Greetings and

Assalamualaikum
Wrh. Wbt.
 Securities
Market/Transactions
 Bursa Malaysia
 Formerly known as Kuala Lumpur Stock
Exchange.
 Historical development:
 1930 - Singapore Stockbrokers’ Association – the
first formal organisation in the securities business
in Malaysia.
 1937 - Re-registered as Malayan Stockbrokers’
Association, but still no public trading of shares.
 1960 - Malayan Stock Exchange formed and
public trading of shares began on 9 May.
 Bursa Malaysia (Cont’d)
 1964 - Stock Exchange of Malaysia formed.
 1965 - With the secession of Singapore from
Malaysia, the common stock exchange continued
to function but as the Stock Exchange of Malaysia
and Singapore (SEMS).
 1973 - SEMS was separated into The Kuala
Lumpur Stock Exchange Bhd (KLSEB) and The
Stock Exchange of Singapore (SES).
 1973 - The Kuala Lumpur Stock Exchange (KLSE)
took over operations of KLSEB as the stock
exchange.
 Bursa Malaysia (Cont’d)
 1994 - Re-named to Kuala Lumpur Stock
Exchange.
 2004 - Kuala Lumpur Stock Exchange became a
demutualised exchange and was re-named Bursa
Malaysia.
 Demutualisation of Bursa Malaysia
 Objective:
 Legal Perspective - conversion of KLSE from a
non-profit ‘mutual’ entity limited by the
guarantee of its members, into a public
company limited by shares.

 Business Strategy Perspective - an enabler for

the KLSE Group to further enhance its
corporate, organisational, and governance
structures to respond to the challenges of a
globalising and increasingly competitive capital
market.
Demutualisation of Bursa Malaysia
(Cont’d)
 Demutualisation of Bursa Malaysia
(Cont’d)

 Benefits of Demutualisation
 Can be realised by four classes of
beneficiaries:
 The Government, Economy, and Capital Market
 The Issuers and Investors
 The Intermediaries – Stockbrokers and Remisers
 The Exchange
 Demutualisation of Bursa Malaysia
(Cont’d)

 Effects on Conversion
 Effects on KLSE upon demutualisation.
 Effects on Members
 Continuing Obligations
 Bursa Malaysia Derivatives Bhd
 Operates under the supervision of the Securities
Commission and is governed by the Futures
Industry Act (FIA) 1993.
 The Exchange also falls under the jurisdiction of
the Ministry of Finance of Malaysia.
 Offer investors the security of trading on a
regulated Exchange with similar rules and
regulation as the more established markets
worldwide.
 Mdex

Malaysian Derivatives Exchange.

 Stands for Malaysia Derivatives Exchange Berhad
 Offers both futures and options contracts on a
sound trading platform.
 Offering investors the security of trading on a
regulated exchange
 Provide safe and effective risk management tools
to both the commodity and financial communities
 Mesdaq
 Malaysian Exchange of Securities Dealing &
Automated Quotation
 It was launched on 6th October 1997.
 It is a separate market mostly for technology
based companies listing.
 It is part of Bursa Malaysia.
 Securities Commission
 Is a self-funding statutory body with investigative
and enforcement powers.
 Established on 1 March 1993 under the Securities
Commission Act 1993
 It reports to the Minister of Finance and its
accounts are tabled in Parliament annually.
 Some regulatory functions include:
 regulating all matters relating to unit trust
schemes.
 approving authority for corporate bond issues.
 Securities Commission (Cont’d)
 Regulating all matters relating to securities and
futures contracts.
 Regulating the take-over and mergers of
companies.
 Investment Program

 A program/plan on investment.
 What to invest?
 How much to invest?
 Where to invest?
 When to invest?
 Where to get the money?
 Securities Markets
 Also known as stock exchange.
 A place where stocks, bonds, or other securities
are bought and sold.
 An association of stockbrokers who meet to buy
and sell stocks and bonds according to fixed
regulations.
 Example: Bursa Malaysia, NYSE, etc
 Can be classified into money markets and capital
markets.
 Securities Markets (Cont’d)
 Money markets : Market in which short-term
securities are bought and sold.
 Capital market : Market in which long-term
securities are bought and sold ( stocks, bonds)
 Capital market can be further classified into
primary market and secondary market.
 Securities Markets (Cont’d)
 Primary Market – Market in which new issues of
securities are sold to the public.
 It allows company or government to raise initial
capital.
 Can be done usually by issuing a prospectus
through an underwriting stock broking company.
 The purchaser of the shares would become the
initial owners.
 There are four methods of raising new equity
capital:
 Securities Markets (Cont’d)
 Initial Public Offering – Usually done by a
privately owned company, which wants to
change its status to public company.
 Public Offering – Share are offered for sale to
the public.
 Private placement – Sale of new securities
directly to selected groups of investors such as
institutional investors.
 Right offering – Shares are offered for sale to
existing shareholders. Number of shares offered
is determined by the percentage of the
shareholder’s existing ownership.
 Securities Markets (Cont’d)
 Secondary market – Market in which securities
are sold and bought after the issuing company
has issued them.
 Also called an aftermarket.
 Secondary market will provide liquidity to the
sellers.
 Also provides a mechanism for continuous pricing
of securities, which reflects the securities value at
each point in time.
 Secondary market includes organized securities
exchange and over–the-counter.
 Securities Markets (Cont’d)
Organized Securities Market
 Is a centralized institution in which the forces of
supply and demand for securities already
outstanding are bought and sold.
 Securities traded in this market are called listed
securities.
 It acts as a medium for fund raising and
investing.
 Securities Transaction

