in simple words

8/3/2019 In Simple Words

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In simple words: The stock exchange provides a market place where shares can be

bought and sold.

There are many ways to define stock exchange. Few of them are as follows:

An organized marketplace where members gather to trade securities. Members may act

either as agents for customers, or as principals for their own accounts.

An organized marketplace for securities featured by the centralization of supply and

demand for the transaction of orders by member brokers for institutional and individual

investors

A centralized market for buying and selling stocks where the price is determined

through supply - demand mechanisms. Individuals and institutions buy and sell stocks inan auction-like forum.

A stock exchange is an organization of which the members are stockbrokers. A stock

exchange provides facilities for the trading of securities and other financial instruments.

Usually facilities are also provided for the issue and redemption of securities as well as

other capital events including the payment of income and dividends.

The most comprehensive definition

A stock exchange, share market or bourse is a corporationormutual organizationwhich

provides facilities forstock brokers and traders, to trade company stocks and

othersecurities. Stock exchanges also provide facilities for the issue and redemption of

securities, as well as, other financial instruments and capital eventsincluding the

payment of income and dividends. The securities traded on a stock exchange

include:shares issued by companies, unit trusts and other pooled investment products

andbonds. To be able to trade a security on a certain stock exchange, it has to be listed

there. Usually there is a local & central location at least for record keeping, but trade is

less and less linked to such a physical place, as modern markets are electronic

networks, which gives them advantages of speed and cost of transactions. Trade on an

exchange is by members only & stock & shareholders. The initial offering of stocks and

bonds to investors is by definition done in the primary marketand subsequent trading is

done in the secondary market. A stock exchange is often the most important component
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of a stock market. Supply and demand in stock markets is driven by various factors,

which as in all free markets, affect the price of stocks.

There is usually no compulsion to issue stock via the stock exchange itself, nor must

stock be subsequently traded on the exchange. Such trading is said to be off exchangeorover-the-counter. This is the usual way that bonds are traded. Increasingly more and

more stock exchanges are part of a global market for securities.

History of the stock exchange

In 12th century France the courratiers 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.

Some stories suggest that the origins of the term "bourse" come from the Latin bursa

meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three

purses), hung on the front of the house where merchants met.

However, it is more likely that in the late 13th century commodity traders in Bruges

gathered inside the house of a man called Van der Burse, and in 1309 they

institutionalized this until now informal meeting and became the "Bruges Bourse". The

idea spread quickly around Flanders and neighboring counties and "Bourses" soon

opened in Ghent and Amsterdam.

In the middle of the 13th century Venetianbankers began to trade in government

securities. In 1351 the Venetian Government outlawed spreading rumors intended to

lower the price of government funds. There were people

in Pisa, Verona, GenoaandFlorence who also began trading in government securities

during the 14th century. This was only possible because these were independent city

states were not ruled by a duke but by a council of influential citizens.

The Dutch later startedjoint stock companies, which let shareholders invest in business

ventures and get a share of their profits - or losses. In 1602, the Dutch East India

Companyissued the first shares on the Amsterdam Stock Exchange. It was the first

company to issue stocks and bonds.

THINGS WE NEED TO UNDERSTAND ABOUT STOCK EXCHANGE
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What are shares?

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 companys 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 companys share register, which will entitle you to receive all the benefits of share

ownership including the rights to receive dividends, to vote at the companys general

meetings to receive the companys reports.

If you decide to sell your shares you will need to deliver share certificates to the broker

in time for the transaction to be completed.

With the introduction of the Central Depository System (CDS), an investor can have

shares in paper form or can own 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 and growth of businesses 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 companys equity as well as a share in its

profits, in the form of dividends, and a voting right at general meetings of shareholders.

Why Do Investors Buy Shares?

Studies have shown that over a twenty-year span, investment in shares has provided

greater returns than most other forms of savings. Shares can provide you with a regularstream of income through dividends as well as the potential for your investments to

grow in value. If the prices of shares go up, you can sell them for more than you paid.

This is called capital gain.

What are Dividends?


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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 companys profit

distribution policy.

What is Capital Growth?

