Topic

Transactions
in the Share
Market

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the transaction procedures in the Bursa Malaysia;
2. Differentiate the types of orders;
3. Assess the mechanics of margin trading; and
4. Explain the terms used in share trading transactions.

X INTRODUCTION
In Topic 1, we looked at the definition of investment, types of investments and
financial markets. In this topic, we will look at transaction procedures in the
stock market. After we have discussed transaction procedures, we will move on
to various orders that exist in share market transactions. Finally, we will discuss
margin trading or loan facility to buy shares.

2.1

TRANSACTION PROCEDURES IN BURSA

MALAYSIA

Its 9am on Sunday and you are at home reading the newspapers. In the business
section, you read that an established cosmetic company is expecting an increase
in profit. You are interested in buying shares in this company but do not have a
clue as to how to go about it. What is the first step that you should take?

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TOPIC 2 TRANSACTIONS IN THE SHARE MARKET

The first step that you need to do is open a CDS Account and a Trading Account
with a remisier or a dealer from a licensed broker. Before proceeding with the
transaction procedures in the share market, let us clearly understand what a
remisier and a dealer are.
A remisier is an agent who handles individual investors while a dealer is an
agent who handles institution investors.
The trading account looks like any ordinary bank account where there are debit
and credit columns. All purchases are recorded on the credit side and all sales are
registered on the debit side. All transactions in the Bursa Malaysia do not involve
any physical transfer of share scripts between buyer and sellers. It is all done
electronically.
Having decided to purchase shares, the investor will then contact his remisier
and place a buy order. The order will specify the number as well as the price of
the purchase. Next, the order will be entered into the Bursa Malaysia automated
trading system or WinScore. The purchase will usually be completed if there is a
seller willing to sell below or at the same price offered by the buyer. If there is
more than one buyer, then the security will be sold to the highest bidder. If there
is more than one seller, the purchase will be fulfilled by the seller with the lowest
offer price.
The completed transaction will indicate the number of shares and the matched
price. The broker will then send details of any transaction to the investor in the
form of a contract note. The note will have information such as brokerage, stamp
duty and clearing fees. The contract note will serve as an indication that the
transaction bid or offer was successful.
The buyers account will then be credited with the number of shares on the third
day after the successful order. This is known as T+3. The buyer will own the
shares upon payment to the broker. The buyer cannot trade in these shares before
payment is made without the permission of the broker. The buyer is not allowed
to cancel the purchase since the bid was successful. If he fails to settle the
payment, the broker can sell off the shares.
Since the buyers account has to be credited or recorded on the third day, it is
important for the other party of the transaction, that is the seller, to have the
shares in his account two days after the successful order. This is known as T+2.
Sometimes, the buyer may sell the shares before the payment is made. This is
known as contra transaction. If the selling price is higher than the purchase price,

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the buyer has made a profit. Then, the broker will pay the buyer this profit. If a
loss has been made, the client has to pay the broker the difference.
Bursa Malaysia has specified the minimum bids that can be used for any
transaction. This minimum bid is the change in price of a share that can be
offered or bid. For example, a share with a market price of RM5.50 can only be
offered or bid with a change in price of five sen. A buyer may bid to buy at
RM5.55 or RM5.60 but not at RM5.53. Notice the price change is at a minimum of
five sen and not three sen. Details of other price ranges can be obtained from the
Bursa Malaysia website.

ACTIVITY 2.1
1. Based on your understanding of the transaction procedures in a
share market, use a mind map to explain the roles of buyer, seller,
remisier and the share market.
2. Visit other share market websites such as the Hong Kong Stock
Market at http://www.asiadragons.com/hong_kong/finance/
stock_market/ and the New York Stock Market at
http://www.nyse.com/ and determine whether their trading
procedures are the same as that of the Bursa Malaysia procedures.

2.2

TYPES OF ORDERS

Remember in the earlier section, we noted that having decided to buy a share,
you must place a buy order with the remisier. In a stock market transaction, there
are five types of orders:
(a)

Market Order

(b)

Limit Order

(c)

Stop Order

(d)

Good Till Cancel Order

(e)

Day Order

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TOPIC 2 TRANSACTIONS IN THE SHARE MARKET

Let us discuss each type of order further.

