Chapter 5 Islamic Equities Market
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Transcript of Chapter 5 Islamic Equities Market
ISLAMIC INVESTMENT
Mahyuddin Khalidemkay@
salam.uitm
.edu.my
Islamic Equities Market
Topic Outline
Islamic Equities Market Types of Securities Common Stock Preferred Stock Shareholders Reward
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Introduction
Securities are financial assets
Traded in the capital markets
Since the fluctuations in securities prices can be very volatile it is very attractive investment
People with surplus funds
To buy and sell them
Hoping to get dividends and/or
capital gains within a short
time
Issuers of securities
Use their securities to raise
funds
For future expansion of their
business
Governments
Issue securities to raise funds
For development projects.
Islamic Equities Market
Going by the Shariah, equity financing would be the preferred financing/investing technique. • Equity financing has no fixity of return.• Returns that are tied to the earnings of the underlying
business. • A risk-profile not detached from that of the business. Thus, equity financing is very much profit and loss sharing with all the business risks thrown in. Investment in a stock resembles the provision of Mudarabah financing.
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Islamic Equities Market
However, not all stocks listed in an exchange may be acceptable from a Shariah viewpoint.
The need for a shariah evaluation of stocks and the identification of shariah compliant stock has led to the development of :
• Shariah filters• Shariah indices• Shariah compliant REIT (Real Estate Investments Trust) and ETFs
(Exchange Traded Funds)• Entire industry of Islamic Mutual Funds
All these have meant that there is an Islamic Equities Market operating in parallel with the conventional equity market.
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Components of Islamic Equities Market
Stock/ shares
Islamic Mutual Funds
Islamic ETFs (Exchange Trade
Funds)
Islamic REITs (Real Estate Investment
Trusts)
Others like Islamic Private Equity Funds,
Islamic Structured
Products etc.
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Islamic Equities Market
STOCK EXCHANGES
SHARIAH COMPLIANT STOCKS
INVESTORS
ISLAMIC PRIVATEEQUITY
ISLAMIC REITS
ISLAMICETFs
ISLAMIC MUTUAL FUNDS
Types of Securities
There are 2 main types of securities namely:
Equity instruments
Debt instruments
The third type which
is increasingl
y becoming popular is:The hybrids. Hybrids are those that have the
characteristics of both equity
and debt.
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Types of Securities
The most common equity
instrument is the common stock
As long as the stockholder has
the shares he has a residual claim on
the firm.
The most common debt
instrument is the bond/sukuk
Generally bonds would provide holders a fixed annual or semi-annual interest
payments (coupon payments) and full
repayment of principal at maturity.
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Common Stock
Characteristics of Common
stock
• Right to residual value of the firm• Right to the portions of dividends if
announced• Right to vote in the AGM.
Common Stock
Dividend
• Cash: Treated as investment income and taxable
• Stock: Dividend in form of additional stock issued in proportion of stock owned
• Property: Dividend in form of product and services
Equity instruments represent ownership in the company.
Common stock is
• A public listed company is jointly owned by its shareholders.• Since the corporation is a separate legal entity the shareholder is responsible for any losses up to his total investment.
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Types of Common Stock
Types of Common stock associated with the underlying company
Blue chip
Strong, stable and mature, with a long history of consecutive quarterly dividends; May also be a suitable investment for an investor with an income objective.
Growth
Strong potential for improving profits. The company's earnings are growing faster than the overall economy, and thus the stock has a strong potential for outperforming the market.
Emerging growth industry
Young firm in new industry with good growth prospects, but also high-risk.
Income
Mature company with high dividend yield and few prospects for growth or diversification. These are typically utility companies; however, they may also be blue chip companies.
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Types of Common Stock
Types of Common stock associated with the characteristics of the industry
Cyclical stocks
Move with the broader market - and often with greater volatility -
so they outpace the market during an expansion but whipsaw back
during a contraction. Automotive stocks are one
example.
