1st assignment (investment)

MuhammadDanish| www.knowledgedep.blogspot.com
Q: 1- Define the term investment analysis and portfolio
management. Is the study of investments really important to most
individuals?
Answer:
INVESTMENT:
Investment is the commitment of funds to one or more assets to be held over some future
time period. Investments are also the study of the investment process.
Investment is the act of committing money or capital to an endeavor (a business, project,
real estate, etc.) with the expectation of obtaining an additional income or profit. It can be in
shape of fixed income investment such as bonds, fixed deposit or in shape of variable income
investment such as business ownership, property ownership etc.
Traditionally, the investment decision process has been divided into investment analysis and
portfolio management.
INVESTMENT ANALYSIS:
The process of evaluating an investment for profitability and risk ultimately has the
purpose of measuring how the given investment is a good fit for a portfolio.
An investment analysis is a look back at previous investment decisions and the thought
process of making the investment decision. Key factors should include entry price, expected time
horizon, and reasons for making the decision at the time.
INVESTMENT PORTFOLIO MANAGEMENT
Portfolio management is the art and science of making decisions about investment mix
and policy, matching investments to objectives, asset allocation for individuals and institutions,
and balancing risk against performance. Portfolio management is all about determining strengths,
weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international,
growth vs. safety, and many other trades.
Portfolio management utilizes the results of security analysis to construct portfolios. As
explained in Part II, this is important because a portfolio taken as a whole is not equal to the sum
of its parts.
IMPORTANCE OF STUDYOF INVESTMENTFOR INDIVIDUAL:
The study of investments is important to many individuals because almost everyone has
wealth of some kind and will be faced with investment decisions sometime in their lives. One

important area where many individuals can make important investing decisions is that of
retirement plans, particularly 401 (k) plans. In addition, individuals often have some say in their
retirement programs, such as allocation decisions to cash equivalents, bonds, and stocks.
The time horizon for achieving an investment goal varies from one goal to the next. In
addition, some goals are reoccurring, such as travel, and others are more rare occurrences, such
as a college education or the purchase of a home. In general, the greater amount of time you have
to accumulate the money you’ll need, the more risk you can tolerate and the greater return an
investment might earn due to the power of compound interest. The criticality of the need, such as
saving for retirement, and the time you have to meet the financial need will determine your
return requirements and your ability to tolerate investment risk.
1. Short-Term Investment Goals
You arrange your investment goals by the deadline you set for achieving each one.
For example, short-term goals might include a wedding, vacations and major household
goods, such as furniture or appliances. Your short-term goals should also include the creation
of an emergency fund that consists of three to six months of living expenses. To accomplish
these goals, you might choose investments with short-term maturity dates that allow you to
access your money without incurring a penalty. Both a Federal Deposit Insurance Company-
insured money market account and savings bonds allow you to you earn money on your
deposits that will help you accomplish your short-term goals.
2. Mid-Term Investment Goals
Saving money for your mid-term investment goals is next on your investment agenda.
Mid-term goals include money for a house down payment or house renovation, as well as a
vacation home or business investment. You can accomplish these investment goals with
investments that entail more risk, such as stocks, because the longer time horizon provides
you time to recoup any losses.
3. Long-Term Investment Goals
Your long-term goals are a critical element of you investment plan that might include
a degree program, a family inheritance and a retirement fund. The retirement fund, which
means you won’t be required to work throughout your life, is one important reason to invest
for the long-term as frequently and as inexpensively as possible. You'll want to accumulate
your desired annual income.

