UNIVERSITI TEKNOLOGI MARA, JOHOR BRANCH SEGAMAT CAMPUS BACHELOR OF BUSINESSADMINISTRATION (HONS.) INVESTMENT MANAGEMENT FINANCIAL RISK MANAGEMENT (INV 551) DEBT CAPITAL MARKET AND ALTERNATIVEINVESTMENT PREPARED FOR: SIR FERRI BIN NASRUL PREPARED BY: NUR AMILIA BINTI ABD MUTALIB(2016331385)MUHAMMAD ASYRAFF BIN MOHDYUSOFF (2016596185) GROUP ASSIGNMENT BM 251 4B DUE DATE 1ST JANUARY 2017 TIME 12.00 P.M Table of Contents 1.0 Commodities Investment 2.0 Business Venture Capital 3.0 Bibliography 11 4.0 Appendix 1.
0 COMMODITIES INVESTMENT 1.1 INTRODUCTION Commodities are those tangible assets, that arebasic or raw materials, often used as the inputs in the production of someother goods or services. In general, commodities usually categorized into fourmain groups and those may include; 1) Metals that are including silver, platinum,copper and gold, etc.2) Meat and livestock that are includingchicken, meat, pork bellies, etc.3) Energy that are including natural gas,gasoline, crude palm oil (CPO), etc.4) Agricultural that are including coffee,sugar, corn, soybeans, etc.
In some ways, commodities investment has a lotof differences to be compared with stocks and other types of investment.Commodities investment requiring the investors to deal with a physical good aswell as needing the investor to manage the physical good. Main reason of why people do commoditiesinvestment is because of the growing concern of when price of commodities hasalways known to keep on rising constantly, or in the specific term, inflated. Besides,stock market volatility has made the commodities to seem like a very goodinvestment. Commodities investment also provides true diversification infinancial portfolio, as well as it acts as hedge against risks involved inbusiness.
Some of factors that may drive the prices ofcommodities include global economy that we can see generally prices will be pushedup by strong demand, complying the rule of economy. Nonetheless, commoditiesdefer from other assets as the prices will be affected by those news andshort-term expectations on the economy directions. Next, storability.Commodities that can be stored will be positively correlated with inflation,meanwhile those that cannot be stored will be negatively correlated withinflation. This can be implied that when the commodities are positivelycorrelated with inflation, it is actually a good sign that prices will tend torisen up with growing inflation. Third factor is the components of economicequilibrium, the supply and demand.
General rule of equilibrium states thatprice will be pushed up when there is a continuous strong demand from the buyerbut at the same time the supply of commodities is very limited. Notwithstandingthat, we know that when supply exceeds demand, the prices of commodities willsurely drop. 1.2 SUMMARYOF THE ARTICLE The article that has been chosen entitled Howto Invest in Commodities the Right Way written by Dan Caplinger. In thisarticle, the author wrote on several ways that can be taken out to get into theinvestment in commodities market. As stated in the above introduction part,commodities investment requiring the investors to deal with physical good aswell as managing the commodities. Therefore, this will require some extraefforts from the investor as compared with some other type of investment suchas stock market investment.
Nevertheless, as there are benefits of this type ofinvestment, investors do not have to be worried about dealing with thecommodities. The author has provided and explained onseveral ways that can be taken to invest or trade in commodities, includingfirst, by owning the physical commodity. Second, is by associating in futures contractsthat will be explained further in this report, in which briefly, this contractgives the right to the investors to take future ownership of the physicalcommodity. Third, is by investing in exchange-traded fundsor the ETF and last but not least, by investing in companies that manufactureor produce the commodity that is being traded. Those four ways that has been written by theauthor in that article will be explained further in the next chapter. We believe that by looking down through thisarticle will help the readers to at least have some information and knowledgeon getting into the markets of commodities as the application of this type ofinvestment is differ from the application of stock market investment and someother type of investment that are available to be joined by investors allaround the world.
1) Owning the physical commodity itself. Going through the first method given by theauthor, is by owning the physical commodity or good itself. Obviously when youown whatever good it is, it is now your own, and hence, the decision will beright in your hand, that you will automatically have the direct exposure onincreasing or decreasing the value of the good or commodity that you arecurrently owning. As an owner, you can always decide when and to whom that youwant to sell the commodity that you own as well as at whatever the sellingprice that you decide, based on the current market price when you feel likeconverting the good to cash. This will in further help you as an owner ofthe holdings to have the benefit and advantage of liquidity in which you canconvert those goods to cash to perform or meet your commitment or daily orshort-term obligations. Simply by applying the factor that may drivethe price of goods, seller may gain the return and also enjoying the profitfrom the goods or commodities by taking the advantage by selling the holdingsat higher price than the buying price.
