Professional Documents
Culture Documents
1.0 Introduction
This means that assets, or the means used to operate the company, are balanced by a
company's financial obligations along with the equity investment brought into the company
and its retained earnings.
Assets are what a company uses to operate its business, while its liabilities and equity are two
sources that support these assets. Owners' equity, referred to as shareholders' equity in a
publicly traded company, is the amount of money initially invested into the company plus
any retained earnings, and it represents a source of funding for the business. Refer to the table
1:
Table 1: Nature of Owners’ Equity
2.0 Corporations
A corporation is a legal entity having an existence separate from that of its owners.
It owns property on its own name, the assets belong to the corporation itself and not to the
owners. It has a legal status in court. As a legal entity, it may enter into contracts and is
responsible for its own debts and pays taxes on its earnings. A corporation may have any
number of investors. In dollar value of business activity, corporations hold an impressive
lead.
There are two types of limited company that define the way that money can be raised
through shares.
• A private limited company can sell shares only to designated people and there is a
limit how much capital they can raise through this method.
• A public limited company can issue shares to the public. This means anyone can
have a share in the company.
It is important to note that once a share is issued, it only raises money for the
company the first time it is sold. After that the proceeds any sale of that share goes to the
owner of the share. It is like a second hand car. When a BMW is sold second hand, then the
money goes to the owner of the car and not BMW.
A company may wish to issue shares because:
• A large amount of money can be raised through a share issue.
• Unlike a loan the money does not have to be repaid over a fixed period of time.
• Reward and retain key staff by giving workers a piece of the business.
• Have more options for raising funds. Instead of going into more debt, you can attract
equity investor.
• Shift tax liability away from you to the corporate entity.
• It takes more time and money to incorporate than to form other types of businesses.
• Corporations are subject to more regulation at both the federal and state level.
• The management structure of a corporation is more rigid, giving you, as the owner,
less flexibility to run things as you see fit.
The capital market is the market for securities, where companies and governments can
raise long term funds. It is a market in which money is lent for periods longer than a year.
It consists of:
• Primary Market
• Secondary Market
Primary Market:
The primary market is that part of the capital market that deals with the issuance of
new securities.
• Companies, governments or public sector institutions can obtain funding through the
sale of a new stock or bond issue.
• Include all types of securities being sold for the first time.
• After being offered in primary market it becomes the part of secondary market.
IPO (initial public offering) :-where unlisted company is selling the securities to the
public for the first time.
FPO (follow on public offering) :-new offering of the listed company that have sold
securities before
• This is the market for new long term capital. Therefore it is also called the new issue
market (NIM).
• In a primary issue, the securities are issued by the company directly to investors.
• The company receives the money and issues new security certificates to the investors.
• Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating capital formation in
the economy.
The new issue market does not include certain other sources of new long term
external finance, such as loans, debts etc.
Secondary Market
• The secondary markets are where existing securities are sold and bought from one
investor or speculator to another, usually on an exchange
Also,
• Secondary market is the market where stocks are traded after they are initially offered
to the investor in primary market (IPO's etc.) and get listed to stock exchange.
Secondary market comprises of equity markets and the debt markets.
• Secondary market is a platform to trade listed equities, while Primary market is the
way for companies to enter in to secondary market
1. Stock rights
Shareholders are often said to have a residual claim to the income and assets of the
business. Financially, they stand last in line behind corporate creditors, such as bondholders,
short-term lenders, banks, trade creditors. When a company is unable to pay its debts, and the
company is forced into bankruptcy, shareholders receive nothing.
2. Uncertain returns
The returns on common stock are uncertain. The company might not have earnings
with which to pay dividends. The board might not declare dividends, but instead reinvest
earnings in the company. There may not be a market into which to sell stock. The market
might, because of structural or informational flaws, not value stock efficiently. The board
might approve a merger that imposes a price that does not reflect the stock's future return
potential. The board might approve a dissolution and liquidation of the company's assets at a
price that does not reflect the company's ongoing business value.
3. Value based on dividends
Professional stock valuators focus on cash dividends. Some companies do not pay
dividends, and most companies pay less in dividends than has been earned. In addition, many
shareholders realize returns when they sell the stock (capital gains) or receive a higher price
in a fundamental corporate transaction, such as a merger.