This is one of the ways in which shares differ from deposit accounts. The principal

amount of money you put in a bank or any fixed income savings scheme always stays

the same e.g. if you start with Rs.100,000 you will always have Rs.100,000 (other than

any interest earned). On the other hand, changes in the value of shares occur according

to the performance of the company. With good management, the value of your

investment in shares of a company can grow over time so that your shares are worth

more than you paid for them. This is capital growth.

Risks and Rewards

Buying shares can offer advantages over saving in deposit accounts: your investment

may increase in value besides paying you dividends. You share the rewards when the

company does well and the price of the shares goes up. But if the company performs

badly, the share price may go down and the value of your investment will be reduced.

Other factors, such as the performance of the stock market as a whole and the general

economic climate, may also affect the price of your shares. Investment in shares is

therefore investment in risk capital. The shareholders can be rewarded for taking this

risk and the potential return on your money can be higher than that on other

investments. You can reduce your risks with careful planning.

Everyone today appreciates the need to save whether for a house, for childrens

education, a wedding, or for use after retirement. All these goals can be realized

through excellent financial planning. An intelligent plan entails investing your money in

an appropriate combination of assets with potential to generate the income needed to

achieve your goals. If you invest wisely, you can maximize the earning on your

investments.

There are many investment avenues available, but a wise investor does not invest on

impulse, a hot tip or follow the herd. An investor should discriminate between


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information, casting away irrelevant and illogical pieces of information, and checking for

opportunities and facts before making an intelligent choice of investments.

What is the Role of the Stock Exchange?

The stock exchange admits companies for trading at their securities.

It provides a market for raising capital by companies.

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.

The exchanges role is to monitor the market to ensure that it is working efficiently,

fairly and transparently.

Raising capital for businesses

The Stock Exchange provides companieswith the facility to raise capitalfor expansion

through selling shares to the investingpublic.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational

allocation of resources because funds, which could have been consumed, or kept in

idledepositswith banks, are mobilized and redirected to promote business activity with

benefits for several economic sectors such as agriculture,commerce and industry,

resulting in a strongereconomic growthand higherproductivitylevels.

Facilitate company growth

Companies view acquisitions as an opportunity to expand product lines, increase

distribution channels, hedge against volatility, increase its market share, or acquire

other necessary business assets. A takeoverbid or a mergeragreement through

the stock market is one of the simplest and most common ways to company growing by

acquisition or fusion.

Redistribution of wealth
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By giving a wide spectrum of people a chance to buy shares and therefore become

part-owners (shareholders) ofprofitableenterprises, the stock market helps to reduce

large income inequalities. [Citation needed] Both casual and professional stock

investorsthrough stock priceincreases and dividends get a chance to share in the

profits of promising business that were set up by other people.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve on

theirmanagementstandards and efficiencyin order to satisfy the demands of these

shareholders and the more stringent rules for public corporations by public stock

exchanges and the government. Consequently, it is alleged thatpublic

companies(companies that are owned by shareholders who are members of the general

public and trade shares on public exchanges) tend to have better management records

thanprivately-held companies(those companies where shares are not publicly traded,

often owned by the company founders and/or their families and heirs, or otherwise by a

small group of investors). However, some well-documented cases are known where it is

alleged that there has been considerable slippage in corporate governanceon the part

of some public companies (e.g.Enron Corporation, MCI WorldCom, Pets.com, Webvan,

orParmalat).

Creates investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is

open to both the large and small stock investorsbecause a person buys the number of

shares they can afford. Therefore the Stock Exchange provides an extra source of

income to small savers.

Government raises capital for development projects

Governments at various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or housing estates by

selling another category ofsecurities known as bonds. These bonds can be raised

through the Stock Exchange whereby members of the public buy them, thus loaning

money to the government. The issuance of such municipal bonds can obviate the need

to directly tax the citizens in order to finance development, although by securing such

bonds with the full faith and credit of the government instead of with collateral, the result
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is that the government must tax the citizens or otherwise raise additional funds to make

any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, onmarket forces.

Share prices tend to rise or remain stable when companies and theeconomyin general

show signs of stability and growth. An economic recession, depression, orfinancial

crisis could eventually lead to a stock market crash. Therefore the movement of share

prices and in general of the stock indexes can be an indicator of the general trend in the

economy.

