Topic 1

Investments:
An Introduction
What will be covered in this
topic?
1. Investment definition
2. Types of Investments
3. Suppliers & Demanders of Funds
4. Types of Investors
5. Investing Steps, Life Cycles and Business Cycle
6. Careers & Professional Qualification in Investments
7. Buying & Selling Shares in Malaysia

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1. What is an Investment?
Investment: Any asset into which funds can be placed
with the expectation that it will generate positive
income and/or preserve or increase its value
Portfolio: a collection of different investments

Which of the following is an investment as defined above?

A) Automobile insurance
B) A new automobile
C) A Fixed Deposit Account
D) All of the above
Return:
• The reward for owning an investment
1. Income from investment
2. Increase in value of investment (Capital Gains)
• “It’s not what you make, it’s what you keep that is
important.” – in the case of investment return, it is
important to know your after-tax and transaction costs
return and not before.
• Dividends, interests and rental received from investments
are considered as part of your total income and subject to
your personal income taxes.
• Capital gains from investments are subject to capital gain
taxes. Personal Income taxes are progressive whereas
capital gains tax rates are generally flat. How will this affect
the high net worth investors?
An example of Federal Income Tax Rates and Brackets for Individual
and Joint Returns (Due By April 15, 2015) – progressive in nature
 Investment and Taxes
Tax planning involves looking at your earnings, both
current and projected, and developing strategies that
will defer and minimize the level of taxes.
There are various ways to reduce taxes on
investments and increase the after-tax return. For
example: you can defer and time you capital gain tax
– capital gains are not taxed until actually realized.
However, must consider also risk – the key is – it is the
after-tax return and associated risk that matter.

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Frequent trading will result in high trading/transaction
costs that can affect returns. Example: If trading costs is
0.6% of trading value per trading, making $100 capital
gain from $1000 investments in two transactions (buy
and then sell) is 10% -1.2% = 8.8% return. But if your
$100 gain is made from ten transactions (buy and sell
for 5 times), your net return is 10% - 6% = 4% only.

Total trading costs = 0.6% x

10 transactions = 6%
2. Types of Investments
Types of investments can be differentiated in terms of:
Securities (more liquid) or Property (less liquid)
◦ Securities: stocks, bonds, options
◦ Real Property: land, buildings
◦ Tangible Personal Property: gold, artwork, antiques,
collectables (e.g. old coins, stamps)
Direct or Indirect
◦ Direct: investor directly owns a claim on a security or
property
◦ Indirect: investor owns an interest in a professionally
managed collection of securities or properties. What is one
of the most popular indirect investments?
Figure 1.1 Direct Stock Ownership by Households
- shows percentage of common stocks in each country that is owned directly by
households. In most countries, households’ direct ownership accounts for less than ¼ of
listed common stocks in the country.
- for many countries has been declining over the last decade: 2 reasons: cautious after
2008 US Subprime Crisis and increasing trend of indirect ownership via professional
money managers in mutual, pension funds & insurance.
1-11
Which of the following is an indirect investment?
A) Stocks in foreign companies
B) Malaysia government bonds
C) Unit trust investment
D) Real estate
 Types of Investments (cont'd)
Securities investments can be categorized into Debt, Equity
or Derivative Securities
◦ Debt (also known as Fixed Income Securities): investor
lends funds in exchange for interest income and
repayment at maturity (bonds)
◦ Equity: represents ongoing ownership in a business or
property (common stocks)
◦ Derivative Securities: neither debt nor equity; derive
value from an underlying asset (options and futures) –
 Types of Investments (cont'd)
Types of investments can be differentiated in terms of:

Low Risk or High Risk

◦ Risk: the uncertainty surrounding the return that a particular
investment will generate. One way to manage risk is through
diversification.
◦ In general, investors face a tradeoff between risk and return.
Short-Term or Long-Term
◦ Short-Term: mature within one year
◦ Long-Term: maturities of longer than a year (common stock –
no maturity)
Domestic or Foreign
◦ Domestic: home-based companies
◦ Foreign: foreign-based companies – benefit: can help to
diversify your investments
 3. Suppliers and Demanders of Funds
The investment process brings together suppliers who have extra funds
(investors) and demanders who need funds. Households, governments, and
businesses are the key participants in the investment process, and each of
these participants may act as a supplier or a demander of funds at a
particular time.
Government
◦ Federal, state and local projects & operations
◦ Typically net demanders of funds – what does that mean?
Business
◦ Investments in production of goods and services
◦ Typically net demanders of funds
Individuals
◦ Some need for loans (house, auto)
◦ Typically net suppliers of funds (they spend less than they earn, and they
need to save/invest for retirement and other purposes)
Figure 1.2 The Investment Financial institutions
Process diagram can participate in financial
markets as either suppliers
or demanders of funds.
Commercial
banks
1