In the end, stock has value because of the possibility of cash returns:
For this reason, professional stock valuators say that only dividends are relevant. But
stock markets are more realistic about human nature. Market traders know, for example, that
stock prices in mergers often involve more than the acquirer's valuation of future dividends.
Sometimes the acquirer's managers have big egos and just want to run a bigger business. The
selling shareholders know this and will demand a higher merger price.
Preferred stock is a hybrid between common stock and a bond. Each share of preferred
stock is normally paid a guaranteed dividend which receives first priority (i.e., the common
stockholders cannot receive a dividend until the preferred dividend has been paid in full) and
has dibs over the common stockholders at the company's assets in the event of bankruptcy (its
claim is still subordinate to that of the bond holders, however). In exchange for the higher
income and perceived safety, preferred shareholders forgo the possibility of large capital
gains.
The terms of preferred stock issues can vary widely, even among the same
corporation. Arguably, the most important characteristic of a preferred stock is if it is
cumulative or non-cumulative. In a cumulative issue, dividends that are not paid (referred to
as "in arrears") build up. Before any dividend can be paid on the common stock, the entire in
arrears balance must be paid in full. If a preferred issue is non-cumulative and a dividend
payment is missed, the shareholders are out of luck; they will, most likely, never receive that
money from the company even if and when the enterprise encounters prosperous times.
Common stocks holders are generally the primary owners and have voting rights.
Preferred stocks holders are secondary owner and generally don’t have voting rights.
Worth of each share of stock per the books based on historical cost. It differs from
market price per share. Book value per share can be computed for common stock and
preferred stock as follows:
In most situations, the book value per Share or BV can be a pretty meaningless value.
Technically, it is considered to be the accounting value of each share, which can be drastically
different than what the market value per share is for a common stock. There is also very little
that market value and book value have in common. Market value or price per share is a
reflection of supply and demand for a stock. Usually this is based on some expectation of
future performance.
There is one circumstance where situation where BV can be useful and that is when
the market price or value is currently set below the book value. When this occurs, the
company is considered undervalued and might be considered an attractive stock to buy.
Market price of preferred stock is the price as determined dynamically by buyers and
sellers in an open market for capital stock which provides a specific dividend that is paid
before any dividends are paid to common stock holders, and which takes precedence over
common stock in the event of liquidation.
Market price of common stock also called share price, this figure is simply the price
of one share of stock. This is the most visible piece of financial data for a company, and the
media tends to focus on this single piece of financial data. This value can be sometimes
found in the Income Statement, but if not, it is just as easily found by going to a stock-price
lookup website, searching for the historical stock price for the day the financial statement was
submitted.
Companies often split shares of their stock to try to make them more affordable to
individual investors. Unlike an issuance of new shares, a stock split does not dilute the
ownership interests of existing shareholders. When a company declares a stock split, its share
price will decrease, but a shareholder’s total market value will remain the same. For example,
if you own 100 shares of a company that trade at $100 per share and the company declares a
two for one stock split, you will own a total of 200 shares at $50 per share immediately after
the split. If the company pays a dividend, your dividends paid per share will also fall
proportionately.
A stock may split two for one, three for two, or any other combination. A reverse
stock split occurs when a company reduces its number of outstanding shares, such as a one
for two split. For a history of a company’s stock splits, check the company’s web site or
contact its investor relations department.
5.0 Treasury Stock
A corporation may choose to reacquire some of its outstanding stock from its
shareholders when it has a large amount of idle cash and, in the opinion of its directors, the
market price of its stock is too low. If a corporation reacquires a significant amount of its own
stock, the corporation's earnings per share may increase because there are fewer shares
outstanding.
If a corporation reacquires some of its stock and does not retire those shares, the
shares are called treasury stock. Treasury stock reflects the difference between the number of
shares issued and the number of shares outstanding. When a corporation holds treasury stock,
a debit balance exists in the general ledger account Treasury Stock (a contra stockholders'
equity account). There are two methods of recording treasury stock: (1) the cost method, and
(2) the par value method.
Under the cost method, the cost of the shares acquired is debited to the account
Treasury Stock. For example, if a corporation acquires 100 shares of its stock at $20 each, the
following entry is made:
Cash 2,000
In ordinary trading companies the key factor is the difference between the prevailing
share price and the price the treasury shares are sold to the market. Where the shares are sold
at a discount to the share price investors may have concerns about dilution. These types of
issues are well understood and account for the existence of pre-emption rights in company
law.