Stock Exchanges in Pakistan:

There are three stock exchanges in Pakistan:

i) Karachi Stock Exchange (Guarantee) Ltd.

ii) Lahore Stock Exchange (Guarantee) Ltd.

iii) Islamabad Stock Exchange (Guarantee) Ltd.

Of these, Karachi Stock Exchange is the biggest exchange in the country.

LSE HISTORY AND INFORMATION

History

Lahore Stock Exchange (Guarantee) Limited came into existence in October1970,

under the Securities and Exchange Ordinance, 1969, of the Government of Pakistan in

response to the needs of the provincial metropolisof the province ofPunjab. It initially

had 83 members and was housed in a rented building in the crowded area of Bank

Square in Lahore. The number of members has increased from 83 to 152 over a period

of 35 years.

Lahore Stock Exchange has opened branches in the industrial cities

ofFaisalabad andSialkot for trading.
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LSE Indices

LSE-25: The Lahore Stock Exchange Twenty Five company index also calculates the

performance ofstocks assuming that all rights issues and bonus share issues only

increase the listed capital. In the case of bonuses or rights the prices of the shares are

not adjusted as they are in the case of the LSETRI (Lahore Stock Exchange Total

Return Index). However, the LSE-25 assumes that dividendspaid out by a component

company are not reinvested. In summary, in the LSE-25, no price adjustments are

made when any component company issues cash dividends.

LSETRI: The Lahore Stock Exchange Total Return Index calculates the performance of

stocks assuming that all payouts are reinvested in the index on the ex-date. The

LSETRI assumes that if a component company issues bonus shares or announces a

rights issue it will increase the listed capital. Additionally, the LSETRI also assumes that

all payouts by a component company are 100% reinvested in the index. Therefore, the

LSETRI is adjusted against such payouts announced by any of index constituents on its

ex-date allowing the index value to remain comparable over time.

Current performance
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LSE since its inception has faced ups and down in its progress. However, it has been

on the paragon of success after the introduction of government economic reforms in2001. The beginning of 2006 saw unprecedented increase in market capitalization but it

was unable to settle its laurels and the mid of 2006 saw a fall. The performance has

been on the rise since the last week of September and the indications show that laurels

are still to be set down.

Indexation

In process of indexation, first thing is to choose the number of high performers (listed

companies) in terms of volume and trade which is according to the size of thecorresponding stock exchange. In case of LSE, its 25. Now each high performer is

allocated weights according to the traded value of its stocks on the stock exchange.

Say, for instance NBP has weight of 10%, PPL 15%; bank Alfalah 3% and so on. Now

for each of these companies the total numbers of shares floated are multiplied by their

respective market prices.


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But at the time of construction of index, face value of shares is multiplied by total

numbers of shares floating. We get an index simply by dividing this total by a factor. Its

done just to present the daily changes in terms of percentage compared to a base time

period (or from the time index is last revised).

What we hear daily about rise or fall in index is basically presenting the cumulative

effect of rise or fall of each of these companies individual stock price and rise or fall of

volume traded; this obviously depends on market conditions. And hence in this measure

of performance of a bucket of high performers help stakeholders in understanding the

overall direction of a stock exchange.

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:

i) T+3 Settlement System;

ii) Provisionally Listed Counter;

iii) Spot Transactions; and

iv) Futures Contracts.

T+3 Settlement System

In the T+3 settlement system, purchase and sale of securities is netted and the balance

is settled on the third day following the day of trade.

Benefits of T+3 Settlement System

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


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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 imply delivery upon payment. Normally in spot transactions the trade

is settled within 24 hours.

Futures Contract

A Futures contract involves purchase and sale of a financial or tangible asset at some

future date, at a price fixed today.