Nevertheless, it is needed to beconsidered that price that is too high may cause that the holding will not besold as buyers can own the commodity at lower price from the other seller thatintend to sell the same commodity at better price. It can be concluded thatselling price of goods or commodities or services price should always be aroundthe market price. However, it can be said that most physicalcommodities have always involved with major logical challenges such as storageand exchanging challenge.
For instance, it is always easy to find a seller whowants to sell commodity of bulks of gold in the shape of bars or coins althoughat a selling price that has been markup a little slight. In a meantime, we canalso say that it is way harder to deal with say one metric ton of platinum ormaybe 5,000 barrels of crude oil. Well this has caused owning physicalcommodities or goods will only work in very few and limited situation with onlyparticular type of commodities. 2) Futures contracts.
Often when people talk about commodityinvestment, it will associate with contracts, futures contracts. Futurescontracts allowing the delivery of commodities to be taken in place at specificperiod of time that has been stipulated in the agreement between the buyer orthe investor and the seller or the owner. Futures contracts also allow thebuyer and seller to lock the price of commodities as has been arrived to theagreement between the two parties so that the holdings change hands.
It is so important for investors who are new tothe futures or derivatives instruments to help themselves to get equipped withsufficient information and knowledge regarding the investment right before theyget started in this futures or derivatives trading as the risk associated ispretty high. In Malaysia, two commodities futures that aremostly traded on Bursa Malaysia Derivatives are the FCPO or Crude Palm OilFutures and also the FPKO or Crude Palm Oil Futures. In FCPO, the underlyingasset that associates with the contract is crude palm oil in which originallysourced from palm that can produce cooking oil, vegetable gee and also soap. Onthe other hand, the underlying asset in FPKO is crude palm kernel oil that itassociate with the kernel of the palm itself. Usually, the pressed kernel oil isused for the manufacturing of detergents. Therefore, we can say that normally, those whoare investing in futures contracts are the farmers that only with thiscontract, the investor can be safe from the fluctuation of commodity prices asthey are able to do the transaction of the commodity at agreed price todaywhile the delivery of the commodity will take place at a later date. As the price of commodity often fluctuate, hereis how the two parties of buyer and seller make profit.
Say at stipulated laterdate, the commodity price goes up, then the buyer in the contract will gainprofit, vice versa if the price falls. This is therefore it can be said that the investorswho want to invest in futures contracts will always need sufficient informationand knowledge that they might be gaining no profits at all by investing in thiscontract. 3) Commodityexchange-traded funds, ETF. An ETF consists of a collection of securitiesthat comprises of asset-backed contract. Therefore, when an investor buys acommodity ETF, he will own that collection of asset-backed contract ofcommodity instead of owning the physical commodity itself.
There are so many types of commodity ETFavailable in the market which include the four-main type of commoditiesinvestment. It can be said that the most popular ETFs in the market is the goldand silver. This is because that underlying asset will never go spoil.
Besides,the other type of commodity ETF that is also popular is the oil and the naturalgas. In the article, the author states that thecommodity do have mixed performance. Therefore, since an ETF is actually a setor sort of portfolio of securities, hence with ETF, investor may diversify therisk that they might need to bear. This has been one of the reason andattraction of why investors invest with ETF. One of the advantages of investing in commodityETF is the ease of the trades. With one trade, you will immediately haveinstant exposure to the price as the commodity ETF has been bundled ahead oftime. Next, taxes from capital gained from commodityETF investment will not be incurred until the sale of ETF. Besides, lowercommissions fees will benefit the commodity ETF investment too.
After all, the most important part in ETFinvestment is always the strategies planning part. As the ETF associates with acollection or sort of portfolio of stocks, therefore, investors need to plan todecide the best commodities to invest in. 4) Investing in companies that produce ormanufacture the commodity This part of method would be the best tips thatwhen you invest with commodity investment. Investing in commodity from thecompany that is the producer or manufacturer, would be the best decision. Thisis because, those company will tend to do great when the asset of commodity areperforming great too. As we consider that commodity investmentusually associates with high risk because commodity have to have a very bigswing in prices, therefore, this will create a chance for the investors togenerate more income or profit. This makes sense since the higher the risk ofan investment, the higher the return that can be generated.
Bad side that we can say that company that dealwith commodities might always get hit with a big loss. From the article, the individual stocks willhave the risk of the behavior of the commodity price. Nevertheless, a lot ofshares would offer return in term of for example dividends to the rest of theshareholders. This has made commodities to be added with incentive that hasalready made a big difference from the ownership of physical good that cannoteven produce any income. Back to basic that this can always be done onlywith plenty of researches because as has been mentioned in the above, commodityinvestment is a high-risk type of investment. 2.0 BUSINESSVENTURE CAPITAL 2.
