CHAPTER 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 P0 Q 0 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…