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Presented By: TAUSEEF LADAK SR MANAGER EQUITY SALES TAURUS SECURITIES LIMITED
CONTENTS
KSE Introduction
100-index
COT/ CFS New Trends Mkt slang Notes of advice
KSE INTRODUCTION
Overview 100 - Index Products, Trading & KATS
Overview
The Karachi Stock Exchange (Guarantee) Limited (KSE) -1947 The Lahore Stock Exchange (LSE) - 1970 The Islamabad Stock Exchange (ISE) - August 1992 KSE is a self-regulating body governed by its Board of Directors consisting of brokers, nominees of the Securities & Exchange Commission of Pakistan (SECP) and representatives from the private sector 200 members: out of which the corporate members are 109- out of which 9 are listed companies
Most of the members are involved in brokerage business or they have huge asset management companies
Overview Continued
Biggest and most liquid exchange in Pakistan. Declared best performing stock market of the world for the year 2002 AND 2006 As on march 31st 2006 663 companies Market capitalization Rs. 3,257.062 bn (USD $ 54.28 bn) Listed capital Rs. 486.489 bn (USD $ 8.11 bn) Began with a 50 shares index- when the market grew the KSE-100 was developed which is a capital weighted index and consists of 100 companies representing about 90 percent of market capitalization of the Exchange KSE management has recently made an index of top 30 companies of most liquid and higher free-float companies. It is believed to give a better picture of the market compared to our existing capitalization based 100-index Proper future derivatives are also in the pipeline
Overview Continued
SALIENT LISTING REQUIREMENTS
Minimum paid up capital Rs 150 mn Publishment of prospectus or offer for sale. Application for shares to be accepted through bankers to the issue.
Overview Continued
OTHER REQUIREMENTS A Co. may be de-listed from KSE ,if:
securities are quoted below 50 per cent of face value for a continuous period of three years. It has failed to declare dividend or bonus for five years from the date of declaration of last dividend or bonus; or commencement of business. it has failed to hold its annual general meeting for a continuous period of three years. liquidation - either voluntarily or under court order. it has failed to pay the annual listing fees for a period of 2 years of penalty.
Overview Continued
Bird's eye view-KSE
762 750 600 487 450 291 300 150 15 0 1950 1960 1970 1980 1990 2000 81 341
Overview Continued
LISTED CAPITAL & MARKET CAPITALIZATION
Bird's Eye view-KSE
450000 375000 300000 225000 150000 75000 0 1950 1960 1970 1980 1990 2000
Overview Continued
ASSOCIATED BODIES
SECP security and exchange commission of Pakistan: The company is the regulatory body and is responsible in framing the rules and regulations of the stock market and to keep track of activities taking place in the stock market. The company is also working as a middleman between stock exchanges and the finance ministry or govt. CDC central depository company: Shares of public listed entities can be traded only through the stock exchange, whether in the physical form or in the electronic form (CDC form). Previously, all shares used to trade in the physical form as in the paper form, imagine the labor required for trading millions and millions of shares.
Overview Continued
CDC
Presently 97% of the settlements are routed through CDC. With the implementation of CDC and automated trading system, trading and settlement of securities have become transparent and efficient. CDC is like a bank account, where investors keep shares instead of cash, where KSE members, brokers, institutional investors and the retail investors have their account. Retail investors may have a Private Individual investor a/c or they may have a CDC Sub a/c with the Broker they do their business with.
Overview Continued
NCSS
Stands for National Clearing and Settlement System (NCSS) to replace the separate and individual Clearing Houses operated by each of the three Pakistani Stock Exchanges, was incorporated on July 03, 2001. Established to provide Clearing and Settlement services to Pakistani Capital Market with full automation of pay & collect and Broker to Broker delivery system (BTB), Institutional Delivery System (IDS), cross exchange netting and such other value added features expected in future. CDC is a depository company like banks are for money, whereas NCSS chiefly deals with clearing, settlement, transfer of shares/securities between the three local bourses (stock exchanges) and between broker-to-broker and institutional investors.
