole or in part by having a claim on the underlying common stock. Warrant A corporate created option to purchase a stated number of common shares at a specified price within a specified time (typically several years). Convertible Securities Bonds or preferred stock that are convertible at the holders option into shares or common stock of the same corporation. Options The right but not the obligation to buy or sell shares of stock within a specified period at a specified price. Put An option to sell a specified number of shares of stock at a specified price within a nine-month period. Calls An option to buy stock at a stated price within a specified period of months. Futures Contracts Agreements providing for the future exchange of a particular asset at a currently determined market price. Indirect Investment The buying and selling of the shares of investment companies which in turn, hold portfolios of securities.

Investment Company A financial company that sells shares in itself to the public and uses these funds to invest in a portfolio of securities. Open end investment company An investment company whose capitalization constantly changes as new shares are sold and outstanding shares are redeemed. Mutual Funds The popular name for open end investment company. Money Market Mutual Fund _ A mutual fund that invests in money market instruments. Closed end investment An investment company with a fixed capitalization whose shares trade on exchanges and OTC.

1.3 The Concept and characteristics of Money market and Capital Market 1.3.1 Money Market The market for short-term, highly liquid, low risk assets such as Treasury Bills and Negotiable Certificate of Deposits. Highly marketable securities and low probability of default. Money market securities is a short-term debt instruments sold by governments, financial institutions and corporations to investors with temporary excess funds to invest. The market is denominated by financial institutions, especially banks and governments. The size of transactions typically is large. The maturities of money market instruments range from one day to one year and often less than 90 days. Some of the investments are negotiable and actively traded. Investors may invest directly or indirectly.

Money Market Securities 1. Treasury bills The premier money market instrument , fully guaranteed and very liquid. They are sold on an auction basis at a discount from the face value. The discount determines the yield. The greater the discount at time of purchase, the higher the return earned by

investors. 2. Negotiable Certificates of Deposits (NCD) Issued in exchange for a deposit of funds. It is a marketable deposit liability of the issuer, who usually stands ready to sell new NCD on demand. The deposit is maintained in the bank until maturity at which time the holder receives the deposit plus interest. Marketable securities which it can be sold in the open market before maturity. 3. Commercial Paper (CP) A short-term, unsecured promissory note issued by large, well-known and financially strong corporations. Usually sold at a discount. It is weak in the market and most of it held to maturity. It is rated by rating services as quality. 4. Eurodollars Dollar-denominated deposits held in foreign banks located abroad. Originally developed in Europe . It consists of both time deposits and NCDs. 5. Repurchase Agreement (RPs) An agreement between a borrower and a lender to sell and repurchase the securities . The borrower initiates an RP by contracting to sell securities to a lender and agreeing to repurchase these securities at a pre-specified price on a stated date. The effective interest rate is given by the difference between the purchase price and the sale price. 6. Bankers Acceptance (BA) A time draft drawn on a bank by a customer, where by the bank agrees to pay a particular amount at a specified future date.

 It is negotiable instruments because the holder can sell them at discount in the money market. Normally used in international trade. It is traded in a discount basis. 1.3.2 Capital Market It can defined as the market for long-term securities such as bonds and stocks. It encompasses instruments with maturities greater than one year. Risk is generally much higher than in the money market because of the time to maturity and the nature of the instruments. It includes both debts and equity instruments with equity instruments having no maturity date. 1.4 Issuance of Security Equity Purpose is to raise funds from the public. 1.4.1 Reasons For Going Public i. Raising Funds To expand their business either locally or overseas. Companies are able to tap funds from public for business expansion. ii. Higher Profile Generally a listed company carries a higher corporate profile in the business world than an unlisted company. Reasons: It has met the stringent requirements of the KLSE. It has the financial ability to raise funds for larger projects from the public. It has managed by a team of forward-looking professionals who work closely with financial institutions and other professional entities. It always strives to perform better because of its commitment to the investors in terms of dividend payments and share price performance. The publicity of a listed company is generated by stock broking companies.

iii. Future Expansion Business opportunities are usually generated by interested parties; local or overseas, who are interested to do business with them. iv. Professionalism Injection of fresh blood into the company. New management skill is produced . Accounting system will be updated to meet the exchanges requirement. 1.4.2 Methods or Types of Share Issues a) Initial Public Offers (IPO) IPO is the offer of shares by company to the public through the KLSE. The new shares are issued to the public at a pre-determined price. When a firm sells its shares to the public for the first time, this is termed the initial public offering. This is one of the ways an existing firm can raise additional funds for expansion plans, working capital or repayment of borrowings and hire-purchase. Besides raising funds, initial public offerings may also serve other purposes such as to provide opportunities to the public to invest in the company, to comply with the requirement of Bumiputera equity participation as required in the National Development Policy, to enable the company to gain recognition and enhance its stature and corporate reputation from the listing on the stock exchange, etc. In an initial public offering, a copy of the prospectus must be registered with the Securities Commission and a copy of the prospectus together with the form of application must be odged with the Registrar of Companies. b) Offer For sale It is block of shares belonging to existing shareholders will be offered for sale to

