FEM 3204 : 3 (2+1)
Perancangan Kewangan Dalam Pasaran Global
Financial Planning in a Global Market
HUSNIYAH BT. ABD. RAHIM
BILIK A2-14
Jabatan Pengurusan Sumber & Pengajian Pengguna
Fakulti Ekologi Manusia
Chapter 6
Investment & Risk Management
Choices
Investment: Principles
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One financial management strategy is to obtain the
most from income, this involve the investing of the
surplus of income
Successful budgeting creates savings for emergency
funds & other short-term & long-term financial needs
The income saved can thus be invested either in
short-term or long-term investments
Investment is the basis for an improved financial
position & long-term financial security
The principle in investment: High risk, high return;
low risk, low return
Investment: Principles (cont.)
Components of the risk factor
 Inflation risk
 Interest rate risk
 Business failure risk
 Market risk
 Global investment risk
Investment: Principles (cont.)
Components of the risk factor
Inflation risk
 Inflation is the rise in the general level of prices
 High inflation reduce the value of ringgit
 One ringgit placed in a safe-deposit box has less buying
power in the future
Interest rate risk
 The interest rate for investments are the results of
changes in the interest rate in the economy
 When overall interest rate decreases, the value of the
investment rises & vice-versa
Investment: Principles (cont.)
Business failure risk
 Business failure risk (eg. bad management, product
failure, competition) is associated with investments in
common stock, corporate bond
 Lower profit leads to lower or no dividends
Market risk
 Prices of stocks, bonds, mutual funds may fluctuate due
to market behavior of investors
Global investment risk
 Risks faced in stocks, bonds issued by foreign firms &
global mutual funds
Investment: Strategies
Long-term Strategy
 Buy-and-hold technique, dollar cost averaging, direct
investment and dividend reinvestment plans
1. Buy-and-hold technique
 Holding the stock for several years and let the value or
price increase
 Entitled to dividend (subject to approval by board
directors)
 The stock may split (increase number of stocks but may
have different price) – may increase in future value over
time
Investment: Strategies
2. Dollar cost averaging
 Investors purchase an equal dollar (ringgit) amount of the
same stock at equal intervals (number of shares might differ)
 Average cost determined: dividing total investment in RM by
the total number of shares
 Eg. Buy stock RM2,000 for 3 years
Year 1: RM50/share => No. stock = 40
Year 2: RM65/share =>
30.8
Year 3: RM60/share =>
33.3
Sum RM6,000;No stocks=104.1;average cost: RM57.64
You make profit if you sell the stock more than RM57.64
Investment: Strategies
3.Direct investment and dividend reinvestment plans
 Buy directly from corporation without using brokerage
firm or account executive
 Dividend reinvestment plan – enable to reinvest the
dividend to purchase companies’ stocks
 Avoid commission to brokerage firm
 Can take advantage of dollar cost averaging
Investment: Strategies
Short-term Strategies: risky methods
 selling short, buying stock on margin, trading in options
 Be experienced in the long-term strategies first before
venturing in this short-term strategies
Selling short:
 Selling stock that has been borrowed from brokerage firm and
must be replaced later (without own money)
 Used when the value of stock is expected to decrease
 First, borrow from brokerage firm eg 100 shares, sell at
RM40/share , valued at RM4,000. with that buy another 100
shares later (few months later) at lower price eg. RM30/share,
value is RM 3,000. return back the 100 shares borrowed from
brokerage firm. Gain gross profit RM 1,000. net profit less the
fees.
Investment: Strategies
Buying stock on margin
 Borrow part of the needed to buy stock
 Margin requirement set by Securities Commission eg. Only
50% borrowed & one have a minimum amount of cash eg
RM2,000
 Allows investor to buy more shares than the amount of
money they have in cash
 Eg. If one has RM5,000 & borrow through broker RM5,000,
can buy 10,000 stocks at RM10/share. Stock certificate as loan
security
 At the time to sell, price RM14/share, sold at total RM14,000,
gross profit RM4,000 after deduct the RM5,000 loan net profit
less RM4,000 (deduct fees)
Investment: Strategies
Trading in options
 Gives you the right to buy or sell stock at a predetermined
price during a specified period of time
 Options available for 3, 6, 9-months period
 If you assume the price will increase in short time, you can
buy call option
 Call option –is sold by stockholder and gives the buyer the
right to buy 100 shares of stock at a guaranteed price before
a specified expire date
 A put option – the right to sell 100 shares of stock at a
guaranteed price before a specified expire date
 If the price changes does not occur before expire date, you
lose the money you paid for the option
Investment: Choices
Factors Affecting Choice of Investments
1. Safety & risk
2. Investment income
3. Investment growth
4. Investment liquidity
Investment: Choices
Factors Affecting Choice of Investments
1. Safety & risk
 Safety in an investment means minimal risk of loss
 Risk in an investment means a measure of uncertainty of the
outcomes
 Investment at one end consists of very safe instruments eg.
