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TOPIC 6
CAPITAL MARKET: EQUITY
BASIC CONCEPT OF CAPITAL
MARKET
The market for trading long-term instruments
(those that mature in more than one year).
Also used in a more general context to refer to
the market for stocks, bonds, derivatives and
other investments.
To serve the public and private sectors need for
financing requirements
DIFFERENCES BETWEEN EQUITY
AND DEBT MARKETS
What Does Equity Market Mean?
The market in which shares are issued and traded,
either through exchanges or over-the-counter
markets.
Also known as the stock market, it is one of the most
vital areas of a market economy because it gives
companies access to capital and investors a slice of
ownership in a company with the potential to realize
gains based on its future performance.
DIFFERENCES BETWEEN EQUITY
AND DEBT MARKETS
This market can be split into two main sectors:
the primary and secondary market. The primary
market is where new issues are first offered. Any
subsequent trading takes place in the secondary
market.
DIFFERENCES BETWEEN EQUITY
AND DEBT MARKETS
What Does Bond/Debt Market
Mean?
The market for trading debt instruments.
The debt market is any market situation where
trading debt instruments take place.
Examples
of debt instruments include mortgages,
promissory notes, bonds, and Certificates of Deposit.
DIFFERENCES BETWEEN EQUITY
AND DEBT MARKETS
The bond market (also known as the debt,
credit, or fixed income market) is a
financial market where participants buy and sell
debt securities, usually in the form of bonds.
Nearly all of the bonds trading takes place
between broker-dealers and large institutions in
a decentralized, over-the-counter (OTC) market.
However, a small number of bonds, primarily
corporate, are listed on exchanges.
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DIFFERENCES BETWEEN EQUITY
AND DEBT MARKETS
Other than definition
Return?
Risk?
EQUITY MARKET INSTRUMENTS:
SHARE/STOCK
Investing in shares of stock
Represents
ownership
a share of stock is a financial security issued to raise
long-term capital for business growth and expansion
The company may issue up to the amount of its
authorized capital
Main classes of shares are ordinary and preference
shares
Companies are said to be going public when their
shares are listed and quoted on the stock exchange
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INVESTING IN SHARES
Reasons why investors invest in shares:
Income
from dividends
Distribution of profits
Depend on dividend policies
Capital
gain from the appreciation of share value
Capital gain is the difference between the purchase price
and the selling price
buy low, sell high
What about if the price keeps going down???
ORDINARY SHARES
Ordinary shares
Owners
of the company, shareholders, also known
as equity capital or equities
Par value (in Malaysia) normally RM1 or RM0.50
The value assigned to a unit of share when it is authorized,
and is much less that its expected market value
Where to get the market value of a share?
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ORDINARY SHARES
Privileges
1.
and legal rights of ordinary shares:
Voting privileges
Statutory voting
Allows using all votes based on the total shares for each of the
vacancies for the board of directors
Cumulative voting
Increases the number of votes that a shareholder can use for
a particular candidate, could be apportioned in any way
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ORDINARY SHARES
Right to information
2.
Reports, audited financial statement, minutes of the
meetings of the board of directors, examine the list of
shareholders
Pre-emptive rights
3.
It is the right of existing shareholders to purchase shares
of a new issue of the company before they are offered to
the public, so that existing shareholders can maintain
proportionate ownership of the company
Issues subscription rights ( no. of shares and price)
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ORDINARY SHARES
Rights to dividends
Limited liability
4.
5.
Limits the liability of shareholders to the capital they own
in the company
Residual claim
6.
