KembaraXtra-Islamic Finance-Islamic Capital Market- Is NAV in Mutual Funds?

NAV stands for Net Asset Value.
It represents the price per unit of a mutual fund.


Simple Definition

NAV is the value of one unit of a mutual fund, calculated by dividing the total value of the fund’s assets minus liabilities by the number of units outstanding.


How NAV Is Calculated

Formula

{NAV} ={Total Assets} - {Total Liabilities}/{Total Units Outstanding}

What Counts as Assets

• Stocks
• Bonds / Sukuk
• Cash and bank balances
• Accrued income (dividends, profits)

What Counts as Liabilities

• Management fees
• Operating expenses
• Any short-term obligations

Simple Numerical Example

• Total assets of fund = $10,000,000
• Total liabilities = $500,000
• Units outstanding = 1,000,000

NAV = {10,000,000 - 500,000}/{1,000,000} = 9.50


👉 One unit of the mutual fund is worth $9.50.

How NAV Is Used

• Investors buy units at NAV
• Investors redeem units at NAV
• NAV is calculated once per day, usually at the end of the trading day

Important Points to Remember

• NAV is not traded intraday
• NAV changes daily based on:
– market value of assets
– income earned
– expenses incurred
• Mutual fund units do not trade in the secondary market


One-Line Exam Answer

NAV is the per-unit value of a mutual fund calculated as total assets minus liabilities divided by the number of units outstanding.

KemmbaraXtra-Islamic Finance-Islamic Capital Market – Dealer Market

A dealer market is a category of the secondary market where trading takes place electronically through dealers, rather than by direct interaction between buyers and sellers, as seen in auction markets.

1. No physical convergence of investors

• Unlike auction markets, dealer markets do not require buyers and sellers to meet or converge in one place.
• Trading is conducted electronically through dealer networks.
Example: Investors trade shares online through dealer platforms without meeting each other.

2. Trading is facilitated by dealers
• Dealers act as intermediaries who stand ready to buy and sell securities.
• Investors trade with dealers, not directly with other investors.
Example: An investor buys shares from a dealer instead of another investor.

3. Example of a dealer market

• NASDAQ is a well-known dealer market.
• It operates through an electronic system where multiple dealers quote prices.
Example: Technology stocks traded on NASDAQ are bought and sold through dealers.

4. Dealers maintain an inventory of securities

• Dealers keep a stock (inventory) of securities that they are willing to trade at any time.
• This allows immediate buying or selling without waiting for another investor.
Example: A bond dealer holds government and corporate bonds ready for sale.

5. Dealers quote buy and sell prices

• Dealers announce:

• a bid price (price at which they will buy)
• an ask price (price at which they will sell)
  • This quoted range is known as the price spread.
  Example: A dealer may quote $99 to buy a bond and $101 to sell it.

6. Dealers provide liquidity

• By being ready to trade at all times, dealers provide liquidity to the market.
• Investors can buy or sell securities without delay.
Example: An investor can sell a bond immediately because a dealer is willing to buy it.

7. Dealers use their own capital


• Dealers risk their own money by holding securities in inventory.
• This exposes them to price changes.
Example: If bond prices fall, the dealer may incur a loss on inventory held.


8. Dealers earn profits through spreads


• Dealers make profits from the difference between the buying and selling price.
• This difference is called the spread.
Example: Buying a bond at $99 and selling it at $101 gives the dealer a $2 profit.

9. Transparency in pricing

• Dealer prices are publicly displayed, ensuring transparency.
• Investors can compare prices offered by different dealers.
Example: Online trading platforms show multiple dealer quotes for the same security.

10. Competition among dealers

• Multiple dealers compete by offering better prices.
• Competition helps ensure fair pricing for investors.
Example: One dealer lowers the selling price to attract more buyers.

11. Strong presence in currency and bond markets

• Dealer markets are more active in:

• foreign exchange
• bond markets
  • These markets require high liquidity and continuous trading.
  Example: Government bonds are commonly traded through dealers.

12. Use in derivatives and standardised contracts

• Dealer markets are preferred for:

• futures
• options
• derivatives
  • Standardisation makes dealer-based trading efficient.
  Example: Currency futures are traded through dealer systems.

13. Foreign exchange market as a dealer market

• The foreign exchange (FX) market operates mainly through dealers.
• Banks and currency exchanges act as dealer intermediaries.
Example: A bank quotes exchange rates and trades currencies with clients.


One-Line Exam Answer

A dealer market is a secondary market where dealers trade securities from their own inventories, provide liquidity, quote transparent prices, and earn profits through bid–ask spreads, with strong application in bond, currency, and derivative markets.

