Intro to Equity Market

8/10/2019 Intro to Equity Market

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BNM fstep Prepared by Vergis Mathew 1

Introduction toIntroduction toEquity MarketEquity Market

Presented by

Vergis Mathew

[email protected]



BNM fstep Prepared by Vergis Mathew

2

Today’s RoadmapSession 1

Introduction to Equity Market

/ Stock Exchange

Bursa Malaysia information

World Exchanges

Coffee Break

Session 2

Why seek listing on Bursa?Bursa products

Lunch Break

Session 3

Bursa Rules & Regulations

Tea Break

Session 4

Market Regulators

Q & A




3

EquityEquity

investment

generally refers to the buyingand holding of shares of stock

on a stock market

by individuals and funds in anticipation of income

from dividends

and capital gain

as the value of thestock rises. It also sometimes refers to theacquisition of equity (ownership) participation in a

private (unlisted) company or a startup (acompany being created or newly created). Whenthe investment is in infant companies, it isreferred to as venture capital investing and is

generally understood to be higher risk thaninvestment in listed going-concern situations.

Wikipedia




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What is a Stock Market / Exchange?

A Stock Exchange is an organization that provides a

Private

or Public

marketplace for both physical

or

virtualtrading of shares, bonds, warrants and other

financial

products.

Here investors, directly or via stock broker, may

buy and sell shares etc of companies listed on thatExchange.




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Stock Market –

Functions and purposeRaising capital

for business

Mobilising savings

for investment

Facilitating growth

in CompaniesRedistribution

of wealth

Corporate governance

Create investment opportunities for small

investors

Government

raising capital for development projects

Barometer

of the economy




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Major Stock Exchanges worldwideLondon

Stock Exchange

New York

Stock Exchange

Tokyo

Stock ExchangeShanghai

Stock Exchange

Hong Kong

Stock Exchange [Hang Seng]

Stock Exchange of Singapore

[SES]

Australian

Stock Exchange

Bombay

Stock Exchange

Paris

Stock Exchange

etc, etc




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Malaysian Stock ExchangeKLSE

Main board Second board MESDAQ

What are listing requirements for each?




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Brief history of BURSA Malaysia

1960 Malayan Stock Exchange formed

1964 Stock Exchange of Malaya [SEM] formed

1965 SEM renamed Stock Exchange of Malaysia[SEMS]

1973 SEM separated into KL Stock Exchange and

Stock Exchange of Singapore2002 Mesdaq Exchange merged with KLSE

2004 Demutualised 5 Jan 2004 and renamed BURSA

Malaysia Bhd 14 April 20042005 BURSA listed 1 Mar 2005




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Malaysian Stock Exchange growth

Market valuation of Listed Companies

Year

No of Co’s

Market Valn[Bill]

1998 736

375

2000

798

4442006 1027 849




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Listing advantages

IPO [Initial public offering] is first sale of sharesby a private company to the public. So thecompanies are usually smaller, without long

history seeking capital for expansion. Some will belarge private companies wanting to be publiclytraded. Note: Role of underwriters

Raising fresh capital

for company –

in future rightsissues

Founders

selling out

Access to cheaper

funds An acquistion

vehicle

Stock options

OpportunismReputation




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Listing drawbacks

Increased accountability

and additional obligations

Need to maintain dividend and profit growth

More vulnerable to hostile takeoverHave to observe and ahdere strictly to rules and

regulations

Increased costsRelinquish partial

control

Loss of privacy




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Major products on BURSA

All guided by terms of issue

Ordinary shares –

highest profit, highest lossPreference shares –

interest bearing, priority

Warrants / TSR [Transferable Subscription Rights]

CULS / ICULS

REITS

Closed end fund

Options / Exchange traded funds




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CULS & ICULS

Preference shares

Preference shares are also a form of equity hybrid, which carry a prior right to a

fixed dividend (ordinary shares do not have a right to a fixed dividend). This fixed

dividend is usually expressed as a percentage of the share's nominal value, and ispaid when sufficient profits are earned. Preference shares that also carry the right of

any arrears of preference dividend which has not been paid, is known as cumulative

preference shares. Preference shares that are not entitled to such arrears in

dividends are called non-cumulative preference shares.

CULS can be issued in the form of redeemable (RCULS) or irredeemable (ICULS)

convertible unsecured loan stocks. If the loan stocks are irredeemable, the holder

must convert the ICULS into shares on maturity (normally after four to five years) at

a predetermined conversion ratio and conversion price. If redeemable, then onmaturity the holder can either convert the RCULS into shares or redeem the RCULS

from the issuing company at their par value.