Q: 2- Discuss at least three reasons why U.S. investors should be concerned
with international investing? Do you think the exchange rate value of
the dollar will have a significant effect on the decisions to invest
internationally?
Answer:
REASONS WHY U.S. INVESTORS SHOULD BE CONCERNED WITH
INTERNATIONALINVESTING
1. Diversification Opportunities:
International investing offers diversification opportunities, and diversification is
extremely important to all investors as it provides risk reduction.
In other words, Managed funds can reduce risk by spreading your money across a
number of investments including asset classes, companies, industries, sectors, countries
and fund managers. Simply put, diversification is not putting all your eggs in one basket.
Or not putting all your money into just one type of investment.
2. Better return:
It is also a main reason of investment in foreign market that the returns may be
better in foreign markets than in the U. S. markets. Investors look for the better return
investment opportunities and verify the rate of risk of these securities. Most of the
companies in the U.S working internationally because of better rate of return.
3. Market Condition:
Third, many U. S. a company are increasingly affected by conditions abroad and
makes high profit from foreign markets. For example, Coca Cola derives most of its
revenue and profits from foreign operations. U. S. companies clearly are significantly
affected by foreign competitors.
4. Enhancement:
One of the significant advantages of worldwide contributing is that you can
broaden your portfolio. Numerous speculators put just in their household budgetary
markets. While this can work on occasion, amid a negative monetary period, the majority
of the residential budgetary markets could be crushed. On the off chance that the greater
part of your cash is tied up in one nation, you are putting yourself at awesome hazard. By
putting resources into different zones of the globe, you will have the capacity to
withstand financial inconveniences in your nation of origin.

THE EXCHANGE RATE VALUE OF THE DOLLAR WILL HAVE A
SIGNIFICANT EFFECT ON THE DECISIONS TO INVEST
INTERNATIONALLY?
International investing differs from investing in your home market in many ways, but
perhaps the biggest difference is the impact of currency fluctuations.
When an American investor buys shares of a U.S. company, or a Japanese investor buys shares
in Tokyo, the key variable is the change in stock price. If the stock price goes up 10%, the value
of the investment is up 10%. but that’s not necessarily the case in international markets.
To understand why, let’s take a look at a hypothetical example. To keep things simple, we will
also ignore dividends as well as brokerage commissions or other transaction costs.
Let’s say you’re interested in investing in a (fictitious) Japanese company called Tokyo Toys.
According to your research, the company has a new electronic gizmo coming out that will likely
be a “must have” toy in the coming holiday season. Shares of Tokyo Toys currently trade at
5,000 yen. The current exchange rate is 100 yen per dollar.
To find out how much a share of Tokyo Toys is worth in U.S. dollars, we simply divide the price
in local currency (5,000 yen) by the exchange rate (100 yen). A share of Tokyo Toys therefore
costs $50. You call your broker and place an order for 100 shares – a total investment of $5,000.

Q: 3- Define PSX? Discuss the importance of Stock exchange for the
economyof any country. Also explain the KSE- 100 index.
Answer:
PSX
The Pakistan Stock Exchange (PSX) is the stock exchange of Pakistan with trading floors
in Karachi, Islamabad and Lahore. PSX is part of the MSCI Emerging Markets Index.
PSX was established on the 11th of January 2016 after the merger of individual stock
exchange's of Karachi, Lahore and Islamabad. PSX's origin's where laid with the establishment
of the Karachi Stock Exchange in 1947, the Lahore Stock Exchange in 1970 and the Islamabad
Stock Exchange in 1992. As of December 22, 2016, there are 558 companies listed in PSX and
the total market capitalization is Rs. 9,312,236.28 million ($88.811 billion).
IMPORTANCE OF STOCKEXCHANGE
Some of the Important Functions of Stock Exchange/Secondary Market are listed below:
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a
country. Every major change in country and economy is reflected in the prices of shares. The rise or
fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also
known as a pulse of economy or economic mirror which reflects the economic conditions of a
country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply
factors. The securities of profitable and growth oriented companies are valued higher as there
is more demand for such securities. The valuation of securities is useful for investors,
government and creditors. The investors can know the value of their investment, the creditors
can value the creditworthiness and government can impose taxes on value of securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities
include the companies names in the trade list only after verifying the soundness of company.
The companies which are listed they also have to operate within the strict rules and
regulations. This ensures safety of dealing through stock exchange.

