CHAPTER 3
SECURITIES MARKET
Learning Objectives:
After studying this chapter, students should be able to:
✓ Describe the basic types of securities markets
✓ Differentiate the channels of primary and
secondary markets
✓ Discuss the basic requirements under main market
and ace market
Definition of securities market
According to William F. Sharpe, et al
A security market can be defined as a
mechanism for bringing together buyers and
sellers of financial assets in order to
facilitate trading.
3.1 Types of Markets
Money Markets: the market where short-term
securities are bought and sold
Capital Market: the market where long-term securities
such as stocks and bonds are bought and sold
Primary Market: the market in which new issues of
securities are sold to the public
Secondary Market: the market in which securities are
traded after they have been issued
(outstanding/existing shares)
Securities market
Primary market Secondary market
Markets where new shares are issued Markets where existing shares are
traded
Seller of the securities is the firm that Not involve firm that issues the shares
issues the securities.
Channels in the primary market: Secondary market consist of:
1. Initial Public Offerings (IPO)/ Public 1. Main Market
Offering of New issues 2. ACE (access, certainty and
2. Private/direct placement efficiency) Market
3. Right offering
4. Sale of shares to employees
Primary market:
1. Initial Public offerings (IPO’S)
securities securities
Investment Capital
bankers raiser
Investor
$ $
1. Capital raisers consists of companies needing funds selling
securities to the public through investment bankers.
2. Investment bankers acting as intermediary between the
company and investors.
3. Securities purchased by investor who provide fund to
companies.
Roles of Investment Banker
i. A firm that act as middleman/intermediary between
the investor and the capital raiser(company).
ii. The consultant to the corporate clients on matters
pertaining to the sales of new securities and funds
raising.
iii. Also acts as underwriters on the new issues of shares.
(to guarantee the subscription of the new shares
issued by the company).
- received underwriting commission
-underwriting syndicate ( responsible for selling the
shares and undertakes to buy the shares if the shares
are not sold)
Primary market:
2. Private/direct placement
$
Capital
raiser
Investor
securities
1. Capital raisers sell securities directly to the investor
2. Without the services of the investment bankers
3. Investors provide fund directly to capital raisers.
Cont…
A company wishing to raise capital sells securities
directly to one institutional investor. (eg. Lembaga
Tabung Haji, Pemodalan National Berhad or KWSP)
They agrees to buy the securities issue on terms
negotiated between the issuer(company) and the
lender(capital provider).
Private/Direct placement
Advantages Disadvantages
Speed – the registration of the issue Lower offer price-less than
with the Securities Commission does those in IPOs. (no
not take longer time. underwriting fee)
Reduced flotation cost – eliminate Restriction on sale of
the cost of underwriting and securities- the buyer have to
distribution. hold until maturity
Financing flexibility – deals directly
with a small number of investor
Primary market:
3. Right offerings
securities securities
Investment Capital
Present bankers raiser
owner
$ $
1. Capital raisers/companies needing funds sell securities
2. Selling securities to present owner(existing shareholder) through investment
bankers (intermediary and underwriter)
3. Securities purchased by present owner who provide fund to companies
4. Present owner may also waived their right to subscribe to the new shares
by selling their rights in the stock market.
Right offerings
•Company sells shares of common stock to the existing owners based on their
proportional share of the business through the preemptive right
•Preemptive right give the existing shareholders the right to purchase the
shares of the company based on the no. of shares their own.
•Price are lower than a market price (opportunity for the shareholder for
making profit)
•Underwritten
•Advantages – maintain ownership percentage, discounted price, can sell
rights in the stock market if the shareholder refuse to subscribe the new share.
•Disadvantages – not afford to subscribe, market condition affect share price
to dip below, dilution of ownership.
Process of right offerings
Step Details
1 Company proposed right issue through circular to shareholders
2 A general meeting is called to approved the proposal
3 Proposal approved by shareholders
4 Company issues the Provisional Allotment Letter/Provisional
letter of Offer
5 Shareholders subscribe to the right
6 BOD allocate the shares
7 New shares issued to shareholders
8 Listing of new shares in Bursa Malaysia
Primary market:
4. Sale of shares to employees
securities
Capital
Employee raiser
Investor
$
1. Capital raisers sell securities directly to their employees
2. Without investment bankers
3. Employees subscribe to the shares and provide fund directly
to capital raisers.
Sales of shares to employees
Employees have opportunity to own equity of
the company
Retaining loyal workers and key executives
Prohibited from selling the shares within the
specified time period.
Secondary market
3.2 Bursa Malaysia
Bursa Malaysia
Previously known as Kuala Lumpur Stock Exchange (KLSE)
Incorporated on Dec 14, 1976 under Companies Act 1965
Self-regulatory organization with its own Memorandum and Articles of
Association – to govern and conduct
Functions:
i. Provides a market place for transaction of securities
ii. Provides a mechanism for determining the price of securities
iii. Provides information on security price and volume of transaction
iv. Provide a mechanism for raising funds by companies through issuing rights,
warrants and loan stocks
v. Provide a mechanism for listing of new securities
Securities commission
Establish on March 1, 1993 under the Securities Commission Act 1992
Consist of 9 members elected by Finance Minister:
i. Chairman
ii. 4 members from government
iii. 4 members from private sector
Functions:
i. Advise the Minister of Finance
ii. Regulate all matters relating to securities and futures contracts
iii. Regulate M&A
iv. Regulate all matters pertaining to unit trust scheme
v. Supervising and monitoring the activities of any exchange, clearing house and
central depository
vi. Suppress any illegal conduct
3.3 Stock Broking Companies
There are three types of stock broking service:
Execution-only, which means that the broker will only
carry out the client's instructions to buy or sell.
Advisory dealing, where the broker advises the client
on which shares to buy and sell, but leaves the final
decision to the investor.
Discretionary dealing, where the stockbroker
ascertains the client's investment objectives and then
makes all dealing decisions on the client's behalf.
Notes
•Broker – an agent who buys and sells on behalf of clients, usually a director and
owner of stock broking firm, earn brokerage fee or commission
•Remisier – an agent who buys and sells on behalf of clients, not employee of the
brokerage firm, pay a deposit to secure a seat to trade at the stock broking
firm, earns commission from clients
•Paid dealer representative - an agent who buys and sells on behalf of clients,
employees of stock broking firm, earn wages
•Over-the-counter – Malaysian Exchange of Securities dealing and Automated
Quotation (MESDAQ), separated from KLSE, enable investor to buy shares that
are not listed
•SCORE – System On Computerized Order Routing and Execution, main
computer, matching all orders from various stock broking firms
•WINSCORE – broker front-end system, integrated trading system, to control
trading operations, to execute orders, real time stock price info
END OF CHAPTER 3
TQ
ANY QUESTIONS???