 Investor buy securities in anticipation that price

will increase in the future.
 The share at the higher price and profit is made.
 The possibility of long purchases is, price may
never rise in the future and may incurred loss.
 Long Purchase

 It happens when investor buys securities with a

hope that will increase in the future.
 When the price increase investor will sell the at a
higher price.
 The profit made are known as capital gain.
 In case of the price did not increase investor will
incur loss.
 Short Selling

 The practice of selling securities that is not owned

by the investor at the time and then replacing it
later by buying the security at a lower price.
 A short seller is making a bet that the price of the
stock will go down.
 Therefore, he sells it today at a higher price, then
buys it tomorrow at a lower price.
 Short Selling (Cont’d)
 Pros
 The chance to profit from a price decline.
 Cons
 Investor faces limited return opportunity.
 High risk exposure.
 Never earn dividend income.
Uses
 To seek speculative profits when they expect the
price of a security to drop.
 Subject to a considerable amount of risk.
 Margin Trading
Definition
 Margin: amount of equity in an investment or
amount that is not borrowed.
 The used of borrowed funds to purchase securities.
 Magnify returns by reducing the amount of equity
that the investor must up.

Margin Requirements:
 Initial Margin
 Maintenance Margin
 Margin Trading (Cont’d)

Initial Margin
 The min amount of equity that must be provided
by the investor at the time of purchase.
 Prevents overtrading and excessive speculation.
 Margin acc  initial requirements, the investor
may use the acc.
 Value of investor’s holding , margin in his acc .
 Restriction acc – equity < initial margin requirement.
 Not permitted to make any more margin purchases.
 Margin Trading (Cont’d)
Maintenance Margin
 Min amount of equity that an investor must
maintain in the acc at all times.
 Insufficient amount – receive margin call.
 Bring the equity back to the initial margin level.
 Fails – broker would be authorized to sell the investor’s
margin holding.
 Protects the:
 Brokers house: avoid having to absorb excessive
investor losses.
 Investor: avoid being wiped out.
 Margin Trading (Cont’d)
 Return on invested capital
 Formula: pg 23 manual.

 Pros
 Magnified returns.
 Allows for greater diversification of security
holdings.
 Cons
 Potential of magnified loss.
 Cost of margin loans.
 Margin Trading (Cont’d)
Basic Margin Formula
 Measured in terms of its relative amount of
equity.
 2 pieces of info:
 Prevailing market value of the securities being margin.
 Debit balance – amount of money being borrowed in a
margin loan.
 Formula:
Margin = Value of Securities (V) - Debit balance (D)
Value of Securities (V)
 Price of stocks (), investor’s margin ().
 Margin Trading (Cont’d)
Pyramiding
 Uses the paper profits in margin acc to partly or
fully finance the acquisition of additional
securities.
 Buy securities with no cash at all.
 Paper profits in the acc leads to
 Excess margin – more equity than is required in margin
acc.
Principle
 Use the excess margin in the acc to purchase
additional securities.
 Margin acc  required initial margin level.
 OSK Securities
History
 A stock broking company.
 1963 – 1st commenced under name of OSK &
Partners.
 1973 – Became a private unlimited company.
 1981 – Achieve the status of a private limited
company.
 1996 - To better reflect its corporate image and
expanded activities, underwent a name change to
OSK Securities Berhad.
 OSK Securities (Cont’d)
Regulatory functions include:
 Supervising exchanges, clearing houses and
central depositories;
 Registering authority for prospectuses of
corporations other than unlisted recreational
clubs;
 Approving authority for corporate bond issues;
 Regulating all matters relating to securities and
futures contracts;
 Regulating the take-over and mergers of
companies;
 Regulating all matters relating to unit trust
schemes;
 OSK Securities (Cont’d)

 Licensing and supervising all licensed persons;

 Encouraging self-regulation; and
 Ensuring proper conduct of market institutions
and licensed persons.
Ultimate Responsibility:
 Protect the investor
 Obliged by statute to encourage and promote the
development of the securities and futures
markets in Malaysia.
 OSK Securities (Cont’d)

Mission:
 To promote and maintain fair, efficient, secure
and transparent securities and futures markets
and to facilitate the orderly development of an
innovative and competitive capital market.
 Market Average

 Measurement of the overall price level of a given

market, as defined by a specified group of stocks
or other securities.
 Market Price

 Also known as market value.

 The price as determined by buyers and sellers in
an open market.
 Securities Firm

 Brokerage firm
 Firms, federal, state and local government that
issues any investment instrument.
 Indicates a creditor relationship between them.
 E.g. Mayban Securities Sdn Bhd, OSK Securities
Sdn Bhd, KLCS Sdn Bhd.
 Trading Account

 Traditionally thought to hold only stocks.

 Hold cash, foreign cash, securities and a number
types of investments.
 CDS Account

 Central Depository System (CDS) Account.

