Tutorial 1

1. Explain the main differences between the primary and secondary market.
Discuss how the primary market is dependent on the secondary market.

- Shares are trades in the primary market when the company issues them for the
first time. In the secondary market, people buy and sell shares that were already in
the primary market before. There are no more trades in the primary market.
- The secondary market is the place where the existing holders of the shares sell
trade the shares with the new buyers in the market. The investors can carry out
trading the shares in the secondary markets as many as they want.
- The secondary market is very important to the primary market because it helps set
the price of the stock. It also affects price volatility and how well the market
works. There are a lot of shares in the primary market that are bought and sold in
the secondary market. This means the secondary market is very important to the
primary market.

Primary markets are markets where corporations raise capital by issuing new
securities. Securities are offered for sale for the first time, e.g., Initial public offer
(IPO). IPO is where a company issues stock in the public market for the first time.
Secondary market is the place where the stocks, bonds and other financial instruments
that were issued in the primary market are traded between the potential buyers and
sellers.

Secondary market provides the necessary liquidity for the issued securities. The
prospective investors of secondary market apply in primary market based on its
experiences in secondary market. By providing safety, regulation in secondary
market, stock market attracts investors in primary market.

2. Discuss SEVEN (7) differences between money markets and capital markets.
Basic of differences Money markets Capital Markets
Nature of Market The market where lending Markets for long term
and borrowing or debt (i.e debt securities
investment and loan of that will be repaid after
securities is made (less more than one year) and
than 1 year) equity
Liquidity of the market Money markets are high Capital Markets are
liquid comparatively less liquid
Purpose Short term funds Long term funds
requirement of the requirement of the
business. business

Duration of securities The maturity of financial The maturity of capital

instruments is generally markets instruments is
up to 1 year longer and they do not
have stipulated time frame
 Risk factor Since the market is liquid Due to less liquid nature
and the maturity is less and long maturity, the risk
than one year, Risk is comparatively high
involved is low
Return on investment Less return on investment Comparatively high
Securities dealt with Certificates of deposits, Shares, Bonds
treasury Bills, etc

3. Discuss FIVE (5) types of financial institutions and explain the primary services
offered by each.

Financial institutions - act as a middleman between ones that are having an excess of
funds and those who have a scarcity of funds providing advantages to both sides of
parties

i. Commercial banks-providing banking products like loans, deposits etc.

ii. Insurance -To financially guard against unpredictable life Occurrences i.e
accidents, illness or even death

iii. Investment bank- bridge between large enterprises and the investor. Their
primary roles are to advise businesses and governments on how to meet their
financial challenges and to help them procure financing, whether it be from
stock offerings, bond issues, or derivative products.

iv. Unit trust - are a form of collective investment scheme that allows customers
with similar investment objectives to pool their funds together to invest in a
portfolio of assets. A team of full- time professionals manages the pool, and a
trustee is appointed to protect the interests of the unitholders.

v. Pension funds - are collective investment undertakings that manage employee

savings and retirement. Their primary objective is to provide pensioners who
have reached retirement age with incomes in the form of a lifetime pension or
capital.

Central Bank - Bank Negara Malaysia

The Bank Negara is the apex of the monetary and financial structure of the country. The
principal objective of the bank is to promote monetary and financial stability that is
conducive to the sustainable growth of the Malaysian economy.
BNM is guided by the principle that it should act only in the economic interest of the nation
and without regard to profit.
The functions of BNM is to promote economic growth, a high level of employment,
maintaining price stability and a reasonable balance in the country's international payments
position, eradicating poverty and restructuring society.
BNM ensures that the availability and cost of money and credit in the economy are consistent
with national macroeconomic objectives.
Therefore, BNM acts as the banker for currency issue, keeper of international reserves and
safeguarding the value of the ringgit, banker and financial adviser to the Government, agency
responsible for monetary policy and management of the financial system and banker to the
banks.
As the country's monetary authority, it is responsible for maintaining monetary stability, i.e.,
the stability of the value of the Ringgit.
BNM conducts its monetary policy by influencing the level of interest rates using the
statutory reserve requirement and liquid ratio asset These instruments have enabled the
Central Bank to control in the volume of liquidity in the banking system and therefore the
credit situation in the economy

