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INVESTOR GUIDE Investcap Document INTRODUCTION What is Stock Exchange? A stock

INVESTOR GUIDE Investcap Document INTRODUCTION What is Stock Exchange? A stock exchange is an organization which provides "trading" facilities for stock brokers to trade shares of the listed companies and other financial instruments such as Term Finance Certificates and Derivatives etc. for institutional and individual investors. Stock exchanges also provide facilities for the issue (listing), redemption (delisting) of securities and other capital events including further issues, the payment of income and dividends. Trades on an exchange are by members only. Stock Exchanges in Pakistan There are three Stock Exchanges in Pakistan, namely Karachi Stock Exchange; formed in 1947. Lahore Stock Exchange; formed in 1971. Islamabad Stock Exchange; formed in 1989. Out of all the three Exchanges, the Karachi Stock Exchange is the premiere Stock Exchange of the country, with approximately over 650 listed companies. It was established soon after the creation of Pakistan. What are Shares? Shares, as the name says, are shares in a limited company. Each shareholder is a partial-owner of the company in which they have bought shares and investors can buy and sell their shares on the stock exchanges. Companies on incorporation issue shares, (also called equities) and later perhaps when they are building up a business. The original shareholders might still own them, or they may have sold them to someone else through the stock market. If the company makes a profit, it may some of it passed to Shareholders in the form of dividends. The amount paid in dividends varies year by year, depending on how profitable the company has been and how much money the directors and the company management want to keep in reserve for future expansion. 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. There are different ways in which you can participate in the stock market: Directly: by buying and selling shares; Indirectly: through a collective vehicle, in which shares are grouped together, such as a mutual fund or Exchange Traded Funds (ETFs). Page 1 of 16 1. 2. 3. 1. 2. INVESTOR GUIDE Investcap Document Page 2 of 16 What are the Different Types of Stock? Common Stock: Common stock holders have partial ownership and enjoy voting rights in the company. However, in the event of bankruptcy, common stock shareholders are entitled to assets left over after credi tors, bondholders and preferred shareholders have been paid in full. Preferred Stock: Preferred stock holders have ownership in the company but may not enjoy voting rights like their common stock holders. However, they do have other benefits. There are four classes of preferred stocks, outlined below: Cumulative: Shareholders have the right to accumulate dividend payments that were skipped in earlier years. They are the first to receive payments once the company resumes dividend payout. Non Cumulative: Shareholders do not accumulate skipped dividend payments. Participating: Shareholders receive more than the normal dividend payments if the company makes more than expected profit. Convertible: Shareholders can convert the preferred stock into a specified number of shares of common stock. Why do Companies go Public? The primary purpose for companies to be publicly listed at the exchange is to cost-effectively raise capital. It reduces the company's reliance on the traditional financiers such as financial institutions and individuals. Listing allows business expansion without increasing borrowings or draining the company's cash reserves. History of listed companies indicate that companies that convert to public ownership are more likely to become successful than control companies that remain private. Companies that go public are also more likely to become acquirers than control companies. The Initial Offering of Stocks (IPO)? The initial offering of stocks and bonds to investors is by definition done in the primary market (IPO) and subse- quent trading is done in the secondary market. Initial Public Offering (IPO) is the initial sale by a company of shares of its stock to the public in the financial market. Book Building Process for new Companies? Book Building is a mechanism of price determination through with indication of interest for investment in the shares offered by an issuer/offeror is collected from institutional investors and High Net Worth Individuals and a book is built which gives a picture of demand for the shares at different price levels. The strike price is determined based on the price at which demand for the shares at the end of book building period is sufficient to raise the minimum capital required. INVESTOR GUIDE Investcap Document Page 3 of 16 TRADING OPTIONS Ready Market The ready market means the market where trades are settled on rolling settlement basis, based on actual delivery. In Ready Market, all listed companies shares are traded during regular market time. Regular market works on T+2 settlement system. Future Market A Futures contract involves purchase and sale of securities at some future date (normally within one calendar month), at a price fixed today. These contracts are traded on an organized and regulated futures exchange enabling buyers and sellers to transact business. A futures contract gives the holder the obligation to buy or sell and both parties of a "futures contract" must fulfill the contract on the settlement date. There have been introduced new products/systems namely Margin Trading System (MTS), Margin Financing System (MFS) and Securities Lending and Borrowing (SLB). The Rules for these products/systems are called ‘Securities (Leveraged Market and Pledging) Rules, 2011’ (SLMPR) and are available at SECP website www.secp.gov.pk. Margin Trading System (MTS) Margin Trading refers to purchase of securities in ready market by equity participation. Information / procedures are placed at NCCPL website www.nccpl.com.pk. Margin Financing System (MTS) Margin Financing refers to financing against net ready market purchases and may be obtained as per agreed Financier Participation Ratio. Information/procedures are placed at NCCPL website www.nccpl.com.pk. Securities Lending and Borrowing (SLB) SLB refers to the temporary exchange of securities with an obligation to redeliver the same securities in the same number and at an agreed premium on a future date. Information/procedures are placed at NCCPL website www.nccpl.com.pk. ORDER/TRANSACTION TYPES Market Order Carefully read and sign off the Account Opening Form including special terms & conditions for online trading and declaration. a. b. 1. INVESTOR GUIDE Investcap Document Page 4 of 16 Limit Order This is an order where the investor will send the Limit Price and the Order Quantity so the exchange will execute the trade when the market price reaches the Price specified. Stop Loss Order A stop-loss order is a request to sell a security once the market price reaches or falls below a customer-specified price. Once the target price has been reached or surpassed, the order becomes a "market" order. This is spe cially true in a fast-moving market where stock prices can change rapidly. A stop-loss order is typically used to sell a security, to lock in profits or limit losses if a security price falls. Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%. Stop-loss orders are only available when selling a security to close a position. Example: If a certain investor purchases XYZ shares at Rs. 175 per share and right after buying the stock he enters a stop-loss order for Rs.160. This means that if the stock falls below Rs.160, the investor's shares will then be sold at the prevailing market price. Stop loss can be used for sell transactions as well where once the target price has been reached; market order is placed on the trigger price to buy back shares. In these conditions, investors expect that price will rise again. Short Sell Short selling refers to the practice of selling securities the seller owns in the hope of repurchasing them later at a lower price. This is done in an attempt to profit from an expected decline in price of a security. Such as a stock or a bond, is contrast to the ordinary investment practice, where an investor "goes long," purchasing a security in the hope the price will rise. The term "short selling" is often used as a blanket term for all those strategies which allow an investor to gain from the decline in price of a security. Those strategies include buying options known as puts. A put option consists of the right to sell an asset at a given price; thus the owner of the option benefits when the market price of the asset falls. Similarly, a short position in a futures contract, or to be a short futures contract, means the holder of the position has an obligation to buy the underlying asset at a later date, to close out the position. TRADING & SETTLEMENT T + 2 Settlement System 2. 3. 4. 1. INVESTOR GUIDE Investcap Document In the T+2 settlement system, purchase and sale of securities is netted and the balance is settled on the second day following the day of trade. Provisionally Listed Securities The shares of companies, which make a minimum uploads/Finance/ what-is-stock-exchange-investor-guide.pdf