BBAP4103 Investment Analysis Topic 2 Transactions in the Share Market January 2018
Content 2.1 Transaction Procedures in Bursa 2.2 Types of types of orders 2.3 Margin trading 2.4 Other trading transactions jargon
Learning Objectives By the end of this topic, you should be able to: 1. Explain the transaction procedures in the Bursa Malaysia; 2. Differentiate the types of orders; 3. Assess the mechanics of margin trading; and 4. Explain the terms used in share trading transactions.
2.1 TRANSACTION PROCEDURES IN BURSA The first step to trade on the Bursa is to open a CDS Account and a Trading Account with investment bank or a dealer from a licensed broker. A remisier is an agent who handles individual investors while a dealer is an agent who handles institution investors. The trading account looks like any ordinary bank account where there are debit and credit columns. All purchases are recorded on the credit side and all sales are registered on the debit side. All transactions in the Bursa are done electronically.
2.1 TRANSACTION PROCEDURES IN BURSA The buyer s account will then be credited with the number of shares on the third day after the successful order. This is known as T+3. The buyer will own the shares upon payment to the broker. The buyer cannot trade in these shares before payment is made without the permission of the broker. The buyer is not allowed to cancel the purchase since the bid was successful. If he fails to settle the payment, the broker can sell off the shares. Since the buyer s account has to be credited or recorded on the third day, it is important for the other party of the transaction, that is the seller, to have the shares in his account two days after the successful order. This is known as T+2.
2.2 TYPES OF TYPES OF ORDERS In a stock market transaction, there are five types of orders: (a) Market Order (b) Limit Order (c) Stop Order (d) Good Till Cancel Order (e) Day Order
(a) Market Order 2.2 TYPES OF TYPES OF ORDERS Market order is an instruction that an investor gives to the broker to buy or sell at the prevailing market price. This type of order is risky as the difference in price can be very far from the price anticipated by the investor. (b) Limit Order To protect against too great a price range, an investor can set limits to the price the broker can use. In a limit buy order, the investor sets the highest price that he is willing to pay for a stock. If the market price of the stock is thought to be too high and does not fall below this limit, then the buy order will not be executed. In a limit sell order, the investor sets the lowest price he is willing to sell a particular stock. In this case, the stock will not be sold if there is no buyer willing to pay the stated price.
(c) Stop Order 2.2 TYPES OF TYPES OF ORDERS Stop order is an instruction to protect an investor from profit or limit losses. It is used when the investor thinks the price is going to fall and he needs to protect his investment. For example, an investor buys some shares for RM3 each and the price is now RM4. He gains a profit of RM1.00 and wants to protect it. Thus, he places a stop loss order of RM3.75. If the price falls to RM3.75, the broker will try to sell the share. Sometimes, the broker may not be able to complete the transaction at that price and may sell it at a lower price. The risk in this type of arrangement is that the price drop is temporary. The price may go up again and the investor will lose the opportunity to get higher returns once the share is sold. A stop order can be combined with a limit order. For example, the above investor can issue a stop order of RM3.75 and a limit sell order of RM3.50. If there is no buyer willing to buy at RM3.50, then the stock will not be sold.
2.2 TYPES OF TYPES OF ORDERS (d) Good Till Cancel Order Good till cancelled is an order that is valid until the client instructs it to be cancelled. (e) Day Order Day order is an order that will be valid for a day. It will not be carried to the next trading day.
2.3 MARGIN TRADING Margin trading is a loan facility that an investor can use to buy stocks. This loan is provided by the broker. The loan amount is based on an agreed percentage of the value of the shares. Interest will be charged on the amount of the loan as well as the length of time the loan was used. Illustration: a margin trading situation using an example of purchasing five lots of shares at a price of RM3 per share. The amount of cash flow needed is RM1,500. The investor is given a margin facility of 40% of the investment value. Therefore the investor needs to come up with RM900 of his own funds.
2.3.1 Margin Call The value of investment can change if the price of the share changes. Thus, the broker needs to protect himself against any default by the customer. The broker can insist on a maintenance margin against the value of an investment. A maintenance margin is a level to which the investment value can drop before the investor has to increase his contribution to the investment.
2.4 OTHER TRADING TRANSACTIONS JARGON If an investor is buying and intends to hold the share for a while, then he is regarded as being in a long position. An investor is said to be in a short position if he is not interested in a share, or if he has any, he intends to sell it. A bull trend is a condition where the market is on the rise. If an investor feels bullish, then he may think that a share may increase in price and it is a good time to buy. A bear trend is a market that is on the decline. A bearish situation is when investors think it is time to sell or may also indicate that it is not the time to enter the market.
2.4 OTHER TRADING TRANSACTIONS JARGON Short selling is a situation where we sell shares that we do not own. This is done when there is a forecast that the price of a share is going to fall. The procedure is to borrow shares and sell them. Then wait for the price to fall after which we will buy them at a lower price. The shares are then returned to the lender. The difference between the selling and buying price is the profit made. This move is very risky and involves a lot of speculation. If it is done on a large scale, it may also upset the situation in the market. Some exchanges may ban this type of transaction.
2.4 OTHER TRADING TRANSACTIONS JARGON Short selling is a situation where we sell shares that we do not own. This is done when there is a forecast that the price of a share is going to fall. The procedure is to borrow shares and sell them. Then wait for the price to fall after which we will buy them at a lower price. The shares are then returned to the lender. The difference between the selling and buying price is the profit made. This move is very risky and involves a lot of speculation. If it is done on a large scale, it may also upset the situation in the market. Some exchanges may ban this type of transaction.