COURSE CODE : FIN 358

COURSE NAME : INVESTMENT MANAGEMENT

SUBMITTED TO : NORASYIKIN ABDULLAH FAHAMI

SUBMITTED BY : SHARIFAH NUR AFIQAH BINTI SYED HISAN SABRY

DATE OF SUBMISSION : 7th JANUARY 2022

Contents

Introduction ......................................................................................................................... 1

What is the financial security that Tenaga Nasional Berhad owns and what is it? ........ 2

Why would Tenaga Nasional Berhad issue preferred stocks? ........................................ 3

When investors become preferred shareholders? ........................................................... 4

Where do preferred stocks is traded? ............................................................................... 4

Who purchases preferred stocks and who issues preferred stocks?............................. 6

How to buy preferred stocks? ............................................................................................ 7

Conclusion .......................................................................................................................... 9

References ........................................................................................................................ 10
Introduction

The report will uncover many information for students to learn and understand
regarding the financial securities that they have chosen. In order to understand the subject,
the students have to use and answer the 5W1H questions regarding the financial security
chosen from a company or an institution. The subject that is chosen for this report is preferred
stock for Tenaga Nasional Berhad company. In order to answer the curiosity and questions
regarding this subject, many information have been gathered and combined that derived from
many types of sources such as books, websites, articles and many more.

As a start, preferred stocks are one of the investment alternatives in the form of
investment in financial assets. Financial assets are referred to as intangible assets that is
issued by corporations in order to finance their project. Compared to real assets, investment
in financial assets can be acquired through securities, saving, unit trust funds and derivative
securities. Next, as securities are one of the ways to invest financial assets, preferred stocks
are classified as hybrid securities that derives from other types of securities such as debt
securities, equity securities, and derivative securities.

At last, this report also concludes of information regarding the company chosen in this
report that is Tenaga Nasional Berhad. For example, students would get a chance to know
how to buy and sell preferred stocks, advantages and disadvantages of issuing and
purchasing preferred stock as well as the perfect timing and occasion to purchase preferred
stock. This report would I hope to gain interest and attention from many students for them to
inquire more information regarding preferred stocks.

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What is the financial security that Tenaga Nasional Berhad owns and what is it?

Tenaga Nasional Berhad is the multinational electricity company and the only
electricity utility company available in the Peninsular Malaysia. Tenaga Nasional Berhad is
also known as Tenaga has been operated since the company is founded from the 1st of
February 1990. The main company is based in Kuala Lumpur, Malaysia. Tenaga Nasional
Berhad offer financial services when the company issue financial securities to perform buying
and selling between the company and the investors using the secondary market. The financial
security issued by Tenaga Nasional Berhad is called preferred stocks. (Tenaga Nasional,
2021)

Shares is a one of the investments made to gain financial asset through securities.
Shares represents a portion of a company while shareholder in return would share the success
or failures faced by the company performances. Share can also be referred to stocks as
investors could pick between purchasing preferred stocks or common stocks. Preferred stocks
carry the right to (fixed rate) dividend which would be paid out earlier than the shareholders of
common stocks. Preferred stocks would not carry voting rights but voting rights would be
contingent if the company fails to pay dividends for a period time. (Drinkard, 2021)

Preferred stocks would be classified as a hybrid security among other types of

securities. This is due to the similarity in characteristics that preferred stocks possesses to
other investments such as common stocks and bonds. For example, the similarity between
preferred stocks and bonds is that they both have fixed par values and fixed rate of dividends
when it is paid out. Even though preferred stocks have fixed rate of dividends, the guarantees
would not be the same as it depends on the company success or failure while bonds would
be given the same guarantees everytime. Next, the similarity between preferred stocks and
common stocks is they are both equity instruments with dividend paid from company’s after-
tax profits. Meanwhile, the difference between preferred stocks and common stocks is that
even though preferred stocks are not sensitive to company’s losses, preferred stocks would
have less share in a company’s success compared to common stocks.

