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Financial Literacy Initiative- Campus Outreach Program by: South Asian Federation of Exchanges (SAFE). Financial Markets – Operations of Stock Exchange. What is Financial System?.
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Financial Literacy Initiative-Campus Outreach Programby: South Asian Federation of Exchanges (SAFE) Financial Markets – Operations of Stock Exchange
What is Financial System? • A financial system is the system that allows the transfer of money between savers (and investors) and borrowers. The role of the financial system is to intermediate between lenders and borrowers, providing a menu of saving vehicles with differing risk and return characteristics. • Financial intermediaries help the investors find the financing they need, taking into account the returns and risks on the project they wish to undertake. • For a given level of saving, more efficient intermediation increases the productivity of investment. It seems obvious that the more efficient the financial system is, the stronger would be the economic growth.
Constituents of Financial System • Surplus Units (Savers/Investors) • Deficit Units (governments, corporate borrowers, financial institutions , etc) • Financial Markets • Money Markets & Capital Market • Primary Market & Secondary Market • Financial Intermediaries • (Banks, Mutual Funds, Leasing Companies, Modarabas, Insurance Companies etc)
Difference Between Money Market & Capital Market 1.Money market is a place where banks deal in short term loans in the form of commercial bills and treasury bills. But capital market is a place where brokers deal in long term debt and equity capital in the form of debenture and shares.2.In money market maturity date of repayment may after one hour to 90 days. But in capital market, loans are given for 5 to 20 years and if issue of shares by co. , its amount will repay at winding of company . But investors have right to sell it to other investors if they need the money.3.Rate of interest in money market is controlled by SBP or central bank of any country. But capital market’s interest and dividend rate depends on demand and supply of securities and stock market’s conditions. Stock market regulator is in the hand of SECP.4.Main dealer of money market s are commercial banks like MCB, NBP and other financial institutions. Main dealers are all the public and private ltd. Co. and investors. 5.In Pakistan, money market is famous with dealing of money fund and banker’s acceptance instruments. But capital market in Pakistan is famous with KSE, LSE & ISE and stock regulator is Securities & exchange commission of Pakistan (SECP).
Capital Markets Defined • A market for medium to long-term financial instruments focusing on capital raising for business purposes. • Financial instruments traded in the capital market include securities and bonds issued by the Government, corporate borrowers and financial institutions.
Classification of Capital Markets: (1) Primary Market The market for new shares of securities. A primary market is one in which a borrower issues new securities in exchange for cash from an investor (buyer). (2) Secondary Market Once new securities have been sold in the primary market, an efficient manner must exist for their resale. Secondary markets give investors the means to trade existing securities
History of Stock Exchanges
History of Stock Exchanges 1602 11th Century Amsterdam Stock Exchange (first Stock exchange) was created and it began official trading shares of Dutch East India Company In France, courtiers de change (first Brokers) traded in debt and government securities Till 1600 14th Century Unofficial share markets existed across Europe where brokers would meet outside or in coffee houses to make trades In Bruges (Belgium) commodity traders gathered in house of “Van der Burse”. That meeting was called “Bruges Bourse”. That idea spread in neighboring countries and bourses were formed in various places
History of Stock Exchanges Title Add your text After 1700 Sub-continent of India Before Independence there were many stock exchanges established in sub-continent during 1800s. In 1934 Lahore Stock Exchange was formed but it was closed after partition and later on merged with Delhi Stock Exchange. Karachi Stock exchange was founded in 1947. Europe & Others By early 1700s there were fully operational stock exchanges in France and England. America followed in the later part of the century by signing Buttonwood Agreement. Other parts of the world followed later in 19th century. There are now a large number of stock exchanges in the world.
Functions of Stock Exchanges
Functions of Stock Exchanges Raising Capital for business Facilitating company growth Mobilizing saving for investment Barometer of the economy Vetting Companies Redistribution of wealth Bought & sold Creating investment opportunities for small investors Corporate governance Efficiently & fairly
Governing Laws • The Securities and Exchange Commission of Pakistan (SECP) is the main regulator of the stock market. It regulates the stock market through following major statutory laws/rules: • Securities and Exchange Ordinance 1969 • Securities and Exchange Rules 1971 • Securities and Exchange Commission of Pakistan Act 1997 • Specific Purpose Legislations for Conduct of Trade Stock Exchange’s Regulations: • Memorandum & Articles of Association • Listing Regulations • General Regulations
Regulatory Structure Parliament Ministry of Finance Securities & Exchange Commission of Pakistan State Bank of Pakistan Federal Board of Revenue ISE CDC NCCPL
Custodial Functions • Central Depository Company of Pakistan Limited (CDC) provides custodial services for shares. • It ensures efficient handling and transfer of shares. • Types of CDC Accounts: • Main Account for Brokers ( a gateway account) • House Account (a family account of the Broker) • Sub-Account (An investor account with CDC through Broker) • Investor Account Services. (Facilitating the Investors to open their independent CDC Accounts) • Initial Account Opening Fee: Rs.500/-. • Annual renewal Fee Rs.500/-.
