Lecture 12

Investment Planning
 What is an investment?
• “Make our money work for us”
• It is a commitment of funds to one or more
assets that will be held over some future
time period, in the hope that it will
generate more income.
• Could be tangible, i.e., real estates or
intangible, i.e., securities.
 Types of Investments
• Equities - Stocks or ordinary share
• Unit trusts – including
• Futures and Options
• Bonds
• Hybrid Investments
• Real Estate
 Stocks and Shares
• When you buy stocks and shares, you
own part of the company and have the
right to vote at general meetings.
• Each share is a small stake in a company
and you can buy a large number of lots.
• As a shareholder you can benefit from the
profits earned by the company in the form
of dividends, and also from the growth in
the value of the company
 Why do companies issue shares?
• The company benefits by raising funds to
operate and expand its business without
having to borrow the money from other
sources such as banks.
 Risks in buying shares
• Shares may fall in value due to company’s
performance as well as the economic
condition
• Thus it is important to know what the
company is doing, how well the business
is, its financial strength, price-earning ratio
and dividend yield, earning growth
prospect and competitive edge
 Types of Share Issues
• Bonus issues
– Issue of new ordinary shares at no cost to the
existing shareholders but out of the
company’s reserves and given in direct
proportion to the number of shares owned.
– Used to enlarge the capital base of the
company and may also be used as a means
of rewarding its existing shareholders.
– Ex-date, Cum-dividend, cum-rights and cum-
bonus
 Types of Share Issues
• Rights Issues
– Gives the existing shareholders the right to
subscribe for new ordinary shares at an issue
price lower than the prevailing market price
and at a ratio equivalent to their existing
shareholding.
– Companies carry out a rights issue when they
want to raise additional funds to finance their
capital requirement.
 Unit Trusts
• An investment scheme that pools money
from many investors who share the same
financial objectives.
• The fund issues units to investors who are
known as unit holders
 Managing Unit Trust Fund
• The fund is managed by a group of
professional managers or unit trust
company who will invest the pooled money
in a portfolio of securities such as shares,
bonds and money market instruments
 Income earned by unit trust
• The unit trust earns its income from its
varied investments in the form of
dividends, interest income and capital
gains.
• Income is distributed to the unit holders in
proportion to the units they hold, in the
form of dividends or bonus units.
 Types of Unit Trusts
• Income funds
• Capital growth funds
• Aggressive growth funds
• Balanced funds
• Index funds
• Money market funds
• Islamic funds
• State funds
 Advantages of Unit Trusts
• Ready affordability
• Instant diversification
• Liquidity
• Continuous professional management
• Reduced stress
• Access to broader array of financial assets
 Disadvantages of Unit Trusts
• Subject to market risks
• Not suitable for short-term investment
• No custom-made service
• Hidden costs involved
– Initial service charge
– Repurchase fee
– Management fee
– Trustee fee
– Brokerage fee
 Futures and Options
• Basic derivative instruments whose values
are dependent on the value of an
underlying assets such as common
stocks, bonds, indices, currencies or
commodities
 Forward Contract
• An agreement to buy or sell an asset at an
agreed price and specified date

Futures Contract
• Similar to forward contract but traded on an
exchange (MDEX)
• Main purpose is not to buy or sell the physical
goods but to manage the risk of price changes
for hedgers and for speculators, to profit from
the changes
 Options
• Give the buyer/holder of the option the
right, but not the obligation, to buy or sell a
specified assets at a specified price, at or
before the specified date from the seller,
for which the buyer pays a premium.
• Options that give the buyer the right to buy
are Call Options.
• Options that give the buyer the right to sell
are Put Options.
 Warrant
• Also knows as Transferable subscription
rights (TSR) which gives the holders the
right but not the obligation, to subscribe for
new ordinary shares at a pre-determined
exercise price within a stipulated validity
time frame
 Bonds
• IOU, a debt instrument issued by a
borrower
• Basic characteristics:
– A maturity date or identifiable term
– A fixed rate of interest payment (coupon)
– A fixed face value redeemable on maturity
• Always referred to as fixed income
securities
 Who Sell Bonds?
• Government bonds
– Malaysian Treasury Bills (MTB)
– Bank Negara Bills (BNB)
– Malaysian Government Securities (MSG)
– Government Investment Certificates (GIC)
• Private or corporate bonds
– Debt instruments issued by corporations
 Who Buys Bonds?
• Mainly institutional investors
• Retail or individual investors can invest in
bond funds.
 Why invest in Bonds?

1. Less risky than shares

2. More returns than fixed deposits

Popular with investors for two reasons:

1. Stability of income flow

2. Opportunities of capital gains
 How risky are bonds?
• Credit risk
– The risk that the issuer will default
– Thus bonds are rated
– Less risky if issued by government
• Interest rate risk
– Inverse effect on bonds if bondholder sells
before maturity
How do bonds rate with shares?
Advantages Disadvantages
• Investor receives periodic • Bondholders get fixed
fixed or variable interest income even though the
income, irrespective company may be making
whether company is more profit
doing or not. • No voting rights
• Bondholders have the
right over ordinary
shareholders on the
distribution of earnings in
the event of bankruptcy.
 How are bonds traded?
• When the issuer first offers new issues,
that first trading is done at the primary
market, i.e., the issuer is able to raise for
its own use and the money raised from the
sale of bonds come directly to the issuer.
• Subsequently, bonds can be bought and
sold at the secondary market.
• Trading of bonds in the secondary market
creates a market pricing for the bonds.
 Pricing of bonds
• When market price of bond is less than its
par value, the bond is considered as being
sold at a discount.
• When the market price of bond is more
than its par value, the bond is considered
as being sold at a premium.
 Different types of bonds
• Bonds are classified according to:
– Maturity terms, such as short-term, medium-
term or long-term.
– Issuer, i.e., government bonds, corporate
bonds or private debt securities, quasi-
government bonds, i.e., Cagamas bonds and
Islamic private debt securities or Islamic
bonds.
 Government Bonds
• Government Investment Issues (GII)
• Malaysian Government Securities (MGS)
 Corporate Bonds
• Straight bonds • Mortgage bonds
• Convertible bonds • Islamic bonds
• Bonds with • Secured and
warrants unsecured bonds
• Floating rate bonds • Guaranteed bonds
• Zero coupon bonds
 Common terms associated with
bonds
• Nominal value • Type of issuer
• Coupon rate • Yield
• Term-to-maturity • Call provision
• Trust deed • Sinking fund
• Trustee