COT

The Karachi Stock Exchange (Guarantee) Limited (KSE) had enforced Carry-Over

Transactions Regulations (the Regulations) with effect from 11 January 1993. These

regulations were introduced to enhance the stock market liquidity and parallel

regulations were also enforced by the other stock exchanges of the country. Followingparagraphs summarize the mechanism of COT

Carry over transaction, as defined in section 2(e) of the Regulations, means the

combination of two transactions taking place simultaneously and settled in two clearings

in sequence. According to section 4(iii) of the regulations, the buyer of shares in current

clearing period (the first transaction) would become seller of the same shares in the

immediate next clearing period (the second transaction) and the seller of shares in

current clearing period (the first transaction) would become buyer of the same shares

in the immediate next clearing period (the second transaction).

The appropriate Committee of the Institute (ICAP)has examined all aspects of the query

regarding Carry-Over-Transactions (COT) and is of the opinion that a Carry-Over-

Transaction is a Repo transaction as the substance of the transaction and not its form


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should be considered and accordingly it should be treated as a financing transaction. in

the books of accounts.

Buyer / Seller enters into the first transaction on Friday after normal trading hours and

its settlement takes place on succeeding Wednesday through Clearing House of KSEalong with settlements of normal transactions. Simultaneously, seller / buyer enters into

the second transaction on the same Friday and its settlement takes place through

Clearing House but on succeeding second Wednesday. However, the contract ticket of

the second transaction (which is prepared on Friday) bears the date of succeeding

Monday, not of Friday. Share Price of the second transaction is marked-up and

generally does not match with the prevailing market quotes of the succeeding Monday.

The marking-up of second transaction is dependent on demand and supply of funds in

the Carry-Over Market.

Margin Financing

It is borrowing money from a stock broker or a bank to purchase stock. Margin financing

allows you to buy more stock than youd be able to normally. To trade on margin, you

will need a margin account. This is different from a regular account in which you trade

using the money in the account. By law, your broker will be required to obtain your

signature to open a margin account. The margin account may be part of your standard

account opening agreement or may be a completely separate agreement. An initial

investment of some amount will be required for a margin account, though it may vary

from one broker to another. That deposit will be known as the minimum margin. Once

the account is opened and operational, you can borrow up to a percentage of the

purchase price of a stock. This portion of the purchase price that you deposit is known

as the initial margin. Its essential to know that you dont have to margin all the way up

to that percentage, you can borrow less, say 10% or 25%. Be aware that some

brokerages may require you to deposit more than 50% of the purchase price.

You can keep your loan as long as you want, provided you fulfill your obligations. First,when you sell the stock in a margin account, the proceeds go to your broker against the

repayment of the loan, until it is fully paid. Second, there is also a restriction called the

maintenance margin, which is the minimum account balance you must maintain before

your broker will force you to deposit more or sell stock to pay down your loan. When this

happens, its known as a margin call.


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Margin isnt without its costs. Regrettably, margin able securities in the account are

collateral. Youll also have to pay the interest on your loan. The interest charges are

applied to your account unless you decide to make payments. Over time, your debt

level increases as interest charges accrue against you. As debt increases, the interest

charges increase, and so on. Therefore, buying on margin is mainly used for short-term

investments. The longer you hold an investment, the greater a return you need to break

even. So if you hold an investment on margin for a long period of time, the odds that

you will make a profit are stacked against you.

All stocks will not qualify to be bought on margin, as in COT. The SECP & the stock

exchanges will regulate which stocks are margin able. As a rule of thumb, brokers will

not allow customers to purchase IPOs, non-blue chips; OTC market shares (whenever

that starts) on margin because of the day-to-day risks involved with these types of

stocks. Individual brokerages can also decide not to margin certain stocks, so check

with them to see what restrictions exist on your margin account.

CFS

The market was highly depressed due to serious liquidity crunch with the business

volume plunging to three-year low. So SECP decided to introduce CFS replacing COT

(badla financing) on 22nd august, 2005. Everyone welcomed the resolution of the long

standing crisis and hoped that the replacement of carryover transactions by Continuous

Funding System (CFS) and the lengthening of the period of futures contract from 30

days will usher in a new era of buoyancy in the stock market.

Initially, CFS got popularity and placed positive effects on stock market but later on

experts and even management of KSE held it responsible for SE crash, especially loss

to small investors. So SECP was forced to review its policy regarding CFS. Currently

SECP has eased its policy regarding CFS and they are working on a project CFS mark

ii which would replace CFS and hence pitfalls in that system.