SIDC website




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REITS

REITs are trust funds that hold or invest in rental properties and are

required to distribute most of its profit as dividend to its holders.

REITs could boost and help reduce capital cost.REITs create conditions for building an integrated property business and

attracting foreign capital.

IT could also help develop the broader economy and bring in new players,

citing S-REITs as an example in attracting established property developerslike Capital Land Ltd and Keppel Land Ltd.

The local REITs industry needed consistent improvement in the regulatory

environment and the removal of withholding tax.

extract from The Edge




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Closed end funds

A closed-end fund, sometimes called an investment trust, issues

shares and then uses its capital to buy shares in other

companies.

In contrast, a unit trust issues units that represent holdings ofshares.

A unit trust is open-ended in the sense that its size depends on

its success in selling units, while the number of shares

issued by a closed-end fund are fixed.

Unlike unit trust holders, who are able to sell their units back

to the fund manager, holders of closed-end funds buy and

sell shares to other investors.Like unit trusts, closed-end funds offer investors similar

benefits of diversification and professional management. In

addition to capital growth, investors in closed-end funds are

also paid dividends from investment profits.




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Closed end funds

An open-ended fund doesn’t have a fixed amount of units.

Today it can have 13 million units and tomorrow it can have 10million units, depending on how many people have bought or soldthe funds. The price that you buy or sell an open-ended fundis based on the NAV of the fund, which is calculated daily by thefund companies and is published daily on the newspaper. [NAV =Net Asset Value = how much the fund is worth = the exact price ofthe fund]

A closed-end fund has a fixed amount of units. For example,ICAP has a fixed 140 million

units available. Tomorrow, it will

still be 140 million units no matter how many people sell or buy

it.The bid and ask price do not depend on the NAV butactually depends on supply and demand.

When you buy a Public Mutual fund, you are buying from PublicMutual directly at the NAV + entry fee (6.5%). If you sell, you are

selling to Public Mutual directly at the NAV. You don’t need toworry whether there are buyers or sellers available, Public Mutualwill always buy or sell to you.

Since ICAP only has a fixed 140 million of units, you can only buy froman existing ICAP holders who wants to sell to you. And so the price

is determined by supply and demand.

Extract from iCap website




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Options

Options

are financial instruments that carry the right, but not

the obligation, in a future transaction. For example, buying a

call

option gives the right to buy an agreed quantum of

stock at an agreed price [strike price] at some future date. Aput

option gives the right to sell when the option is

exercised.

•

Exchange traded options

(also called "listed options") are

a class of exchange traded derivatives having standardizedcontracts that are settled through a clearing house.

Standardized contracts facilitate accurate pricing. These

include:

stock options,

commodity options, bond options, interest rate options

index (equity) options, and

options on futures contracts




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BURSA classification

MAIN BOARD

Consumer

Industrial Products

Construction

Trading / Services

Infrastructure

Finance

Technology

Hotels

Properties

PlantationMining

REITS

Close-end Funds

Exchange Traded Funds

SECOND BOARD

Consumer

Industrial Products

ConstructionTrading / Service

Technology

Properties

Plantation

MESDAQ




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Major indices

KL Daily Composite Index

Tracking the KL Composite

Index [Day]

Consumer

Industrial Products

Construction

Trading / Services

Finance

Technology

Properties

Plantation

MiningWhat was yesterdays KLCI

closing index?

Sample price quotation

Turnover

Main Board

Vol & Value

Off Market

Vol & Value

Second BoardVol & Value

Gainers

Losers

Unchanges

Untraded




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KLC Index

Kuala Lumpur Composite Index (KLCI) [as

at 30 November 2007]

Base year

1977

Calculation mode

Weighted by marketcapitalisation

Index

Current aggregate Market

Capitalisation

x 100

Base Aggregate Market Capitalisatio

Note: Largest stocks by market capitalisation

havemost impact




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Computing indices

Method varies

Simple average closing price

Weighted average

BURSA calculates indices on a realtime basis. These

are made available to Stock broking companiesand other real time market information

subscribers




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Rules and Regulations

Listing requirement –

detailed requirements [296

pgs]

Practice notes –

Sec 2.08 of Listing requirements

Application of Listing Requirements

Guidance notes –

Sec 2.09 of Listing requirements

Documents to comply with Listing Requirements




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Trading Rules

Execution of trades –

via stock broker, or etrade

Settlement –

T + 3

Failed trades –

selling or buying price not available




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Trading

Buy, Sell via stock broker, bank –

T+3, margin trading, short selling,gains tax, dividend, bonus, rights

Full service brokers -

give investment advice, more personal service.