In the case of liquidation
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PREFERENCE SHARES
Typically do not carry voting rights
Entitled to receive dividend before payment is
made to ordinary shareholders
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PREFERENCE SHARES
Rights attached to preference shares:
Before
a dividend can be declared on the ordinary
shares, any dividend obligation to the preference
shares must first be satisfied
The dividend rights are often cumulative
Preference shares may or may not have a fixed
liquidation value or par value
Have a claim on liquidation proceeds in the event of a
company failure
Have a negotiated fixed dividend amount, either
specified as a percentage of par value or as a fixed
amount
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PREFERENCE SHARES
Types of preference shares:
Cumulative
preference shares
Should there be any shortage of the dividend payment, the
arrears are carried forward
Non-cumulative
No rights of dividends in arrears
Participating
preference shares
Will be redeemed later by the company
Convertible
preference shares
In addition to the stated preferential yearly dividend, the
holders possess the right to participate in any further profits
after the ordinary shareholders have received their dividends
Redeemable
preference shares
preference shares
Allow the holders to exchange for a pre-determined number of
the companys ordinary shares
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PREFERENCE SHARES
Unlike interest on debt financing, preference
dividends are not tax deductible
Issuance of preference shares can actually avoid
the threat of bankruptcy that exists with debt
financing
Unlike
interest, unpaid preference dividends are not
the liability of the company and unlike debt holders,
preference shareholders cannot force a company into
liquidation because of unpaid dividends
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TYPES OF STOCKS
1.
2.
3.
4.
5.
6.
7.
Blue chip priced high, low volatility, steady stream of dividends, safe
investment, little room to appreciate because they are so large
Penny low-priced, speculative, very risky, normally issued by
companies with a short and erratic history of revenues and earnings,
popular among small speculators
Income pay higher than average dividends, paid by large and
established companies with stable earnings such as utilities and
telephone companies
Value currently selling at a low price, companies that have good
earnings and growth potential but their stock prices do not reflect it
Defensive prices stay stable when the markets declines, issued by
industries that naturally do well during recessions, e.g. food and utilities
companies
Cyclical move up or down with the business cycle. E.g. housing
industry
Treasury a type of stock that has been bought back by the company
that issued it, may be because the price is underpriced, set aside for
future uses
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PRIMARY MARKET
The new issue market, the market for issuing
new securities
public issue, going public or floatation on
the stock exchange
When we say that a company is doing an IPO
(initial public offering), it means the company is
issuing ordinary shares or shares to the public
for the first time
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PRIMARY MARKET
The stocks can be purchased through brokerage
firms and other parties (some commercial banks
and financial institutions) acting as agents for
investment banks
In IPO, the money flows directly to the company
An IPO is a high risk investment and too
speculative
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PRIMARY MARKET
Why do companies go public?
1.
To obtain more capital to finance growth
2.
To source long-term capital
3.
Can raise additional capital
To allow owners to realize their assets
4.
Fast growing companies
Opens to a wider pool of investors
Often perceived as financially stronger and may enjoy better
credit rating, enabling to borrow at a favorable interest rates
Floatation allows existing shareholders to release some of
their equities as well as raise new capital
To make the shares more marketable
Increase liquidity
The market value can be easily determined
Shares can be used as collateral for loans
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PRIMARY MARKET
5.
To enable payment of managers by stock options
6.
To facilitate growth by acquisition
7.
May encourage foreign investment in the company
To establish good corporate governance practices
10.
Gives an aura of financial respectability, which may encourage new
business contracts
To act as a catalyst for the participation of foreign
partners
9.
Easy to offer own shares for the purpose of acquisition
To enhance the companys image
8.
Incentives to improve performance
Management is accountable to shareholders who ensure that the
company operates in an appropriate manner
To boost employee pride
Make the employees aware of the companys reputation and encourage
them to enhance it
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PRIMARY MARKET
Listing methods
Public
offering
Offering the share capital for sale to the public
Private
placement
A private offering made to a limited number of persons
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PRIMARY MARKET
Public offer for sale
Selling
the shares to the public
A large issue will probably take the form of an offer for
sale during the first time issuance (when companies go
public)
Shares can be offered to the public either at a fixed price
(an agreed price between the company and the lead
investment bank) or by tender (invitation to submit
chosen offer)
Normally all new issues will be sold through an investment bank
Prospectus
For the tender, after all tenders are received, they will be ranked
from the highest downwards and a striking price is established.