IMPORTANT THINGS TO KNOW ABOUT EQUITIES

If you can afford to take some risk and have the ability to endure the markets ups

and downs, equity investments may grant you good returns.


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Do not invest any money with the stockbroker as a deposit at fixed rate of return.

Such a deposit has no legal standing and the investor is exposed to risk of losing his

money.

You must know the rates of fees and commissions charged by the broker/stockexchange as these affect your costs, and hence your returns.

The aim of investing in stocks and shares is to buy at low and sell at high. Knowing

when is however, the problem. Many investors attempt to time the market: they try to

figure out when the market is going up and buy before it does and then anticipate when

it is going to crash and sell before that. Usually you try to buy when the upswing has

begun and sell as the downswing starts. However, such accuracy is extremely difficult

to achieve.

The stock market is driven by two emotions: greed and fear. People are caught up in

the boom fever and pay beyond the worth of shares this is the greed that drives bull

markets. In bear markets, people get carried away with the ruling pessimism and are

eager to sell their investments believing in the worst rumors this is the fear that

dominates bear markets.

Be careful in selecting your broker. Ensure that he/she is licensed by the SEC to

trade and the stock broking firm has a good track record. Give clear instructions to avoid

ambiguity, check trade confirmations received and keep a proper record of all your

transactions. All the registered brokers are listed at the web site of

SECwww.secp.gov.pk

HOW TO TRADE? EQUIPPING YOU WITH PRACTICAL KNOWLEDGE

Your first step is to contact a stockbroker or an investment adviser.

Introducing Stockbrokers

Stockbrokers are your link to the stock market. Their job is to help you get the best price

available when you want to buy or sell your shares. Be careful in selecting your broker.

The Mechanics of Share Dealing
http://www.secp.gov.pk/http://www.secp.gov.pk/


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There are various ways of investing in the stock market: you can deal directly in shares;

invest through a unit trust or investment trust or let your investment be handled by an

advisor.

Opening of Account

Once you have decided the broker with whom you intend to deal, you should ensure

that an account is opened in your name by filling the account opening form. It is

imperative that the terms and conditions prescribed in the account opening form are

read very carefully and well understood. It will be in your interest if you give clear

instructions as to who can operate the account. It is preferred if the investor gives

instructions that business can only be transacted in the account on his instructions.

Buying/Selling Directly

When you have decided to buy/sell shares in a particular company, contact your

stockbroker. You can ask to buy/sell a fixed number of shares or shares up to a certain

value. Get the contract note confirming your order immediately and check for the

following information.

a) Name and number of securities;

b) Date on which the order is executed;

c) Nature of transaction (spot, ready or forward and also whether bought or sold);

d) Price at which the transaction is executed; and

e) Commission charged by the broker;

There are two types of orders:

Limit Orders: In a limit order, the client specifies the price at which the order is to be

executed.

Market Order: Also known as at best order, the order is executed at the prevailingmarket rate.

VARIOUS WAYS OF BECOMING A SHAREHOLDER

Initial Public Offering (IPO)


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When companies offer shares to the general public for the first time it is known as a

flotation or an Initial Public Offering (IPO). These shares can be bought directly from the

company without paying stockbrokers commission. You might see an advertisement in

a newspaper from a company issuing shares or your stockbroker might tell you about a

company making an IPO. Simply fill in the share subscription form and deposit the form

along with subscription cheque in a branch of the designated bank(s).

Right Issues

Right shares are issued when companies need to raise additional capital to finance their

new expansion projects or to meet working capital needs, etc. In case of rights issues,

the existing investors have the right to subscribe to these new shares in proportion to

their respective shareholdings.

Trading Market

The most common way of buying/selling in stock market is through trading in the

secondary market. Through a stockbroker you can buy shares from existing investors

who wish to sell them and vice versa.

IMPORTANT CONSIDERATIONS FOR INVESTORS

Before you invest in shares, you must consider a number of factors

How Much Money Can You Afford to Invest?

Investment in shares does not result in instant yields. Do not invest any money which

you may need immediately, since the price of shares can go up and down, It is

advisable to keep some money in a deposit account to meet your financial obligations in

the near future. In this way, you will not be forced to sell shares even at low price, if

cash is needed urgently.