Commercial Bank
The mobilization of savings, deposits, surplus and idle funds through savings account, current
account, fixed deposit and money market instruments.
The provision of services and facilities for their customers and other members of the public to
collect/receive and transfer/pay money both locally and internationally.
Commercial banks is the only institution allowed to provide current account facilities i.e to
issue cheques.
The BAFIA combined the Banking Act 1973 and the Finance Companies Act 1969 under a
single legislation but this too was replaced by Financial Services Act 2006 the (FSA 2013).
inancial
Following the merger of local banks and finance companies into 10 local banking nomy.
groups in 2000 the functions of finance companies, such as hire purchase and erest of leasing
activities, have been incorporated into commercial banks.

Investment banks
Offer services to corporate clients are much more loosely regulated by the Securities
Commission (SC). This offers less protection to customers (corporate clients), but allows
investment banks a significantly greater amount of operational freedom. The comparative
weakness of regulation by the government, along with their specific business model, does
give investment banks a higher tolerance of, and exposure to, risk.
Unlike commercial banks investment banks do not take deposits or issue cheques. An advisor
who provides investment banking services in the Malaysia must be a licensed broker-dealer
and subject to the Capital Market Services Act 2007 (CMSA 2007)
Islamic Banks
Islamic banks are financial institutions that operate within the framework of Islamic
principles and laws.
The objective is to implement the economic and financial principles of Islam in the banking
arena. An Islamic bank is a financial institution whose statues, rules and procedures expressly
state that its commitment to the principles of Shariah and to the banning of the receipt and
payment of interest on any of its operations.
4. How would economic transactions between the supplier of funds (e.g., household)
and users of funds (e.g, corporations) occur in a world without financial
institutions?

- Financial institutions - act as a middleman between the users of the funds and the
supplier of the funds
- The absence of financial institutions means a lack of intermediary, which means
direct transfer from the investors to the users of funds.
- The supplier of funds (household) may keep their savings for future plans Keep in
hand
- The users of funds (corporation) facing scarcity in capital and expansion
- Here, the arrival of financial institutions reduces the distance between users and
suppliers of funds.

5. Discuss how banks currently dealing with Fintech

- Fintech has taken the majority of the banking transaction in modern-day
- Today, every bank transaction is conducted online and so is bank record- keeping
going virtual
- From depositing cash or transferring money to obtaining loans, everything has
gone digital
- However, technology has not been able to cover all aspects such as virtual
currency
- Dealing with financial inclusion in banks comes with a lot of risks as well.
- To deal with the financial risks, the bank is investing heavily in security measures
for the security of data, transactions and the like.
- Any data leak of a bank is a severe financial loss for an economy as a whole,
- The appropriate strategy far large banks and fintech startups moving will be to
make the banking sector more accessible, reliable and provide proper security.

6. Define and explain cryptocurrency. Evaluate cryptocurrency in terms of the

functions of money and explain if it is money or not.
- Cryptocurrency is a type of digital asset that can be used as a medium of exchange.
Individual coin ownership records are stored in a digital ledger or computer database
and strong cryptography is used to protect transaction record entries, control the
creation of new digital coin records, and verify the transfer of coin ownership.

- It doesn't usually come in a physical form like paper money and isn't usually made
by a central authority.

-Functions of money are means of exchange, a store of wealth and a unit of account

-Although cryptocurrency meets the criteria as a medium of exchange, it fails as a

store of value and a unit of account. Unlike fiat currencies the Ringgit Malaysia, such
as cryptocurrency has proven to be too volatile to make it a reliable vehicle in which
to store value over long periods. Thus, cryptocurrency cannot be considered as real
money.