 Account where shares are kept. It is opened with
MCD Sdn. Bhd.
 One who does not have trading account cannot
buy & sell stocks because it is linked with MCD
Sdn. Bhd.
 Secondary Market

 Market in which securities are traded after they

have been issued.
 Investors buy securities from other investors
instead of an issuing company.
 Give security purchases liquidity.
 Trading System

Trade
Definition Confirmation

Order
Matching Order Entry
Confirmation
 Definitions
 Opening Price. The first traded price for each
trading session of the day.
 Closing Price. The previous trading day's last
done price.
 Reference Price means one of the following:
 the closing price, or
 if for two (2) consecutive sessions of one (1) trading
day no trading has been done for a particular
securities, the reference price for that securities can be
one of the following :
 the limit buy price at market close, if it is greater than the
last reference price, or
 the limit sell price at market close, if it is less than the last
reference price, or
 the reference price of ex-entitlement securities, shall be as
determined by the Exchange
 Definitions (Cont’d)
 Best Buy Price - The highest non-matchable
buy order price after the last match.
 Best Sell Price - The lowest non-matchable sell
order price after the last match.
 For securities being traded for a trading session
with reference price of below RM1.00;
 UPPER LIMIT PRICE - the highest price such a
securities can be traded, shall be 60 bids equivalent to
30 cents rounded to the lower bid.
 For securities being traded for a trading session
with reference price of above RM1.00;
 UPPER LIMIT PRICE shall be 30% higher than the
reference price.
 Definitions (Cont’d)
 Display Prices consist of:
 the last done price after the completion of a
series of matching for each stock,
 the best buy price or prices, and
 the best sell price or prices.
 Dealer WinSCORE Workstations are the
WinSCORE system's trading terminals located at
the stockbroking companies.
 Purpose of order entry, reduction and cancellation.
 To view order status and also monitor Bursa Malaysia's
stock market information on a real time basis.
 Matching
 Trading Time
 Is done from 9.00 am to 12.30 PM for the morning
session and from 2.30 PM to 5.00 PM for the afternoon
session.
 Matching Priority
 Is by price preference and time preference. Market
orders have priority over limit orders. For limit orders,
preference is given to the highest buy orders and lowest
sell orders. When buy/sell orders are quoted at the
same price, preference is given to the earliest buy/sell
order, i.e. first in, first matched.
 Matching Interval
 Is the elapse time between two (2) matches. Bursa
Malaysia reserves the right to set the interval between
one second and 99 seconds and each stock may have
different matching intervals from the other.
 Matching (Cont’d)
 Call Market System
Bursa Malaysia uses the call market system to
determine the matching price. The trading rules
are as follows:
 The match price of a stock is the price at which the most
number of shares can be executed.
 Where there is more than one price at which the most
number of shares can be executed, the price closest to
the last traded price shall be the matching price.
 All buy orders quoted above the matching price and sell
orders quoted below the matching price are executed at
the matching price.
 Order Confirmation
 Direct Order Entry
 Orders received from clients are entered directly into the
Dealer Trading Workstation by the respective dealers.
The orders will be checked to make sure that they do
not exceed the client, dealer and the stockbroking
company trading limits. It will only be accepted if they
are within the limits set by the respective stockbroking
companies in the WinSCORE system.
 Order Confirmation
 Once the orders are accepted by the system, they will
automatically be time-stamped by the system and
confirmed as accepted via an order status on-line screen
on the respective dealer's WinSCORE workstation. The
dealer can also choose to have the order confirmation
printed out on a printer.
 Order Confirmation (Cont’d)
 Order Queue
Simultaneously, these orders will get into the order queue
waiting to be matched.
 Order Entry (Cont’d)
 Direct Order Entry by Dealers
 Orders are entered directly by dealers into
WinSCORE workstations at the stockbroking
companies.
 Order Entry Time
 Orders may be entered between 8.30 am and
12.30 pm for the morning session and 2.00 PM
and 5.00 PM for the afternoon session, i.e. half
an hour before the actual trading sessions
begin.
 Orders entered for each trading session are
good for that trading session only. Unexecuted
orders at the end of a trading session must be
re-entered into the system for execution.
 Order Entry (Cont’d)
 Order Entry Sequence
 8.30am to 9.00am and from 2.00pm to
2.30pm - randomised.
 Will decide on the sequence in the order queue
based on a randomised algorithm for all orders
input during the period.
 9.00am and 2.30pm - first come, first served
basis.
 Cancellation of Orders
 Cancelled or reduced - not been fully executed,
i.e. cancellation or reduction can be made only
to the unexecuted quantity of the order.
 Order Entry
 Quantity and Value Limit Per Order
The SCORE trading system located at Bursa
Malaysia limits each order to a maximum of 500
lots of a particular stock. However, each
stockbroking house can further reduce the limit
per order by lots and/or by value per order. For
example, a stockbroker can set the limit per
order to 200 lots and/or RM500,000.
 Upper and Lower Limit
All orders must be entered within a certain price
range, called the upper limit price and lower limit
price. Similar to the quantity limit per order, each
stockbroking company can narrow the range of
the upper and lower limits.
 Order Entry (Cont’d)

 Limit and Market Orders

There are two (2) categories of orders that an
investor can place:
 Limit Order - to be executed at the entered
price or better,
 Market Order - to be executed at any price
within the upper and lower limit price.
 Trade Confirmation
 Once an order is matched, the information is immediately
relayed to the stockbroking company's office electronically.
The information can be viewed on the order status on-line
screen on the respective dealer's WinSCORE workstation.
Similar to the order confirmation, the dealer can choose to
have the trade confirmation printed out.
 Trading Hours
 Trading takes place five days a week (Monday-
Friday), except on public holidays and other
market holidays (when the Exchange is declared
closed by the Bursa Malaysia Committee).
 There are two (2) trading sessions on any market
day:

 Morning Session: 9.00 a.m. - 12.30 p.m.

