PERSONAL INVESTMENT PLANNING – SHARES, BOND, UNIT TRUSTSPresentation Transcript
Investment Planning Lecture 12
What is an investment?
“ Make our money work for us”
It is a commitment of funds to one or more assets that will be held over some future time period, in the hope that it will generate more income.
Could be tangible, i.e., real estates or intangible, i.e., securities.
Types of Investments
Equities - Stocks or ordinary share
Unit trusts – including
Futures and Options
Stocks and Shares
When you buy stocks and shares, you own part of the company and have the right to vote at general meetings.
Each share is a small stake in a company and you can buy a large number of lots.
As a shareholder you can benefit from the profits earned by the company in the form of dividends, and also from the growth in the value of the company
Why do companies issue shares?
The company benefits by raising funds to operate and expand its business without having to borrow the money from other sources such as banks.
Risks in buying shares
Shares may fall in value due to company’s performance as well as the economic condition
Thus it is important to know what the company is doing, how well the business is, its financial strength, price-earning ratio and dividend yield, earning growth prospect and competitive edge
Types of Share Issues
Issue of new ordinary shares at no cost to the existing shareholders but out of the company’s reserves and given in direct proportion to the number of shares owned.
Used to enlarge the capital base of the company and may also be used as a means of rewarding its existing shareholders.
Ex-date, Cum-dividend, cum-rights and cum-bonus
Types of Share Issues
Gives the existing shareholders the right to subscribe for new ordinary shares at an issue price lower than the prevailing market price and at a ratio equivalent to their existing shareholding.
Companies carry out a rights issue when they want to raise additional funds to finance their capital requirement.
An investment scheme that pools money from many investors who share the same financial objectives.
The fund issues units to investors who are known as unit holders
Managing Unit Trust Fund
The fund is managed by a group of professional managers or unit trust company who will invest the pooled money in a portfolio of securities such as shares, bonds and money market instruments
Income earned by unit trust
The unit trust earns its income from its varied investments in the form of dividends, interest income and capital gains.
Income is distributed to the unit holders in proportion to the units they hold, in the form of dividends or bonus units.
Types of Unit Trusts
Capital growth funds
Aggressive growth funds
Money market funds
Advantages of Unit Trusts
Continuous professional management
Access to broader array of financial assets
Disadvantages of Unit Trusts
Subject to market risks
Not suitable for short-term investment
No custom-made service
Hidden costs involved
Initial service charge
Futures and Options
Basic derivative instruments whose values are dependent on the value of an underlying assets such as common stocks, bonds, indices, currencies or commodities
An agreement to buy or sell an asset at an agreed price and specified date
Similar to forward contract but traded on an exchange (MDEX)
Main purpose is not to buy or sell the physical goods but to manage the risk of price changes for hedgers and for speculators, to profit from the changes
Give the buyer/holder of the option the right, but not the obligation, to buy or sell a specified assets at a specified price, at or before the specified date from the seller, for which the buyer pays a premium.
Options that give the buyer the right to buy are Call Options.
Options that give the buyer the right to sell are Put Options.
Also knows as Transferable subscription rights (TSR) which gives the holders the right but not the obligation, to subscribe for new ordinary shares at a pre-determined exercise price within a stipulated validity time frame
IOU, a debt instrument issued by a borrower
A maturity date or identifiable term
A fixed rate of interest payment (coupon)
A fixed face value redeemable on maturity
Always referred to as fixed income securities
Who Sell Bonds?
Malaysian Treasury Bills (MTB)
Bank Negara Bills (BNB)
Malaysian Government Securities (MSG)
Government Investment Certificates (GIC)
Private or corporate bonds
Debt instruments issued by corporations
Who Buys Bonds?
Mainly institutional investors
Retail or individual investors can invest in bond funds.
Stability of income flow
Opportunities of capital gains
Popular with investors for two reasons: Why invest in Bonds?
Less risky than shares
More returns than fixed deposits
How risky are bonds?
The risk that the issuer will default
Thus bonds are rated
Less risky if issued by government
Interest rate risk
Inverse effect on bonds if bondholder sells before maturity
How do bonds rate with shares?
Investor receives periodic fixed or variable interest income, irrespective whether company is doing or not.
Bondholders have the right over ordinary shareholders on the distribution of earnings in the event of bankruptcy.
Bondholders get fixed income even though the company may be making more profit
No voting rights
How are bonds traded?
When the issuer first offers new issues, that first trading is done at the primary market , i.e., the issuer is able to raise for its own use and the money raised from the sale of bonds come directly to the issuer.
Subsequently, bonds can be bought and sold at the secondary market .
Trading of bonds in the secondary market creates a market pricing for the bonds.
Pricing of bonds
When market price of bond is less than its par value, the bond is considered as being sold at a discount.
When the market price of bond is more than its par value, the bond is considered as being sold at a premium.
Different types of bonds
Bonds are classified according to:
Maturity terms, such as short-term, medium-term or long-term.
Issuer, i.e., government bonds, corporate bonds or private debt securities, quasi-government bonds, i.e., Cagamas bonds and Islamic private debt securities or Islamic bonds.