Understanding of Initial Public Offerings (IPOs)

By Stella Goh – Market Data Analyst | 25 September 2018

Initial Public Offering (IPOs) is a type a process happened when the private company issued new or existing shares to be sold to the general public in the primary market to raise funds. The capital gains from the sale of the shares will be used to buy machinery, land or repay for the loans/debts of a company. Most of the companies that offering IPOs are young companies, or the companies that have been operating for many years and finally decided to go for the stock exchange. Through the IPOs, the companies get its name on the stock exchange. IPOs is one of the ways for the young company to gain more access to market capital.

The Approval Process of IPOs in Malaysia

Adviser submits an IPOs application to Securities Commission

The company must apply for IPOs and must be complete for SC to meet its timeline charter of 3 months for consideration of the IPOs application. Incomplete application’s details may cause delays in review and the submission. Advisers may have a pre-submission consultation with SC to discuss the issues on IPO application.

Securities Commission evaluates IPOs application

Assessments will is make in accord with the provisions of Guidelines to review to ensure it complies with SC’s guidelines on Asset Valuation. Corporate governance will have record checks, and queries will be sent to advisers to seek clarification on issues identified to have a clarification meeting to discuss issues.

Securities Commission decides on IPOs application

The recommendation committee which includes senior management from different departments will convene challenges process to ensure the thoroughness and consistency in the recommendation of application tabled with the Issue Committee. They will meet to deliberate and decide on IPO application.

Securities Commission informs adviser of SC’s decision

The advisers/applicants have six months from the date of SC’s decision letter to implement the listing proposal of Applicant. If any rejection occurred, SC would conduct a post-decision meeting with the applicant to convey and discuss. They have one month time to reveal the rejection.

Adviser submits registration IPOs prospectus

The prospectus must not contain false and misleading, and there is no material omission of statement/disclosures.

Securities Commission registers the IPOs prospectus

SC will review and departments will conduct checks on compliance on approval conditions. Once registered, applicants must lodge the prospectus with Companies Commission of Malaysia. The prospectus will start to issue to investors over a period of minimum 5 market days.

Listing by Bursa

It will take around 13 market days minimum from the issuance of the prospectus before listing into Bursa exchange. Relevant SC departments perform post-approval follow-up on the terms and conditions of the approval and post- vetting on the prospectus.

How to Apply IPOs online?

Investors who are interested in subscribing IPOs must have a bank’s online account. They can log in to their bank account and click the “eShare” for the Maybank’s user, and then it will show you the IPOs list. Then, investors can select the IPOs that he wants to apply. By the way, investors are required to read through the Terms and Conditions of the eShare Application and Declaration and also the prospectus of the IPOs before proceeding. Then, the investors needed filling up the application form and proceed to the submission. However, it may be difficult to purchase the IPOs because there will be a limitation of people can only subscribe to it. It was due to the balloting process to determine who will successfully obtain the rights to purchase the pre-listing of the company shares. The people who failed may buy the IPO stock during the first day of IPO stock listed in the stock market.

How to Determine the Initial Public Offerings is Good or Bad?

Background of The Company

Investors need to consider a lot of things before invest in a new public company. They need to do some researches on the prospectus of the company before deciding to subscribe the IPOs. The prospectus served as overall information related to the company such as Business Models of the company, financial health, prospects, risks may face and so on.

The business model of the company will determine the company future direction and projection. Investors can look into what the company’s primary business is? Can the business sustain in a recession? Can the company maximise their profit in an economic boom? Let’s say the company’s primary business is operating under the food industry. Food is essential for everyone to survive. From this, we knew that this company could survive in all weather market.

Financial Highlight

Company’s past performance is a clear indicator of how the company has performed over the years, and we can use it to project the company future financial performance. If the company’s growth chart is volatile, an investor should refrain from investing in this type of company. However, if the company’s growth rate has been stable and growing over the years, there is a high probability that the company will perform well in the future. However, the financial data is limited because the Securities and Exchange Commission (SEC) only requires the income statement shows the current year plus the past two previous fiscal years of the company. Therefore, investors may be only able to look through the financial highlights of the company so they must also see other details in the prospectus.

 Risks

Investors must understand their risk tolerance when subscribing to the Initial Public Offerings (IPOs). The risk involved is higher when compared to a fixed deposit due to FD provides consistent rates of returns until the maturity date; regardless of market conditions.

Initial Public Offerings stocks do not provide a guarantee of returns and will not guarantee they will make money in their business, or the will pay you dividends. Investors have to be comfortable with the risks that they might lose all their money when they are buying the stocks.

 The Lock-Up Period

Investors must be careful on the lock-up periods of the Initial Public Offering after it successfully listed on Bursa Malaysia. When the company goes public, Bursa Malaysia requires the promoters of all applicants for Main Market not to sell, transfer or assign their entire shareholdings in the applicants as at the date of listing, for six months from the date of admission to Bursa Malaysia based on the lock-up agreement between them. Upon expiry of 6 months, all the insiders or substantial shareholder will be freely selling their stocks. Therefore, there will quite some shares up for sale and creating an excess supply that can cause the stock price to drop drastically.

Conclusion

Among all investment tools, Initial Public Offerings (IPOs) is one of the choices that investors can consider. Investors shall study and analyse the pros and cons thoroughly before making their investment decisions.