4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This
process of disinvestment and reinvestment helps to invest in most productive investment
proposal and this leads to capital formation and economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating
new issues, better trading practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits
healthy speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and
purchase of securities. The presence of stock exchange market gives assurance to investors
that their investment can be converted into cash whenever they want. The investors can
invest in long term investment projects without any hesitation, as because of stock exchange
they can convert long term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are
actively traded so such companies can easily raise fresh capital from stock market. The
general public hesitates to invest in securities of loss making companies. So stock exchange
facilitates allocation of investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various
securities. These attractive opportunities encourage people to save more and invest in
securities of corporate sector rather than investing in unproductive assets such as gold, silver.
KSE 100
Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a
benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period. In
determining representative companies to compute the index on, companies with the
highest market capitalization are selected. However, to ensure full market representation, the
company with the highest market capitalization from each sector is also included.

Q: 4- What is meant by direct investing? Discuss the concept of money
market and its instruments. Explain with suitable examples.
Answer:
DIRECT INVESTMENT:
Direct investment, more commonly referred to as foreign direct investment, refers to an
investment in a business enterprise in a country other than the investor's country designed to
acquire a controlling interest in the foreign business enterprise.
Direct investments are those in which the investor owns the particular assets himself.
Direct Investment’s Capital inflows can help finance a current account deficit. Long term
capital inflows are more sustainable than short term portfolio inflows. E.g. in a credit crunch,
banks can easily withdraw portfolio investment, but capital investment is less prone to sudden
withdrawals.
MONEYMARKET:
The money market is where financial instruments with high liquidity and very short
maturities are traded. It is used by participants as a means for borrowing and lending in the short
term, with maturities that usually range from overnight to just under a year.
MONEYMARKET INSTRUMENTS
The major purpose of financial markets is to transfer funds from lenders to borrowers.
Financial market participants commonly distinguish between the "capital market" and the
"money market". The money market refers to borrowing and lending for periods of a year or
less.
1. Treasury bills
Treasury bills are short-term securities issued by the U.S. Treasury. The Treasury
sells bills at regularly scheduled auctions to refinance ma Eagle Traders Comg issues. It also
helps to finance current federal deficits. They further sell bills on an irregular basis to smooth
out the uneven flow of revenues from corporate and individual tax receipts.
2. Certificates of deposit
A certificate of deposit is a document evidencing a time deposit placed with a
depository institution. The following information appears on the certificate: the amount of
the deposit; the date on which it matures; the interest rate; and the method under which the

interest is calculated. Large negotiable CDs are generally issued in denominations of $1
million or more.
3. Commercial Paper
Commercial paper is a short-term unsecured promissory note issued by corporations
and foreign governments. It is a low-cost alternative to bank loans, for many large, credit
worthy issuers. Issuers are able to efficiently raise large amounts of funds quickly and
without expensive Securities and Exchange Commission (SEC) registration. They sell paper,
either directly or through independent dealers, to a large and varied pool of institutional
buyers. Investors in commercial paper earn competitive, market-determined yields in notes
whose maturity and amounts can be tailored to their specific needs.
4. Bankers Acceptances/Letters of credit
A bankers acceptance, or BA, is a time draft drawn on and accepted by a bank.
Before acceptance, the draft is merely an order by the drawer to the bank to pay a specified
sum of money on a specified date to a named person or to the bearer of the draft, it is not an
obligation of the bank. Upon acceptance, which occurs when an authorized bank employee
stamps the draft "accepted" and signs it, the draft becomes a primary and unconditional
liability of the bank. If the bank is well known and enjoys a good reputation, the accepted
draft may be readily sold in an active market.
5. Eurodollars
Eurodollars are bank deposit liabilities denominated in U.S. dollars. It's not subject to
U.S. banking regulations. For the most part, banks offering Eurodollar deposits are located
outside the United States. However, since late 1981 non-U.S. residents have been able to
conduct business free of U.S. banking regulations at International Banking Facilities (IBFs)
in the United States. Individuals, corporations, or governments from anywhere in the world
may own Euro deposits. The exception are that only non-U.S. residents can hold deposits at
IBFs.
6. Repurchase Agreements (RPs) and Reverse RPs
The terms repurchase agreement (repo or RP) and reverse repurchase agreement refer
to a type of transaction in which a money market participant acquires immediately available
funds by selling securities and simultaneously agreeing to repurchase the same or similar
securities after a specified time at a given price, which typically includes interest at an
agreed-upon rate. A transaction viewed from the perspective of the supplier of securities (the
party acquiring funds) is called a repo, and it's a reverse repo or matched sale-purchase
agreement when described from the point of view of the supplier of funds.