2 Example: private
Supply their placement of securities
resources to to institutional
the demanders investors – bypass
financial market
via 1, 2, & 3
 4. Types of Investors
Individual Investors
◦ Invest for personal financial goals
(extra income, retirement, house, child education)
Institutional Investors
◦ Paid to manage other people’s money
◦ Trade large volumes of securities
◦ Include: banks, insurance companies, mutual funds,
hedge funds, pension funds, endowments (source of
funding from public, many donors), foundations
(source of funding from a particular company,
individual or family).
 5. Steps in Investing
Step 1: Meeting Investment Prerequisites
a. Adequately provide for necessities of life, including funds for
meeting emergency cash needs
b. Adequate protection against various common risks, such as
death, illness, disability
Step 2: Establishing Investment Goals – to get rich?
Examples include:
a. Accumulating retirement funds
b. Enhancing current income
c. Saving for major expenditures (buy car, house, child education)
d. Sheltering income from taxes (ex: government can identify
certain types of investments to allow tax-deductibility from
personal income tax, for instance, returns on the EPF investment
are tax exempted)
 Steps in Investing (cont'd)
Step 3: Adopting an Investment Plan
a. Develop a written investment plan
b. Specify target date and risk tolerance for each goal –Example, you
have $30,000 to invest today. If you want to have $100,000 in 10 years
to pay for a deposit to buy a house, meaning your goal is to have
12.8% return per year. Therefore how should you invest your fund to
achieve that return percentage if you set the condition that you don’t
want to lose more than 10% per year of your investment?
Step 4: Evaluating Investment Vehicles
a. Assess potential return and risk of each investment –From the above
example, if your analysis tells you that the stock market may return
you 13% return per year but there is also a risk that it may fall by more
than 10% in a year, based on your risk tolerance, should you invest all
your fund into stocks?
b. Chapter 4 will cover risk in detail
 Steps in Investing (cont'd)
Step 5: Selecting Suitable Investments
a. Research and gather information on specific investments
b. Make investment selections – for example, which stock to
buy?
Step 6: Constructing a Diversified Portfolio
a. Use portfolio comprised of different investments
b. Diversification can increase returns or decrease risks
(Chapter 5 will cover diversification in details)
Step 7: Managing the Portfolio
a. Compare actual behavior with expected performance
b. Take corrective action when needed – example: sell the
stocks that do not perform.
 Investing Over the Life Cycle

Investors tend to follow different investment philosophies

as they move through different stages of the life cycle.
 Investing Over the Life Cycle (cont'd)
1. Growth-oriented youth stage
◦ Age 20s-30s
◦ Growth-oriented investments
◦ Higher potential growth; Higher potential risk
◦ Stress capital gains over current income
◦ (you don’t have much capital, so return from capital gain
is the fastest way to grow your capital and if you lose, you
have the ‘time’ to recover and also you don’t have many
life obligations at this stage)
◦ What are some investments for this stage?
◦ Common stocks, options or futures
◦ Example of suitable Asset Allocation: 80% in equity
related securities
 Investing Over the Life Cycle (cont'd)

2. Middle-Aged Consolidation Stage (growing +

protecting/preserve your portfolio)
- Ages 45 to 60
- Family demands and responsibilities become important (child
education expenses, retirement savings, etc.)
- Move toward less risky investments to preserve capital
- Transition to higher-quality securities with lower risk
- What are some investments for this stage?
Low-risk growth and income stocks (high quality or blue chip
stocks), preferred stocks, convertibles, high-grade bonds
Investing Over the Life Cycle (cont'd)
3. Retirement Stage
◦ Ages 60 and older
◦ Preservation of capital (from inflation) becomes
primary goal
◦ Highly conservative investment portfolio
◦ Income needed to supplement retirement income
◦ What are some investments for this stage?
◦ Income-oriented: Low-risk income stocks (high
dividend stocks) and mutual funds government
bonds, quality corporate bonds, bank FD/CD

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Investments and the Economy: Business Cycle

Investments are affected by conditions of the economy.