More expensiveDiscount brokers -

no investment advice but charge less

Contract notes

Central Depository System [no share cert]

BURSA website:

DMA is direct automated order routing. This means that when theinvestor keys-in an order via his broker there is no manualintervention. The system routes the order directly to the Exchangeafter a process of checks and validations. The investor thus has

direct electronic access to our trading platform -

Bursa Trade.

This is why it is also known as “zero-touch”.




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Trading

Arbitrage

Listing on more than one exchange may creatediscrepancies which could create opportunities in

expectation of their eventual convergence. This isknown as an arbitrage trade. However withelectronic trading, these discrepancies, if any will

be short-lived and acted upon quickly due tomarket efficiency.

Direct or Pooled holding [eg unit trust]

Fund managers charge fees

Diversification

Share in expensive stock




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Share analysis

Identifying good

investment:

Technical

analysis includes study of price history of

both share [incl volume] and the stock market.Technical analysts can be very complex.

Fundamental

analysis includes study of relevant

information re the stock and the market.

Fundamental information studied will include the

annual financial statements, industry and product

data (eg sales, orders), financial and economic

environment (eg interest rates). Aim is to forecastshare price movement

based on future business

and financial developments.

Supply and Demand




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Share analysis

52-week High Low

Code

Shares

Close

+/-

Vol (’00)

PE

DY

Day’s High Low

No of Shares (m)

MCap (RMm)

NTA




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Price quotes

STOCK

CODENAME REF HIGH LOW LAST CHANGE VOLUME

1295 PBBANK 11.100 11.400 11.100 11.400 0.300 28591

1295CD PBBANK-CD 0.125 0.135 0.120 0.135 0.010 37639

1295CE PBBANK-CE 0.240 0.245 0.240 0.240 0.000 5180

1295CF PBBANK-CF 0.140 0.155 0.140 0.155 0.015 12850

1295F PBBANK-O1 11.200 11.500 11.000 11.400 0.200 38077




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Efficient Market Hypothesis

EMH

says that investing is rational, so price of aparticular stock at any given time will representrational

evaluation of known information.

Therfore share price will be efficiently

priced.

According to ‘Behavioral Finance’, humans often

make irrational

decisions especially re the buyingand selling of shares based on fears andmisconceptions eg dot.com bust

The ‘greater fool theory’

says that becausereturns are made from sale to another investor,always select shares that someone else will valuehigher in future, thus relying on other investors

irrationality.




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Terminology

Bull & Bear

Types of orders –

market,

stop, limit

Averaging

Blue chips

Insider trading / dealing

Transactions based uponmaterial non-public,

company owned

information

Market capitalisation

Odd lots

Golden Share

Penny stocks




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Order TypesMarket OrdersThis is an order placed for immediate

execution at

the best available bid or offer price in themarket.

Limit Order

A limit order stipulates a price limit

for atransaction execution. A buy

limit orderindicates

that the futures contract may be purchasedonly at

the designated price or at a lower

last done

price.On the other hand, a sell

limit orderindicates that

the futures contract may be sold at adesignated

price or at a higher

last done price.

Stop Order

This is used to stop loss, protect profit orinitiate

strategies based on stipulated price levels. A stop

order converts into a market orderwhenever the

futures contract trades at or beyond thedesignated

price of a loss order. This conversion isautomatic

Day Order or Good for The DayThe limit or stop order will lapse at the end

of the

trading day if no particular date has beenset for

validity.

Good Till Cancel Order (GTC)This order remains valid until it is either

filled or

cancelled. It is prudent that records of suchorders

are kept and monitored daily.

Good To Date (GTD)This order remains valid until

the end of a

specified trading date.

Basis Order

It is also known as spread order and isused for

taking a spread position, which issimultaneous

purchase and sale of contracts withdifferent

expiration dates (different contractmonths).

CIMB website




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Regulators

From listing application to day to day operations

SC –

oversee Capital Market

BURSA –

oversee Trading

SIDC –

The Secuities Industry Development

Corporation

incorporated in March 2007, is the leading capital marketseducation, training and information resource provider in

ASEAN.



BNM fstep Prepared by Vergis Mathew 34

Introduction toIntroduction toEquity MarketEquity Market

THE ENDTHE END

THANK YOUTHANK YOU

Presented by

Vergis Mathew

[email protected]

Intro to Equity Market

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