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 There are many types of preferred stocks available such as non-cumulative preferred
stock, cumulative preferred stock, callable preferred stock, participating preferred stock and
convertible preferred stock. The difference between non-cumulative preferred stock and
cumulative preferred stock is its cumulative feature in paying dividends. Non-cumulative
preferred stock would not accumulate dividends if it is not paid while cumulative preferred
stock would pay the missing dividends if the company fails to pay dividends. Other than that,
callable preferred stock is when the issuing company has the right to redeem outstanding
shares. Participating preferred stocks is a share that would be involved in the dividends of
common stock although their additional returns would not be at par as common stock. Lastly,
convertible preferred stock sometimes would offer to convert their shares into common stock
at a predetermined ratio. (Features of Preferred Stocks, 2021)

Why would Tenaga Nasional Berhad issue preferred stocks?

Tenaga Nasional Berhad issue preferred stocks to investor for several reasons. The
main reason is for Tenaga Nasional Berhad ability to raise more capital to finance their
company. Other than that, Tenaga Nasional is able to limit the control that they give to
stockholders using preferred stocks. This is because preferred stocks have limited voting
rights compared to common stocks. With preferred stocks, the company is able to provide
equities without disturbing the controlling balances in the corporate structure. Other than that,
with preferred stocks, Tenaga Nasional Berhad can maintain a lower debt to equity ratio
whereas debt to equity purpose is to analyze the financial stability of a business. (Norris, 2020)

Preferred shares would receive returns in two forms of payment, dividends and capital
gains. Many people are interested in investing their capitals in preferred stock for a number of
reasons. In Malaysia, preferred shares are commonly marketable at Bursa Malaysia Berhad
for investors to purchase and sell preferred shares. Next, preferred shares would receive fixed
dividends for a regular period of time. Preferred stocks would be prioritized to receive
dividends after bonds. In the event of cumulative preferred shares, preferred shareholders are
obligated to receive missed dividends. After that, investors receive a higher rate of return than
bondholders. This is due to preferred stocks bear a bigger risk than bonds. Lastly, preferred
stocks would have less risk compared to preferred stocks. Following preferred shares are
seniors than common shares but juniors to bonds, this shows that preferred shares have a
higher obligation on the company’s asset than common stocks. Due to this, it attracts
conservative investors to have a risk protection within preferred stocks investment.

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 Preferred shares also bear numerous disadvantages. One of them would be the
downside to having fixed dividend from preferred shares. When a company flourishes to
increase in earnings, preferred shares would not be able to receive more returns than agreed
compared to common shares that could get higher returns suitable for their additional risk.
Other than that, preferred stocks carry no voting rights for them to influence the success of
their investment. Next, preferred shares do not have protection against inflation. The
government would increase the interest rate in order to curb inflation. Even though, our
dividends would remain constant, the rises in price would cause purchasing power to
decrease. (John, n.d.)

When investors become preferred shareholders?

Investors who acquire preferred stocks as their investments is called preferred

shareholders. Preferred shareholders are entitled to fixed or floating rate payments similar to
coupons in bonds. Although, unless it is a cumulative preferred stock, failure of the company
to pay dividends does not constitute a default as preferred stocks are not mandatory
obligations for the issuer. Other than that, when preferred shares value would be dictated by
the market, preferred shareholders can also experience capital appreciation. To sum it off,
preferred shares can be easily explained as an ownership with a particular corporation with
sharing both success and losses by the ability to gain dividends and capital appreciation from
acquiring and selling preferred stocks at the secondary market.

A customer would certainly be interested in acquiring preferred shares in order to gain

income either by dividends or capital appreciation. Either way, there are a few steps boiled
down on how to determine the best time to acquire preferred shares such as by buying
companies when they are less than their intrinsic values. That is what Warren Buffet does
when investing. As future cash flows are uncertain and contain risks, Warren Buffet would
demand a margin of safety by doing so. (Dziubinski, 2021)

Where do preferred stocks is traded?