7. Bank Guarantees
A Guarantee by Bank (banker's guarantee) is a written undertaking wherein the bank
agrees to make stipulated payments on your behalf should you fail to fulfill or carry out
specified terms of a contract. Guarantees may also be issued in respect of the purchase of
fixed property and against cash cover. The bank's liability is restricted to the payment of a
sum of money and under no circumstances accepts responsibility for the completion of the
customer's contract.
8. Bonds
A bond is a debt security, similar to an I.O.U. You are lending money to a
government, corporation, municipality, federal agency or other entity known as the issuer,
when you purchase a bond.
In return for the loan, the issuer promises to repay the face value of the bond (the
principal) when it "matures" or comes due and to pay you a specified rate of interest during
the life of the bond. You can choose among the following types of bonds: U.S. government
securities, corporate bonds, federal age securities, municipal bonds, mortgage and asset-
backed securities and foreign government bond.
9. Corporate bonds
Corporate bonds (also called corporates) are debt obligations, or IOUs, issued by private and
public corporations. They are typically issued in multiples of $1,000 and/or $5,000. The funds
raised by companies from selling bonds are used for a variety of purposes, from building
facilities to purchasing equipment to expanding the business. When you buy a bond, you are
lending money to the corporation that issued it, which promises to return your money, or
principal, on a specified maturity date. Until that time, it also pays you a stated rate of interest,
usually semiannually. The interest payments you receive from corporate bonds are taxable.
Unlike stocks, bonds do not give you an ownership interest in the issuing corporation.

Q: 5- Explain the concept of Capital market and its instruments. Why is
preferred stock referred to as a “Hybrid” Security?
CAPITAL MARKET:
Capital markets are markets for buying and selling equity and debt instruments. Capital
markets channel savings and investment between suppliers of capital such as retail investors and
institutional investors, and users of capital like businesses, government and individuals. Capital
markets are vital to the functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets, where new stock and
bond issues are sold to investors, and secondary markets, which trade existing securities.
Preferred stock:
A preferred stock is a class of ownership in a corporation that has a higher claim on its
assets and earnings than common stock. Preferred shares generally have a dividend that must be
paid out before dividends to common shareholders, and the shares usually do not carry voting
rights.
Common Stock:
Common stock is a form of corporate equity ownership, a type of security. The terms
voting share and ordinary share are also used frequently in other parts of the world; "common
stock" being primarily used in the United States.
Capital Market instruments:
Capital market instruments are responsible for generating funds for companies,
corporations and sometimes national governments. These are used by the investors to make a
profit out of their respective markets.
Capital market is also known as Securities Market because long term funds are raised through
trade on debt and equity securities. These activities may be conducted by both companies and
governments.
1. Stock:
A stock is a type of security that signifies ownership in a corporation and represents a
claim on part of the corporation's assets and earnings. There are two main types of stock:
common and preferred. Common stock usually entitles the owner to vote at shareholders'
meetings and to receive dividends.
2. Bonds:

A bond is a debt investment in which an investor loans money to an entity (typically
corporate or governmental) which borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states and
sovereign governments to raise money and finance a variety of projects and activities.
Owners of bonds are debt holders, or creditors, of the issuer.
3. T- Bills:
Treasury Bills, also known as “T-Bills,” are bonds that are issued by the US
government, making them important both to the American economy and the world of
finance. Although many people think The United States Department of Treasury is
responsible for issuing these, they are actually issued by the Bureau of Public Department.
Treasury Securities come in four separate denominations: Treasury Bills, Notes,
Bonds, and Savings Bonds. Second to Savings Bonds, they are the most popular in the
various secondary markets and easy options to use. These bills do not yield any interest
before they mature.
4. Foreign Exchange:
Foreign Exchange Market or Forex market is a place where international currencies
are traded. It has emerged to be the largest and decentralized financial market operating
globally. It does not have any central authority and hence it is called an “Over The Counter”
(OTC) market. It allows the traders to buy, sell, exchange and speculate on currencies. The
major determinant of the exchange rate is the monetary value of the currency.
The foreign exchange market is the market in which participants are able to buy, sell,
exchange and speculate on currencies. Foreign exchange markets are made up of banks,
commercial companies, central banks, investment management firms, hedge funds, and retail
forex brokers and investors.
5. Public Deposits:
The public deposits refer to the deposits that are attained by the numerous large and
small firms from the public. The public deposits are generally solicited by the firms in order
to finance the working capital requirements of the firm. The companies offer interest to the
investors over public deposits.
The rate of interest, however, varies with the time period of the public deposits. The
companies generally offer 8 to 9 percent interest rate on the deposits made for one year. The
companies offer 9 to 10 percent interest rate over public deposits for two years while 10 to 11
percent interest rate is offered for the three year deposits. There are rules regulating the fixed
deposits.