The striking price is the price of the last tender which just
clears the issue.
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PRIMARY MARKET
Private placement
Shares
are offered to clients or other contacts of the
investment bank leading the issue, rather than to
general public
Advantage: the costs of advertising and producing
documentation are reduced
Disadvantage:
Shares being held by a smaller number of more powerful
investors
The discount on the issue is greater than with public offer
(the difference between the price at which the shares are
first sold and the price at which they are subsequently
traded in the market)
Refer
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PRIMARY MARKET
The cost of an IPO
Extremely
expensive the costs engaging
underwriters, attorneys, accountants, printing
prospectus, listing fee
The most expensive cost is underwriters discount
Underwriters help determine the price of offering, draft
prospectus, find potential investors
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PRIMARY MARKET
Rights issue
A
company wishing to issue additional new shares
A rights issue is an issue of new shares where
existing shareholders have pre-emptive rights to
subscribe for the shares before other investors
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SECONDARY MARKET
After a share has been sold through the primary
market, the subsequent trading will take place in
the secondary market.
Trading among investors
Shows liquidity of stocks investment
Much larger and much more active than the
primary market
Where the price discovery occurs and liquidity is
created
No additional funds to the company
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STOCK EXCHANGES
A stock exchange is a corporation which provides
a place and facilities for the trading of shares,
unit trusts and other investment products.
On the stock exchange, investors are represented
by brokers
Provide facilities for the issuance and redemption
of securities and act as the clearing house for
each transaction
Eliminate
the default risk
Provide real-time trading information on the
listed securities facilitate price discovery
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STOCK EXCHANGES
Two types of stock exchange:
Physically
located and transactions are executed on a
trading floor using a method known as open outcry
where brokers and traders may submit verbal bids
and offers simultaneously (NYSE)
A virtual kind where it is equipped with network of
computers where trades are conducted electronically
through the actions of traders
Stock market is often considered the primary
indicator of a countrys economic strength and
development
Listing requirements (refer to Bursa Malaysias
website)
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Theamountisinvestedorcontributedbytheinvestors
andthentheyarecollectivelysoldandpurchasedby
neworexistinginvestorsthroughvariousmeanssuch
asbrokersofstockmarket/companiesetc.,thus
directlyorindirectlygivingbirthorusingtheSTOCK
MARKET(ShareMarket).
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What is Stock Market?
A stock market or equity market is a public
entity
for
the
trading
of
company
stock
(shares) and derivatives at an agreed price;
these are securities listed on a stock exchange
as well as those only traded privately.
Function and purpose:
The stock market is one of the most important
sources for companies to raise money. This
allows businesses to be publicly traded, or
raise additional capital for expansion by selling
shares of ownership of the company in a public
market.
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STOCK EXCHANGES
Bursa Malaysia
The
only stock exchange approved by the Minister of Finance
under the provisions of the Securities Industry Act 1983
The public trading started in 1960 under the name of
Malayan Stock Exchange (MSE)
1963 - known as Stock Exchange of Malaysia (SEM)
1965 - became the Stock Exchange of Malaysia and Singapore
(SEMS)
1973 - SEMS split into the Kuala Lumpur Stock Exchange
Berhad (KLSEB) and Stock Exchange of Singapore (SES)
1976 - Kuala Lumpur Stock Exchange (KLSE) took over the
operation of KLSEB
Jan 2004 KLSE became a public company limited by shares
April 2004 changed its name to Bursa Malaysia
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STOCK EXCHANGES
Bursa Malaysia
In
the 1960s, started with only Main Board as the board for
company listing
1988 the establishment of Second Board
For smaller firms that do not meet the requirement of the main
board
August
2009 combines Main Board and Second Board into
a single market known as main market
October 1997 the Malaysian Exchange of Securities
Dealing and Automated Quotation (MESDAQ) was launched
Intended as an avenue for small and medium enterprises in
technology related areas to raise capital
August 2009 changed its name to ACE (Access, Certainty, and
Efficiency)
Provides lower listing requirements and open to companies of all
sectors
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STOCK EXCHANGES
Over-the-counter market
Is
a network of dealers who buy and sell the stocks of
companies that are not listed on the stock exchange
Example: NASDAQ
Reason: unable to meet stock exchange listing
requirements
Stock of listed companies can be traded on the OTC
market
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TRADING PROCESS
Buying and selling of shares are done through
brokerage houses that are members of the stock
exchange
A
stockbroker
A licensed individual registered with the securities
commission
An instruction given to broker to buy or sell is
actually giving an order
Types of orders
1.