The business cycle reflects the current status of several common
economic indicators: gross domestic product (GDP), industrial
production, household disposable income, unemployment rate.
A strong economy is reflected by an expanding business cycle and
vice versa.
Stock prices tend to rise during expanding business cycles and fall
during declining business cycles
In fact, stock market as a whole is also believed to be a leading
indicator for the economy because stock prices reflect investors’
beliefs about future prospects of companies.
 Investments and the Business Cycle (cont’d)

Bonds and other forms of fixed-income securities are also

affected by the business cycle since their values are tied to
interest rates, which are affected by economics conditions
Interest rates and bond prices move in opposite directions.
(interest , existing bonds still pay the same coupon rate, so its demand will 
and cause its price to also  and investors can buy cheaper)
So if you are already holding a bond, you don’t like interest rates
to move up – why?
Of course, high interest rates will make new bonds more
attractive because these bonds will have to pay higher coupon
rate to investors in this case.
6. Careers & Professional Qualification
in Finance & Investments
CFA stands for Chartered Financial Analyst
• A professional qualification awarded by the CFA Institute. It is
recognized as comparable to a Master’s in Finance.
• CFA – The Gold Standard in the Finance & Investments Careers
• In major capitals, many Buy-side and Sell-side Analysts are CFA
holders
o Example of Buy-side Analysts – Analysts working with Asset/Investment
Management companies such as Mutual Funds, Pension Fund, and Insurance
companies to make recommendation to their fund manager on which stocks
to invest.
o Example of Sell-side Analysts – Analysts working with Stock broking
companies to make recommendation to investors. They are “sell side”
because they want to ‘sell’ their financial service to you (to get you to open a
trading account with them and trade securities through them – so that they
can then earn commissions/brokerage fees).
• There are now about 700 CFA holders in Malaysia.
HOW TO EARN THE CFA CHARTER

1. Become a CFA candidate and enroll in the CFA Program. To do so, you must
meet one of the following criteria:
• have a bachelor’s (or equivalent) degree, or
• be in the final year of a bachelor’s degree program,
• be prepared to take the exams in English.
• have a valid international passport.

2. Pass the Level I Exam (June or December).

3. Pass the Level II Exam (June).
4. Pass the Level III Exam (June).

5. Have four years of professional work experience in the

investment decision-making process (accrued before,
during, or after participation in the CFA Program).
6. Adhere to the CFA Institute Code of Ethics and Standards of Professional
Conduct
7. Join CFA Institute as a regular member.
CFA Curriculum is grouped into 10 categories:
I. ETHICAL AND PROFESSIONAL STANDARDS
II. QUANTITATIVE METHODS
III. ECONOMICS
IV. FINANCIAL REPORTING AND ANALYSIS
V. CORPORATE FINANCE
VI. EQUITY INVESTMENTS
VII. FIXED-INCOME INVESTMENTS
VIII. DERIVATIVES & RISK MANAGEMENT
IX. ALTERNATIVE INVESTMENTS (real estate, hedge funds,
private equity, etc.)
X. PORTFOLIO MANAGEMENT AND WEALTH PLANNING
TOP CFA Charterholder Occupations:
Occupations Percentage %
1 Portfolio Manager 23
2 Research Analysts 16
3 Chief-level Executives (CEO, CIO, etc) 7
4 Consultant 7
5 Risk Management 6
6 Corporate Finance Analyst 5
7 Financial Adviser 5
8 Investment Relationship Manager 5
9 Investment Banking Analysts 4
10 Others (Private banking, Trader and 22
Broker, Accountants, University professors
etc.)
TOTAL 100
7. Buying and Selling Shares (Bursa Malaysia)

• In order for you to invest or trade shares that are listed in

Bursa Malaysia, you need to open a Trading Account and
a CDS Account (Central Depository System).
• You have to open trading accounts with stock broker
known as Participating Organization (PO) that is registered
with Bursa Malaysia.
• There are about 30 Stock Broking companies in Malaysia.
Many of them carry with them Investment Bank behind
their name.
• Top 5 stockbroking firms in Malaysia are: Affin-Hwang
Investment Bank, CIMB Investment Bank, RHB Investment
Bank, Maybank Investment, and Kenanga Investment
Bank
1. To invest or trade in Bursa Malaysia you can have either
do it via offline or online but now, most of the brokers in
Malaysia provide online trading platform.