100-INDEX
What is an index? Need for an index? What is index history of indexes at KSE Compare index levels with GDP Types of index at KSE: all share/ 100-indexs Indexs composition recomposing
100-INDEX
What is an index: basically just a barometer of the overall movement of stock price in the exchange. It is a statistical measure by which one can gauge the price performance of listed securities, just like we have CPI for measuring inflation. Index weightage of share can be calculated by: Market cap of that scrip (* on a particular day) -------------------------------------------------------------- X 100 Total market cap of 100-index
Subsequently you can calculate new index value by the following formula:
{ New market cap / old market cap} * old index value. For e.g. market cap on 27th July was 2627 bn, & of 28th July was 2607 bn, where as the index was at 10430 levels. Put the values in the formula and you will get indexs closing on 28th July i.e. yesterday.
100-INDEX
KSE never had proper index until, 1991, prior to which there was small 50-share index in the traditional time of trading. The KSE 100 Index was introduced in November 1991 and was recomposed in November 1994 whereas the KSE All Share Index was introduced in September 1995.
100-INDEX
100-INDEX
Index and GDP
100-INDEX
COMPOSITION OF 100 INDEX
Inclusion of companies in 100-index is based market capitalization of the listed companies - capitalization based index.
Top companies (in terms of market capitalization) from each of 34 sectors of KSE are selected first.
Then the remaining 66 companies are selected as follows: All listed companies, other than the top 34 that were earlier selected are listed in a descending order such that, company with highest market capitalization is at the top, while one with the lowest market capitalization is placed at the bottom. Then top 66 companies are selected.
100-INDEX
CALCULATION METHODOLOGY
The formula for calculating the KSE100 Index is : {(Sum of Shares Outstanding * Current Price)/Base Period Value}*1000 The KSE100 Index calculation at any time involves the same multiplication of share price and shares outstanding for each of the KSE100 Index component stocks. The aggregate market value is divided by the base value and multiplied by 1000 to arrive at the current index number. Subsequently you can calculate new index value by the following formula:
Maintenance of the index over time will require an on-going semi-annual recomposition process done effective from every March and September based on sector and market capitalisation rules.
From investing stance: Day jobbers Short term traders Punters Investors From Legal/portfolio stance: Members Brokers Traders Institutional investors Retail investors High net worth individuals
Tax on transactions CVT Withholding tax CDC charges Commission Zakat deduction Tax on dividends
Equity Ready T+3 Ready T+2 Badla/CFS Physical Odd lot Spot T +1
Bond market is relatively small at KSE. As of March 2006, it only contributed to 23% of total market capitalization. Following are key features:
Types of bonds are traded at KSE, Fixed Income for e.g. WAPDA, Corporate Bonds for e.g. TFCs and Government Bonds Traded and settled both in physical and in scripless form. TFCs are mostly traded over-the-counter through market makers. Price quoted is a clean price. Since trading is mostly OTC, settlement terms are all negotiable although the settlement cycle for TFCs is generally on a T+1 basis.
In International Markets: Both futures and forwards are hedging instruments, better known as derivatives. One thing that is common between them is that they both Are contractual agreement, generally made on the trading floor of a future exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price on a certain future date. However, they certain differences, which are mentioned here under. Once they are made, they are openly traded on stock exchanges. Since they are traded, they are marked to market on a daily/weekly basis, and therefore gains/losses are noted accordingly. Due to daily/weekly adjustment of price changes are recorded as profit/losses, its default risk decreases. Forward contracts are usually tailor made contracts, between two parties, which are not traded after their initiation. They are not traded and they are not marked to market, and no profit/losses settled between initial date and settlement date. Default risk remains there. Absence of this profit/loss adjustment, the default risk increases, as if the rates change drastically, depending on the case, either the buyer or the seller does default out of the contract. The contracts are physically settled, on the contract date.
There are no requirements of physical delivery of the underlying asset, at the future date transaction are settled by simply settling the differences
Weekly profit/losses are settled, between initial price and weekend price. (Future Feature)
These contracts are settled through physically shares on the settlement date. (Forward Feature)
When a buyer/seller accepts a bid/offer of a contract (quantity of shares) the contract as per format attached to these regulations shall be deemed to have taken place between buyer/seller.
Futures contracts are held in marketable lots of 500 shares. Non-resident investors have just recently been allowed to trade in futures.