2.
3.
Market order
Limit order
Stop loss order
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TRADING PROCESS
Market order a request to buy or sell shares at
the best price available when the order reaches
the marketplace
Limit order a request to buy or sell shares at a
specified price (the limit) or better
Stop loss order an order to sell a particular
stock at the next available opportunity after the
price of the stock reaches a specified amount. To
prevent further losses.
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TRADING PROCESS
Buying stock on margin
Buying
shares but does not pay the full amount. A
part of the amount is financed through buying on
margin.
Must have a margin account with the broker
Will need to pay interest on the borrowed amount
Investors buy on margin because the financial
leverage provided by borrowing money can increase
the return on investment
But, in a declining market, buying on margin can be
a risky strategy
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TRADING PROCESS
Selling short
A
way for investors to make money in a declining
stock market by borrowing rather than buying stocks
Steps involved:
1.
2.
3.
4.
Borrow shares from a broker
Sell the borrowed shares, assuming the price of similar
shares will drop in a reasonably short period of time
Purchase similar shares at a lower price
Replace the shares borrowed with the purchased shares
How well you can forecast?
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SOME IMPORTANT TERMS RELATING TO
STOCK MARKET
Market Capitalisation:
Marketcapitalizationisthemeasureofcorporate sizeofa
country.Itshowsthecurrentstockprice multipliedbythe
numberofoutstandingshares.It iscommonlyreferredtoas
Marketcap.
Capital Structure:
Capitalstructuremeanstheproportionofdebtandequityusedfor
financingtheoperationsofabusinessoranenterprises.
Thecapitalstructureshouldbesuchwhichincreasesthevalueof
equitysharesormaximizethewealthofshareholder
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CONT
Speculation:
Speculation is the practice of engaging in risky financial transactions in an
attempttoprofitfromshortormediumtermfluctuationsinthemarketvalueof
atradablegood.
Speculationcaninprincipleinvolveanytradablegoodorfinancialinstrument.
Speculators:
Manyspeculatorspaylittleattentiontothefundamentalvalueof
asecurityandinsteadfocuspurelyonpricemovements.
FourkindsofspeculatorsoperateinBursaMalaysia.Theyare
knownas:
Bull
Bear
Stagand
Lameduck
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Bull:
ABullisanoperatorwhoishopefulofpriceriseinthenear
future.Inanticipationofpricerisehemakespurchasesofshares
andothersecuritieswiththeintentionofsellingthemathigher
pricesinfuture.
Hebeingaspeculatorhasnointentionoftakingdeliveryof
securitiesbutdealsonlyindifferenceofprices.
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Bear:
Abeardoesnothavesecuritiesatpresentbutsellsthem
athigherpricesinanticipationthathewillsupplythem
businesspurchasingatlowerpricesinthefuture.
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Stag:
Astagisthattypeof
speculatorwhotreadshispath
verycarefully.Heappliesfor
sharesinnewcompaniesand
expectstosellthemata
premiumifhegetsan
allotment.Heselectsthose
companieswhosesharesare
mostindemandandarelikely
tocarryapremium.Hesells
thesharesbeforebeingcalled
topaytheallotmentmoney.
LameDuck:
ALameDuckisnothingbutastressedbear.When
abearfindsitdifficulttocompletehispromisehe
islabeledasalameduck.
