Capital / Equity
Market
WHAT ARE SHARES?
• A Share is one of a finite number of equal portion in the capital of a
company.
• Each share represents a small stake in the equity of a company. You
can buy large or small lots to match the amount of money you want to
invest. A company’s share price can rise or fall as a result of its own
performance or market conditions.
• Once the shares are brought and transferred in your name your name
will be entered in the company’s share register, which will entitle you to
receive all the benefits of share ownership including the rights to receive
dividends, to vote at the company’s general meetings and to receive the
company reports.
• With the introduction of the Central Depository System (CDS), an
investor can have shares in an electronic book- entry form at the Central
Depository Company (CDC).
Why Do Companies Issue Shares?
• Companies issue shares to raise money from investors. This money
is used for the development of growth of business of companies.
• A Company can issue different types of shares such as ordinary
shares, preference shares, shares without voting rights or any other
shares as are permissible under the law. These give shareholders a
stake in the company’s equity as well as a share in its profits, in the
form of dividends, and a voting right at general meetings of shareholders.
What are Dividends?
• The Income received from shares is called Dividend Income.
• Dividends are returns paid to shareholders out of the profits of the
company.
• Returns can be in the form of cash or additional shares of
the company called bonus shares.
• Dividends are usually paid once or twice a year depending upon the
company’s profit distribution policy.
EQUITY DESK OF THE BANK
The investment of the bank will be structured around passive management
with majority of the portfolio invested for a medium to long term horizon
based on the fundamental developments in the economy, its various sectors
and in the listed companies. However, an overnight to short term trading
portfolio will be maintained in order to enhance the yield on the portfolio.
OBJECTIVES
The key investment objective behind developing an equity portfolio for
the bank is to create and manage an investment portfolio that allows
earning of superior yields in comparison to other alternate investment
Opportunities.
RISK MITIGATION
The risk of the equity portfolio will be managed through:
1. Comprehensive focus on fundamental research and equity analysis;
2. Diversification of the investment portfolio;
3. Rigorous investment review procedures; and
4. Development of controls and procedures for the trading portfolio.
EQUITY MARKET AND THEIR PARTCIPANT
1. All Commercial Banks /NBFls.
2. Mutual Funds
3. Brokerage Houses.
4. Corporate Treasuries.
5. Public Sector/Government.
6. Individuals
7. Foreign Funds
ROLE OF THE STOCK EXCHANGE
1. The stock exchange is a barometer of the economy.
2. It provides a market for raising capital by companies.
3. It provides a market place for shares of listed public companies to be
bought and sold, by bringing companies and investors together at one
place.
4. The exchange’s role is to monitor the market to ensure that it is working
efficiently, fairly and transparently.
STOCK EXCHANGES IN PAKISTAN
There are three stock exchanges in Pakistan:
Karachi Stock Exchange (Guarantee) Ltd.
Lahore Stock Exchange (Guarantee) Ltd.
Islamabad Stock Exchange (Guarantee) Ltd.
Of these, Karachi Stock Exchange is the biggest exchange in the country.
EQUITY TRADING MECHANSIM
KSE Clearing
House
T+2 Settlement
Payment Shares
Buyer Broker Broker Seller
TRADING AND SETTLEMENT
The stock exchanges have introduced a computerized trading system to
provide a fair, transparent, efficient and cost effective market mechanism
to facilitate the investors.
The trading system comprises of four distinct segments, which
are:
T+2 Settlement System
Provisionally Listed Counter;
Spot Transactions
Futures Contracts.
T+2 SETTLEMENT SYSTEM
In the T+2 settlement system, purchase and sale of securities is netted
and the balance is settled on the third day following the day of trade.
BENEFITS
It reduces the time between execution and settlement of trades,
which in turn reduces the market risk.
It reduces settlement risk, as the settlement cycle is shorter.
PROVISIONALLY LISTED COUNTER
The shares of companies, which make a minimum public offering of
Rs.100 million, are traded on this segment from the date of publication of
offering documents When the company completes the process of
dispatch/credit of allotted shares to subscribers, through CDC it is officially
listed and placed on the T+3 counter. Trading on the provisionally listed
counter then comes to an end and all the outstanding transactions are
transferred to the T+3 counter with effect from the date of official listing.
SPOT / T+1 TRANSACTIONS
Spot transactions simply delivery upon payment. Normally in spot
transactions the trade is settled within 24 hours.
FUTURE CONTRACTS
A Futures contract involves purchase and sale of a financial or tangible
asset at some future date, at a price fixed today.
ARBITRAGE OPPURTINUITIES IN EQUITY MARKET
Opportunity taken for higher return and to avoid market risk. This
opportunity arises from inefficiency of the market.
There are mainly two types of arbitrage in equities.
Simple Arbitrage
Ready Future Arbitrage
SIMPLE ARBITRAGE
Price differential between two exchanges or market of the same instrument
PTC Rs. 60 PTC Rs. 60
T+3 Settlement
Buy Sell
K.S.E L.S.E
READY FUTUER ARBITRAGE
Price differential between ready and future contracts of the same
instrument in the same exchange or market.
PTC (ready) Rs. 60 PTC (future) Rs. 64
T+3 Settlement T+30 Settlement
K.S.E
Example