6. Fixed Deposits:
A fixed deposit (FD) is a financial instrument provided by banks which provides
investors with a higher rate of interest than a regular savings account, until the given maturity
date. It may or may not require the creation of a separate account.
PREFERREDSTOCKREFERRED TO AS “HYBRID” SECURITY:
Preferred stock is referred to as a hybrid security because it has some features similar to
fixed-income securities (it pays a fixed return and has a meaningful par value) and some features
similar to equity securities (it never matures and it pays dividends).
Preferred stock is referred to a hybrid security because it has similarities to both common
stock and bonds. They have no “fixed maturity date, if dividends aren’t paid by the firm, “it does
not bring on bankruptcy, and dividends are not tax deductible. There is a similarity with bonds,
in that their dividends have a fixed amount. Common stocks aren't paid regularly, and their value
is dependent on the growth rate of their dividends. Preferred stock is paid regularly, and their
value is fixed.

Q: 6- What is an investment company? Distinguish between an open-
end and closed-endcompany. Explain with suitable examples.
Answer:
INVESTMENT COMPANY:
An investment company is a company whose main business is holding and managing
securities for investment purposes. Investment companies invest money on behalf of their clients
who, in return, share in the profits and losses.
In United States securities law, there are at least three types of investment companies.
 Open-End Management Investment Companies (mutual funds)
 Closed-End Management Investment Companies (closed-end funds)
 UITs (unit investment trusts)
In general, each of these investment companies must register under the Securities Act of
1933 and the Investment Company Act of 1940. A fourth and lesser-known type of Investment
Company under the Investment Company Act of 1940 is a Face-Amount Certificate Company. A
major type of company not covered under the Investment Company Act is private investment
companies, which are simply private companies that make investments in stocks or bonds, but
are limited to under 100 investors and are not regulated by the SEC. These funds are often
composed of very wealthy investors.
DISTINGUISH BETWEEN AN OPEN END AND CLOSED END COMPANY
Open Ended Company Closed Ended Company
 It is an investment company which
aggregates money from many investors
and invests the money in stocks, bonds,
short-term money-market instruments
or other securities.
 Investors purchase mutual fund shares
directly from the fund itself at a price
that is determined by the fund's per-
share net asset value (NAV) plus any
shareholder fees that the fund imposes
at purchase (such as sales loads).
 Mutual fund shares are "redeemable":
when the holder of the mutual fund
 It is an investment company that sells a
fixed number of shares at a one-time
initial public offering.
 Shares are not continuously offered for
sale; after the public offering, the
shares typically can be bought and sold
only on a formal exchange such as the
New York Stock Exchange or the
Nasdaq.
 Closed-end funds come in many
varieties. The investment strategies,
risk tolerance, and return objectives
 Once closed-end fund shares begin to

shares wants to sell those shares, he or
she sells them back to the fund (or to a
broker acting for the fund) at their
approximate NAV minus any fees the
fund imposes at that time (such as
deferred sales loads or redemption
fees).
 Open-end fund shares cannot be bought
or sold in secondary markets, such as
the New York Stock Exchange or the
Nasdaq.
 In most cases, mutual funds sell their
shares continually to investors.
However, there are circumstances
where the investment adviser may close
the fund to new investors, usually when
it's decided that the fund has become
too large to manage effectively.
 The fees charged by mutual funds can
significantly impact total return and
should be carefully assessed by
investors.

trade, their prices are determined by
supply and demand and not by net-asset
value (NAV); therefore, the market
price may be greater or less than the
shares' NAV. Generally,
 Closed-end fund is not required to buy
its shares back from investors upon
request. However, some closed-end
funds, commonly referred to as interval
funds, offer to repurchase their shares
at specified intervals of time.
 Closed-end funds are allowed to invest
in a greater amount of "illiquid"
securities. (By "illiquid" we mean
securities that can't be sold within a
reasonable period of time - usually
seven days - at the approximate price
used by the fund in determining NAV.)