(a)

Market Order
Market order is an instruction that an investor gives to the broker to buy or
sell at the prevailing market price. This type of order is risky as the
difference in price can be very far from the price anticipated by the investor.

(b)

Limit Order
To protect against too great a price range, an investor can set limits to the
price the broker can use.
In a limit buy order, the investor sets the highest price that he is willing to pay
for a stock. If the market price of the stock is thought to be too high and does
not fall below this limit, then the buy order will not be executed. If the price is
lower than the limit buy order, the broker should buy at the best price.
In a limit sell order, the investor sets the lowest price he is willing to sell a
particular stock. In this case, the stock will not be sold if there is no buyer
willing to pay the stated price.

(c)

Stop Order
Stop order is an instruction to protect an investor from profit or limit losses.
It is used when the investor thinks the price is going to fall and he needs to
protect his investment. For example, an investor buys some shares for RM3
each and the price is now RM4. He gains a profit of RM1.00 and wants to
protect it. Thus, he places a stop loss order of RM3.75. If the price falls to
RM3.75, the broker will try to sell the share. Sometimes, the broker may not
be able to complete the transaction at that price and may sell it at a lower
price. The risk in this type of arrangement is that the price drop is
temporary. The price may go up again and the investor will lose the
opportunity to get higher returns once the share is sold.
A stop order can be combined with a limit order. For example, the above
investor can issue a stop order of RM3.75 and a limit sell order of RM3.50. If
there is no buyer willing to buy at RM3.50, then the stock will not be sold.

(d)

Good Till Cancel Order

Good till cancelled is an order that is valid until the client instructs it to be
cancelled.

(e)

Day Order
Day order is an order that will be valid for a day. It will not be carried to
the next trading day.

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Visit Bursa Malaysia website at http://www.bursamalaysia.com or any broker

companys website and list other order(s) that is(are) not discussed in this
section.

EXERCISE 2.1
1. Explain why it is risky to place a market order.
2. Explain what kind of order an investor can make if he is not a risk
taker.

2.3

MARGIN TRADING

Margin trading is a loan facility that an investor can use to buy stocks.

This loan is provided by the broker. The loan amount is based on an agreed
percentage of the value of the shares. Interest will be charged on the amount of
the loan as well as the length of time the loan was used.
Table 2.1 shows a margin trading situation using an example of purchasing five
lots of shares at a price of RM3 per share. The amount of cash flow needed is
RM1,500. The investor is given a margin facility of 40% of the investment value.
Therefore the investor needs to come up with RM900 of his own funds.
Margin facility can effectively increase an investors return. It provides a leverage
effect on the returns. Panel A on Table 2.1 shows the effect on the returns if the
price of the shares rises to RM5. If the investor sells the shares at that price, the
amount of cash he will receive is RM2,500 (500 x RM5). From the sale, he has to
pay interest as well as the principal amount that he borrowed. The net cash flow
from the sale is RM1,840 (RM2,500  RM600  RM60) and after deducting his
initial capital, the net cash flow from the investment is RM940 (RM1,840 
RM900). The rate of return for the investment is just the net cash flow from the
investment divided by the initial capital [(RM940 900) x 100]. Therefore, if the
price rises to RM5, then the rate of return for this investor is 104.44%.
However, the leverage effect can be risky to an investor. If the price falls to RM2,
Panel A shows that the rate of return is negative 62.22%. The use of margin
trading is similar to a firm that uses debt to finance an operation. It adds risk to
the investor.

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TOPIC 2 TRANSACTIONS IN THE SHARE MARKET

Look at Panel B where the investor buys shares without the margin trading. With
RM900, the investor will only be able to purchase three lots of shares. If the price
rises to RM5, the rate of return is only 66.67%. However, if the price falls to RM2,
the rate of return is negative 33.3%, which is lower than 62.22% as compared to
the rate of return when margin trading is used.
Table 2.1: Calculation of Share Trading with and without Margin Trading
A: Trade with Margin Trading

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B: Trade without Margin Trading

SELF-CHECK 2.1
The cosmetic companys shares that you read about in Sundays
newspaper cost RM3 per share. You are interested in purchasing five
lots, and it will cost you RM1,500. If you do not have sufficient cash to
purchase the shares, how would you finance your investment?