Preferred shares trading is made possible through the secondary market available
such as Bursa Malaysia Berhad. Shareholders can choose whether to trade preferred stocks

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in Main Market, ACE Market or LEAP Market. Companies that issue preferred shares would
often go through listing in order to be categorized in either any of these markets. Main Market
and ACE market is open for any type of shareholders to trade. Main Market is classified for
established companies that is able to fulfil stricter conditions compared to ACE Market such
as acquiring RM 6 million after-tax profit in the most recent fiscal year. Example company in
the Main Market is Tenaga Nasional Berhad. ACE Market is a sponsor - driven market with
growth prospects while LEAP Market is an adviser-driven market which aims to provide
emerging companies with greater fundraising access and visibility via the capital market. LEAP
Market is uncommon for investors to trade as the LEAP Market is only available to
sophisticated investors only. (LISTING ON BURSA MALAYSIA, n.d.)

Preferred stocks are shares that would be issued from the company to the investors
while also be traded from investors to investors. Furthermore, one of the features to in
preferred stocks is par value. Par value represents the claim of the preferred stockholders
against the value of the firm (Features of Preferred Stocks, 2021). Preferred shares could not
be sold below par value which safeguard the value of a company and shareholder’s
investments. Normally, the par value for a preferred stock is RM 100.

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Who purchases preferred stocks and who issues preferred stocks?

Stocks generally is an attractive investment for people to purchase as way to build

savings and maximize their income from stocks. Specifically, people would prefer to purchase
preferred stocks due to its advantages such as having a more consistent dividend and stronger
protection if bankruptcy happens. Investors can purchase preferred shares through the
secondary market such as Bursa Malaysia Berhad. Normally, people can choose to invest
preferred stocks in Main Market or ACE Market while LEAP Market is specifically for
sophisticated investors that has better knowledge on the potential risk and returns of the
investment.

Companies would normally issue stocks as way for the company to accumulate its
funds. It all depends on the relationship the company would want to have with investors.
Preferred shares is one of the ways for companies to raise capitals without sacrificing
ownership of the company. For example, companies such as banks, insurance companies,
utilities and real estate investment trusts would issue preferred shares (Tiffany Lam-Balfour,
2021) . Issuing preferred stocks in Bursa would need the company to fulfil requirement whether
to be categorized in Main Market, ACE Market or LEAP Market.

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How to buy preferred stocks?

There are a few steps that investors need to follow in order to buy preferred stocks.
Preferred stocks transactions are normally traded in the secondary market such as Bursa
Malaysia Berhad. Bursa is responsible in providing the facility so that investors could conduct
in trading shares. In 1992, Bursa Malaysia started to use full computerized system in order for
investor and companies to execute share trading know as System on Computerized Order
Routing and Execution (SCORE). Nowadays, people can invest in Bursa Malaysia’s app,
Bursa Anywhere. That way, investors can trade shares anywhere, anytime. Bursa Malaysia
provides information to investors through real time information dissemination to the public so
that it helps investors to make the right decisions regarding investment. (Hoi, 2021)

The first step involved for investors to purchase preferred stocks is before opening a
brokerage account at an investment bank, investors need to open a CDS (central depository
system) account. A CDS account would record the purchase and ownership regarding
Malaysian securities while a brokerage account would allow you to trade through your broker.
At Bursa, by this step, investors would be engaged with a licensed dealer or remisier. The
next step is for investors to give order to CMSR to buy or sell shares on behalf of the investors
by giving an order to the remisier by the specific number. This is when you will need to provide
the CDS account number for your order entry.

Next, all the information regarding trading will be key in WinSCORE at investment bank
to trade the share and to receive confirmation of transaction. The orders can also be keyed-in
via the PO’s (purchase order) internet trading system who will be transferred to Bursa’s
Malaysia’s trading engine. The fourth step is when transaction will match in SCORE at Bursa
Malaysia based on supply and demand of share through bid and offer. In every transaction, a
security is sold to the highest bidder and purchased at the lowest offer. The price transacted
for a buy order will either be at the same price keyed in, or lower if the seller’s price is below
the buyer’s price. Opposite of that is a sale transaction where the price will be the same or
higher if the buyer’s order is higher.

