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  1. 1. Investment Planning Lecture 12
  2. 2. What is an investment? <ul><li>“ Make our money work for us” </li></ul><ul><li>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. </li></ul><ul><li>Could be tangible, i.e., real estates or intangible, i.e., securities. </li></ul>
  3. 3. Types of Investments <ul><li>Equities - Stocks or ordinary share </li></ul><ul><li>Unit trusts – including </li></ul><ul><li>Futures and Options </li></ul><ul><li>Bonds </li></ul><ul><li>Hybrid Investments </li></ul><ul><li>Real Estate </li></ul>
  4. 4. Stocks and Shares <ul><li>When you buy stocks and shares, you own part of the company and have the right to vote at general meetings. </li></ul><ul><li>Each share is a small stake in a company and you can buy a large number of lots. </li></ul><ul><li>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 </li></ul>
  5. 5. Why do companies issue shares? <ul><li>The company benefits by raising funds to operate and expand its business without having to borrow the money from other sources such as banks. </li></ul>
  6. 6. Risks in buying shares <ul><li>Shares may fall in value due to company’s performance as well as the economic condition </li></ul><ul><li>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 </li></ul>
  7. 7. Types of Share Issues <ul><li>Bonus issues </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Used to enlarge the capital base of the company and may also be used as a means of rewarding its existing shareholders. </li></ul></ul><ul><ul><li>Ex-date, Cum-dividend, cum-rights and cum-bonus </li></ul></ul>
  8. 8. Types of Share Issues <ul><li>Rights Issues </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Companies carry out a rights issue when they want to raise additional funds to finance their capital requirement. </li></ul></ul>
  9. 9. Unit Trusts <ul><li>An investment scheme that pools money from many investors who share the same financial objectives. </li></ul><ul><li>The fund issues units to investors who are known as unit holders </li></ul>
  10. 10. Managing Unit Trust Fund <ul><li>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 </li></ul>
  11. 11. Income earned by unit trust <ul><li>The unit trust earns its income from its varied investments in the form of dividends, interest income and capital gains. </li></ul><ul><li>Income is distributed to the unit holders in proportion to the units they hold, in the form of dividends or bonus units. </li></ul>
  12. 12. Types of Unit Trusts <ul><li>Income funds </li></ul><ul><li>Capital growth funds </li></ul><ul><li>Aggressive growth funds </li></ul><ul><li>Balanced funds </li></ul><ul><li>Index funds </li></ul><ul><li>Money market funds </li></ul><ul><li>Islamic funds </li></ul><ul><li>State funds </li></ul>
  13. 13. Advantages of Unit Trusts <ul><li>Ready affordability </li></ul><ul><li>Instant diversification </li></ul><ul><li>Liquidity </li></ul><ul><li>Continuous professional management </li></ul><ul><li>Reduced stress </li></ul><ul><li>Access to broader array of financial assets </li></ul>
  14. 14. Disadvantages of Unit Trusts <ul><li>Subject to market risks </li></ul><ul><li>Not suitable for short-term investment </li></ul><ul><li>No custom-made service </li></ul><ul><li>Hidden costs involved </li></ul><ul><ul><li>Initial service charge </li></ul></ul><ul><ul><li>Repurchase fee </li></ul></ul><ul><ul><li>Management fee </li></ul></ul><ul><ul><li>Trustee fee </li></ul></ul><ul><ul><li>Brokerage fee </li></ul></ul>
  15. 15. Futures and Options <ul><li>Basic derivative instruments whose values are dependent on the value of an underlying assets such as common stocks, bonds, indices, currencies or commodities </li></ul>
  16. 16. Forward Contract <ul><li>An agreement to buy or sell an asset at an agreed price and specified date </li></ul><ul><li>Similar to forward contract but traded on an exchange (MDEX) </li></ul><ul><li>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 </li></ul>Futures Contract
