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CAPITAL MARKET (EQUITY & BOND MARKET) - Coggle Diagram
CAPITAL MARKET (EQUITY & BOND MARKET)
EQUITY MARKET
Trade long-term securities
Corporations can raise funds by:
Issuing new stocks and shares (initial public offerings)
Trade shares in secondary market
Trading in Bursa Malaysia, under supervision of Securities Commission.
HISTORY:
1870s
Informal share broking activities
1964
Formation of Stock Exchange of Malaysia (SEM)
1969
Trading volume had risen to 600 million shares
CAPITAL MARKET DEVELOPMENT
1986
Launched of KLSE Composite Index (KLSE CI) – main market indicator
SECURITIES COMMISSION (SC)
Regulatory institution in equity market
Self-funding, set up in March 1993 under Securities Commission Act 1993
Objectives:
Rationalize and streamline legislation and regulatory framework of the Malaysian capital market
Promote and maintain fair, secure, efficient and transparent securities and future markets
Functions:
Advise MOF relating to securities and futures contract
Approve corporate bonds issues
INDEXES / AVERAGES
Indexes – current price behavior of a representative group of stocks in relation to a base
value set at an earlier point of time.
Averages – arithmetic average price behavior of a representative group of stocks at a
given point of time.
Purposes of indexes and averages:
Measure performance of stock market (bullish / bearish)
Forecast future market behavior of a particular stock market
Examples:
Dow Jones Industrial Average
Index of 30 large public companies based in US
Nikkei Index
index for Tokyo stock Exchange (TSE)
BURSA MALAYSIA COMPOSITE INDEX
100 stocks listed in Bursa Malaysia main board
Criteria of the stocks:
Companies give substantial contribution to Malaysia’s economy
Large market capitalization
Newly listed companies must be traded at least 3 months
BROKERAGE FIRMS
Intermediaries between investors and operations of exchanges.
Example: investment bank
TYPES OF MARKET
PRIMARY MARKET
Process of IPO is also known as “going public” or “flotation”
Issuer of the stocks will receive cash proceeds from the new issues.
Advisor of IPO: investment bank (intermediary)
Advice on the type of securities to be offered, features, pricing, timing of issuance.
SECONDARY MARKET
Market for previously issued securities
Issuer does not receive any cash proceed. It goes to current owner.
EQUITY MARKET INSTITUTIONS
BURSA MALAYSIA BERHAD
COMMON STOCK
Issued by companies to raise funds through IPOs.
Represents OWNERSHIP of a company that issue stock.
Common stockholders:
Part of the company
Has right to vote
Has right on the earnings and assets of the company
Opposite of common stock = preferred stock
No right to vote
The holders receive fixed dividend from the company
ADVANTAGES OF
COMMON STOCK
High returns
Liquidity – highly liquid (easy to buy and sell)
DISADVANTAGES OF
COMMON STOCK
Fluctuation of prices
Lower current income (dividend)
TYPES OF COMMON STOCK
Growth stocks
Income stocks
Blue-chips stocks
RISKS OF INVESTING IN STOCK MARKET
Business risk
Financial risk
FACTORS AFFECTING STOCK PRICES
Economic factor
BOND MARKET
Use to raise funds
Issuer of the bond promises to pay PERIODIC INTEREST + PRINCIPAL (at maturity)
History
Highly dominated by Malaysian Government Securities (MGS) in 1987 – almost
98%
After privatization program in mid 1980s, the composition of bond market changed:Less on MGS
Issuers of bonds:
Malaysia government
BNM
Quasi government institutions
Corporations
Multilateral development banks (MDBs)
FEATURES OF BOND
Maturity
Coupon rate – rate that determine periodical payment (fixed) until
maturity
Indenture – legal agreement between issuer and investor
Bondholders will not receive any incremental income
REGULATORY AUTHORITIES IN BOND
MARKET
BNM
All issuance of bonds need to be approved first by BNM (under BAFIA
1989)
For private debt securities (PDS), approval is by SC from 1st July 2000.
Securities Commission (SC)
Encourage development of securities market
Curb any improper dealings
TYPES OF BOND INSTRUMENTS
Malaysian Government Securities
Malaysian Treasury Bills (MTBs)
Government Investment Issues (GII)
Bank Negara Monetary Notes-i (BNMN-i)
BNM Bills (BNB)
PARTICIPANTS IN BOND MARKET
BNM
Financial institutions
Provident pension funds
Corporations
Investment banks
BOND RATINGS
Perform by rating agencies (RAM – Rating Agency of Malaysia & MARC– Malaysian Rating Corporation) or S&Ps, Moodys
Objectives:
Provide information about bond issuer
Create awareness on creditworthiness among the bond investors