Cos. under the process of 1st time subscription and listing, subject to a min subscription of Rs 150 mn. It is just like local futures counters, just that this provisional trading ceases when the company is formally listed on the trading board. And its settlement is done on the third day preceding the ceasing date. From the date of formal listing, trading in the shares of the company is shifted to the Ready Board Counter under T+3 Settlement system. Provisional trading is also ceased if the shares of the company are left under subscribed.
Ready T +3
Transactions executed on the Ready Board Counter are settled according to the T+3 settlement cycle. Transactions are settled through the clearinghouse that nets out the purchases and sales and the financial obligations thereon of each member / firm for the notified clearing period and issues instructions for deliveries of netted outstanding business .
Spot T +1 Spot transactions imply delivery upon payment. Normally in spot transactions the trade is settled within 24 hours
Prior to book closure, securities are placed on spot settlement on a T+1 basis. Securities are placed on spot in the preceding clearing from the clearing during which the book closure commences. Securities can therefore be traded on spot for about 5-7 days prior to book closure.
Physical
Trading at physical counter involves trading only in the physical/paper-form of shares, currently only less than 5 % of all shares are traded on this counter.
Securities are delivered or received at the custodian banks counters. Deliveries of physical shares are generally received by 10:00.
Odd lot
Odd lot is an amount of a security that is less than the normal unit of trading for that particular security.
No unison rates. No transparency. Physical shares no electronic shares. Index was calculated at the last registered rate at the Batla counter. Last rate was treated as the rate of the day.
Close Rate: The price of the stock at the end of previous days trading session.
Current Rate: Current market price of the stock, if the trading session is in progress. However, if it is not in progress then it shows the closing rates of todays session, whereas the close rate will reflect closing price of previous session.
Bid Qty: Quantity of shares for which buyer is available on the market, at a given bid price. Bid Price: Price at which buyer is available to purchase a particular quantity of shares.
The price and quantity combination that is displayed on KATS is that of the highest bid price. For instance let us assume that there are only three bids placed at KATS; 5000 shares for Rs 50 6000 shares for Rs 49.50 4000 shares for Rs 50.50 Since, volume/price combination (c) has the highest bid price of Rs 50.50, it will be reflected on KATS. Once combination (c) has been executed then the combination of second highest bid-price will be reflected on KATS, i.e. combination (a). And so and so forth, it goes on in a matter of fraction of seconds. If, following the execution of combination (c) another bid is placed of 1000 shares at Rs 50.20 then, instead of (a) this new bid will be reflecting on KATS.
Offer/Ask Qty: Quantity of shares for which seller is available in the market at a given offer price. Offer/Ask Price: Price at which seller is available in the market for a given quantity of shares.
The mechanism of offer quantity/price is exactly the opposite of bid price/quantity. that is to say the price and quantity combination for offer that is displayed on KATS is that of the lowest offer price. For instance let us assume that there are only three offers placed at KATS; 5000 shares for Rs 50 6000 shares for Rs 49.50 4000 shares for Rs 50.50 Since, volume/price combination (b) has the lowest offer price of Rs 49.50, it will be reflected on KATS. Once combination (b) has been executed then the combination of second lowest bid-price will be reflected on KATS, i.e. combination (a). And so and so forth, it goes on in a matter of fraction of seconds. If, following the execution of combination (b) another offer is placed of 1000 shares at Rs 49.80 then, instead of (a) this new offer will be reflecting on KATS.
Total Volume: Total Quantity of shares traded during the day. High Rate: The maximum price at which the share is traded during the day. It may be higher or lower than the last closing rate. Low Rate: The minimum price at which the share is traded during the day. It may also be higher or lower than the last closing rate. Difference: The change in price between the current price and the last closing rate.
COT/CFS-CFS Mkt II
Cot demystified COT/CFS
COT/CFS
UNDERSTANDING COT/BADLA
KEY FEATURES:
3 party involvement: Purchaser, broker, financer. Brokers market. Financed at closing rate, and not purchasing rate. Interest is charged in paisas.
