The Karachi Stock Exchange

Presenter
Ali Asghar
What is a Market?

 A market is a public place where products or

services are sold, either directly or through
intermediaries.

 Markets are important for a number of reasons:

 They provide a place (either physical or virtual) for the
trading of goods or services.
 They provide for competition so that the best price
may be found (this is called price discovery).
 They provide liquidity.
Money vs. Capital Markets

 Money Market – Short-term, high quality debt

securities are traded here. These securities carry
little or no default risk and have very little price
risk due to their short maturities.

 Capital Market – Long-term securities trade in

the capital markets. These securities are subject
to significant price risk, default risk, purchasing
power risk, etc. due to their longer maturities.
Primary vs. Secondary Markets
 Primary markets are where securities are initially sold. In this market the
issuer receives the proceeds from the sale.
 Once securities have been sold into the primary market, they begin
trading in the secondary markets. In the secondary markets the seller of
the securities receives the proceeds, not the issuer.
 Primary markets would barely exist were it not for well functioning,
efficient secondary markets. At the least, prices of securities would be far
lower due to much higher required returns. How much would you pay for
a security that you could never sell?
 There are also third and fourth markets. The third market is comprised of
trades in listed securities away from the exchange where they are listed.
This is an institutional market. The fourth market refers to trades directly
between buyers and sellers.
Organized vs. OTC Markets

 Organized markets are those which have a

physical location where all trading takes place.
For example, the NYSE, Amex, and regional
exchanges are organized markets.

 Over the Counter (OTC) markets do not have

physical locations. Instead, they are characterized
by networks of dealers who are connected by
telephone or computer networks. The Nasdaq is
an example of an OTC market.
Basic Statistics of Exchanges
 The size of the world stock market was estimated at
about $36.6 trillion at the start of October 2008

 The total world derivatives market has been

estimated at about $791 trillion face or nominal
value, 11 times the size of the entire world economy.
The value of the derivatives market, because it is
stated in terms of notional values, cannot be directly
compared to a stock or a fixed income security,
which traditionally refers to an actual value.
Brief History

 On the ports of Spain in 10th century first form

of modern stock exchanges were formed.

 In 12th century France the courtiers de change

were concerned with managing and
regulating the debts of agricultural
communities on behalf of the banks. As these
men also traded in debts, they could be called
the first brokers.
Introduction to sub-continent

 East India company started this business in

India.

 In 1850 eight stock exchanges were formed in

sub-continent, two each in Bombay, Calcutta
and Ahmedabad. One each in Madras and
Lahore.
The NYSE History
 The New York Stock and Exchange Board began on 17 May 1792 under a
buttonwood tree. Originally, 24 brokers signed the Buttonwood
Agreement in which they agreed to trade only among themselves and at
a fixed commission rate (fixed commissions were the rule until 1975).
 In 1817 the exchange was moved into rented rooms at 40 Wall Street.
They also wrote and approved a formal constitution.
 In 1863, the name was changed to The New York Stock Exchange.
 In 1903 the NYSE moved to its current home.
 Today, the NYSE Group is a publicly traded company (NYSE: NYX).
NYSE Current Statistics

The New York Stock Exchange Selected Facts

January 2010

Listed Companies (common & preferred) 2,750

Number of Common Issues Listed 2581

Number of Preferred Issues Listed 364

Average Daily Share Volume 1,663,100,000

Average Share Price $30.27

Number of Seats 1366

Seat Price $ 1,500,000

First recorded speculative
bubble
 Tulip mania was a first recorded instance of
modern terminology – asset bubbles
 The event occurred in 1637 when the price of
a single Tulip bulb reached as high as 10 times
the salary of a skilled labourer
 At one point around 12 acres of land was
offered for 1 single bulb of tulip
 Needless to say many people lost everything
Stock Market Indices and
Averages
 For more than 110 years, people have tracked the market’s
daily ups and downs using various “indexes” of overall
market performance
 There are currently thousands of indices calculated by
various information providers. Best known are:
 Dow Jones & Co
 Standard & Poor’s
 Morgan Stanley Capital Markets (MSCI)

