WHAT ARE SHARES?

A share stands as a unit of possession in a corporation or financial asset.

However, owning shares in a business doesn’t render a shareholder to have direct control over
the business’s day-to-day operations nor makes him entitled to an equal distribution in the
profits if they are in the form of dividends.

Each share signifies a proportionate stake in the equity of a company. You can select from buying
large or small shares to match the amount of money you want to invest. A company's share price
can accelerate or decrease as a result of its own performance or market conditions.

TYPES OF SHARES

Shares can be widely divided into two categories namely, ordinary shares and preference shares.

1. Ordinary Shares

Ordinary shares carry no exceptional or preferred rights. Ordinary shareholders are

entitled to share in the earnings of the company. They can vote at the company’s general
meeting as well as other official meetings. They are also eligible to participate in any
dividends or any distribution of assets on winding up of the company.

2. Preference Shares

Preference shareholders usually get a significance or 'priority' over ordinary shareholders

in terms of payments of dividends or on winding up of the company. There are varying
degrees of preference shares having different rights and characteristics. Holders of
preference shares are entitled to having a fixed periodic income and have restricted
voting rights liable to particular circumstances or particular resolutions; however this is
strictly dependent on the terms of the shares.

WHY DO COMPANIES ISSUE SHARES?

Companies issue shares to raise money from investors who tend to invest their money. This
money is then used by companies for the development and growth of their businesses.

Company issues different types of shares namely; preference shares, ordinary shares, shares
without voting rights or any other shares as are approved under the law. These allow the
shareholders a stake in the company's equity as well as a share in its profits, in the form of
dividends, and the aptitude to vote at general meetings of shareholders.
WHAT IS A CAPITAL MARKET?

Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial
securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals
and institutions.

Capital market trades mostly in long-term securities. The magnitude of a nation’s capital markets
is directly interconnected to the size of its economy which means that ripples in one corner can
cause major waves somewhere else.

Types of Capital Market

Capital market consists of two types i.e. Primary and Secondary.

1. Primary Market

Primary market is the market for new shares or securities. A primary market is one in
which a company issues new securities in exchange for cash from an investor (buyer).It
deals with trade of new issues of stocks and other securities sold to the investors.

2. Secondary Market

Secondary market deals with the exchange of prevailing or previously-issued securities

among investors. 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 resell/
trade existing securities.Another important division in the capital market is made on the
basis of the nature of security sold or bought, i.e. stock market and bond market.

WHAT ARE BONDS?

Bond is a negotiable debt investment certificate that ensures fixed income for a defined period
of time generally issued by a company or government agency.

A bond investor offers money to the issuer and in return, the issuer promises to repay the amount
equal to bond value at a fixed interest rate (at a specified maturity date) over the life of the bond.
However the interest on bonds is usually paid (semi-annually) every six months.

Bonds are generally used by companies and foreign governments to fund multiple projects as
well as activities.

TYPES OF BONDS
This section will focus on the various types of bonds that a company might issue.

Bonds can be classified in the following categories:

1. Fixed rate: Fixed rate is an interest rate that remains fixed either for the entire term of
the bond or part of the term. This category includes bonds with fixed coupons.
2. Floating rate: Floating rate is an interest rate that is allowed to rise up and down in sync
with the market or together with an index. Also regarded as variable interest rate.

In the financial market of Pakistan, bonds are either issued by the Government or Corporate
entities.

Government Bonds

Government bond is a debt security loaned by a government to assist government spending,

most often issued in the country’s local interest.

The various types of Government bonds issued by the Govt. of Pakistan are as follows:

 Pakistan Investment Bonds

 US Special Dollar Bonds
 Wapda Bonds
 National Saving Bonds
 and Sukuk

Corporate Bonds

Corporate Bond is a debt security which is issued by company and sold to investors to meet its
financial requirements. In Pakistan this is commonly known as Term Finance Certificate (TFC).
Corporate Bonds are normally issued for a specified time period with an assurance to return the
principal amount of the bond money including interest to the bondholder.

When someone buys a bond, he/she is lending money to the company that issued it. The
company ensures to return the money, on a specified maturity date. Till that time, it also pays a
stated rate of return, which usually occurs semiannually. The interest payments collected from
corporate bonds are taxable. Unlike shares, bonds do not provide an ownership interest in the
issuing company.

BOND CHARACTERISTICS
Bonds have a number of different features of which you need to be well aware of. All these below
mentioned factors play a role in determining the value of a bond and the extent to which it fits
in your portfolio.

Face Value/Par Value

The face value (also called as the par value) is the quantity of money a holder will receive back
once a bond matures. A newly issued bond generally sells at the par value.

What makes other people more confused is that the par value isn’t the price of the bond. A
bond's price wavers all through its life in reaction to a number of variables. When a bond trades
at a price higher the face value, it is thought to be selling at a premium. When a bond sells lower
than face value, it is thought to be selling at a discount.

Coupon (The Interest Rate)

Coupon is the quantity of money the bondholder receives as interest payments. It is usually
expressed as a percentage of the par value. It’s referred to as “coupon” because sometimes these
bonds have a physical presence which one can tear off and redeem back for interest. Though,
this was a more common thing in the past, these days the records are electronically managed.