KembaraXtra-Islamic Finance-Islamic Capital Market – Broker Market

A broker market is a category of the secondary (and sometimes primary) market where transactions are completed only when a buyer and a seller are successfully matched as counterparties, with brokers acting as intermediaries.

1. Role of counterparties

• A broker market functions effectively only when both a buyer and a seller are found.
• The broker’s main task is to match these two parties.
• Without a matching counterparty, a transaction cannot take place.
Simple explanation: A broker cannot sell shares unless another investor is willing to buy them.
Example: An investor wants to sell shares of a company, and the broker searches for another investor willing to buy at an agreed price.

2. Difference from dealer markets

• In broker markets, the broker does not usually act as a counterparty.
• A dealer can act as a counterparty, but this is not the core feature of broker markets.
• Brokers mainly act as agents, not principals.
Simple explanation: Brokers connect people; dealers trade using their own money.
Example: A stockbroker finds a buyer for your shares but does not buy them himself.

3. Impact on liquidity

• Liquidity in broker markets depends on how quickly a suitable counterparty can be found.
• The longer it takes to find a buyer or seller, the lower the liquidity of the market.
• Broker markets may therefore be less liquid than dealer markets.
Simple explanation: If it takes time to find someone to trade with, buying and selling becomes slower.
Example: Rare bonds may take days to find a buyer, reducing liquidity.

4. Historical background

• Traditionally, stock markets operated as brokered markets.
• Stockbrokers physically gathered on trading floors to match buy and sell orders.
• This created the classic image of stock exchanges like Wall Street, with traders shouting prices and recording orders manually.
Simple explanation: Trading used to be done face-to-face before electronic systems existed.
Example: Brokers yelling “Buy!” and “Sell!” on the trading floor.

5. Use in securities trading

• Broker markets are used for many types of securities.
• They are especially suitable for new or initial issues, where buyers and sellers are not yet well established.
Simple explanation: When a security is new, brokers help find interested investors.
Example: A newly issued bond needs brokers to locate initial buyers.

6. Role in IPOs

• During an IPO, investment banks often act as brokers to find subscribers.
• Shares are offered to potential investors through brokerage efforts.
• This helps ensure the issue is successfully subscribed.
Simple explanation: Brokers help connect new companies with investors during IPOs.
Example: An investment bank markets an IPO and collects applications from investors.

7. Use in bond markets

• Broker markets are also applied to certain bond issues, especially newer or less liquid bonds.
• Brokers help identify buyers and sellers when direct trading is difficult.
Simple explanation: Bonds without active trading rely on brokers to find counterparties.
Example: A newly issued corporate bond is sold through broker networks.

8. Suitability for customised products

• Broker markets are ideal for tailored or customised financial products.
• These products may not have standardised prices or large trading volumes.
• Brokers negotiate terms between buyers and sellers.
Simple explanation: Custom products need negotiation rather than instant trading.
Example: A customised Sukuk structure negotiated between an Islamic bank and institutional investors.


One-Line Exam Answer

A broker market is a market where brokers act as intermediaries to match buyers and sellers, with transactions depending on finding suitable counterparties, making it suitable for initial issues, bonds, and customised financial products.

KembaraXtra -Islamic Finance-Islamic Capital Market – Exchanges

• An exchange market is a market structure where trading is executed through automated systems rather than manual negotiation.
→ This means computers handle buy and sell orders instead of people.
→ Example: Online stock trading platforms that match orders instantly.


• Trades are executed using an order book mechanism.
→ All buy (bid) and sell (ask) orders are recorded in a central system.
→ The system matches orders based on price and quantity.
→ Example: A buy order at $10 is matched with a sell order at $10.


• Trading occurs only when buyer and seller prices match.
→ If buyers and sellers cannot agree on price, no transaction takes place.
→ This ensures fairness and prevents forced trades.
→ Example: A buyer willing to pay $9 cannot trade if sellers ask $10.


• Exchange trading is mostly automated and electronic.
→ Human involvement is minimal compared to broker or dealer markets.
→ This improves speed and accuracy.
→ Example: Trades executed in milliseconds during market hours.


• There is no direct involvement of brokers or dealer intermediaries in matching trades.
→ Investors interact directly with the exchange system.
→ The exchange itself provides the matching platform.
→ Example: Retail investors placing orders directly through an exchange interface.


• Exchanges provide a centralised marketplace.
→ Buyers and sellers know exactly where to trade.
→ This reduces search costs for counterparties.
→ Example: All investors trade stocks through a single stock exchange platform.


• Automated exchanges are convenient and efficient.
→ Trades are fast, transparent, and low-cost.
→ This encourages higher trading volumes.
→ Example: Same-day buying and selling of shares.