• For offline Trading account, you will have a real people

called remisier who will handle all your orders. You will
have to contact your remisier through whatever means to
buy or sell shares.
• For online Trading Account, all of your orders are made
through internet application which normally load through
internet browser of your computer. Some stock broker also
allow to do transaction via mobile phone.
• The main advantage of Online Trading Account over
Offline Trading account is lower brokerage fee. For online
trading account, you may call helpdesk for trading but they
may impose higher brokerage fee.
• Central Depository System (CDS) account is an electronic
account which is maintained by Bursa Depository.
• CDS account is used to keep track of your shares or stocks
movement. Shares will be credited to your account when
you buy and debited from your account when you sell.
• You will also have a trust account where your cash amount
will be kept by your broking firm. Normally you will be
paid an interest rate slightly higher than the bank FD for
the money kept in your trust account.
2. Once you open Trading and CDS Account, the next steps
before buying shares is deposit cash to your trust account
(opened with the stockbroking firm). Depending on your
broker, you can make deposit either via cheque, cash or
through online banking.
• In Bursa Malaysia, shares are traded on all working days
of Federal Territory (Wilayah Persekutuan) between
9.00am to 12.30pm for morning session and 2.30 pm to
5pm for afternoon session. However, Bursa Malaysia
allows orders to be sent 30 minutes before each session
but no matching will be done.
• For offline trading account you can call your remisier to
check shares prices.
• If you have an online trading account, you should have
username, password and broker website address. Login
to your account and get familiarized with the interface.
• Shares price will move based on tick sizes set by
regulator. The tick size is the minimum price variation
between the buy and sell price for a share.
• The table shows the tick sizes for shares listed in Bursa
Malaysia:

Shares Price Tick Size

Below RM1.00 0.5 sen
RM1.00 to RM2.99
RM3.00 to RM4.99 1 sen
RM5.00 to RM9.99
RM10.00 to RM24.99
2 sen
RM25.00 to RM99.98

RM100.00 and above 10 sen

3. When you are satisfied with the chosen counter after
researching the company fundamental or technical
analysis, you can start place a buy order.
• In Bursa Malaysia, the minimum number of shares or
stocks you can buy or sell per transaction is 100 units.
In other words, if the shares price is RM1 per unit, you
need at least RM100.
• For Offline account, call your remisier to place an order.
He or she will key-in your order based on your chosen
price and amount of shares. The order will be sent
electronically to Bursa Malaysia computer system.
4. Matching of all buy and sell orders by Bursa Malaysia - the
computer system will check whether there is any seller that
matches your price. If there is no seller, your order will be put
in queue until there is a seller that is willing to sell that match
your price. Your remisier will update you on the status of your
order.
• For Online account, place your order through trading
interface by specifying your chosen counter, number and
quantity of shares to buy. The trading interface will send
the order to your broker computer system and
subsequently route it to Bursa Malaysia computer system.
• For Offline account, the same process as above will occur in
Bursa Malaysia computer system. You can see the status of
your order in your trading interface.
Trading interface:
Matching of buy and sell order in broker market:
Bursa Malaysia is an example of a broker market.

BUY SELL
Order Qty Price Price Qty Order
A 4,500 3.10 2.98 6,600 K
B 25,000 3.08 2.98 5,000 L
C 3,200 3.08 2.99 3,600 M
D 1,900 3.04 3.00 17,500 N
E 49,700 3.00 3.06 1,900 O
F 8,000 2.99 3.08 16,900 P
G 16,400 2.98 3.10 8,500 Q
H 5,400 2.97 3.12 21,650 R
I 900 2.96 3.14 11,420 S
J 4,575 2.95 3.16 290 T
• After successfully buying your chosen shares, you may
sell it anytime during trading hours. If you notice that
the shares price appreciate and you already make
profit, you can send a sell order. The process is similar
as the buy order.
• For both buy and sell order, a contract note will be sent
to you by your stockbroking company to confirm your
transaction.
Understanding Settlement Date:
• In Bursa Malaysia, all buy or sell order have to be
settled at 12.30pm on day T+3 where T is the day of
transaction.
• Basically, what it means is that you have to pay your
purchase or deliver your sell transaction on the
third day following the transaction day. However,
weekend and public holiday are not counted.
• If you buy shares, and fail to pay at T+3, your
broker have the right to sell your unpaid shares at
T+4 morning at any price - force selling (you will
loss in this cases if the force selling price is lower
than your purchase price).
• If you buy shares, then you have to pay before T+3,
12.30pm. Normally, broker will set off automatically
from funds that are available in your trust account.
If the fund is insufficient then you have to deposit
additional cash into your trust account.
• Buying settlement are calculated as follow:

Total Buy Settlement (RM) = Value of Shares +

Brokerage Fees + Clearing Fees + Stamp Duty

• Shares that you purchase will be credited to your

CDS account at T+3.
• Selling settlement are calculated as follows:

Total Sell Settlement (RM) = Value of Shares –

Brokerage Fees – Clearing Fees – Stamp Duty

• Cash from sell proceed will be credited to your trust

account at T+3.
Example: Calculating Profit and Loss in Stock Investment:

• If you buy or sell 1,000 units of A shares at RM5.00 then you have to pay or
receive RM5,000.
• Brokerage fees is normally ranged from 0.3% to 0.7% from contract value
depending on your value of transaction, trading type and the broker (but
the fee can be as low as 0.10-0.15% for some online trading).
• Take the same example as above, and with brokerage fees of 0.42%.

