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