Stocks Investing vs Unit Trust Fund

By Evelyn Yong | 7 September 2018

There is always an argument between buying a stock or buying a unit trust. Before saying that which one is better, let’s look through the characteristics of both stocks and unit trust for better understanding.

Unit trust

Nature

A unit trust is a product comes out by a fund house which has a group of professions in managing the capital gathered. It usually exists as an open-ended fund which is no limit with the purchase unit. The price of the shares is determined by the fund’s net asset value (NAV) per share which calculated at the end of each business day. An open-ended fund can issue any number of new shares or can redeem existing shares. Their shares or units of a mutual fund did not trade on an exchange and quoted at per-share NAV (i.e. the fund’s net asset value divided by the number of fund shares outstanding).

Controllability

‘Unit trust’ comes with the word of ‘trust’ which mean you trust on the fund management team in both ability and professionalism so that you buy the unit of the fund. Hence, the fund manager is fully empowered in decision making in managing the portfolio. Thus, the investor has no rights in judging, questioning and affecting about the assets allocation, diversification and all the decisions made within the portfolio. If you don’t like the style of the fund manager, the only way you can do is divest your units.

Fund Types

A unit trust is available in various types with a different investment focus. (ie. Equity Funds, Balanced Funds, Fixed Income Funds, Capital Protected Funds, Shariah Funds, etc.) For example, Shariah funds will only invest into Shariah-compliant investments which avoid companies involved in activities, product or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products. The set-up of so many types of funds intends to fulfil different kinds of customer’s need and the risk compliance.

The customer can choose the fund’s that meets your investment objective and approach. Besides, they can also look for the historical performance as a comparison with other similar funds. Although the past performance cannot guarantee the future performance at least, this is a reference for a customer in choosing a better fund as the same concept in fundamental-based stock investing.

Fees and Cost

Investing in a unit trust is like you ask someone to help you in managing your money. Hence, rationally, you have to pay them money for the hard work. Commonly, there are four kinds of charges which are initial sales charge, management fee, redemption charge and switching fee. Initial sales charge also known as front-end load which the investor is charged when buying a unit trust (typically 1.5-5% of your investment). For example, RM 1000 is given to invest in a 5% initial sales charge fund; then the amount will be placed in the portfolio will be left with value worth RM 950.

The management fee is an annual fee charged by the fund manager for the management of the fund, typically 0.5-2% per annum of the Net Asset Value of the fund. Other types of fees are charging when doing related changes. All those fees are usually payable, regardless of how well or poorly the fund performs. Therefore, even your fund’s value has been relatively stable or may perform well; the investor will get a lesser return percentage from your unit trusts investment.

Stocks

Nature

Stocks are the shares of companies listed on exchange trade platform. (ie. Bursa Malaysia, Singapore Exchange, Hong Kong Exchange, etc.) They are listed on the board and selling their shares to get capital to the company for development. Hence, the volumes of shares are limited to the companies’ offered. Every stock has their book value. The Board will display the last traded share price, and it might change by seconds to seconds.

Controllability

An investor has his right to put their money in which stock (no matter in which industry or country), and once the transaction is successful, the investor will become as a shareholder of the company. The investor has the right to buy or sell the stocks at any time as he decided and able to manage his portfolio in his favour.

Stocks Types

Stocks are segregate into high dividend stocks, blue-chip stocks, fluctuating stocks and so on. An investor can go in different kind of shares which suits their preference and personal risk compliance. High dividend stocks might have a lower chance at price appreciating. Blue-chip stocks are companies in the stable stage which can avoid much effect from market turbulence and lower down the risk for the portfolio. High volatile stocks might from some profoundly affected by the nature of some industries. (ie.petrol related industry, steel industry, etc.) They have the chance of getting price appreciated at the same time they also facing the risk of suffering loss.

Fees and Cost

To trade on Bursa Malaysia, an investor needs to open a CDS account through a brokerage firm which subjected to RM10 once-off charge. The CDS account will act as a depository for you to keep the stocks after buying them. At the same time opening the CDS account, you require to open a trading account with the broker firm together. The broker will act as a helper to help you in dealing with every transaction. The broker firm has the standard brokerage charge (typically RM7-28 / 0.2% on the invested amount), and the government is also charging the fixed rate 0.001% of stamp duty and Bursa Malaysia also charging on 0.03% of clearing fees. The total minimum cost for a transaction is around RM10. Hence, the more significant amount invested, the lower the percentage of taxes charged which is also the payable cost no matter how the stocks’ performance.

Unit Trust Characteristics Stocks Investing
Units unlimited can buy whenever time Nature Shares limited, intend to buy needed another to sell
No, in all decisions Controllability Yes, in all decisions
Equity Funds,
Balanced Funds,
Fixed Income Funds,
Capital Protected Funds,
Shariah Funds, etc.Depends on risk preference and investment objectives
Types High Dividend Stocks,
Blue-chip Stocks,
High Fluctuating Stocks, etc.Depends on risk preference and investment objectives
1.5-5% Initial Sales Charge,
0.5-2% Annual Management Fee,
and other charges on different changes made
Fees Minimum RM10 per transaction

Conclusion

In conclusion, a unit trust is more suitable for the investor without investment knowledge as an investor need to prepare the money for the fund manager to manage it while investing in individual stock require a minimum investment knowledge and time-consuming in market observation as well as researches needed to select a good share.