Brokerage Fees = 0.42% x RM5,000 = RM21

• Clearing Fee is charged by Bursa as the clearing house. The fee is 0.03%
from contract value or value of shares but subjected to maximum of
RM1,000.00
• Take the same example as above:

Clearing Fees = 0.03% x RM5,000 = RM1.50

• Stamp duty is a charge by the Government and
broker will collect on their behalf. You have to pay
RM1.00 for every RM1,000.00 of contract value
or value of shares and rounded up to the nearest
ringgit subject to maximum value of RM200.00
• Take the same example as above:

Stamp duty = RM5

Based on formula above we take the following example, buy
1,000 units of A shares at RM5.00 and sell it later at RM6.00

• Shares Value when buying = RM5 x 1,000 = RM5,000

• Shares Value when selling = RM6 x 1,000 = RM6,000

• Buy Settlement = RM5,000 + (0.42% x RM5,000) + (0.03% x

RM5,000) + RM5 = RM5,027.50

• Sell Settlement = RM6,000 – (0.42% x RM6,000) – (0.03% x

RM6,000) – RM6 = RM5,967.00

• Net Profit = RM5,967.00 – RM5,027.50 = RM939.50

What is Contra?

• We already understand that when you buy shares,

you only have to pay it at T+3. What happen if you sell
the shares that you bought earlier before T+3?
• We call this Contra. What will happen is that, your
broker will calculate the difference between buy and
sell settlement. The different sum will be credited or
debited in your trust account depending whether you
are making profit or loss.
Regulation of Financial Markets

Financial Services Act 2013 and Islamic Financial Services Act

2013
• Below are trading activities that are prohibited in Bursa
Malaysia stock trading as stipulated in the act:

1. Short Selling: Short selling is the action of a person selling

shares, which he does not own at the time of selling.
(exceptional for 100 stocks under Regulated Short Selling, RSS)
2. Stock market manipulation (penny stock is especially
affected): The act of transacting in the securities of a company that
will have or is likely to have the effect of raising or lowering or
maintaining the price of the company’s securities on a stock market,
with the intention of inducing other persons to purchase or
subscribe for the company’s securities. Such acts are illegal under the
Act.
Example (stock market manipulation)

In an effort to pump up the price of his holdings in

Moosehead Railroad Company, Jason logs on to
several investor chat rooms on the internet to start
rumors that the company is about to expand its rail
network in anticipation of receiving a large contract
for shipping steel.

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3. Insider Trading or dealing: is the purchase or sale of a company’s
securities effected by or on behalf of a person with knowledge of relevant
but non-public material information regarding the company that may
affect the price of the company’s securities (price sensitive information) if
made public.

Example 1: A lawyer representing the CEO of a company learns in a

confidential meeting that the CEO is going to be indicted for accounting
fraud the next day. The lawyer shorts 1,000 shares of the company because
he knows that the stock price is going to go way down on news of the
indictment.

Example 2: A board member of a company knows that a merger is going to

be announced within the next day or so and that the company stock is likely
to go way up. He buys 1,000 shares of the company stock in his mother's
name so he can make a profit using his insider knowledge without reporting
the trade to the Securities and Exchange Commission and without news of
the purchase going public.
Businesswoman and famous
TV personality in the US
4. False Trading/Market Rigging: This involves matched
transactions (buy and sell the same stock at the same time, same
price) where the buyer and seller are the same person i.e. either
involving the same Central Depository System (CDS) account or
“passing around” a specific group of CDS accounts. Transactions
result in ‘no change in beneficial ownership’ (NCBO).
The Act does not allow a person to create a false or misleading
appearance of active trading in any securities on a stock or a false
or misleading appearance with respect to the market for, or the
price of, any such securities.

Ex: you should avoid placing buy and sell orders concurrently at the
same price to ensure that you do not unintentionally matched your
own orders and thus resulting in NCBO transaction.