 Dow Jones alone currently publishes more than 3,000 indices

Types of Indices and Averages

 There are essentially four methods of index

or average construction:
 Price Weighted
 Capitalization Weighted
 Equal Weighted Arithmetic
 Equal Weighted Geometric
 There are also some variations of these
techniques. We will cover the basics.
Example Data for Index
Calculation

Stock Day 1 Day 2 Day 3

ABC 60 62 32*
(100 shares) Split 2-for-1

DEF 25 22 23
(200 shares)
XYZ 43 45 46
(300 shares)
Index Types:
Price-weighted Average
 A price-weighted average is calculated by
adding up the prices of the index constituents
and dividing by a divisor.
 The divisor begins as the number of
constituents, but will change over time (to
maintain price continuity) as:
 Constituents change
 Stocks are split or pay a big stock dividend
Index Types:
Price-weighted Average (cont.)
 The DJIA is the best-known price-weighted average.
 It was created by Charles Dow on 17 May 1896, and originally
contained only 12 stocks (industrial stocks were less
important at the time than the railroads).
 Today, General Electric is the only company left that was in
the original average.
 Today, the DJIA contains 30 stocks and the divisor is about
0.14418073. (17 September 2002)
 Each 1 point change in a component therefore adds about
6.94 points to the value of the average.
Index Types:
Price-weighted Average (cont.)
 As an example of calculating a price-weighted average,
consider our sample data.
 On day 1, we start our average by adding up the prices and
dividing by 3, to get a value of 42.67.
 For day 2, we calculate the average the same way, and get a
value of 43.
 For day 3, ABC has split 2-for-1 necessitating a change in the
divisor. The new divisor is calculated (using day 2 closing
prices adjusted for the split) such that the average begins
day 3 unchanged from day 2.
Index Types:
Price-weighted Average (cont.)

 To calculate the divisor:

62  22  45
98
43  2 
x x
98
x  2.279
 43
Now, to calculate the average on day 3:
32  23  43
 44.32
2.279
 From now on, until another adjustment is required,
the divisor will be 2.279.
Index Types:
Capitalization-weighted
 A capitalization-weighted index is weighted by the total
value of the outstanding shares (price x shares) rather than
stock price.
 The best known cap-weighted index is the S&P 500 which
contains 500 of the leading stocks in the U.S. markets (not
necessarily the largest, though the S&P 500 is considered a
large-cap index).
 Currently, the total market value of the 500 stocks is over
$8.23 trillion.
Index Types:
Capitalization-weighted (cont.)
 The current (9/25/2006) composition of the S&P 500 is
shown below:
Market Capitalization ($
Sector # of Companies % of Total Millions) % of Total
Energy 29 5.80% 1,077,459 9.03%
Materials 30 6.00% 341,856 2.86%
Industrials 52 10.40% 1,292,053 10.83%
Consumer Discretionary 86 17.20% 1,218,908 10.21%
Consumer Staples 39 7.80% 1,148,899 9.63%
Health Care 56 11.20% 1,518,295 12.72%
Financials 89 17.80% 2,671,307 22.38%
Information Technology 78 15.60% 1,826,509 15.30%
Telecommunications Services 10 2.00% 429,064 3.59%
Utilities 31 6.20% 411,162 3.44%
S&P 500 500 100.00% 11,935,511 100.00%

Data as of 9/25/2006

Source: Standard & Poor’s

Index Types:
Capitalization-weighted (cont.)
 A capitalization-weighted index is calculated by
dividing the total market cap of the stocks in the
index by the index divisor.
N