• Exchange markets are mainly used for standardised securities.
→ Standardisation allows automation and quick matching.
→ Example securities include:
– Stocks
– Bonds
– Futures
– Options
– Other standardised contracts

• Securities traded on exchanges have defined contract or lot sizes.
→ Investors must trade in fixed quantities.
→ This ensures uniformity in trading.
→ Example: An exchange may require stock purchases in lots of 100 shares.


• Exchange trades usually have immediate execution time.
→ Once prices match, trades are completed instantly.
→ This contributes to high market liquidity.
→ Example: Shares bought and sold instantly during trading hours.


• Each exchange defines a tick size.
→ Tick size is the smallest allowed price movement.
→ This prevents random or meaningless price changes.
→ Example: In US stock exchanges, the tick size is $0.01.


• Exchanges also define a contract tick size.
→ Contract tick size = tick size × contract (lot) size.
→ This determines the smallest value change of a contract.
→ Example: $0.01 × 100 shares = $1 minimum contract price movement.


• Delivery terms apply mainly to commodity and derivative exchanges.
→ They specify how and when the asset must be delivered.
→ This avoids disputes between buyers and sellers.
→ Example: Gold contracts specifying delivery location and date.


• Quality standards are set for assets traded on exchanges.
→ Assets must meet predefined specifications.
→ This is crucial for physical commodities.
→ Example: Gold purity or diamond grading requirements.


• Physical assets must be in a deliverable and transferable form.
→ This ensures smooth settlement of contracts.
→ Assets must be ready for ownership transfer.
→ Example: Certified gold bars instead of raw gold.


• The standardisation of contracts ensures transparency and consistency.
→ All investors trade under the same rules.
→ This builds trust in the market.
→ Example: Identical futures contracts traded by all participants.


• Exchange markets are considered the most liquid market structure.
→ High trading volume and fast execution allow easy entry and exit.
→ Investors can buy or sell without major price changes.
→ Example: Highly traded stocks with continuous buying and selling.

One-Line Exam Answer

Exchange markets are automated, centralised platforms where standardised securities are traded through order book matching, ensuring transparency, efficiency, and high liquidity.

KembaraXtra-Islamic Finance-Islamic Capital Market-Categories of Secondary Market

Auction Market (Secondary Market Category)

What it is
• An auction market is a type of secondary market where prices are determined through continuous bidding and asking by participants.
• Buyers and sellers announce prices they are comfortable with.


Who trades
• Transactions mainly occur between investors.
• Issuing companies are not involved.
• Business expansion is not the objective of these trades.


How prices are formed
• All participants openly declare their bid and ask prices.
• This makes prices more concrete, transparent, and efficient.
• Market efficiency improves because everyone sees price information.


Price discovery process
• Buyers and sellers come together in the market.
• Buyers submit the highest price they are willing to pay.
• Sellers submit the lowest price they are willing to accept.
• A transaction is completed when bid and ask prices match.


Benefits to investors
• Investors do not need to search for the best price elsewhere.
• A fair and justified price range is automatically discovered.


Example
• The New York Stock Exchange (NYSE) is a well-known auction market.





Dealer Market

Core idea
• Dealer markets do not require buyers and sellers to converge directly.
• Transactions take place electronically through dealers.


How it differs from auction markets
• In auction markets, investors meet each other.
• In dealer markets, investors trade with dealers.


Role of dealers
• Dealers maintain an inventory of securities.
• They are ready to buy or sell at any time.
• Dealers quote:
– a buying price (bid)
– a selling price (ask)


Liquidity and risk
• Dealers use their own capital to hold securities.
• By doing so, they provide liquidity to the market.
• Their capital is exposed to price risk.


How dealers earn profit
• Profit is earned from the spread between buying and selling prices.


Transparency and competition
• Dealer prices are displayed publicly.
• This transparency encourages competition among dealers.
• Competition helps investors get better prices.


Markets where dealer systems dominate
• Currency markets
• Bond markets
• Futures and options
• Other standardised contracts and derivatives


Foreign exchange example
• The foreign exchange market operates mainly as a dealer market.
• Banks and currency exchanges act as dealer intermediaries.


Example
• NASDAQ (New York) is a popular dealer market.



Broker Market

Basic principle
• A broker market works only when a buyer and seller are matched as counterparties.
• Brokers act as agents, not principals.


Counterparty issue and liquidity
• The longer it takes to find a suitable counterparty, the lower the liquidity.
• This makes broker markets generally less liquid than dealer or exchange markets.


Historical background
• Traditional stock markets were brokered.
• Brokers physically searched for counterparties on trading floors.
• This created the classic Wall Street image of traders shouting orders and writing on paper.


Role of brokers
• Brokers search for appropriate buyers or sellers for their clients.
• They do not usually trade using their own capital.


Use in securities markets
• Broker markets are used for many types of securities.
• Particularly important for initial issues.


