2. Capital Markets
Capital Markets-Features
Types of Capital markets
Primary financial markets
IPO – Initial Public Offering
Pre-initial Public Offering – Private Placement
Role of Investment Banker for IPO
3. Capital Markets
Secondary financial markets
Auction markets
Automated market
Over the counter market
Electronic Communication Networks – ECNs
Institutional Networks – Instinets
4. Features of Capital Market
Long term
Risk is high
Return is also high
Individual and institutional investors (banks,
mutual funds, insurance companies, pension
funds and any other company) are there.
Share , bonds and TFCs are bought and sold.
Stock market is capital market.
5. Primary Markets
Primary markets are those markets where
shares or TFCs are bought and sold for the
first time.
Company-------------------general
public
shareholder
6. Primary market-Types
Initial public offering – where company directly
sells to the prospective shareholders
Prospectus
Abridged prospectus
Offer for sale
7. Primary Markets - Types
Pre-initial public offering – private
placement
Selling of share privately by investment
bankers on behalf of issuers to the
institutional investors.
Advantage
cost of issue is saved.
Disadvantages:
cost of financing is high
Restrictive conditions
8. Book Building Process
This is the process of initial public offering
where shares are sold by the company through
a bidding process with a floor price (which is
generally higher than par value) and an upper
price. Resultantly successful bidder are allotted
the shares.
9. Role of Investment Bankers
Designing the public Issue
What to issue
When to issue
What should be the price
What should be the features of issue
Forming underwriting syndicates
Privatizations
Mergers and Acquisitions
10. List of international investment
banks
J P MORGAN
MORGAN STANELY
SALOMON SMITH BARNEY
CITIGROUP INC
BOSTON CONSULTING GROUP
MITSUIBISHI TOKYO BANK
BANK OF AMERICA
MERRIL LYNCH
BEAR STEARNS
11. List of Pakistani investment
banks
Orix Investment Bank
Atlas Investment Bank
Trust Investment Bank
IGI Investment Bank
Fidelity Investment Bank
Escorts Investment Bank
Prudential Investment Bank
12. Types of Secondary markets
“Secondary financial markets are where
already issued shares are bought and sold”
Auction markets – physical markets with a
trading floor and an open outcry system
Automated markets – Regular T+2
Buying and selling – KATS -KITS
Payment – NCSS
Delivery – CDS
13. Types of Secondary markets
SME SEGMENT
These are stock exchanges which have been
designed to facilitate small and medium
enterprises to raise capital from general public.
Minimum capital requirement for listing is Rs.
25 million and maximum limit is Rs. 200 million.
14. Types of Secondary markets
Odd Lot Market-In this market segment, investors can
trade in securities in lots which are less than normal/
regular lots (500 shares). The minimum number of
shares that can be traded is 1. Settlement takes place
in T+2 days.
Square up Market-In this market segment, if a
Clearing Member (CM) fails to deliver sold securities,
then the failed deliveries are squared up in the Square-
up Market.
15. Types of Secondary markets
Negotiated deal market
This is not part of the mainstream market
transactions. Here negotiated deals are
conducted outside the Exchange Trading
Systems and are reported through the
interface provided by the Exchange. These
deals may also be called Off Market
Transactions. These transactions are
conducted between brokers.
16. Types of Secondary markets
Bonds Automated Market-Fixed income
securities include Corporate Debt securities/
bonds and Government Debt securities/ bonds.
These bonds are investment products that provide
a return in the form of fixed periodic payments as
mark-up and the eventual return of principal. Any
investor can purchase these securities listed at
the Stock Exchange through authorized
participants.
17. Types of Secondary markets
Derivatives-Futures - Deliverable Future
Contracts (DFC)
DFCs are standardized futures contracts to buy or sell
eligible underlying securities with actual delivery of the
said security occurring at the expiry of the contract. The
minimum lot for trading in DFC is 1 contract that
consists of standard 500 shares of underlying security.
Contract maturity is 90 days after the contract is listed.
The contract matures or expires on the last Friday (or
preceding trading day if Friday is a holiday) of the
expiry month. Settlement takes place on T+2 basis.
18. Types of Secondary markets
Single Stock Cash Settled Futures (CSF)
It is a standardized contract which allows
buying or selling of eligible underlying shares
at a certain date in the future, at futures price
i.e., the price on which it is bought or sold in
the CSF market. It is settled in cash, where
the result of the settlement is the cash
difference between the futures price and final
settlement price. Settled on T+1 basis.
19. Margin Trading System
In MTS (Margin Trading System), an investor
can buy MTS eligible securities having a part
percentage of funds available of the total
value of MTS eligible securities bought. The
remaining amount is financed or leveraged by
the Brokerage firm. A mark-up rate of not
more than Kibor+8% is charged against the
leveraged securities held under MTS. Margin
Trading Contracts are settled in T+2 days.