Activity Chart Buying Investor Selling Investor UTS Broker Broker NCCPL Amount Shares Broker Broker Shares Shares Buying Investor Shares Selling Investor Proceeds
Basic Concepts • Bull & Bear • Blue Chip • Carry-Over Trades • Dividends • Right Issue • Book closure • Buy Stop Order • Inside trading • Portfolio • Public Limited Company • Short selling Ex-Dividend Dates: When a company declares a dividend, it sets a record date when you must be on the company's books as a shareholder to receive the dividend. Earning per share (EPS):A profitability indicator calculated by dividing the net after-tax earnings (earnings available to common shareholders) during a period by the average number of shares outstanding at the end of that period. Stop-Loss Order:An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. Also known as a "stop order" or "stop-market order".
Sensitivity of Stock Market Demand & Supply Economy & Politics Stock Market Earnings of Companies Emotions Rumors News
Corporate Structure of the Stock Exchanges • The affairs of the Exchanges are run by the Board of Directors. • Composition of the Board: • Elected from Members of the Exchange 5 • Nominated by SECP 4 • The Managing Director 1 • Total 10 • Managing Director is a member of the Board by virtue of his office. The Chairman of the Board is elected out of the non-member directors.
Stakeholders of ISE Issuers Members • 261 Companies are listed in ISE • Rs. 200 million paid-up capital • public offer should be Rs.100 million or 20% of the capital whichever is higher • 500 applicants • ISE has 119 Members/ • Brokers • 26 individual • 93 corporate • Pakistani Citizen • Having certain taxable income • Graduate • Not defaulter of any public institution • Not penalized for any moral guilt • Membership Fee Companies Brokers Customers of ISE Investors Investors ISE has a base of investors as compare to other Exchanges
Trading Systems • The stock exchanges have fully computerized trading systems and out-cry systems no more exist. • Bids (buy orders) and offers (sale orders) are placed in the trading software and then executed accordingly. • Types of Trading: • Regular • Future • Trade Orders: • Market Order • Limit Order
Procedure for Trading in ISE Step 3 • Delivery • Clearing & Settlement Step 2 • Placing Orders • Commission/Brokerage Fee Step 1 • Selecting Stock Broker • Opening Account with Stock-Broker
Stock Market Index • KSE-100 INDEX • LSE-25 INDEX • ISE-10 INDEX • ISE-10 INDEX: Date of launching: Jan 1, 2004 • The main objective for the construction of an index is to track the performance of the various listed stocks according to their market capitalization. A capital weighted index is composed of a basket of securities, which captures the change in market capitalization due to the variation in prices. Mathematically this can be representedby: • Index Value = Total market capitalization * 1000 • Index divisor
Sources of Revenue of ISE • Listing Fees • Initial listing fee @.1% of total paid-up capital maximum upto Rs.1.00 million • Annual Listing Fee Paid-up Capital • Upto Rs. 50 mn Rs. 10,000/- P.A. • Above Rs. 50 mn to Rs. 200 mn Rs. 15,000/- P.A. • Above Rs. 200 mn Rs. 25,000/- P.A. • Additional Listing Fee @ 0.1% of the increased capital • Trading Fee @ 0.0015% - Rs.1.50 per Rs.100,000 value of transaction • Any Other Income Source
Assessing Securities Economic Factors Technical Indicators IndustrialSectors Fundamental Analysis Technical Analysis Graphs Companies Analysis Charts
Word of Advice Understand the nature of Stock Investment before making any investment decision. Always Invest Through a Registered Broker of the exchange. Diversify your investment to a possible extent. Keep Complete record of your Investments. Maintain your own CDC account for the safe custody of your shares. The key to making money in stocks is not to get scared out of them.
DOS & DON’TS