For an investment company, shares sold from treasury would normally be at the
prevailing share price (or very close). The critical issue, in terms of shareholders being
prepared to waive their pre-emption rights, is less to do with shares being sold at a discount to
the share price than at a possible discount to NAV (net asset value).
NAV enhancement: One market view is that any re-sale of shares at a discount to
NAV inevitably erodes value for existing shareholders. It maintains that repurchased shares
should always be cancelled following a repurchase as this provides the greatest possible uplift
of NAV per share. The contrasting view focuses on the ‘round-trip’.
This identifies the whole process of repurchasing, holding and re-selling shares as one
exercise and considers its overall impact on NAV and other issues (such as liquidity). The
‘round-trip’ perspective takes a more holistic view of the operation. It recognises that there is
an ‘opportunity cost’ in selling the re-issued shares at a discount, but that this should be
weighed against potential other benefits.
5.3 Benefits of Stock Buybacks
1 Increased Shareholder Value - There are many ways to value a profitable company but
the most common measurement is Earnings Per Share (EPS). If earnings are flat but the
number of outstanding shares decreases. An increase in period-to-period EPS will result.
2 Higher Stock Prices - An increase in EPS will often alert investors that a stock is
undervalued or has the potential for increasing in value. The most common result is an
increase in demand and an upward movement in the price of a stock.
3 Increased Float - As the number of outstanding shares decreases, the shares remaining
represent a larger percentage of the float. If demand increases and there is less supply,
then fuel is added to a potential upward movement in the price of a stock.
4 Excess Cash - Companies usually buy back their stock with excess cash. If a company
has excess cash, then at a minimum you can bank that it doesn't have a cash flow
problem. More importantly, it signals that executives feel that cash re-invested in the
corporation will get a better return than alternative investments.
5 Income Taxes - When excess cash is used to buyback company stock, in lieu of
increasing or paying dividends, shareholders often have the opportunity to defer capital
gains and lower their tax bill if the stock price increases. Remember that dividends are
taxed as ordinary income in the year they are received whereas the sale of appreciated
stock is taxed when sold. Also, if the stock is held for more than one year the gain will
be subject to lower capital gain rates.
6 Price Support - Companies with buyback programs in place use market weakness to buy
back shares more aggressively during market pullbacks. This reflects confidence that a
company has in itself and alerts investors that the company believes that the stock is
cheap. Frequently you will see a company announce a buyback after its stock has taken a
hit, which is merely an overt action to take advantage of the discount on the shares. This
lends support to the price of the stock and ultimately provides security for long-term
investors during rough times.
7 Now that we've shown a few reasons to be bullish on "buyback stocks," should you go
out and buy every buyback you can find? Definitely not. Not all buybacks are equal and
some buybacks seem to be nothing more than an attempt to manipulate the stock price.
2 Buyback Percentage - The higher the percentage of the buyback, the greater the potential
for profits. Unfortunately, the buyback percentage is not typically part of an
announcement so in order to determine if there is any significance to the announcement
you'll need to do some research. Don't assume that a large number of shares is
necessarily a large percentage.
Earnings not paid out as dividends but instead reinvested in the core business or used to
pay off debt. It’s also called earned surplus or accumulated earnings or inappropriate profit.
In general terms, the capital retained by a company is used to maintain the existing
business or could be used to grow the business. This is seen as a means for boosting sales and
profits.
Some companies like those in the manufacturing sectors tend to spend a large portion
of their profits on new equipments in order to maintain its operations. This could cause
retained earnings to be slim. In this case, such large amounts of money are required to keep
the business running. On the other hand, some companies that do not invest heavily on
machinery and equipment could use a good portion of their profits to grow the business by
opening more branches etc.
Just like individuals set money aside for future investment purposes, so also
companies must retain some of their earnings for future growth. These earnings should be
invested back into the business or in other ventures that can generate more money. Retained
earnings are meant to boost the value of a company which indirectly boosts investor’s capital.
If a company is able to use its retained earnings to produce exceptionally good results, it is
better they keep those earnings instead of paying them out to investors. This is very important
because some companies pay as high as 90 percent of their earnings as dividends.