How Do You Want to Invest?

There are various ways of participating in the stock market:


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You can invest directly by purchasing shares through a broker. You may buy shares

in one company or you may spread your risk by investing in a number of different

companies to give you a portfolio or collection of shares.

You can invest indirectly and through collective investment schemes such as open-ended unit trusts and closed-ended mutual funds. This would reduce your risk further.

Do You Need Advice or Do You Want to Make Your Own Decisions?

Investors can choose to make their own share dealing decisions or take advice from a

professional. Buying and selling shares and tracking their performance can be time

consuming but it is rewarding for those who have the time to manage their own

investments. Some investors deal with stockbrokers directly while others prefer to use

the services of professional managers who have discretionary powers to manage theinvestment portfolio.

COSTS

Stock brokerage costs vary according to the extent of services you avail. You should

select the service that meets your needs and requirements. Before you start dealing in

shares, determine how much you to pay stockbrokers for their services. You need to

shop around for the right service at the right price. Charges will differ depending on

whether you wish to invest directly or indirectly.

Ask if there are any ongoing costs of stockbrokers, other than the dealing commission

each time you buy or sell.

WHAT HAPPENS ONCE YOU ARE A SHAREHOLDER

There are several types of shareholders: some are long term investors who simply tuck

away their investments for years while others trade frequently and keep a close eye on

how their shares are performing. You can check your shares performance in variousways. A daily indicator of share price movements is available in many newspapers and

also on website of the relevant stock exchange. You may access this information

directly or through your stock broker/advisor.

Informative articles about many companies are regularly published in newspapers and

investment magazines. Your stockbroker may also provide valuable information. Some


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publish newsletters for their clients, reflecting their views on the performance of selected

companies. Annual reports of companies also contain useful information. Some

companies have shareholder relations departments, which can help with factual

information.

TIPS FOR INVESTING WISELY

Know What Investment Products are Available

The following types of securities are available on the stock market for investment:

Ordinary shares of listed companies

Units trust schemes

Mutual funds certificates

Corporate bonds i.e., Term Finance Certificates (TFCs)

Government securities i.e., Federal Investment Bonds (FIBs), Pakistan Investment

Bond (PIBs) and Special US Dollar Bonds.

Know Your Investment Profile

A wise investor chooses an investment product not only according to his goals and the

amount of capital available but also according to his tolerance for risk. All investments

carry a certain degree of risk. You have to determine whether you are a risk-taker or a

risk-averse person. Depending on the extent of risk you intend to take, you should

pursue an investment strategy (aggressive, moderate or conservative) that fits your risk

profile.

Do Your Homework before You Invest

Dont put in your money until you have understood all relevant information regarding the

investment.

Prepare yourself for the vigorous homework of analyzing companys annual reports,

accounts and other statements while keeping abreast of whats happening in the


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industry, country and elsewhere that may affect your investment. Consult your

investment adviser/broker to get latest market information about shares you intend to

buy or sell. Be skeptical of any thing picked up from rumors, particularly if you cannot

rationally explain their choice.

Think Long-term

Bear in mind that even in the best of securities/shares, there can be short-term

aberrations. It is important to have the power to hold your investments for longer

periods. Studies have shown that investments properly timed and based on strong

fundamentals have been very profitable for investors in the longer term.

Avoid Putting All Your Eggs in One Basket

The best way to minimize risk is to diversify your investments across various investment

products. If equities are your sole investments, it makes sense to diversify between

different companies and sectors. In this way, loss made on some investments can be

absorbed by gains made in others, keeping the overall return on investments positive.

You can also diversify your investment by investing in open-end funds managed under

various unit trust schemes. While investing in mutual funds check the rating of the

instruments. Similarly while investing in any security please check the rating if any

available.

Beware of Scams

Beware of promises of quick profits or sky-high returns. Remember: higher the gain on

investments, higher is the risk involved. This is the fundamental risk-reward trade-off.