 Afternoon Session: 2.30 p.m. - 5.00 p.m.

 Investor Protection

 In the interest of protecting investors, the

Compensation Fund of Bursa Malaysia Securities
Berhad was established pursuant to the Securities
Industry Act 1983 (SIA) and is applied for the
purpose of compensating persons suffering
monetary loss under certain circumstances.
 Stockbroker

 An agent that charges a fee or commission for

executing buy and sell orders submitted by an
investor.
 Broker Services

 Buy and sell orders submitted by an investor.

 Give advice and analysis on the market and the
current economy.
 Full Services Broker

 Provide a large variety of services to its client.

 Commission charged are much higher than those
of discount broker.
 Premium Discount Broker

 Broker who charges low commissions to make

transactions for customers but provides limited
free research information and investment advice.
 Basic Discount Broker

 Typically a deep-discount broker through which

investors can execute trades electronically online
via a commercial service, or by phone.

 Also called online brokers or electronic brokers.

Investment Objective

Why
to invest?
 Personal Loan

 Ordinary loan not housing loan, education loan,

car loan…
 Bank Islam Malaysia Bhd (BIMB)
 It differs from conventional bank.
 Under Syariah BIMB functions as:
 Investor
 Entrepreneur
 Guarantors
 Services
 BIMB fund sources:
 Current a/c
 Savings a/c
 Investment a/c
 Bank Islam Malaysia Bhd (BIMB)
(Cont’d)
 Consumer’s Funding:
 Al-Murabahah
 Al-Bai Bithaman Ajil
 Al-Istisna’
 Al-Baiti
 Qard Al-Hassan
 Al-Ijarah
 Al-Musyarakah
 Al-Mudharabah
INVESTMENT
VEHICLES
 Common Stock

 Represents equity ownership in a corporation,

providing voting rights, and entitling the holder to
a share of the company's success through
dividends and capital appreciation.
 In the event of liquidation, common stockholders
have rights to a company's assets only after
bondholders, other debt holders, and preferred
stockholders have been satisfied.
 Unit Trust

 An SEC-registered investment company which

purchases a fixed, unmanaged portfolio of
income-producing securities and then sells shares
in the trust to investors.
 The major difference between a Unit Trust and a
mutual fund is that a mutual fund is actively
managed, while a unit investment trust is not
managed at all.
 Options

 The rights but not the obligation, to buy (for a

call option) or sell (for a put option) a specific
amount of a given stock, commodity, currency,
index or debt at the specified price (the strike
price) during a specified period of time.
 For stock option, the amount is usually 100
shares.
 Warrants

 A certificate, usually issued along with a bond or

preferred stock, entitling the holder to buy a
specific amount of securities at a specific price.
 Usually the price is above the current market
price at the time of issuance, for an extended
period, anywhere from a few years and forever.
 Derivatives

 A financial instrument whose characteristics and

value depend upon the characteristics and value
of an underlier, typically a commodity, bond,
equity or currency.
 Bond
 A debt instrument issued for a period of more
than one year with the purpose of raising capital
by borrowing.
 The Federal government, states, cities,
corporations, and many other types of institutions
sell bonds.
 Generally, a bond is a promise to repay the
principal along with interest (coupons) on a
specified date (maturity).
 Saving Account

 A deposit account at a bank or savings and loan

which pays interest, but cannot be withdrawn by
check writing.
Investment
Information
 Daily Newspaper
 Publication issued periodically, usually daily or
weekly, to convey information and opinions about
current events.
 It covers local stock market movement, price of
each share of previous day, stock market
movement of other counties, daily stock
summary report and daily summary report of
stock indices.
 The Star, The Edge, News Straits Times and
Berita Harian
 Online Investing
 Purchase of a financial product or other item with
an expectation of favorable future events through
internet that offered by some website.
 Investment education site – tutorials, online
classes and articles to educate the novice
investor. Experienced investor can expand their
knowledge here in this website.
 Investor Online Resource Centre
(www.investingonline.org)
 Investor Guide.com (www.investorguide.com)
 Investopedia (www.investopedia.com)
 Bursa Malaysia (www.bursamalaysia.com)
 Online Investing (Cont’d)
Investment tools
 Develop financial plans and set investment goals, find
securities that meet your objectives, analyze potential
investments, and organize your portfolio.
 Are free online.
 Financial calculators and worksheets, screening and
charting tools, and stock quotes and portfolio trackers
at general financial sites and the at the Web sites of
larger brokerage firms.
 Set up a personal calendar
 Notifies you of forthcoming announcements
 Receive alerts when one of stocks hit predetermine price
target.
 Online Investing (Cont’d)
 Planning
 Online calculators and worksheets – financial planning
and investing questions.
 Figure out how much to save each month for a
particular goal.
 Interactive of tools and calculators available for use in
investment planning, retirement, estate planning,
college, tax and annuity, and life insurance.
 One of the best sites for financial calculators is
FinanCenter.com (www.financenter.com).
 Includes 140 calculators for financial planning, retirement,
insurance, auto and home buying, and investing.
 Online Investing (Cont’d)
 Screening
 Quickly sort through huge databases of stocks, bonds
and mutual funds to find those that have specific
characteristic.
 Stocks – specify low or high price/earnings ratios, small
market value, high dividend return, specific revenue
growth, and/or a low debt-to-equity ratio,
 Bonds – specify a given industry, maturity date, or yield.
 Mutual funds – specify low minimum investment, a
particular industry or geographical sector, and low fees.
 Use different method to sort.
 Answer a series of questions  the type of stock or
fund, performance criteria, cost parameters, and so on.
 Then you can do more research on the stocks, bond, or
mutual funds that meet your requirement.
 Online Investing (Cont’d)
 Charting
 Technique that plots the performance of stocks over a
specified time period, from months to decades and
beyond.
 Going online – see charts for a selected stock in just
second, compare one company’s price performance to
that of other stocks, industries, sectors, or market
indices, choosing the type of chart, time frame and
indicators.
 Barchart.com (www.barchart.com), Bigcharts.com
(bigcharts.marketwatch.com), and Stock Charts
(www.stockcharts.com).
 Investment Website