20. Risks at Stock Market
Default Risk – Risk of Default of Broker
Price Risk – Share price fluctuations in market
21. Risk Management Scheme
Centralized Customers Protection Compensation
Fund (CCPF)
Net working Capital Balance
Exposure Limits
Margin Requirements
Circuit Breakers
Trading and Surveillance System
22. Risk Management Scheme
A Centralized Customers Protection Compensation
Fund (CCPF), formerly known as Investor Protection
Fund (IPF), has been established and operated by the
Securities and Exchange Commission of Pakistan.
The sole mandate of CCPF is to compensate
customers of a defaulter stock-broker up to a maximum
of PKR 500,000 per claimant whose claim has been
admitted by the Pakistan Stock Exchange (PSX).
23. Risk Management Scheme
Every Broker member is to maintain a net
working capital balance and liquid capital
balance as monitored by NCCPL.
A Broker can take trading exposure upt0 25
times of its net working capital balance.
Broker has to maintain various margin
requirement against different trading
transactions.
24. Risk Management Scheme
Circuit Breaker-The price of a share can
fluctuate by 7.5% or Re. 1 whichever is high
up and down on any single day.
Trading and Surveillance System-Real Time
monitoring of Trading
25. Brokers & Dealers
Dealers
are investors
buy for themselves
Assume investment risk
Earn profit on investment
Have vested interest
Brokers
Are not investors
Buy for others
Have no vested interest
Earn commission on trading transactions
26. Brokers and Dealers
• In Pakistan, no distinction was made in dealers
and brokers.
• Brokers/Dealers were members of stock
exchanges and were only authorized to buy and
sell in the stock exchanges.
• Now TREC (Trading Right Entitlement Certificate)
Holders are eligible for trading at stock market.
27. Stock Market Indices
A stock market index is the barometer of
performance of stock market.
It can be used as proxy for market portfolio.
Index helps forecasts of market performance as
used by technical analysts.
29. Price-weighted index
Price of each stock in the index is added up
and simple average is calculated which is
comparable with the base day.
30. Capitalization-weighted index
Market capitalization all the stocks in index is
added up and change is measured against
base day.
Market capitalization is product of market
price multiplied with no. of outstanding shares
of each company.
31. PSX Indices
KSE-100 Index
KSE-30 Index
KSE ALL share Index
KMI 30 Index
PSX-KMI All share index
OGTI –Oil & Gas Sector Tradeable Index
BKTI-Banking Sector Tradeable Index
32. KSE-100 Index
Index is a barometer to measure the performance of the
stock exchange.
KSE-100 index is capital weighted index i.e. it is based
on market capitalization of free float of 100 companies.
Market capitalization of 100 companies constitute
almost 90% of the market capitalization.
Base day is Nov 1, 1991
Base day index is 1000 points
Selection of companies rules
Sector rule
Capitalization rule
Re-composition of index takes place twice in a year.
33. Free Float
Free-Float means proportion of total shares
issued by a company that are readily
available for trading at the Stock Exchange.
34. Free Float -objectives
Free-Float calculation can be used to construct stock
indices for better market representation.
It gives weight for constituent companies as per their
actual liquidity in the market and is not unduly influenced
by tightly held large-cap companies.
Free-Float can be used by the Exchange for regulatory
purposes such as risk management and market
surveillance.
35. Free-Float Calculation
Total Outstanding Shares 100 million
Less: Shares held by Directors/sponsors
Government Holdings as promoter/acquirer/
Shares held by Associated Companies
(Cross holdings)
Shares held with general public in Physical
Form
Free-Float: ????
36. List of Sectors
1 Open-end Mutual Funds 20 Oil & Gas Marketing Companies
2 Close-end Mutual Funds 21 Oil & Gas Exploration Companies
3 Modaraba 22 Engineering
4 Leasing Companies 23 Automobile Assembler
5 Investment Bank/ Inv. Cos/ 24 Automobile Parts & Accessories
6 Commercial Banks 25 Cable & Electrical Goods
7 Insurance 26 Transport
8 Real Estate Investment Trust 27 Technology & Communication
9 Textile Spinning 28 Fertilizer
10 Textile Weaving 29 Pharmaceuticals
11 Textile Composite 30 Chemical
12 Woollen 31 Paper & Board
13 Synthetic & Rayon 32 Vanaspati & Allied Industries
14 Jute 33 Leather & Tanneries
15 Sugar & Allied Industries 34 Food & Personal Care Products
16 Cement 35 Glass & Ceramics
17 Tobacco 36 Miscellaneous
18 Refinery