Q: 7- Discuss the importance of the financial markets to the U.S.
economy. Can primary markets exist without secondary markets?
Why the secondarymarketmore important? Comments
Answer:
FINANCIAL MARKETS:
Financial markets are all institution or procedure for bringing together buyer & seller to
exchange the finance. A financial market is one that permits the buying and selling of a resource.
An example of a commonly traded resource includes company stock, foreign currency,
commodities including gemstones, oil and precious metals, or financial instruments such as
swaps, options and futures.
“Markets for sale and purchase of stock (share) bonds, bill of exchange, commodities
futures and optional, foreign currency, etc. which work as exchanges for capital and credit”.
THE IMPORTANCE OF THE FINANCIAL MARKETS TO THE US
ECONOMY
Financial market gives strength to economy by making finance available at the right place.
1. Mobilization of Savings and their Channelization into more Productive Uses:
Financial market gives impetus to the savings of the people. This market takes the
uselessly lying finance in the form of cash to places where it is really needed. Many financial
instruments are made available for transferring finance from one side to the other side. The
investors can invest in any of these instruments according to their wish.
2. Facilitates Price Discovery:
The price of any goods or services is determined by the forces of demand and supply.
Like goods and services, the investors also try to discover the price of their securities. The
financial market is helpful to the investors in giving them proper price.
3. Provides Liquidity to Financial Assets:
This is a market where the buyers and the sellers of all the securities are available all
the times. This is the reason that it provides liquidity to securities. It means that the investors
can invest their money, whenever they desire, in securities through the medium of financial
market. They can also convert their investment into money whenever they so desire.
4. Reduces the Cost of Transactions:
Various types of information are needed while buying and selling securities. Much
time and money is spent in obtaining the same. The financial market makes available every

type of information without spending any money. In this way, the financial market reduces
the cost of transactions.
CAN PRIMARY MARKETS EXIST WITHOUT SECONDARYMARKETS
Primary market cannot function well without secondary market because they are
interrelated with each other as well as interdependent. Because corporation do not actually raise
any funds in secondary markets they are less important to the economy than primary market.
Primary markets are those consisting of investment banks which set the beginning price range for
certain securities. Secondary markets are where the actual trading of shares, stock, and bonds are
done.
WHY THE SECONDARYMARKET MORE IMPORTANT?
In secondary markets, investors exchange with each other rather than with the issuing
entity. Through massive series of independent yet interconnected trades, the secondary market
drives the price of securities toward their actual value. Moreover, the secondary markets create
additional economic value by allowing more beneficial transactions to occur. The net result is
that almost all market prices interest rates, debt, houses and the values of businesses and
entrepreneurs are more efficiently allocated because of secondary market activity.

Q: 8- What is an OTC security? How are such securities traded?
Answer:
OTC SECURITY:
“An over the counter (OTC) security is traded through a dealer network rather than
through a centralized, formal exchange (such as the NYSE, Nasdaq, or London Stock Exchange).
Assets traded, OTC are usually traded by private securities dealers who negotiate directly with
buyers and sellers.”
The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer
network as opposed to on a centralized exchange. It also refers to debt securities and other
financial instruments, such as derivatives, which are traded through a dealer network.
HOW ARE SUCH SECURITIES TRADED?
A step-by-step explanation is the best way to illustrate the trading process. The example
below is tailored for individual investors, although many of the same principles apply to
institutional investors.
1. Investor Selects a Broker-Dealer
In order to execute a trade, an investor must select a FINRA-registered broker-
dealer (or multiple FINRA member broker-dealers).
2. Investor Makes anInvestment Decision
All investment decisions should be based on thorough research on the company
and security. For securities that trade on the OTCQX, OTCQB and Pink markets,
investors can use www.otcmarkets.com to access the information companies have
provided, including trade data and company news and financials to help facilitate
an investment decision.
3. Investor Defines the Order
Investors define the order they wish the broker-dealer to execute. There are two
main order types: the Limit Order and the Market Order.
 Limit Orders
Allow investors to specify the exact price they are willing to accept for a
buy or sell order. While Limit Orders are designed to offer more price
protection for investors, a Limit Order may not be executed if the price of
the security does not reach the price stated in the Limit Order
 Market Orders
Market orders direct the broker-dealer to immediately execute either a buy
or sell order at the current ‘market price’ – the best bid or offer