 Website that contains information about

investment. Where to invest, how to invest and
how many to invest.
 It can help investors to make investment
decision.
 E.g. http://www.investorguide.com/
 Analytical Report

 Report which have been prepared to make sure a

company prepare its Financial Statement
regulating the standards provided by FRS.
 Institutional News

 The monthly economic letters of the nation

leading banks.
 Business Periodical

 Vary in scope.
 General business and economic articles, others
cover securities market and related topics, and
still others focus solely on specific industries
 Present descriptive information, and some also
include analytical information
 Rarely offer recommendation.
 Stockholders Reports

 A report published yearly by a publicly held

corporation, contains a wide range of information,
including financial statements for the most recent
period of operation.
 Market indicators

 A variety of indices that give an indication of the

overall direction and strength market.
Investment Return

and Risk
 Return
 Reward or level of profit from an investment.
 Two terms of returns:
 Realised return – based on past data
 Expected return – what investors would expect or
anticipate to earn over some future period.
 Frequently expressed in %age.
 Investment in stocks  stock yield
 Current dividend
Stock price
 Investment in bonds  compounded rate of
return on the purchase price of the bonds over its
life yield to maturity.
 Return (Cont’d)
 Comprised of 2 components:
 Current income – periodic payment from dividends or
interest or rent or real estates etc.
 Current income=Dividend/interest x 100%
Purchase Price
 Capital gain/(loss) – gain/(loss) in price from selling an
investment vehicle at a price higher/(lower) than the
original purchase price at the beginning of a period.
 Capital gain/(loss)=price at the end-purchase price x 100%
purchase price
 Both the current income and capital gain/loss
would result in a total income.
 Measuring Return
 Two factors that affect the level of return:
 Internal characteristics
 External forces

 Internal Characteristics
 Examples of internal characteristics include:
1. Types of investment vehicle.
2. Quality of management.
3. Customer base of the issuer.
 Measuring Return (Cont’d)
 External forces
 This is beyond the control of the issuer of the
investment vehicle.
 Examples include war, price, control,
inflation/deflation, Bank Negara’s actions and
political events.
 Measuring Return (Cont’d)
 Measures used to compare alternatives
investment vehicles are:
1. Required Returns
i. Is the return that fully compensates for an
investment risk.
ii. Formula:

Required return = Real Rate + Expected + Risk

of return inflation premium
premium for inv.
 Real rate of return = rate of return that could be
earned in a perfect world.
 Measuring Return (Cont’d)
 Expected inflation
premium is the
average rate of
inflation expected in
the future.
 Risk-free rate
 rate of return that can
be earned on a risk-free
investment vehicle such
as government bond.
  of the real rate of
return + the expected
inflation premium.
 Risk-free rate of return
+ expected inflation
premium, which varies
depending on the
specific issue and issuer
characteristics, =
required rate of return.
 Issue characteristic –
type of investment
vehicles, maturity and
its feature.
 Issuer characteristic –
industry and company
factors.
 Measuring Return (Cont’d)
2. Holding Period Return
i. Measure of return that captures both the
periodic benefits and changes in value.
ii. Defined as the total return earned from
holding an investment for a specified period
if time.

Current Capital gain or

Income during + Loss during period
period
HPR = ________________________________________
Beginning Investment Value
 Measuring Return (Cont’d)
3. Yield (Internal Rate of Return)
i. Present value based measure, used to determine
the compounded annual rate of return earned on
investments held for longer than 1 year.
ii. The discount rate that produces a present value of
benefits just equal to its cost.
iii. Should be accepted if the yield on the investment 
the required return.
 Importance:
 Key variable in the investment decision-making.
 Comparisons between actual and expected gains.
 Historical performance – formulating expectations about
its future.
 Expected return – decision based on expected returns.
 Time Value of Money

 The fact that as long as an opportunity exists to

earn interest, the value of money is affected by
the point in time when the money is received.
 Low Yielding