Government bonds, savings accounts, certificates of
deposits, certain stocks & bond, may include also mutual &
real estate
 This attract conservative investors, especially those near
retirement as they dare not to lose their money – no time to
replace the money
 Low chance of become worthless
Investment: Choices (cont.)
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At the other end of the investment spectrum are
speculative investments
Speculative investments – are high risk investment with
high expectation of large profit in a short time
High loss to the extent of losing the initial investment are
possible
Eg. Speculative stocks, certain bonds, real estate,
commodities, precious metals or stones
Too risky for beginning investors
Investment: Choices (cont.)
2.
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Investment income
Invest to obtain predictable source of income
The safest investments – savings accounts, certificates of
deposits, savings bonds – are the most predictable
income
The interest rate is known or almost known & also the
income generated from it on a specific time are known
Other than that, can choose from government bonds,
corporate bonds, utility stocks, selected common stocks
Mutual funds & real estate rental property
The higher risk investments offer low potential for
regular income
Investment: Choices (cont.)
3. Investment growth
 Growth in investments means that the investments will
increase in value
 Common stocks offers such investment eg. Stocks issued
by corporations in the electronics, technology, health care
products
 Sacrifice immediate cash dividends for the higher future
amount of money
 Profits that are supposed to be paid as dividends are
reinvested in the form of retained earnings
 The retained earnings increases the value of a share of
stock
Investment: Choices (cont.)
4. Liquidity
 Is the ability to buy or sell investment quickly without
affecting the investment’s value
 Ranges from near-cash to frozen investments
 Checking & savings account are very liquid – can obtain
cash easily without reducing the value
 Certificates of deposits impose penalty for withdrawing
money before maturity date
 However, market condition, economic condition might
affect the liquidity
Investment: Choices (cont.)
Investment Alternatives
 Stock or equity financing
 Corporate & government bonds
 Mutual funds/unit trusts
 Real estate
 Others
Investment in Equity
With investment in equity or shares or stock, investors
have equity ownership
 Investor own the company according to their shares or
their equity in the company
 Companies don’t have to repay the money a
stockholder/shareholder pays for the stock
 Stockholders may sell their stock to another individual
 Selling price depends on demand for the stock
 Dividends not mandatory
 Dividends paid out of profit, approved by board of
directors
Investment in Equity
Investor’s right in shares ownership (equity ownership)
1. Ordinary shares (aka common stock)
 Shares that have equal value and equal rights of investors in
that shares (rights in the profit value & voting)
2. Preferences shares (aka preferred stock)
 Shares that have benefits that are not the same as the
ordinary shares
 Existed as companies wants to increase capital & thus offer
some specialty that are unlike the other shares
Investment in Equity
Among the special treatments for preferences shares are:
 Have priority in profit payment (not less than 5%), the
balance distributed equally among ordinary shareholder
 Given a fixed annual dividend no matter the performance of
the company
 Given back perfect share values if company was closed
down; the balance distributed equally among ordinary
shareholder
 Have more than one vote in grand annual meeting
 Have pre-emptive rights where they were given priority in
the offer to buy newly introduced shares by the same
company
Investment in Equity
Evaluation of a Stock Issue can be assessed through the
classification of stocks
1. Blue-chip stock:
 Safe investment attracts conservative investor
 Offered by strongest & most-respected companies, eg
Nestle
 Their characteristic: leadership in the industrial group,
history of stable earning, consistency in paying dividends
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Investment in Equity
2. Income stock:
 Pays higher than average dividends
 Steady corporation, predictable source of
income eg. Shell
 Stocks offered by telephone companies, utility
companies, eg TENAGA
Investment in Equity
3. Growth stock:
 Corporation that has potential to earn profits above
average profits of all firms in the economy
 Companies offer expanding products & an effective
research & development department, retail expansion,
expansion into international markets eg. Air Asia
Bonds
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Instruments offered by government or companies for
them to obtain loans from investors
In general, bond holders are paid an amount of fixed
return (coupon) every 6 months and at the maturity date,
investors receive the face value of the bond
Eg. If you buy an RM1,000 bond, & it gives a 5% return
each 6 months, then you’ll be receiving RM1,000 plus
the accumulated returns from each of the 6 months
(RM50 or more) at maturity time
Have a fixed period of time
Bonds
Bond’s price fluctuates as share prices
 Bonds can be transacted before its maturity date
 The factor that determine the bond’s price is the market
interest rate
 If interest rate increase, bond’s price also increase
There are 2 advantages for bonds:
 Consistent income, and alleviated capital at maturity date
There are 2 disadvantages
 The market for bonds are a bit slower, and need large
amount of money
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Unit Trust
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Investors purchased units of investment from unit trust
companies (CIMB Trust Fund, PNB, ASNITA and others)
The money is invested by the asset management companies
appointed by the unit trust companies
The investments are taken care by the trust holders
companies appointed by unit trust companies
The price for one unit of unit trust investment is lower
(<RM1)
Low risk compared to equity (ordinary & preference shares)
Get higher return in long-term & able to overcome
inflation rate
Real Estate
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Investors buy home, shops, apartment for
rent
Higher capital for the advanced money
during purchasing
Require longer time & commitment to
maintain the fixed asset and ensure
rentals collected
Other option is to invest in unit trust
based on real estate eg PNB properties,
Maybank properties
Comparison of Types of Investment
Type of
Investment
Unit trust
Risk Level
low
Expected
Return Level
low
high
high
Bond
Real estate
Equity
shares/stock
Protection & Risks: Principles
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Risk in Takaful & in conventional insurance is
the probability of an undesirable future event to
occur and further resulted in financial loss.