Investors must decide whether price (Limit Order) or timing/immediacy (Market
Order) is more important to them.
4. Broker-Dealer Executes the Order
Once a broker-dealer receives an order, it often goes through the following
decisions as part of the trading process:
 Execute Trade Internally
Broker-dealers will typically first determine if they can or choose to
execute the trade internally. Internal executions occur if they can ‘match’
(same prices for a buy and sell order) Limit Orders or if they choose to
trade for their own account. If they are trading for their own account, they
must give investors their limit order price or the NBBO (National Best Bid
or Offer) as defined by an Inter-dealer Quotation Systems (OTC Link®
ATS/FINRA OTCBB) at that point in time. This rule is known as Best
Execution and is among the regulations discussed in
 Trade Marketable Order Externally
If the broker-dealer cannot, or chooses not to, execute the trade internally,
he/she must attempt to execute the trade with another broker-dealer. OTC
Link® ATS provides trading and messaging capabilities, and therefore,
facilitates the process of ascertaining whether the order is marketable.
Marketable orders are orders where the price specified can immediately be
executed in the market. Market Orders are, by definition, marketable.
Limit Orders are marketable if the limit price is less than or equal to the
bid price (for sell orders) or greater than or equal to the ask price (for buy
orders) (i.e. execution is at a price better than or equal to the limit price).
For example, a customer’s Limit Order to buy security XYZ for $30 will
only be marketable if the offer/ask price is $30 or less. If the offer price is
$30.01 or greater, then the limit order is not marketable and will not be
executed. If the order is marketable, the broker-dealer may utilize OTC
Link® ATS to negotiate a trade electronically with a specific broker-
dealer (or group of broker-dealers) or may contact the broker-dealers by
other means of communication
 Create/Edit Quote on Inter-dealer Quotation System
If the order is not marketable, the broker-dealer may create or edit its
existing quote on an Inter-dealer Quotation System (e.g. OTC Link®
ATS) to reflect a new price or size. The quote communicates the price at
which a broker-dealer is willing to buy or sell. Broker-dealers are only
required to update their quote if the price of the order is equal or superior
to their existing quote. In many cases, a broker-dealer quote is the
aggregation of a number of customer orders. Often, at a client’s request,
broker-dealers will not display the entire order because this information

may cause the other broker-dealers to move their prices resulting in
inferior or no execution
 Trade Non-Marketable Order Externally
Once a broker-dealer has a quote posted on OTC Link registered ATS,
they may receive a trade message via OTC Link registered ATS from
another broker-dealer; as the market changes, a broker-dealer with a
standing quote may also initiate a trade message electronically. At that
point the broker-dealer may accept, decline or counter (send a different
price or size) the offer to trade . The broker-dealers then negotiate trade
price/size, one of the main differences between a trading a security off-
exchange and trading a listed security. There is no central system that
matches/executes orders for off-exchange traded securities – all trades are
agreed upon directly between the broker-dealers. OTC Markets Group’s
trading platform, OTC Link® ATS, facilitates the speed at which trades
are negotiated. Broker-dealers are liable for their quote price and size, and
those firms that decline liable orders are subject to penalties from FINRA.
While broker-dealers may communicate by phone, one of the benefits of
OTC Link® ATS is the ability for broker-dealers to trade and message
electronically, creating a more efficient trading process
5. Broker-Dealer Reports, Clears and Settles Trade
Once broker-dealers accept an offer to trade through OTC Link® ATS or
through another means of communication, they must report, clear, and settle the
trade. Part of this process is the confirmation of the trade with the investor;
however, the trade will not be complete until final settlement (the delivery of
funds by the buyer and the delivery of securities by the seller), which, for equity
securities is generally three business days after the trade date (T+3). While OTC
Markets Group’s products and services facilitate the reporting, clearing, and
settlement process by transmitting trade data to the broker-dealers, all three
functions are the responsibility of the executing broker-dealers.
 Reporting
Broker-dealers are required to report their trades to FINRA within 30
seconds of the execution. This information is then disseminated by FINRA
to the market. OTC Markets Group offers this ‘real-time’ trade data within
a number of its products OTC Dealer, OTCIQ.com). All other trade
information is on a 15 minute delayed basis
 Clearing and Settlement
For equity transactions in OTCQX, OTCQB and Pink, clearing and
settling, the matching of trades and the movement of money and
securities, is often handled by third-party firms for the broker-dealers.