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STOCK BROKER:
Astockbrokerisaregulatedprofessionalindividual,
usuallyassociatedwithabrokeragefirmorbroker
dealer,whobuysandsellssharesandothersecurities
forbothretailandinstitutionalclients,throughastock
exchangeoroverthecounter,inreturnforafeeor
commission.
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STOCK MARKET INDEXES
Refer to the movement of the prices in a market
or a section of a market
Each of the indexes tracks the performance of a
specific basket of stocks considered to represent
a particular market
Types of stock market indexes:
1.
2.
3.
4.
Broad-base index
Price-weighted index
Market-value weighted or capitalization-weighted
index
Market-share weighted index
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STOCK MARKET INDEXES
1.
Broad-base index
2.
Price-weighted index
3.
represents the performance of a whole stock market and by
proxy reflects investor sentiment on the state of the economy.
Example: KLCI, Hong Kong Hang Seng Index
an index in which each stock influences the index in
proportion to its price per share. Stocks with higher price will
be given more weight and will have greater influence over the
performance of the index. Example: American Dow Jones
Industrial Average
Market-value weighted
A type of index whose individual components are weighted
according to their market capitalization, so that larger
components carry a larger percentage weighting. A relatively
small shift in the price of stock price of a large company will
heavily influence the value of the index.
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STOCK MARKET INDEXES
4.
Market-share weighted index
Price is weighted to the number of shares, rather
than their total value. All outstanding shares are
included.
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PARTICIPANTS IN THE EQUITY
MARKET
In an economic system, there units with excess
funds and units with deficits.
These units will meet in the capital market to
satisfy each other needs. Those who have excess
cash will invest or give loans to those who need
cash.
All these units include households, corporations,
financial institutions, government and foreigners
Besides the units, there are also intermediaries
that act on behalf of the units such as brokers
and investment banks
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MAJOR PARTICIPANTS:
Individual Retail Investors
Institutional investors such as mutual funds, banks,
insurance companies and hedge funds, and also publicly
traded corporations trading in their own shares.
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THE ROLE OF SECURITIES
COMMISSION (SC)
Securities Commission (SC)
Established
1.
2.
3.
4.
5.
on 1 March 1993 under the Securities
Commission Act 1993, the SC is a self-funding statutory
body with investigative and enforcement powers. It reports
to the Minister of Finance and its accounts are tabled in
Parliament annually. The SC's many 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
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THE ROLE OF SECURITIES
COMMISSION (SC)
5.
6.
7.
8.
Regulating all matters relating to unit trust schemes;
Licensing and supervising all licensed persons;
Encouraging self-regulation; and
Ensuring proper conduct of market institutions and
licensed persons.
Underpinning all these functions is the SC's
ultimate responsibility of protecting the investor.
Apart from discharging its regulatory functions,
the SC is also obliged by statute to encourage and
promote the development of the securities and
futures markets in Malaysia.
Website: www.sc.com.my
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ISLAMIC CAPITAL MARKET: EQUITY
Islamic financial framework
Islamic
money market, capital market, forward
market, limited foreign exchange
Instruments and operating procedures are
different
Operates
in an interest-free environment
Different principles
Derived from Shariah (Islamic Law)
Sources are from Holy Quran and Sunnah which
condemn riba-based transactions as sinful
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ISLAMIC CAPITAL MARKET: EQUITY
Islamic financial
markets
Islamic
money
market
Islamic banking
Islamic
deposits
Islamic
financing
Islamic capital
market
Equity
funds
Sukuk
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ISLAMIC CAPITAL MARKET: EQUITY
Basic concept is permissible in Shariah
Key components of Islamic capital market are
Shariah-compliant stocks, Islamic funds and
Islamic investment certificates known as Sukuk
Islamic funds:
>200
mutual funds of various categories Shariah
compliant investment facilities
Operates in Saudi Arabia, the United Arab Emirates,
Bahrain, Kuwait, Qatar, Pakistan, Malaysia, Brunei,
Singapore, Germany, Ireland, UK, US, Canada,
Switzerland and South Africa
Most of Islamic funds are equity funds
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ISLAMIC CAPITAL MARKET: EQUITY
1.