public. The price will be pre-determined and will be underwritten. Intending investors will be subscribe for the issue via application form. c) Special issues A listed company gives a special issue of shares at a price which is lower than the market price e.g to Bumiputra to fulfill the 30% Bumiputra equity participation. d) Private Placements New securities issues are being sold directly to a group of large institutional investors e.g life insurance companies, pension funds and investment companies by passing the open market. Buyers are pre-determined. e. Rights Issues It is an issue of new shares to the companys existing shareholders. f. Bonus Issues Giving a bonus issue to reward the shareholders. g. Restricted Issue It is an issue of new shares to shareholders within a group of companies. h. Issues of shares for acquisitions, takeovers and mergers. Issuing new shares in exchange for the assets or issued capital. i.Issue of shares arising from conversion. The increase of shares by conversion of debt equities, warrants, transferable subscription rights etc. to ordinary shares. j. Employee Share Option Scheme. Gives the employees the option to subscribe a certain number of shares in the company within a specified time period.

1.5 The Primary Markets and secondary markets

1.5.1 Primary Market A primary market is a market that deals in new securities. For example, a company issuing shares for the first time would sell the shares in the primary market. Definition The market for new issues of securities, typically involving investment bankers. In the case of issuer is selling securities for the first time ; referred as initial public offerings (IPO). IPO shares of a company being sold for the first time. New securities may trade repeatedly in the secondary market, but the original issuers will be unaffected. Investment Bankers Firms specializing in the sale of new securities to the public, typically by underwriting the issue. Underwriting The process by which investment bankers purchase an issue of securities from an issuer and resell it to the investors. The investment bankers own the securities until they are resold. Investment bankers bear risk in the underwriting stage. Investment bankers can protect themselves by forming a syndicate or a group of investment bankers to diversify their risk. Syndicate Several investment bankers involved in an underwriting. 1.5.2 Secondary market A secondary market is a market that deals in the sale and purchase of existing securities. Definition The market for trading of existing securities. It provides the place for investors to trade securities among themselves. It exist for trading of common and preferred shares , warrants, bonds, options etc. 1.6 Fixed Income Securities The buyer of a bond knows the future stream of payments to be received from the buying and holding of the bond maturity. Bonds are fixed income securities. The interest payments and principal repayment are specified at the time the security is issued and fixed for the life of the bond. A bond certificate is an evidence that a company has borrowed a fixed amount of money from a lender with a promise to repay the principal amount at maturity and pay periodic interest on the principal.

Types Of Bonds:1. Corporate BondsIssued to raise funds for investment, expansion of business, new businesses etc.Various types of corporate bonds :- i. Debentures - Unsecured bonds. ii. Subordinated bonds - Same as debenture but in the event of default, subordinated bondholders have a claim on the assets of the company only after it has satisfied the claims of all senior secured bond and debenture holders. iii. Income Bonds - Usually offer higher returns to compensate investors for the added risk of uncertainty in interest payments of the issuer. iv. Convertible Bonds - It gives the bondholder the option to convert the bonds into the issuers common stock. v. Zero Coupon Bond - It promises no interest payments during the life of the bond but only the payment of the principal at maturity. vi. Junk Bonds - High risk and high yield bonds. - Issued in connection with mergers , companies with heavy debts to repay and stock buybacks by corporations. vii. Mortgage Bonds - Issued with a firstmortgage lien on some or all of the issuers properties. 2. Municipal Bonds - Issued by states, cities and other political entities e.g airport authorities. 3. Eurobonds- Bonds are underwritten by international bond syndicates and sold in several national markets. E.g Eurodollar bonds (Securities denominated in US dollars, underwritten by an international syndicate and sold to non-US investors outside the US. 1.7 Unit Trust Basically a unit trust is an investment scheme that pools funds from individual investors and invests these funds in a range of securities or assets depending on the financial objectives, investment strategy and risk tolerance of the particular type of fund. These managed investment companies establish the fund and handle the marketing, record keeping and administration of the funds. Generally, unit trust is considered attractive because it enables small investors with limited funds, limited financial knowledge and time constraints to invest in a wide array of financial products such as stocks, bonds,

government securities etc. By pooling the funds from a large number of small investors, the investment companies provide a mechanism for these investors to enjoy the benefits of flexibility and diversification of large-scale investing. The unit holders are investors who have claims on the portfolio established by the investment company. The proportion of claims depends on the number of shares purchased in the investment company. The return to unit holders would be in the form of dividends and capital appreciation derived from the portfolio in the fund. It is an open-end investment company. An investment company whose capitalization constantly changes as new shares are sold and outstanding shares are redeemed. A unit trust is formed by a sponsor (e.g a financial institution) purchases a specified set of securities, deposits them with a trustee (a bank or trust company) and receives in turn a number of shares representing proportional interest in those securities. The sponsor then sells the unit trusts to the investors. All income received from the portfolio is paid out by the trustee to shareholders. The sponsor will be compensated for the effort and risk involved by setting a selling price for the shares. Most unit trusts redeem shares at net asset value (NAV) by calculating the total market value of the securities in the portfolio subtracting any trade payables and dividing by the number of mutual fund shares currently outstanding. If NAV> market price The fund is selling at a discount. IF NAV<>