  17. 17. Options <ul><li>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. </li></ul><ul><li>Options that give the buyer the right to buy are Call Options. </li></ul><ul><li>Options that give the buyer the right to sell are Put Options. </li></ul>
  18. 18. Warrant <ul><li>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 </li></ul>
  19. 19. Bonds <ul><li>IOU, a debt instrument issued by a borrower </li></ul><ul><li>Basic characteristics: </li></ul><ul><ul><li>A maturity date or identifiable term </li></ul></ul><ul><ul><li>A fixed rate of interest payment (coupon) </li></ul></ul><ul><ul><li>A fixed face value redeemable on maturity </li></ul></ul><ul><li>Always referred to as fixed income securities </li></ul>
  20. 20. Who Sell Bonds? <ul><li>Government bonds </li></ul><ul><ul><li>Malaysian Treasury Bills (MTB) </li></ul></ul><ul><ul><li>Bank Negara Bills (BNB) </li></ul></ul><ul><ul><li>Malaysian Government Securities (MSG) </li></ul></ul><ul><ul><li>Government Investment Certificates (GIC) </li></ul></ul><ul><li>Private or corporate bonds </li></ul><ul><ul><li>Debt instruments issued by corporations </li></ul></ul>
  21. 21. Who Buys Bonds? <ul><li>Mainly institutional investors </li></ul><ul><li>Retail or individual investors can invest in bond funds. </li></ul>
  22. 22. <ul><li>Stability of income flow </li></ul><ul><li>Opportunities of capital gains </li></ul>Popular with investors for two reasons: Why invest in Bonds? <ul><li>Less risky than shares </li></ul><ul><li>More returns than fixed deposits </li></ul>
  23. 23. How risky are bonds? <ul><li>Credit risk </li></ul><ul><ul><li>The risk that the issuer will default </li></ul></ul><ul><ul><li>Thus bonds are rated </li></ul></ul><ul><ul><li>Less risky if issued by government </li></ul></ul><ul><li>Interest rate risk </li></ul><ul><ul><li>Inverse effect on bonds if bondholder sells before maturity </li></ul></ul>
  24. 24. How do bonds rate with shares? <ul><li>Advantages </li></ul><ul><li>Investor receives periodic fixed or variable interest income, irrespective whether company is doing or not. </li></ul><ul><li>Bondholders have the right over ordinary shareholders on the distribution of earnings in the event of bankruptcy. </li></ul><ul><li>Disadvantages </li></ul><ul><li>Bondholders get fixed income even though the company may be making more profit </li></ul><ul><li>No voting rights </li></ul>
  25. 25. How are bonds traded? <ul><li>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. </li></ul><ul><li>Subsequently, bonds can be bought and sold at the secondary market . </li></ul><ul><li>Trading of bonds in the secondary market creates a market pricing for the bonds. </li></ul>
  26. 26. Pricing of bonds <ul><li>When market price of bond is less than its par value, the bond is considered as being sold at a discount. </li></ul><ul><li>When the market price of bond is more than its par value, the bond is considered as being sold at a premium. </li></ul>
  27. 27. Different types of bonds <ul><li>Bonds are classified according to: </li></ul><ul><ul><li>Maturity terms, such as short-term, medium-term or long-term. </li></ul></ul><ul><ul><li>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. </li></ul></ul>
  28. 28. Government Bonds <ul><li>Government Investment Issues (GII) </li></ul><ul><li>Malaysian Government Securities (MGS) </li></ul>
  29. 29. Corporate Bonds <ul><li>Straight bonds </li></ul><ul><li>Convertible bonds </li></ul><ul><li>Bonds with warrants </li></ul><ul><li>Floating rate bonds </li></ul><ul><li>Zero coupon bonds </li></ul><ul><li>Mortgage bonds </li></ul><ul><li>Islamic bonds </li></ul><ul><li>Secured and unsecured bonds </li></ul><ul><li>Guaranteed bonds </li></ul>
  30. 30. Common terms associated with bonds <ul><li>Nominal value </li></ul><ul><li>Coupon rate </li></ul><ul><li>Term-to-maturity </li></ul><ul><li>Trust deed </li></ul><ul><li>Trustee </li></ul><ul><li>Type of issuer </li></ul><ul><li>Yield </li></ul><ul><li>Call provision </li></ul><ul><li>Sinking fund </li></ul>