 The annual compound rate of return earn by a

long term investment.
 The discount rate that produce a present value of
the investment benefit that just equal its cost.
 The investment should be accepted if the yield on
the investment is  the required return.
 Risk
 The chance that the actual return from an
investment may differ from what is expected.
 Associated with a given investment  related to
its expected return.
 The relationship between risk and return is called
risk-return tradeoff.
 What is risk-return tradeoff?
 The relationship between risk and return, in which
investments with more risk should provide higher
returns, and vice versa.
 positive relationship:  risk  return,  risk  return.
 Component of risk
 According to modern investment theory, risks
consists of two components:
 Unsystematic (Diversifiable) Risk
 Defined as the risk that is unique to that
particular investment. It is also known as Non-
market risk.
 Example include business risk, financial risk and
liquidity risk.
 This risk is due to uncontrollable or random
events such as labor strikes, lawsuits or
regulatory action.
 Component of risk (Cont’d)
 The portion of this risk can be eliminated or
reduced by holding securities with different
level of risk.
 Systematic Risk
 This is the portion of the risk where investors
will have to bear and cannot escape no matter
how well he or she diversifies his/her
investments.
 The risk is due to war, inflation, charges in
political events, changes in market interest
rates, etc.
 Sources of risk
 Business Risk
 The degree of uncertainty associated with an
investment’s earnings and the investment’s ability to
pay the returns owed the investor.
 Financial Risk
 Related to the use of debt financing by a company.
  debt financing, > the company unable to pay interest,
 risk.
 Purchasing power risk
 The chance that ∆ price levels (inflation & deflation) will
adversely affect investment returns.
 Sources of risk (Cont’d)
 Interest rate risk
 The risk where price changes as a result from changes
in the interest rate.
 Price of securities  with  interest rate, vice versa.
 Liquidity risk
 The risk of not being able to liquidate an investment
conveniently and without losing substantially.
 Market risk
 Is the variability in return as a result of the changes in
the market as a whole.
 Reflected in the price volatility of a security.
  volatility,  risk.
 Sources of risk (Cont’d)
 Tax risk
 Is the chance that unfavorable changes in the tax laws
would reduce the after tax returns and market values of
the investment vehicle.
 Event risk
 Risk that comes from an unexpected event that has a
significant and usually immediate effect on the
underlying value of an investment.
 Currency exchanges risk
 The variability of returns caused by currency
fluctuations.
 Measuring Risk

Standard Coefficient
of Variation of Variation

Beta
 Standard Deviation (S)

 A absolute measure of risk which is based on

historical data.
 measure the dispersion (variation) of return
around an asset’s average or expected return.
 > the S,  risk.

 Formula:
 S=(D-D‾)2P, or
 S=[nj=1(rj-r‾)2]

(n-1)
Standard Deviation (S) (Cont’d)
 Coefficient of Variation (CV)

 A relative measure of risk

 measure the relative dispersion of an assets
return.
 comparing the risk of asset with differing
average or expected return.
 Formula:
 V= Standard of Deviation
Average or
Expected Return
Coefficient of Variation (CV)
(Cont’d)
 Beta
 Measures of a stock’s systematic/market risk.
 Indicates how the price of a security responds to
market forces.
  the beta = prices of securities > responsive to
the changes in the market,  the risk.
 Formula:
 Kj = krf + B (km – krf)
 For a overall market is RM1.00/=
 +ve: stocks return in the = direction as the gen market
 -ve: stocks return moves in the opposite direction.
 0: no systematic risk
 Assessing Risk
 Based on the relationship of risk to the expected return
and the investor’s own disposition towards risk.
 Relationship between risk and return
 Risk have linear relationship with returns.
  risk,  return.
 Alternative Investment Strategies
Common stock can be used as:
 Storehouse of value
 Safety of principle – most important criteria.
 More quality-conscious and tend to gravitate non-
speculative shares.
 Accumulation of shares
 Important goals in long term investment.
 Use the capital gain/dividends to build up their wealth,
use growth stocks, income shares.
 A source of income
 Depends on dividends
 High yielding, good quality income shares are preferred
investment.
 Investment
Strategies

CURRENT
BUY-AND-HOLD INCOME

AGGRESSIVE SPECULATION QUALITY

STOCK AND SHORT LONG-TERM
MANAGEMENT TERM TRADING GROWTH
 Buy-and-hold
 Most basic of all  Often used to finance
investment strategies. future retirement
plans.
 To place money in a
secure investment and
 Regularly add fresh
capital to their
watch it grow over portfolios.
time.  Reinvest in additional
 Investor selects high shares with dividends
quality stocks with a received.
good current income  Choose a good stocks
and capital gains. and invest on a
 Hold it for extended regular basis for long
period. periods of time
 Aggressive Stock Management
 Also uses quality issues but seeks attractive rates
of returns through a fully managed portfolio.
 Investor aggressively trade in and out of stocks to
achieve returns, primarily from capital gains.
 Investment vehicles – blue chips, growth stocks,
tech stocks more aggressive, investor consider
small capital stocks.
 Similar to quality long-term growth involves more
trading and investment horizon is much shorter.
 Speculation And Short-term Trading
 The objective is capital gain in short-term.
 Focus more on speculative or small-capital stocks
and tech stocks but not to use foreign shares or
common stocks.
 Market psychology is more important than
industry and company information.
 High risk, transaction yield little or no profit, or
substantial losses.
 Requires -
 considerable knowledge and time.
 Psychological and fun fortitude to withstand the stock of
fin losses.
 Quality Long-term Growth
 Seeks capital gains as the primary source of
return.
 Involve more market risks.
 Usually use diversification.
 Reason use the approach – long term
accumulation of capital.
 Also considers dividend income as a source of
return.
 Seek long term returns from dividend income and
capital gains
 Portfolio – income stocks and growth stocks.
 Current Income
 Strategies – safety of principal and stability of
income.
 2nd importance – capital gain.
 A way of earning high returns.
 For those who try to supplement their income.
 E.g. common stock – high levels of current
income not for high dividend yields but dividend
levels tends to increase over time.
Ordinary Shares