The fifth step in trading preferred shares is when the price matched in SCORE will
send back to IB in WinSCORE and trade confirmation will be printed. When the trade
confirmation is printed, it will provide investor’s detail in the original order number, stock

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number, price and quantity matched and the counter-party PO. The remisier would also
confirm with the investor regarding the number of shares bought or sold as to avoid confusion.
Then the trading clerk will inform their client about the trade confirmation by sending out
contract notes. The contract notes would give details regarding the transactions such as
brokerage, stamp duty and clearing fees payable as well as the cost of purchase or proceeds
of the sale. Lastly, the contract note will be sent to the client. Pay in mind, there is no physical
delivery of shares under CDS as the CDS will use simple book entry system to keep track of
the movement of investor’s purchases of shares.

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Conclusion

As a conclusion, preferred stock is a hybrid security due to its similarities with other
alternative investments such as common stocks and bonds. Preferred stocks would pay a fix
rate of dividends to the investors for them to maximize their income. Not only towards
investors, companies such as Tenaga Nasional Berhad would choose to issue preferred
stocks as even though preferred stocks have their risk, this investment also show great
advantages in returns via dividends and capital appreciation.

Furthermore, preferred stocks are easy to purchase as investors could easily make a
purchase online when Bursa Malaysia Berhad has been computerized since 1992. Since then,
investors could make a purchase through a brokerage company or through the Bursa Malaysia
Berhad app, Bursa Anywhere. That way, people can invest their money anywhere, anytime.
Investors can also determine specifically the order of the investment with the par value of RM
100 per lot. For the many companies such as Tenaga Nasional Berhad, the financing provided
is well appreciated for the company to use them without the use of lenders. This way company
can expand their company to the next level and achievements in the form of profits.

Lastly, from the explanation above, when an investor purchased preferred stocks, they
are referred to as preferred shareholders. The best timing for an investor to buy preferred
shares is to buy preferred shares for companies when they are less than their intrinsic values.
That way, preferred shareholders would get an easier and higher return in the form of capital
appreciation when investor choose to sell the share. Tenaga Nasional Berhad is the best
example of companies that can answer the questions regarding preferred stocks to give a
better understanding on the subject as well as the company itself.

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References

1. Drinkard, T. (14 1, 2021). How Does Preferred Stock Work? Retrieved from
Investopedia: https://www.investopedia.com/articles/stocks/06/preferredstock.asp

2. Dziubinski, S. (24 8, 2021). How to Invest Like Warren Buffett. Retrieved from
MORNINGSTAR: https://www.morningstar.com/articles/963821/how-to-invest-like-
warren-buffett

3. Features of Preferred Stocks. (2021). In N. M. Abdullah, N. Mohamed Yousup, N.

Ramadhan, R. Zainal Abidin, R. Hj. Mohd Shafi, & W. Wan Mustapha, Investment
Management (pp. 127 - 129). Universiti Teknologi MARA.

4. Hoi, S. C. (26 3, 2021). How to buy shares in Malaysia and open a Malaysian
brokerage account (updated 2021). Retrieved from TheFifthPerson:
https://fifthperson.com/buy-shares-malaysia-open-malaysian-brokerage-account/

5. John, C. (n.d.). How Do Rising Interest Rates Affect Convertible Preferred Stocks?
Retrieved from ZACKS: https://finance.zacks.com/rising-interest-rates-affect-
convertible-preferred-stocks-9965.html

6. LISTING ON BURSA MALAYSIA. (n.d.). Retrieved from BURSA MALAYSIA:

https://www.bursamalaysia.com/listing/get_listed/listing_criteria

7. Norris, E. (28 3, 2020). Why Would a Company Issue Preferred Shares Instead of
Common Shares? Retrieved from Investopedia:
https://www.investopedia.com/ask/answers/042015/why-would-company-issue-
preference-shares-instead-common-shares.asp

8. Tenaga Nasional. (26 11, 2021). Retrieved from Wikipedia The Free Encyclopedia:
https://en.wikipedia.org/wiki/Tenaga_Nasional

9. Tiffany Lam-Balfour, J. R. (18 8, 2021). What Is Preferred Stock? Retrieved from

NerdWallet: https://www.nerdwallet.com/article/investing/what-is-preferred-stock

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