If a bond pays a coupon of 10% and its par value is Rs.10,000 its interest would be Rs.1000
annually. Rates that remain stay as a fixed percentage of the par value like these are considered
as Fixed-rate bond. Another possibility is flexible interest payment, referred to as floating-rate
bond where interest rate is tied up to market rates through an index, for example the rate on
Treasury bills.

One might presume investors will pay more for a high coupon than for a low coupon. All things
being equivalent, a lower coupon suggests that price of the bond will fluctuate more.

Maturity

Maturity is the date on which the principal amount of a note, draft, acceptance bond or other
debt instruments becomes due and is reimbursed back to the investor and thereafter the interest
payments stops. It is also regarded as the termination date on which an installment loan must be
paid in full. Maturities can range from as low as 3 years to as long as 30 years.

A bond that matures in three years is much more anticipated and therefore less risky than a bond
that matures in 30 years. Thus, in general, the longer the duration to maturity, the higher the
interest rate. Also, all things being comparable, a longer term bond will alter more than a shorter
term bond.
LISTED AND UNLISTED COMPANIES SHAREHOLDERS

Listed and Unlisted Companies Shareholders

When you buy a share in a company, you become a part owner of that company under company
law; this ownership entitles you to certain rights. Some of these rights relate to financial aspects
of owning shares, and some relate to the communications between the company and the
shareholder, including the actions you can take to make your views known on the company's
performance and actions.

The rights, inter-alia, include the following:

Rights Issues - A Right in Capital Increases:

From time to time, a company may wish to issue further capital. As a shareholder you have a pre-
emptive right to participate in a Rights Issue. This is where the company asks existing
shareholders if they want to buy new shares in the company in proportion of the existing shares
held by each member, irrespective of the class of shares. Such offer is made by a notice sent to
members specifying the number of shares to which the member is entitled and prescribing time
limit within which if offer not accepted will be deemed to be declined. The company sends
prescribed circular to the members along with the notice making the said offer. [Section 86(11,
(3) of the Ordinance]

If they decline to subscribe for the further issue or make no response to the issue, the directors
may allot the shares to that extent, as they deem fit.

Right to a Share in the Profits - Dividends:

As a shareholder you have a right to a share in the company's earnings. This is called dividend
and is the share in net profits that is distributed to shareholders. This share varies according to
the results of the company. Dividends are paid out to all registered shareholders. If you hold
preference shares you will usually get a fixed dividend, which will take priority over payments of
dividend to ordinary shareholders.

The board of directors recommends the dividend, and submits the same to the shareholders for
approval in its general meeting. Dividend is declared by the members in a general meeting, being
a part of the meeting's agenda. However no dividend shall exceed the amount recommended by
the directors.
Participation in a Company's General meetings:

Shareholders should be informed of the rules, including voting procedures which govern general
meetings. Shareholders should be given;

Sufficient and timely information about the date, location and agenda, including the issues to be
decided at the meeting. Notice of the general meeting, specifying the day, time and place of the
meeting and a statement of the business to be transacted with all material facts, is required to
be sent to every member of the company at least 21 days before the meeting. Where any
business other than ordinary business that is any special business is to be transacted at a general
meeting, a statement setting out all material facts concerning such business, including in
particular the nature and extent of the interest of any director, is also enclosed with the notice.
In case of listed companies, notices are also published in English and Urdu newspapers having
circulation in the Province where the relevant stock exchange exists. Opportunity to place items
on the agenda of meetings, subject to reasonable limitations.

Right to Elect and Remove Directors:

Shareholders have a right to elect the directors. The shareholders, as owners of the company,
elect the directors to run the business on their behalf, and hold them accountable for their acts.
First directors are usually appointed by virtue of Articles of Association or otherwise, all the
subscribers are deemed to be directors of the company. They shall hold office until the holding
of first AGM. Subsequent directors are elected in the AGM of the company for a period of three
years.

The shareholders can also remove a director by passing a resolution in a general meeting.

Right to Appoint and Remove Auditors:

Auditors are external accountants appointed by the company to check its financial statements.
The directors appoint first auditor or auditors within sixty days of incorporation, subject to certain
provisions, who stands retired at the conclusion of the first AGM. However, if the directors fail to
appoint first auditor or auditors, the members in general meeting may appoint first auditor or
auditors. Thereafter, members at each AGM appoint the auditor or auditors.

The remuneration of the auditor or auditors appointed by the members is also fixed by the
members in the general meeting. Members can remove the auditors or auditors through passing
of special resolution in a general meeting in accordance with the procedure laid down.
Right to Contest for Election to the Board of Directors:

A member has the right to contest for election as a director of a company subject to basic
conditions for the office of directorship of the company.

Right to Residual Assets at the Time of Winding Up:

Winding up of a company refer to the process whereby all the affairs of the company are wound
up, all its assets are realized, its liabilities paid off and the balance, if any, is distributed to its
shareholders in proportion to their holding in the company A liquidator is appointed who takes
control of the company, collects its debts and distributes any surplus amongst the members
proportionate to their shareholding. It is a basic right of the shareholders of a company to receive
their share of the residual assets at the b me of winding up in proportion to their holding in the
company.

Right to Receive, or Obtain Copies of Annual Accounts:

Every company is required to send copies of annual accounts to the members at least 21 days
before the AGM at which the accounts are required to be laid before the members.

Shareholders of a company are also entitled to obtain copies of audited financial statements
along-with auditor's report and director's report on payment of such amount as fixed by the
company.