Investment
 COMMON
STOCK

DIVIDEND BLUE CHIP

STOCK

ORD SHARE
INVESTMENT

INVESTMENT CYCLICAL
STRATEGIES STOCK

INCOME
STOCK
 Blue Chip Stock

 A very high quality investment

 Shares of large companies that have a history of
strong earnings growth and dividend payments
 Cyclical Stock

 Stock that is strongly affected by changes in

economic activity
 Such as automobiles industry.
 Income Stock

 A stock that pays a relatively high dividend

 A firm having stable earnings and dividends and
operating in a mature industry
 Investment Strategies

 A knowledge and understanding of the effects of

a changing economic environment and life cycle
 Dividend

 A share of a company’s net profit distributed by

the company to a class of its stockholders.
 Common Stock

 Securities representing equity ownership in a

corporation, providing voting rights, and entitling
the holder to a share of the company's success
through dividends and capital appreciation.
Investment

Analysis
 Economic Analysis
The Global Economy
 Top down analysis starts with the global
economy.
 Might affect a firm’s
 Export prospect
 Price competition it faces from competitors or
 The profits it makes on investments abroad.
 National economic environment
 Determinants of industry performance.
 Presents political risk of far greater magnitude.
 Exchange rate.
 Protectionism and trade policy, free flow of capital and the
status of nation’s work force.
Top Down Approach

Global Economy

Economic Analysis

Industry
Analysis

Company
Analysis
 Economic Analysis
Definition
 A study of general economic conditions that is
used in the valuation of common stock.
 Help investors gain insight into the underlying
condition of the economy and the potential impact
it might have on the behaviour of share prices.
 Include a detailed examination of each sector of the
economy, or it may be done on very informal way.
 Purpose:
 To establish a sound foundation for the valuation of
common stock.
 Economic Analysis (Cont’d)
Economic Analysis and the Business Cycle
 The first step in the top-down approach and sets
tone for the entire security analysis process.
 Business analysis - an indication of the current
economy, reflecting changes in total economic
activity over time.
 Measurement for business cycle:
 Gross Domestic Product (GDP) – the market value of all
goods and services produced in a country over a period
of a year.
 Industrial product – is a measure of the activity/output
in the industrial or productive segment of the economy.
 Move up and down with business.
 Economic Analysis (Cont’d)

 Peak – transition or change from the end of an expansion to the

start of a contraction.
 Trough – occurs at the bottom of recession just as the economy
enters a recovery.
 Contraction or recession – downturn from peak economic activity.
 Expansionary or recovery – upturn of economic activity between a
trough and a peak during real GDP .
 Economic Analysis (Cont’d)
Key Economic Factor
 Financial and market decisions – individuals and
households to business firms to government.
 Impact on the direction of economic activity.
 Government fiscal policy
 Taxes -  T,  Yd,  Inv,  Eco
 Government spending -  G,  Yd,  Inv,  Eco
 Debt management
 Monetary policy
 Money supply
 Interest rate
 Economic Analysis (Cont’d)
 Other factors
 Inflation (purchasing power)
 Consumer spending
 Business investments
 Foreign trade
 Most important of these are
 Industrial production
 Corporate profits
 Retail sales
 Personal income
 Unemployment rate
 Inflation
 Economic Analysis (Cont’d)
Keeping Track of the
Economy  Gross Domestic Product
 Industrial Production
 A brief description of
 The index of leading
some key economic indicators
measures.  Personal income
 Compiled by various  Retail sales
government agencies  Money supply
and widely reported in  Consumer prices
the financial media.  Producer prices
 Important economic  Employment
measures and reports  Housing starts
to watch:  Refer pg 292 Gitman
 Economic Analysis (Cont’d)
 Indexes a.k.a. indicators – a technical
measurement used to forecast the market’s
direction.
 Coincident indicators
 Leading and lagging indicators.
Coincident Indicators
 Indicators that are supposed to move directly
with the business cycle.
Leading and Lagging Indicators
 Indicators that are supposed to lead and lag
behind business cycle.
 Economic Analysis (Cont’d)
Developing an Economic Outlook
 Study fiscal and monetary policy, inflationary
expectations, consumer and business spending,
and the state of the business cycle.
 Done in fairly informal basis.
 Form economic judgment, many rely on
 Popular published sources e.g. Business Week, Smart
Investor etc.
 Periodic reports from major brokerage house.
 Provide convenient summary of economic activity and
give investors a general feel for the condition of the
economy.
 Economic Analysis (Cont’d)
 Once developed, can use the information in one
of two ways.
 Construct economic outlook and consider where it leads
in terms of possible areas for further analysis.
 To use information about the economy is to consider
specific industries or company and ask, “How will they
be effected by expected developments in the economy?”
Assessing the Potential Impact on Share Price
 Investor would 1st want to assess the current
state of the business cycle.
 Formulate some expectations about the future of
the economy and business equipment stocks in
particular.
 Economic Analysis (Cont’d)
Market as the Leading Indicator
 Vital to clarify a bit of the relationship that
normally exists between the stock market and
the economy.
 Changes in stock prices normally occur before the
actual forecasted changes become apparent in
the economy itself.
 Current trend of stock prices - used to help to
predict the course of the economy itself.
 More important to
 Derive a reliable economic outlook.
 Be sensitive to underlying economic changes that may
mean the current outlook is becoming outdated.
 Economic Analysis (Cont’d)
 Investors look into the future to justify the
purchase or sale of stock.
 Perception in the future is changing, stock price also
changing.
 Watch the course of stock price and general economy
for more accurate investment forecasting.
 INVESTMENT
ANALYSIS

TECHNICAL RATIO
ANALYSIS ANALYSIS

OTHER
GOVERNMENT INDUSTRY
ECONOMIC
POLICIES ANALYSIS
FACTOR
 Technical Analysis
 The used of specified published market data for
the analysis of both the stock market as a whole
and individual market.
 An analysis based on market action through
technical indicator.
 Such as chart study and trends.
 Industry Analysis

 The study of the industry within which a

particular firm operates and the outlook for that
industry.
 Ratio Analysis

 Study of the relationships of financial variables.