IPO context
• During an IPO, investment banks broker the issue.
• Their role is to find subscribers for the shares.


Bond and custom products
• Broker markets are suitable for:
– new bond issues
– less liquid securities
– tailored or customised financial products





Exchanges

Market structure
• Exchange markets are mostly automated.
• Trades are executed using order books that match buyers and sellers.
• Stocks are no longer brokered manually.


Price agreement rule
• A trade only occurs if buyer and seller prices match.
• If no agreement is reached, the trade is cancelled.


Role of intermediaries
• There is no involvement of brokers or dealer intermediaries in trade matching.
• Buyers and sellers find counterparties directly through the exchange.


Advantages of automated exchanges
• Centralised trading location
• Faster execution
• Higher transparency
• Lower transaction costs


Types of securities traded
• Standardised securities such as:
– stocks
– bonds
– futures
– options
– other standardised contracts


Key characteristics of exchange-traded securities
• Contract or lot size
• Time required to execute the contract
• Tick size
• Terms of delivery
• Quality specifications


Contract or lot size
• Securities must be traded in minimum quantities.
• Example: stocks traded in lots of 100 shares.


Tick size
• Tick size is the smallest price movement allowed.
• Example: US stock exchanges allow a minimum price change of $0.01.


Contract tick size
• Contract tick size = tick size × lot size.
• Example: $0.01 × 100 shares = $1.


Delivery and quality standards
• Mainly relevant for commodities and derivatives.
• Assets like gold and diamonds are traded based on quality and ratings.
• Physical assets must be in deliverable form.


Liquidity
• Standardisation, automation, and immediate execution make exchange markets highly liquid.

KembaraXtra-Islamic Finance-Islamic Capital Market- Comparison of Secondary Markets


• Auction Market
– Operates in the secondary market.
– Trading takes place through competitive bidding and asking by participants.
– Buyers and sellers interact directly with each other.
– Prices are determined by the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
– Convergence of buyers and sellers is required for trading to occur.
– No brokers or dealers are needed to determine prices.
– Participants do not hold inventories of securities.
– No participant uses their own capital to provide liquidity.
– Liquidity is generally high when participation is active.
– Execution is fast once bids and offers match.
– Transparency is high because bids and asks are openly declared.
– Competition exists through simultaneous bids and offers.
– Commonly used for stocks.
– Securities are moderately standardised.
– Not used for IPOs.
– Example: New York Stock Exchange (NYSE).

• Dealer Market
– Operates in the secondary market.
– Trading occurs electronically through dealers.
– Investors trade with dealers, not directly with other investors.
– Prices are set through dealer-quoted bid and ask prices.
– Convergence of buyers and sellers is not required.
– Dealers act as principals in transactions.
– Dealers maintain an inventory of securities.
– Dealers use their own capital to provide liquidity.
– Liquidity is high, as dealers are always ready to trade.
– Execution speed is fast.
– Transparency is high because dealer prices are displayed publicly.
– Competition exists among dealers through price quotations.
– Dealers earn profits through the bid–ask spread.
– Commonly used for bonds, currencies, futures, options, and derivatives.
– Securities are moderately standardised.
– Rarely used for IPOs.
– Example: NASDAQ and foreign exchange markets operated by banks.

• Broker Market
– Operates mainly in the secondary market and sometimes in the primary market.
– Trading is successful only when buyers and sellers are matched as counterparties.
– Brokers act as agents, not principals.
– A dealer may act as a counterparty, but this is not the core feature.
– Convergence of buyers and sellers is required.
– The longer it takes to find a counterparty, the lower the liquidity.
– Brokers do not hold inventory of securities.
– Brokers do not use their own capital.
– Liquidity is moderate to low, depending on market conditions.
– Execution can be slow compared to dealer or exchange markets.
– Transparency is moderate.
– Brokers earn income through commissions.
– Commonly used for IPOs, new bond issues, and customised products.
– Securities are less standardised.
– Historically associated with traditional trading floors like Wall Street.


• Exchange Market
– Operates in the secondary market.
– Trading is carried out through automated electronic systems.
– Orders are matched using an order book mechanism.
– Buyers and sellers trade directly through the exchange platform.
– Trades occur only when prices match; otherwise, the trade is cancelled.
– There is no involvement of brokers or dealer intermediaries in matching trades.
– The exchange provides a centralised marketplace.
– No inventory of securities is held by the exchange.
– No use of own capital by intermediaries.
– Liquidity is very high, the highest among all market types.
– Execution is immediate once prices match.
– Transparency is very high due to visible order books.
– Used mainly for highly standardised securities.
– Common instruments include stocks, bonds, futures, options, and standardised contracts.
– Securities are characterised by contract or lot size, tick size, execution time, delivery terms, and quality standards.
– Example: Electronic stock and commodity exchanges.