In times like these when liquidity seems tight and some companies are having
difficulties generating sufficient cash for their operations, the retained earnings serve as a
boost that complements these shortfalls. Be that as it may, investors believe that management
knows best. After all, shareholders are responsible for voting directors on the board. So, if a
company has a tradition of paying a particular percentage of earnings as dividends and it has
worked well over the years, so be it.
Bursa Malaysia is an exchange holding company approved under Section 15 of the Capital
Markets and Services Act 2007. It operates a fully-integrated exchange, offering the complete
range of exchange-related services including trading, clearing, settlement and depository
services. Bursa Malaysia today is one of the largest bourses in Asia with just under 1,000
listed companies offering a wide range of investment choices to the world. Companies are
either listed on Bursa Malaysia Securities Berhad Main Market or ACE Market.
In assisting the development of the Malaysian capital market and enhancing global
competitiveness, Bursa Malaysia is committed to maintaining an efficient, secure and active
trading market for local and global investors.
Equities offer considerable potential for capital growth and are long term risk investments. It
involves company shares which represents part ownership by the investor in a particular
company. Ownership of equities will often entitle the investor to a portion of the company's
profits through dividends.
Also called equity shares, this is the risk capital of a company. Ordinary shares give
holders the rights of ownership in the company, such as the right to share in the
profits, the right to vote in general meetings and to elect and dismiss directors.
Obligations of ownership are also conferred and this may result in the loss of an
investor's money if the company is unsuccessful. Ordinary shares usually form the
bulk of a company's capital and have no special rights over other shares. In the event
of liquidation, ordinary shares rank after all other liabilities of the company.
These are shares which carry the right to dividend (normally fixed) which ranks for
payment before that of ordinary shareholders. Preference shares may be preferred also
as regards to distribution of assets upon dissolution of the company.
Preference shares generally carry no voting rights, but voting rights may be made
contingent upon failure to pay dividends on preference shares for a certain period of
time.
The holders of the fixed income securities are creditors of the company rather than
shareholders. Holders of fixed income securities have no rights in the company beyond
the payment of a fixed interest on their loans and repayment of the loans in accordance
with the terms on which they were issued. Fixed income securities may be secured or
unsecured, with the secured fixed income securities ranking before the unsecured. Both
principal types of fixed income securities are debentures and loan stocks.
b Loan Stocks
i. Unsecured loan stocks carry higher risk than debentures, and in the event of a
winding-up, unsecured loan stock holders rank alongside all other unsecured
creditors.
ii. Convertible loan stocks carry the right to be converted into ordinary shares
of the company on pre-arranged terms and within a limited period. The
objective of issuing a convertible loan stock is to obtain fixed interest finance
at a relatively low rate of interest and at the same time make it attractive to
potential holders by the offer of equity participation at a later date.
iii. Notes
There also fixed income securities with a maturity date, and may or may not
be redeemable.
iv. Bonds
Like debentures, bonds are fixed income securities issued to lenders of
long-term loans, with a maturity date.
Exchange-Traded Fund (ETF) is an investment fund that trade like stocks. Cheap, flexible,
and tax-friendly, it allows investment of any size in a myriad of different portfolios of
securities, equities, bonds, commodities etc. ETF is more than just cheap fund. It is an
entirely different animal from unit trust funds. ETF can be bought and sold instantaneously
on a stock exchange as opposed to unit trust funds, which almost always trade at end-of-day
prices.
Warrants/TSRs give the holders the right, but not an obligation, to subscribe for new
ordinary shares at a specified price during a specified period of time. The
warrants/TSRs (usually attached to an issue of loan stock) are issued by the company.
Warrants have a maturity date (up to 10 years) after which they expire worthless
unless the holder had exercised to subscribe for the new shares before the maturity
date.
b. Call Warrants
Call warrants also give a right, but not an obligation, to buy a fixed number of shares
at a specified price within a limited period of time. But unlike warrants/TSRs, call
warrants are issued by third parties based on existing shares. Therefore, they do
not increase the issued capital or dilute the earnings of the company as a warrant/TSR
would do. Call warrants have maturity dates of not more than two (2) years.
c. Property Trusts
A property trust fund involves a listed company which invests its funds in landed
properties. It operates just like a unit trust except that it invests in property rather than
shares. It therefore provides investors access to retail and commercial properties.
d. Close-end Funds
For quantitative requirement, the local and foreign company must fulfil one of the
criteria for listing
The minimum paid up capital requirement is at least RM500 million upon listing
comprising ordinary share of at least RM0.50 each; and incorporated and
generated operating revenue for at least 1 full FY prior to submission.