INVESTOR PROTECTION

You should always ensure that the stockbroker you choose is licensed by the Securitiesand Exchange Commission of Pakistan (SEC) to trade. Prefer stock brokerage firms

with good track record. As a shrewd investor, you should know your rights and

responsibilities and should beware of the rules that govern your investments as well as

the legal recourse available, in case things go wrong. You can report abuse to the SEC,

whose mission is to ensure the development of a fair, efficient, and transparent

securities and futures market. Although its main function is regulatory in nature, the


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SEC has the ultimate responsibility to protect the investor through market supervision

and ensuring that its laws and regulations are complied with.

Stock exchanges are the frontline regulators; they must play a proactive role. Send all

your complaints in writing to the respective stock exchange(s) with full details, includingthe complainants name, address and telephone number etc. In case you do not get a

response to your complaint, please contact the Complaint Cell in the SEC.

CDS (CENTRAL DEPOSITORY SYSTEM)

Electronic book-entry transfer of securities i.e. CDS has been set up to eliminate

physical transfer of securities. This new book-entry system is in line with the

international practice and has replaced the manual system of physical handling and

settlement of shares at stock exchanges. With in the CDS, transfer of shares from oneclient account to another takes place electronically.

The CDS is managed by the Central Depository Company of Pakistan Limited, which

has been sponsored by the stock exchanges and leading local and financial institutions.

Presently, 97 percent of settlements are routed through CDS. Investor Account Services

have been introduced in order to facilitate individual investors to maintain their account

directly with the CDC. With the implementation of CDS and automated trading system,

trading and settlement of securities have become transparent and efficient.

CDC

Central Depository Company of Pakistan Limited (CDC) was incorporated in 1993 to

manage and operate the Central Depository System (CDS). CDS is an electronic book

entry system to record and transfer securities. Electronic book entry means that the

securities do not physically change hands and the transfer from one client account to

another takes place electronically. An IBM led consortium along with the management

of the company implemented CDS in Pakistan.

The aim of CDC is to operate as a central securities depository on behalf of the financial

services industry so as to contribute to the country's ability to support an effective

capital market system which will attract institutional and retail level investors from

Pakistan and abroad.


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What is Central Depository System (CDS)?

The central depository system is an electronic book entry system to record and transfer

securities. This system changes ownership of securities without any physical movement

of certificates or necessity for execution of transfer deeds. The CDS is normallyoperated by a Central Depository Company (CDC) which records and transfers the

beneficial ownership of securities. The system works similar to a bank. Securities will be

deposited into CDS and transactions will be effected electronically, thereby removing

the current need to count, verify, store and transport countless certificates.

Key features of the CDS

Electronic book entry delivery and settlement.

Immobilization and dematerialization of certificates. Ability to handle corporate actions.

Strict confidentiality and maximum security for users of the system.

Safeguards for account holders through legislation.

The main operations performed by CDS are as follows

Deposit of existing and new securities into the depository.

Withdrawal of securities in the form of certificate from the depository to cater forinvestors who prefer to have physical possession of certificates.

Free transfer- book entry transfer of securities without any associated cash movement.

Pledge/release/call - placing a lien on securities in favor of a lender, which can only be

released/called by the lender.

Stock borrowing or lending through the mechanism of transfer with or without

associated money movement through the depository system.

Corporate action - bonus issues, rights entitlements, sub-division, consolidation and

any other action that changes the number of securities held in a participant's account or

involves the determination of entitlement to beneficial owners.

Delivery Vs payments - book entry transfer of ownership of a security in exchange for

payment to settle a transaction.


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Cash only movement - movement of cash from one account to another without any

associated securities movement.

How is CDC's account structure organized?

The participant of CDC will be able to settle their transactions within CDS through five

types of accounts, namely,

Main account: Each participant in the system will be allocated a main account by virtue

of being a participant in the CDS. This account will mainly be used as a transit account

for movement of securities.

House Account: It is used for securities owned beneficially by participants. Holding a

house account is optional and any number of such accounts may be created by a

participant. Sub-account (client Account): This account is used for keeping securities belonging

individually to each of the clients of the participants. A participant may open any number

of sub-accounts he requires and maintain these sub-accounts on behalf of his clients.

