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CHAPTER
Financial
2 Environment
Learning Objectives
• Identify the basic forms of business in Malaysia and explain the respective strengths and
weaknesses
• Identify, describe and explain the various financial statements that businesses produce
• Prepare simple financial statements of a firm
• Show an appreciation of the makeup of financial markets in Malaysia
• Distinguish between primary and secondary markets
FINANCIAL MARKETS
• Financial markets perform the essential economic function of channeling funds from the providers
of finance that have surplus funds, to those who have a shortage of funds and hence, require funds.
• Financial markets facilitate savings by individuals, provide a platform for users of finance to raise
funding, provide a channel for interaction between savers and users and finally, provide financial
services.
• Financial markets comprise of: a) Money markets – the markets for debt securities that will be
repaid in the short term (within one year) capital markets b) Capital markets – the markets for
long term debt (debt securities > 1 year) and equity
• Long-term debt includes bonds or loan stocks and bank term loans, leasing and hire purchase.
• Equity represents ownership in a firm. There are two types of equity: a) Ordinary shares b)
Preference shares
• Financial markets may be divided into:
(a) Primary market – used when firms (and the government as well) first issue securities for
funds. Firms engage into two types of primary market activities – public offerings and private
placements.
(b) Secondary market – the holder of a security sells the security concerned to another investor.
Secondary markets provide the means for transferring ownership of a security (debt/equity).
• ASEAN Exchanges is a collaboration of the seven exchanges from Indonesia, Malaysia, Philippines,
Singapore, Thailand and Vietnam (6 countries) to promote the growth of the ASEAN capital
market by bringing more ASEAN investment opportunities to more people.
• A derivative is a financial instrument that is derived from other financial securities or some other
underlying asset. Examples of derivatives are forwards, futures, options and swaps.
• Forwards and swaps are purchased in the market for ‘private’ placements, such as through the
banks.
• Futures and options are traded on Bursa Malaysia Derivatives Exchange.