Q: 9- Assume that the DJIA closed at 10875 one day recently, and the
divisor is 0.12493117.
a) What is the sum of the price of the 30 stocks in the index, given this
information?
Index Value = 10875
Divisor = 0.12493117
Index value =
Sum of Prices
Divisor
10875 =
Sum of Prices
0.12493117
Sum of prices = 10875 X 0.12493117
Sum of prices = 1358.63
b) Assume that one stock in the index, Pfizer, moved $4.40 that day, while
the index itself moved about 105 points (to close at 10875). What
percentage of the total movement in the DJIA that day was accounted
for by the movement in Pfizer?
c) Now assume that one of the 30 stock had a 2-for-1 stock split that day,
declining form $ 47.50 to $ 23.75. What would the new divisor have to
be to keepthe index unchanged at 10875?

Q: 10- As a student, are you saving or borrowing? Why?
Answer:
INTRODUCTION:
An investment in your education is an investment in your future. As a student we are
investing in our future as well as we also learn how to save. We learn the management of money;
each and every student should keep in mind the both aspect of finance. The investment in
university or college on your self is a long term investment which gives us returns in shape of
our career, for a prude person there is nothing important for a person.
TOP REASONS OF SAVING OR BORROWING OF MONEY AS
STUDENT:
As a student try to put investment for the essential needs like purchasing knowledgeable
books and I think saving must be an important aspect for a student because from this stage a
student learns the importance of money & due to this activity they will create a bright future.
1. Unforeseen Expenses
What will you do if your vehicle needs some major repairs? Do you have 500 to 3,000
rupees on hand? You can’t always count on the bank to lend you money for all of these things. It
is much better to anticipate a worst case scenario and have some money saved. So saving in
shape of investment is much better for students.
2. Favorite books
There are some students who like booking reading and want to purchase their favorite book. They
save or borrow the money to meet their needs and wants. They also search the best source of income for
accomplishment of their goals and targets. There are many institutions offer the investment opportunities
for saving and increasing their investment.
3. Continue our study
Most of the students want to continue their study but most of the students failed to do
because of lack financial resources, which is use to purchase books, uniform, university fee etc.
so the students tries to save or borrow money to succeed their purpose.
4. Bright future
What will you feel, if you have completed your education but failed to get specific job
which you like to do. Saving or borrowing of money is the best way to start your own business
for your bright future. There are many education institutions, which offer the job opportunities
after completion of education but these jobs are not sufficient according to student.

5. Emergency:
As much as we hope that emergencies won’t happen, we all know that they do. A family
member can develop a health issue, you might need to make an emergency trip, you may have a
car accident or breakdown, severe weather could flood your basement or crack your pipes, or
you may have to fly to a loved one’s funeral. Any of these emergencies can be expensive, and we
all know that we will likely encounter some sort of emergency from time to time. So why not be
prepared rather than potentially become another victim of an emergency.
SOURCES OF SAVING AND BORROWING
 Open bank account for saving or borrowing
 Purchase Bonds
 Investment in Equities
 Purchase of properties
 Purchase precious metals, which have fluctuation in prices.

1st assignment (investment)

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