2.3.1

Margin Call

The value of investment can change if the price of the share changes. Thus, the
broker needs to protect himself against any default by the customer. The broker
can insist on a maintenance margin against the value of an investment.
A maintenance margin is a level to which the investment value can drop before
the investor has to increase his contribution to the investment.

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TOPIC 2 TRANSACTIONS IN THE SHARE MARKET

Let us look at Table 2.2 for a clearer picture.

Table 2.2: Margin Call

Panel A of Table 2.2 shows the initial position of the investor in a margin trading
situation (based on 2.3 example). The investment value is financed partly by the
loan from the broker and the investors own funds known as equity value. Lets
say that the broker needs a 30% maintenance margin. This means that the equity
portion of the investment must not fall below 30% of the total investment value.
Panel B is the position if the share price increases to RM5. Notice that the loan
figure is still the same while the equity figure has increased from RM900 to
RM1,900. The investor is safe at this level of share price.

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Panel C is a position where the price of the share drops to RM1.72 and
consequently the equity value falls. The equity value has dropped by 30% of the
total investment value. If the price falls any further, the equity portion is going to
be less than 30%. This is shown in Panel D. A price drop of RM1.60 will cause the
equity value to drop to 25% of the total investment value. Therefore, the investor
needs to contribute some cash to meet the maintenance margin. This contribution
of the new cash is known as a margin call.
Panel E is the position when the cash has been collected from the investor. The
investment will now comprise RM800 worth of stocks and RM57.14 cash. The
new cash is then included in the equity of the investor. This will raise the equity
level to 30%. Please take note that the investor had actually borrowed 40% of the
initial investment value.
Sometimes, it is easier to determine the price that the share can drop to before a
margin call is made. This drop in price can be obtained through the equation
below:

Loan
Price drop = BuyingPrice

Initial Value - (Initial Value u Maintenance Margin)

RM600

RM1.71 = RM3.00

RM1, 500 - (RM1500 u 0.3)

The broker will make a margin call if the share price drops below RM1.71.

2.4

OTHER TRADING TRANSACTIONS JARGON

There is some interesting jargon that market players use in share trading
transactions. If an investor is buying and intends to hold the share for a while,
then he is regarded as being in a long position. An investor is said to be in a short
position if he is not interested in a share, or if he has any, he intends to sell it.
A bull trend is a condition where the market is on the rise. If an investor feels
bullish, then he may think that a share may increase in price and it is a good time
to buy. A bear trend is a market that is on the decline. A bearish situation is when
investors think it is time to sell or may also indicate that it is not the time to enter
the market.
Short selling is a situation where we sell shares that we do not own. This is done
when there is a forecast that the price of a share is going to fall. The procedure is
to borrow shares and sell them. Then wait for the price to fall after which we will

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TOPIC 2 TRANSACTIONS IN THE SHARE MARKET

buy them at a lower price. The shares are then returned to the lender. The
difference between the selling and buying price is the profit made. This move is
very risky and involves a lot of speculation. If it is done on a large scale, it may
also upset the situation in the market. Some exchanges may ban this type of
transaction.
Visit the Bursa Malaysia website at http://www.bursamalaysia.com and list
other transaction jargons that used in share trading transactions.

EXERCISE 2.2
Share A is selling at RM3. You only have RM15,000 to invest. The
first alternative is to use only your funds to buy the shares. The
second alternative is to arrange a margin trading with your broker.
You can borrow up to 50% of your investment value. The interest
rate is 8%.
(a)

How many units of shares can you buy with the first
alternative?

(b)

How many units of shares can you buy with the second
alternative?

(c)

If the price goes up to RM3.80, how much return can you get
from your investment from each alternative?

(d)

With the margin trading, calculate how far the price could drop
before you get a margin call. The broker insists on a 30%
maintenance margin.

An account is needed before an investor can trade in shares.

Different kinds of orders can be made during trading, which can be suited to
the requirements of the investor.

Investors can use margin trading for the purpose of funding an investment.
Margin trading has a leverage effect.

TOPIC 2 TRANSACTIONS IN THE SHARE MARKET

Although it is risky, it can also maximise an investors rate of return.

Terms used in share market trading include:



Long position

Short position

Bull trend

Bear trend.

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