 P Q i i
IndexValue  i 1

Divisor
 The divisor is determined at inception by dividing the
total market cap by the desired beginning level of the
index.
Index Types:
Capitalization-weighted (cont.)
 As an example of calculating a  60 100   25  200   43  300  23900  239
Divisor 
capitalization-weighted 100 100

average, consider our sample  60 100   25 200   43 300  23900  100
Day1 
data. 239 239
 Suppose that we want to set  62 100   22  200   45 300  24100  100.84
Day2 
the initial index value at 100. 239 239

First calculate the divisor, Day3 

 32  200   23  200   46  300  24800  103.77
note that it is 239. 239 239

 Now, calculate the index for

each day.
 Note that the split has no
impact on the divisor.
Why to Invest in Stock
Exchange
 Security

 Liquidity

 Profit
 Dividends
 Capital gains
 Bonus and right shares
Types of shares
 Common shares

 Preference shares
Brief history of KSE

 Incorporated on March 10, 1949

 Premier Stock exchange of the country

 Started with 5 companies that had a paid up capital

of Rs. 37 million

 Trading was done through an open-out-cry system

 The first index was the KSE 50 Index

KSE Today

 Exchange owned by around 200 members

 652 companies listed

 4 indices
 Electronic Trading through KATS
 Market capitalization*: US $ 26.04 billion
Procedure for purchase of
shares
1. Selection of broker
2. Open an account with the broker
3. Order placement
4. Order execution by the operator
5. Confirmation of order execution to the
client
6. Delivery of shares and money
Role of a custodian and
clearing house
 Forms of shares available:
▪ Physical
▪ Digital

 Digital shares are held with a custodian

(CDC)

 A clearing house routes shares between

investors
Main Types of orders

 Limit orders

 Market orders
Trading Service

Fully automated
trading, clearing
and settlement
system
Brokers
connectivity to
KSE through Internet routed
VPN (to ensure trading facility
security of
data). Customized services
and state of the art
technology
infrastructure have
given us an edge Gateway
Order-driven over other trading (Order
system Management
exchanges in the System)
region

Investors and
Internet trading fund managers
can also access
facilities
information
available
through Display
Only Terminal
Broker Services, Custodian Services and Clearing &
Settlement

Key Services Offered by Brokers in Custodian Services Clearing & Settlement

Pakistan
 Central Depository Company (CDC) of
Pakistan, sole depository in Pakistan, Responsible for the electronic
Facilitating custodian set up (For has systems and operations consistent clearing & settlement system
International Clients) with global best practices. that has replaced the
individual clearing houses of
Executing Trade  CDC is committed to providing secured Pakistan’s 3 stock exchanges
and dependable services to the capital
and financial markets.
Settlement
Electronic clearing and
 All CDC Services are backed up by a settlement system enhances
Providing real time updates to clients call centre and a Complaint service and improves
on market changes Management System
efficiency
Providing research support
Establishment of Clearing &
Full suite of research services Settlement Trust fund shall
clear any obligations of a
broker in case of default
The KSE-100 Index

 Comprises of 100 companies.

 33 sectors in the overall index

 Out of the 100 companies 33 are the top

companies from these respective 33 sectors

 Other companies are selected on the basis of

market capitalization
Index weighting

 Oil and Gas sector is by far the largest sector

in the index with a weight of around 40%
 OGDCL 25%
 PPL 8%
 POL 2.5%
 Others 4.5%

• Other prominent sectors in the index are Commercial

Banks and Fertilizer sector
Investment Analysis

 Top down approach

 Analysis of macroeconomic situation
 Analysis of Industry
 Analysis of individual companies

 Formation of fundamental basis of valuation

 Free cash flows
 Dividend Discount
 Relative valuation
Asset Allocation

 Objective
 Maximize return per unit of risk (efficiency ratio)

 On the basis of fundamental analysis potential

upside of different investments are calculated

 The upside potential and risk presented by a

particular security determine the asset
allocation in a given portfolio
Thank You