Group Client Account: This account is used for keeping securities, which are

beneficially owned by the participant's clients. It will be used for clients who are not

willing to utilize the facility of opening separate sub accounts. Each group account will

contain the securities owned by a group of clients. The detailed break-up of the

securities held by each client of such a group will be held by the participant and no such

record will be maintained within the CDS.

Cash Account: Each participant in the system who opts to avail the Delivery Vs

Payment (DVP) facility will be required to deposit, in advance, a rolling settlement fund

to be used for the settlement of his DVP obligations. The balance of the participant `s

rolling settlement fund will be stored in this account.

GLOSSARY OF STOCK MARKET TERMS

Bear an investor who anticipates a falling market and, therefore, sells the security in

the hope of buying it back at a lower price.

Blue Chip A large well-established company with a history of profitable operation.

Bonds Fixed-income securities, which entitle the holder to a pre-determined return

during their life and repayment of principal at maturity.


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Bull An investor who anticipates a rising market and, therefore, buys the security in

the hope of selling it later at a higher price.

Capital Gains Tax Tax payable on profit arising from appreciation in value of

investment, realized at the time of selling or maturity of investment.

Carry-over TradesEquity repurchase transactions, better known, as Badla; these are

an established form of transactions used in the stock market for temporary financing of

trades by speculators and jobbers.

Dividend That part of a companys profits which is distributed among shareholders,

usually expressed in rupee per share or percentage to paid up capital.

Earnings per share (EPS) A profitability indicator calculated by dividing the earningsavailable to common stockholders during a period by the average number of shares

actually outstanding at the end of that period.

Equity The owners interest in a companys capital usually referred to by ordinary

shares.

Floatation The occasion when a companys shares are offered on the stock market for

the first time.

Fund managers A company, which invests and manages investors money, with the

aim of maximizing capital growth.

Initial Public Offering (IPO) The offering of equity shares of a company to the general

public for the first time.

Insider trading The purchase or sale of shares by someone who possesses inside

information on a companys performance which information has not been made

available to the market and which might affect the share price. In Pakistan, such dealsare a criminal offence.

Investment companies A company, which issues shares and uses its capital to buy

securities and shares in other companies.


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Listed company A company whose securities are admitted for listing on a stock

exchange.

Long position - When an individual purchases securities of a company he is said to

have a long position in the companys shares. For example an owner of shares in PTCLis said to be "long PTCL" or "has a long position in PTCL." If you are long, you would

like the share price to go up.

Market capitalization The total value of a companys equity capital at the current

market price.

Nominee A person or company holding securities on behalf of others, but who is not

the owner of such securities.

Option The right (but not the obligation) to buy or sell securities at a fixed price within

a specified period.

Ordinary shares The most common form of shares, which entitle the owners to jointly

own the company. Holders may receive dividends depending on profitability of the

company and recommendation of directors.

Portfolio A collection of investments

Price/earning ratio (P/E ratio) The P/E ratio is a measure of the level of confidence

(rightly or wrongly) investors has in a company. It is calculated by dividing the current

share price by the last published earnings per share.

Primary market Where a company issues new shares, either for the first time, or at the

time of issuing additional securities.

Privatization Conversion of a state-owned company to a public limited company (plc)

status.

Private company A company that is not a public company and which is not allowed to

offer its shares to the general public.


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Public limited company (plc) A company whose shares are offered to the general

public and traded freely on the open market and whose share capital is not less than a

statutory minimum.

Rights Issue The issue of additional shares to existing shareholders when companieswant to raise more capital.

Securities A broad term for shares, corporate bonds or any other form of paper

investment in capital market instruments.

Settlement Once a deal has been made, the settlement process transfers stock from

seller to buyer and arranges the corresponding exchange of money between buyer and

seller.

Short Selling- The act of borrowing stock to sell with the expectation of price reduction

with the intention of buying it back at a cheaper price.

Stockbroker A member of the stock exchange who deals in shares for clients and

advises on investment decisions.

Stock Market The market place where shares of publicly listed companies are bought

and sold.

Unit trust An open-ended mutual fund that invests funds in securities and issues units

for sale to the public. It can repurchase these units at any time.

Yield The aggregate return earned on an investment taking into account the

dividend/interest income and its present capital value

in simple words

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