Market Structure and Classifications PDF

CHAPT E R 3 MARKET STRUCTURE AND CLASSIFICATIONS 3.1 Money market 3.2 Capital market 3.2.1 Debt and equity markets 3.2.2 Primary and secondary markets 3.2.3 Forward, future and options market  3.1 Money Market 2....

CHAPT E R 3 MARKET STRUCTURE AND CLASSIFICATIONS 3.1 Money market 3.2 Capital market 3.2.1 Debt and equity markets 3.2.2 Primary and secondary markets 3.2.3 Forward, future and options market  3.1 Money Market 2. 3. ·Money market fund ·Banks issue money invests in highly liquid, market instruments, short-term cash such as commercial equivalent instruments, papers, as a way of commonly known as reinforcing short term 1. “money market cash to balance its daily 4. instruments.” deposit shortfall market that deals with supported by banks and reserves. In other words, short term papers with a are considered a low risk by buying the money maturity period of one due to their high liquidity market instruments, year or less. and short term. money market funds are effectively lending money to banks.  Islamic Money Market ·The central bank conducts daily monetary operations, to achieve the desired liquidity in the banking system. Participation in the ringgit interbank money market is through approved interbank institutions.  to ensure sufficient liquidity for the efficient functioning of the Islamic interbank market. The monetary policy target is only implemented in the conventional money market, where interest rate based instruments are the primary funding instrument. Objective of the Bank’s monetary operations in the Islamic money The Bank influences Islamic interbank market market liquidity through an array of Shariah-compliant instruments, the main instrument being the Qard acceptance (loan). Through the Qard acceptance, the Bank manages liquidity in the context of a surplus liquidity environment by inviting Islamic banking institutions to place their surplus funds with the Bank. The Bank also uses Commodity Murabahah Programme (CMP) to manage liquidity. CMP utilises mainly crude palm oil-based contracts as the underlying commodity transactions to facilitate liquidity management via a commodity trading platform such as Bursa Suq Al Sila’, or other commodity providers. 3.2 Capital Market  ·It encompasses corporate stocks, public and private debt securities with ·Refers to markets for maturity exceeding one medium to long term year, and shares with no financial assets. fixed maturity period that are traded in the stock market, government bond market and the market for private debt securities.  3.2.1 debt and equity market Debt Market ·Market for trading debt securities where companies and government can raise long term funds. ·This include private placement as well as organized markets and exchange. ·The debt market traded in financial instruments that pay interest. ·Example : bonds, sukuk and several loans  3.2.1 debt and equity market Equity Market ·The equity market is a market where securities, shares and other exchange traded instrument are bought and sold. Once the shares or securities are bought, the shareholders have the freedom to sell the securities. ·For an Islamic equity market, it is vehicle to transfer funds from surplus to deficit units. It allows the owner of capital to invest in accordance to their preference in terms of the extent of risk involvement, rate of return and period of investment. ·In Malaysia, the Shariah compliant stocks are traded within Bursa Malaysia in three submarkets namely the Main Board, Second Board and the MESDAQ market.  3.2.1 debt and equity market Islamic Equity Product · MUST comply with the requirements. The underlying instrument derived from interest element and free from forbidden activities such as gambling, gharar, liquor and pork related activities. Islamic equity product must be structured according to Shariah in term of underlying concepts or contracts of products. 3.2.2 PRIMARY AND SECONDARY MARKETS ·Main Market is a prime market for established companies that have met the standards in terms of quality, size and operations. Potential issuers for the Main Market must demonstrate that they have achieved minimum profit track record or minimum size measured by market capitalization; ·ACE Market is a sponsor-driven market designed for companies with growth prospects. It was formerly known as the MESDAQ Market prior to 3 August 2009. Sponsors must assess suitability of the potential issuers, taking into consideration attributes such as business prospects, corporate conduct and adequacy of internal control. ·Main Market and ACE Market provide companies with greater visibility via the capital market and a clearly defined platform to raise funds from both institutional and retail investors  Primary Market ·It is that market in which shares, debentures and other securities are sold for the first time for collecting long- term capital. ·This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET. ·An IPO occurs when a private company issues stock to the public for the first time. ·For example, company ABCWXYZ Berhad hires five underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be RM15. Investors can then buy the IPO at this price directly from the issuing company. ·This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company's equity capital is comprised of the funds generated by the sale of stock on the primary market.  Secondary Market ·The secondary market is that market in which the buying and selling of the previously issued securities is done. ·Investor’s trade previously issued securities without the issuing companies' involvement. ·For example, if you go to buy ABCD Berhad stock, you are dealing only with another investor who owns shares in ABCD Berhad. ABCD Berhad is not directly involved with the transaction.  3.2.3 most common derivative instruments in the market are Forward, forwards, futures, options and swap contracts. future and The purpose of these securities is to give producers and manufacturers the possibility options to hedge risks. market All these contracts derive the value from their underlying assets. WForward HAT'S THE QUESTION CHAMPION ·An agreement between two parties to buy or sell an asset at specified point of time in the future. THIS CERTI FI CATE I S AWARDE D TO ·The price of the underlying instrument, in whatever form is paid before control of the instrument changes. ·The process is used in financial operations to hedge risk as means of speculation, or to allow a party to take advantage of quality of underlying instrument which is time sensitive. ·Example: an agreement by XYZ Bank to sell to ABC Insurance Company, one year from today, RM5 Million face value of Treasury Bonds (6% at 2020) at price that yields the same rate on these bonds today (6%). WFuture HAT'S THE QUESTION CHAMPION ·Standardized contract, traded on a futures exchange to buy or sell certain underlying instrument at a certain date in the future at specified price. THIS CERTI FI CATE I S AWARDE D TO ·Example: 1000 tons of CPO commodity is to bought and sold, and the settlement is 3 months from now. Buyer ‘look’ price RM1900/ton. At the settlement date, producer will deliver 1000 tons of CPO to the buyer and latter will pay RM1,900,000, the future prices. WOption HAT'S THE QUESTION CHAMPION ·Financial instruments that convey a right but not an obligation, to engage in future transaction on some underlying securities. THIS CERTI FI CATE I S AWARDE D TO ·Holders does not have to exercise this rights. ·Example: buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration. While buy a put option, the party who sell or write the option must fulfilled the contract. Thank you for listen!