Risk is sometimes simply defined as the
uncertainty of the financial loss because of the
uncertainty of the perils or misfortune to
happen.
Risk Management
Risk management
 is an organised strategy for protecting assets & people
 helps reduce financial losses caused by destructive
events
 a long-range planning process
 by understanding risks & how to manage risks, you
can provide better protection from the financial losses
 risk management is not limited to buying insurance,
other methods may be less costly
Risk Management
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Risks: defined as the uncertainty of the financial loss
because of the uncertainty of the perils or misfortune
to happen
Perils: the cause of a possible loss. Eg. Fire,
windstorms, explosions, robbery, accident, premature
death
Types of risks:
Pure risk or insurable risk
Speculative risk
Risk Management (cont.)
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Pure risk or insurable risk:
there would be a chance of loss only if the specified
events occurred
It is accidental and unintentional risks for which the
nature & financial cost of the loss can be predicted
Speculative risk or uninsurable risk:
A risk that carries a chance of either loss or gain
Eg. Starting a small business that may or may not
succeed; gambling
Risk Management (cont.)
The following are 3 types of pure risk or insurable risks
 personal risks, property risks, liability risks
 most common risks are classified under the three types
of risks above
1. Personal risks:
 The uncertainties surrounding loss of income or life
due to premature death, accidents, illness, disability, old
age or unemployment
 The risks are faced by the person itself
Risk Management (cont.)
2. property risks:
 Are the uncertainties of direct or indirect losses to personal
or real property due to fire, wind-storms, accidents, theft,
or other hazards
 The risks are faced by the property itself
3. liability risks:
 Possible losses due to negligence resulting in bodily harm or
property damage to others
 Such harm can be caused by automobiles, professional
misconduct, injury suffered on one’s property
 The risks are faced by others
 Eg. A driver knocked-down a pedestrian, individuals in
detention centre being beaten-up by the officers in charge
Risk Management (cont.)
Methods of Risk Management
1.
Risk avoidance
2.
Risk reduction
3.
Risk assumption
4.
Risk shifting
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Risk avoidance:
To avoid the risk is by not involving in activities that
gave rise to that risk
Eg. Avoid the risk arising from a car accident by not
driving to work or by not walking anywhere near a
running car
Risk Management (cont.)
2.
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Risk reduction
when avoid risk totally is not possible, you can try to
reduce risk
To reduce the risk is by doing something or having
something that will lessen the risks that might be faced
Eg. To reduce risk arising from injury in a car accident,
wear a seat-belt
Eg. to reduce potential damage or to protect life from
fire, install smoke alarms & fire extinguisher
Eg. Reduce the risk arising from illness, by eating
balanced diet & exercising
Risk Management (cont.)
3.
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Risk assumption
Means taking responsibility for the loss or injury that
may result from a risk
Assume risk if the potential loss is small or when risk
management has reduced the risk or when insurance
coverage is expensive or when there is no other way to
obtain protection
The risk assumed is self-insured
Self-insurance; is the process of establishing a monetary
fund to cover the cost of a loss
Eg. Don’t purchase insurance for an older car,& if
accident occurs, you have to pay with your own money
Risk Management (cont.)
4. Risk shifting
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Most common method used is to shift risk or transfer risk
to another party that is the insurance company or other
organisation
Insurance is the protection against loss make available by
the purchase of an insurance policy from an insurance
company
Involve high cost & a long-term commitment
Sought after the risk avoidance, risk reduction or risk
assumption are unable to cover the loss from the risk
faced