 Comparison with all firms in the same industry.
 A Challenge to Efficient Market
Hypothesis (EMH)
Introduction
 Influential force in financial market.
 Assets prices fully reflect all available information
is supported by large body of academic research.
 Supporters include John Bogle of Vanguard.
 Helped pioneer development of a special type of mutual
fund as an index fund.
 Managers don’t try to pick individual stocks or bonds
because they assume market is efficient.
 Time and energy will increase funds expenses.
 Will drag down investors’ return.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
 Academic studies have doubts that the EMH is as
“true” as originally believed.
 Documents various anomalies-deviations from
accepted rules-in stock returns.
 Emotions and other subjective factors play role in
investment decisions.
 Has resulted in a significant body research  behavioral
finance.
 Author of these studies a.k.a. behaviorist.
 Professional money managers incorporate
concepts from behavioral finance into their
construction and management of portfolios.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
Investor Behavior and Security Price
 Investors’ decision are affected by a number of
beliefs and preferences.
 Resulting biases will cause investors
 to overreact to certain types of financial information,
 underreact to others.
 Behavioral factors:
1. Overconfidence
a. Underestimates the level of risk.
b. Financial analyst and money managers make
predictions that are bold, giving investors false sense
of security.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
c. Make biggest mistake by trade to much and therefore
leads to large transaction cost that will erode
investment returns.
2. Biased Self-Attribution
a. Take credit for success and blame others for own
failures.
b. Distorts reality and can lead to faulty investment
decisions.
3. Loss Aversion
4. Representativeness
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
5. Narrow Framing
a. Analyze a situation in isolation, while ignoring the
larger context.
b. Tendency to analyze the attractiveness of a particular
stocks without considering the effect on existing
portfolio.
6. Belief Perseverance
a. Ignore information that conflicts with their existing
beliefs.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
Behavioral Finance at Work in the Markets
 Will discuss how behavioral finance can affect
stock return predictability, investor behavior and
analyst behavior.
1. Stock Return Predictability
a. Can be measured by looking at the correlation of stock
returns in a given period with those in a later period.
b. Evidence of -ve correlation over 3- to 5- year periods,
profitable to buy stocks that performed poorly in the
past, their values likely to rise.
c. Evidence of momentum in stock returns over 6- to 12-
month time horizons.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
d. Evidence of predictability can be gleaned from a
comparison of growth and value stocks.
i. Growth stock =  price-earnings and price-book ratio
whereas value stock =  ratios.
ii. Value stocks tend to outperformed growth stocks, and
behaviorist suggest that the latter performed poorly due
to investors’ excessive optimism about their future
prospects.
2. Investor Behavior
a. Make decision based on emotion rather than
understanding economic fundamentals, their actions
increase the risk of investing even for professionals.
b. Arbitrage – the ability to exploit any errors in security
errors.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
3. Analyst Behavior
a. Much info used by investors is generated via financial
analysts,  how behavioral finance can bias analysts’
forecasts of stock prices and earnings.
b. Idea of “herding” behavior by analysts, as they
collectively tend to issue similar recommendations or
earnings forecasts for stocks.
Implications for Security Analysis
 Fundamental analysis involves forecast stock
dividends and earning growth rates as well as
P/E ratios
 Avoid excessive optimism.
 Rework analysis with more conservative forecast and
recognized the potential error in our forecast.
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
 Stock valuation using multiples such as P/E ratio
involves comparing the multiple for a given stock
with the average multiple for a group of stocks
(comparable firms or comparables).
 Average price multiple for a small number of
firms may be practically meaningless.
 To define the comparables more broadly.
 Technical analysis uses the methods we discussed
earlier.
 Behavioral finance may indicate which method to use.
 If believe in momentum in stock returns, moving
averages might be used to generate buy & sell signals.
 Overreaction – rely on relative strength index (RSI).
 A Challenge to Efficient Market
Hypothesis (EMH) (Cont’d)
Your Behavior as an Investor:
It Does Matter
 Important: choose the
asset allocation that is
right for you, based on
your investment time
horizon, level of risk
tolerance, and other
relevant factors.
 ANY
QUESTIONS?
 Presented by:
Khairul Helmy bin Zainal
Ahmad Ikmal bin Husnin

Animated by:
Ahmad Ikmal bin Husnin

Prepared by:
Ahmad Ikmal bin Husnin
Burhanuddin bin Abdul Rahim
Khairul Helmy bin Zainal
Muhammad Faizal bin Md Jamil
Mohammad Izhar bin Abdul Kifli
Wan Aliff Huzairiq bin Wan Hisham

Prepared for:
En. Azrul bin Abdullah

Course:
MAF 380 – Investment Analysis