Profit after tax at of at least RM6 million for the most recent full financial year
and uninterrupted profit after tax of 3-5 full financial years with aggregate of at
least RM20 million.
Must have the right to build and operate an infrastructure project in or outside
Malaysia:-
Above is the quantitative listing requirement, the company also need to fulfil other
requirement for qualitative criteria and others requirement set by Securities
Malaysia.
8. Financial Reporting Standard (FRS)
Financial Reporting Standard (FRS) is a guideline and rules set by the Accounting Standards
Board (ASB) that companies and organizations can follow when compiling financial
statements. FRS also known as financial accounting standard which defined as definitive
benchmarks prescribed by a country's Accounting Standards Board (as in the UK), or
Financial Accounting Standards Board (as in the US) for reporting of accounting data in
financial statements. These rules must be applied to all financial statements in order to
provide a true and fair view of the firm's financial position, and a standardized method of
comparison with financial statements of the other firms.
Financial Reporting Standard (FRS) which are guideline and rules for equity in accounting or
financing for companies. Below are the related FRS for equity:
The objective of FRS is to prescribe the basis for presentation of general purpose financial
statements, to ensure comparability both with the entity’s financial statements of previous
periods and with the financial statements of other entities. FRS set outs the overall framework
and responsibilities for the presentation of financial statements, guidelines for their structure
and minimum requirements for the content of the financial statement. Financial statement set
out by FRS 101 are balance sheet, income statement, statement of changes in equity, cash
flow statement and notes accompanying the financial statements.
The income statement disclosed the changes to net asset that arise through operations. Income
increases net assets and expenses reduce net assets. There are some changes to assets which
are “gain” but are not disclosed in the income statement but required by specific standards to
be shown in the statement of changes in equity. Examples of such gains are surplus on
revaluation of property, plant and equipment, certain foreign exchange differences and
changes in values of certain financial instrument.
The following items are to be presented on the face of the statement of changes in equity.
b. Items of income, gain, expense or loss that are directly recognised in the reserves in
compliance with other accounting standards
c. the total profit attributable to the equity holders and minority interest
Following are items that can be presented on the face of the statement of changes inequity or
in the notes:
ii. opening and closing balance of retained profit at the end of the period and the
changes for the period, and
iv. opening and closing balance of each class of equity capital, share premium
and each reserve and separately disclosing the changes during the periods.
An equity instrument is any contract that evidences a residual interest in the assets of
an enterprise after deducting all of its liabilities. Examples of equity instrument are
ordinary share, preference shares, share options and warrants.
8.2.2 Presentation of liabilities and equity
The issuer of a financial instrument shall classify the instrument, or its component parts, on
initial recognition as a financial liability, a financial asset or an equity instrument in
accordance with the substance of the contractual arrangement and the definitions of a
financial liability, a financial asset and an equity instrument.
For instance, preference share that are redeemable for a fixed amount at a fixed future date
is a financial liability and not an equity. A financial instrument that gives the holder the right
to return to the issuer for cash or another financial asset ( a “puttable instrument”) is a
financial liability.
FRS state that the financial instrument is an equity instrument if, and only if, both
conditions
ii. to exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavourable to the issue.
(b) If the instrument will or may be settled in the issuer’s own equity instruments, it is:
i. a non- derivative that includes no contractual obligation for the issuer to deliver a
variable number of its own equity instruments; or
ii. a derivative that will be settled only by the issuer exchanging a fixed amount of
cash or another financial asset for a fixed number of its own equity instruments.
For this purpose the issuer’s own equity instrument do not include instrument that
are themselves contracts for the future receipt or delivery of the issuer’s own
equity instrument.
In other words, if the obligations to deliver cash or other financial asset or exchange
financial instruments on potentially unfavourable terms do not exist, then the financial
instrument is an equity instrument. Issuer do not have a contractual obligation to
distribute dividends. Hence, instruments that entitle holders to such dividend are equities.
For example, a bond that grants an option to the holder to convert it into a fixed number
of ordinary shares is a compound instrument and it comprises two components,
The cost of an entity’s own equity instruments that it has reacquired is deducted from
equity. Gain or loss is not recognised on the purchase, sale, issue, or cancellation of
treasury shares.