Main categories of Islamic funds:
Equity funds invest in the shares of joint stock
companies and returns are in the form of capital
gains and dividends which are distributed on a
pro rata basis among investors neither the
principal nor a rate of profit can be guaranteed.
What Does Pro-Rata Mean?
Used to describe a proportionate allocation. A
method of assigning an amount to a fraction,
according to its share of the whole.
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ISLAMIC CAPITAL MARKET: EQUITY
1.
Equity funds can be divided into:
Regular income funds
a.
Earn profit through dividends paid by investee companies
Regular income stream
Risk averse investors
Example: CIMB Equity Income Fund, RHB Islamic Equity Fund
Capital gain funds
b.
Earn profit through capital gain from frequent sale and purchase of
Shariah compliant stocks
Better return
Example: AmIslamic Growth Fund
Aggressive funds
c.
Invest in high risk securities to generate abnormal profits
Example: CIMB Aggressive Equity Fund
Balanced funds
d.
Invest in high quality securities with less risk and give the investors a
regular income stream based on div and capital gains
Example: AmIslamic Balanced Fund
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ISLAMIC CAPITAL MARKET: EQUITY
2.
Ijarah funds
3.
Commodity funds
4.
Funds used to purchase different commodities for
the purpose of resale.
Murabaha funds
5.
Such funds are used to purchase assets for the
purpose of leasing. Rentals received are distributed
among subscribers.
closed-end funds, not negotiable in the secondary
market. No tangible assets involved.
Mixed funds
The subscription employed in different type of
investments.
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ISLAMIC CAPITAL MARKET: EQUITY
Equity stocks included in the equity funds need
to be compliant with Shariah guidelines
Decided
by Shariah boards
Some screening criteria:
The capital structure of the investee company must be
predominantly equity based (debt less than 33%)
The investee company is prohibited from investing in
interest-based financial institutions and involve in areas of
gambling, alcohol production etc.
The most widely used Islamic index to measure
Shariah compliant investable equities is the Dow
Jones Islamic Market indexes
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ISLAMIC CAPITAL MARKET: EQUITY
In Malaysia, companies are classified as Shariah
non-compliant securities if they are involved in the
following core activities:
Financial
services based on interest
Gambling and gaming
Manufacture or sale of non-halal products or related
products
Conventional insurance, entertainment activities that
are non-permissible according to shariah
Manufacturing or sale of tobacco-based products or
related products
Stock broking or share trading in Shariah noncompliant securities and other activities deemed nonpermissible according to Shariah
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ISLAMIC CAPITAL MARKET: EQUITY
Islamic equity fund investors
Main
investors are from the Gulf countries
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FSMP AND CMMP
The Financial Sector Master Plan (FSMP) launched in
March 2001 outlines the medium and long-term strategies
for the development of the financial sector. The objective of
the FSMP is to develop a competitive, resilient and
dynamic financial system, based on international best
practices, which would provide an enabling environment
for the long- term economic expansion.
The Capital Market Master Plan was launched in
February 2001 with the objective of setting the strategic
position and future direction for the Malaysian capital
market. There was some progress made in the area of the
consolidating of the stockbroking industry and the stock
exchange, disclosure-based regulation and corporate bond
market development.
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WHY DO THE PRICES OF SHARE INCREASE OR DECREASE IN THE MARKET?
Thereisonemajorfactorthatcausesthemovementof
themarketandthisisBUYER/BUYERS.
Themorebuyersforagivensecurity,thehigherthe
priceofthatsecuritywillgo,iftherearenobuyers,the
priceofthesecuritywilldrop.
Companiescanhavethegreatestproduct/serviceinthe
worldbutifnoonewantstobuy,the
priceofthestockwillgono
whereandifitdoesmoveitwill
movedown.
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