Counter-cyclical or defensive stocks
Do better in bear markets, when investors are looking for safe places - that are not affected
greatly by economic currents - to park their money.
Companies in the food, health care and defence industries are all
examples.
Speculative or special situation stocks
Those for whatever reason, an investor believes will rise quickly
in market price.
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Common Stock Investment Strategies
Buy and Hold
Conservative
approach and value-oriented
Goal : current income
and capital gain
Current income
Safety and stability of
income
Goal: supplement for other
income
Quality long-term
growthTotal
Return Approach
i.e. emphasize
capital gain and
high income
Goal: Capital
gain
Aggressive stock
management
Aggresively trade in and out stock;
timing is the key element
Goal: Capital
gain
Speculation and
short term trading
Known as Day
Trading, capital gain in
short time period
Goal: Capital
gain
Advantages of Investing in Common Stock
Advantages of investing in Common stock• High current income• Higher rate of return• Low unit cost • Less risky due to its
position during liquidation
Disadvantages of investing in Common stock• Return is limited and fixed
in amount• Capital gain potential is
small• Yield give-up relative to
bond• Yield not kept up with
inflation
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Preferred Stock
Preferred Stock
A share that does not give a right to the shareholders to vote at its general meeting or any right to participate in any distribution of the company that has stated the amount, whether through dividends, redemption,dissolution or otherwise.
Characteristics of Preferred stock
Limited voting right
in the event of merger, liquidation or issuance
of bond
Call provision
stock repurchase by company
Conversion feature
to common stock
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Types of Preferred Stock
• Continuous claim to dividend• Dividend paid before common stockholders
Cumulative Preferred
• Doesn’t confer steady claim to dividend• Would not be paid any missed dividend
Non-cumulative Preferred
• Receive extra dividend over nominal onesParticipating Preferred
• Option to convert to common stock Convertible Preferred
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Advantages of Investing in Preferred Stock
Advantages of investing in Preferred stock• Can be bought or sold
easily• Legal liabilities are
restricted• 2 ways to gain
benefits
Disadvantages of investing in Preferred stock• Volatility of price• Could lose substantial
value in short period• Lack of control
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Underlying Shariah Contract of Stocks
Issuance of shares by companies is based on principles that relate to
contract of Musharakah.
Musharakah is contract which
involves two or more parties in a project or business where each
of the parties contribute to the
capital and actively involves the
management of the project or business
Thus, the investor who hold the shares of a company actually participate in the terms of up and downsides of the company.
They will share company’s fortune in the form of higher dividend and higher value of the share, and if the com suffer losses, the shareholder may not received div and experience in declinations of share values.
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Shariah Ruling on Common Stock
In general• It is permissible if the
main business of the company is in compliant with Shariah rulings
OIC Fiqh Academy • It is permissible to
purchase, hold or sell its shares even if the company was to undertake prohibited activities such as borrowing money and/or invest its money on the basis of interest, the company can still be invested provided they fulfil certain criteria.
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Shariah Ruling on Preferred Stock
OIC Fiqh Academy
• Not permissible
SAC of Malaysian Securities
Commission• Only Non-
cumulative preference shares are permissible
• Based on tanazul concept
• Where the right to profit of the common stockholder is given willingly to a preferred stockholders.
Convertible Preferred Stock
• No formal fatwa given although most Shariah scholars are concerned about element of gharar
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Shareholder Rewards
Cash dividends
No objections from Shariah perspectives
Bonus issue or
stock dividend
Shares in lieu of cash
No objections from Shariah
Rights issues
Current shareholders given special
right topurchase new
shares at below market
price
Acceptable to Shariah
Shareholder
benefits or perksRewards given to shareholder in kind ratherthan cash, for e.g., free food
or food coupon,
hotel stays etc.
Acceptable to Shariah
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Summary
In this chapter
you have learned about:
Islamic Equities Market
Types of Securities
Shareholders Reward
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23 Thank you