1 INTRODUCTION Venture Capital (VC) is themoney or capital provided to a young company by an individual or a firm. But knowing that money doesnot a successful business make. So, just as importantly, the venture capitalist(the entity providing the capital) should value-add in other ways, fromproviding business know-how to technical guidance, or even just a pat on theback or a shoe in the rear when required. Of course, venture capitalistsundertake higher risks by investing their money into relative unknowns. So, inreturn, they receive preference shares and have a say in the importantdecisions to safeguard their investments. The real returns usually occur whenthe venture capitalist eventually liquidates its shares through an IPO, tradesale, sell-back, and others. For young, viable companieswhich have difficulty raising capital, partnering with a venture capitalistcould be an appealing and highly beneficial option. Some example venture capital in Malaysia including Malaysia Venture Capital ManagementBhd or known as MAVCAP.
The ICT sector in Malaysia has been growing and growing;it is no secret that the government had a hand in it. In 2001, the Malaysiangovernment formed MAVCAP to help nurture infant ICT companies into big thrivingbusinesses. It’s not easy for a small ornew company to make itself known in the market, or even to just survive.Oftentimes, its product or service is astoundingly innovative and utterlypractical, but even great innovations do not come to light because the companylacks resources and support. Thus, as a seasoned venturecapitalist company, MAVCAP go to great lengths to discover and invest incompanies with the potential to succeed. 2.2 SUMMARY OF THE ARTICLE In Harvard Business Review,an article entitled How Venture Capital Works by Bob Zider has explained wellon the basic understanding of business venture capital. How the business venture capital work? Venture capital is simply can besaid as the financing that investors provide to support a new business or smallbusiness which is believed to have a good potential to growth in future.
Italso can be done in term of managerial or technical expertise, not only in termof monetary form. Venture capital can be said is a middle party between investor andentrepreneur. Business venture will raise money through the issuance of initialpublic offering to the banker institutions. Banker institution have their moneythrough the public markets and corporation such as issuance of stocks Then, allthe money raised will be invested at any small company which are believed togrow and have potential in future. How can the immature company to gain money from the venture capital?Primary step for any business that looking for business venture firm is tosubmit an excellent business proposal or an idea. If the idea seemed to have agood potential, the firm must then perform due diligence, which includes adetailed investigation of the company’s business including the management,products, operations and among another thing.
Due diligence simply meansthat an investigation or audit of a potential investment or product to confirm all facts,such as reviewing all financial records, plus anything else deemed material. Taken from the chosen article, the waybusiness venture capital work can be seen as image below, In explaining how businessventure capital works, the article also points out four advantages of venturecapital which are venture capital fills a void, sufficient return at acceptablerisk, attractive return of venture capital and the upside for entrepreneur. 1) Venture capital fillsa void. How does this entity fill avoid? Based on our reading, the entity fills the void between the sources offunds for the entrepreneur to going concern. In order to fill the voidsuccessfully, it requires the venture to provide a good and sufficient returnto the investors.
For example, give the investors a superior return oninvestments. Usually, lot of people can comeout with a brilliant idea to run a business. However, lack of capital become aproblem for them to pursue the business. They have the idea but no institutionto turn the idea become reality. Hence, the existence of venture capital canfill the void or emptiness. 2) Sufficient returns atacceptable risk. Venture capital couldprovide sufficient return to the investors with reasonable returns although themoney being invested are mostly on the high-risk profile company. Off course,high risk investment could provide high return to the investors.
Although the investment willbe exposed with a very high risk, venture capital can be a middle party toassure the investors to keep their faith since venture capital usually back upby the government. 3) Attractive return of venture capital. It is a good return to the venture capital if their investment doingwell. All the company under the venture capital firm will have lost some of theownership status. That is means when the company doing well, venture capitalcan enjoy a good return as they also have the ownership in the company.
It also a good return to the venture capital firm as they also earn thereturns same like the investors although might be the amount a little bit lowerbecause investor will get more. 4) Upside for entrepreneur. One of the benefits to the entrepreneur is they can be guided by thebusiness expertise. Other than financial back up, the entrepreneur can enjoywith a valuable guidance and consultation. Thus, all the financial management,business decisions so that better decisions can be made as it is vital for thebusiness growth.
Other than that, additional resources can be gained by the investors. Aventure capital firm could provide active support which is good for good andyoung company. This can cause a faster growth and greater success for thepotential company. Entrepreneur can have a wider connection. This is due the venturecapital firm is well connected in the business community.
Hence, theentrepreneur can have tremendous benefits from the connections which isbenefits the company. 3.0 Bibliography Zider, B.
(1998, November). How Venture Capital Works. Harvard Busines View, 131-1239.
Caplinger, D. (2017, May 30). How to Invest in Commodities the Right Way. Retrieved from The Motley Fool : https://www.fool.com/how-to-invest/2017/05/30/how-to-invest-in-commodities-the-right-way.aspx 4.0 Appendix Figure 1Article of Business Venture Capital