COT/CFS
COT
Since traditional times till phased out in august 2005 No separate counter for COT Financing available for 10 days max, if unreleased No cap of maximum total amount of investment for the market. Officially Badla was only available in top volume 30 scrips in past 3 years before its phase out. Prior to that all companies could be financed through Badla, some times in-house Badla. Finding of financer after the market (as discussed earlier)
CFS
Implemented in august 2005 working to date, by- passing the proposed phase out date of February 2006 Separate counter for CFS Financing available for 30 days max, then refinance if unreleased. Maximum investment Rs 55 bn Was only available in top 14 scrips, recently changed to Future eligible 30 scrips
Finding it within market hours at a real time basis (though actual system for really time was only placed sometime in January 2006)
NEW TRENDS
CFS Mkt II
Demutualization
Investor and Brokers education Online brokerage services
INDEX TRADING
CSF (CSF SETTLED FUTURE)
CFS/CFS Mkt II
CFS
Implemented in august 2005 working to date, bypassing the proposed phase out date of February 2006 No such commitment
CFS Mkt II
Yet to be implemented, discussions between brokers, banks, SECP, and KSE under process Min commitment of Rs 200 mn required from CFS financers i.e. banks, DFIs, Financial institutions Financing pool proposed to be atleast for 90 days No cap No such cap Finding it within market hours at a real time basis, however it may even extend upto 45 minutes after the market.
Financing available for 30 days max, then refinance if unreleased. Maximum investment Rs 25 bn Max finance rate 18% Finding it within market hours at a real time basis (though actual system for really time was only placed sometime in January 2006)
DEMUTUALIZATION..Much controversial
SECPS TWO MODELS
According to the FIDE model, the three stock exchanges should merge into a single FIDE. The Central Depository Company of Pakistan Limited (CDC), National Clearing Company of Pakistan Private Limited (NCC) and the National Commodity Exchange Limited (NCEL) shall become subsidiaries of the FIDE.
New National Security Exchange (NewSE), sponsored by financial institutions, shall start its operation as a National Exchange.
DEMUTUALIZATION..Much controversial
POINTS: FOR Lower Monetary/Managerial/Time Cost For Listed Companies. Lower Monetary/Managerial/Time Cost For Associated bodies (CDC, NCSS). Improved price discovery/ Trading Volume & Broader Investor base. Exchange to become a vocal body for the listed companies.
DEMUTUALIZATION..Much controversial
POINTS: AGAINST Many conflicting interests in
Abuse of power.
Free Float Based index. (Free float shares = outstanding shares [shares held by government, sponsors, associated undertakings] physical shares.
Selection criteria for listed companies include: Co. should have financial results for atleast 1-full year. Should be listed atleast 2-months Free float be atleast 5% of paid-up capital (exception given to OGDCL) Both types mutual funds excluded Co. has NOT been in default for atleast six months before the selection period.
Inclusion of companies in 30-index is based on free float market capitalization & average traded value, where 50% weightage is given both parameters. 30-companies are to be selected on the basis of there ranks. These ranks are calculated in the following manner
First, free-float market capitalization will be calculated of each company. Second, average daily traded value of review period will be calculated of each company traded value means No. of shares traded during the day, multiplied by price of each transaction . Now, a factor (rank) would be arrived at by giving 50% weightage to both these values. Finally, top 30 companies with highest factors would be selected for the index.
KSE 30-Index
100-INDEX
Introduced in 1991- Restructured in 1994
Base divisor = 1000 Selection base market cap. of outstanding shares. Daily movement of index on basis of market cap of outstanding shares. Recomposed biannually: March & August
Base divisor = 10000 Selection base market cap. of free float shares and liquidity (ADTV) Daily movement of index on basis of market cap of free float shares. Recomposed biannually: June & December
MARKET SLANG
Taizi (bullish)
Mandi (bearish)
Gola (day trading). Seedha gola/ ulta gola Tukra (odd lot)
Utha lia/ day dia (bought/sold) Acha lagta hay (its means a view on the market/scrip, Acha = bullish)
Nazar aana/ dekhta hay (kia Nazar aata hay/dekhta hay: means a whats your view on the market/scrip,)
Bhar bhar kay lena (market order) Dhobi ghat (wash trade). Waada (Future) OGDC waaday pay lao lo i.e. buy OGDC futures Anday bachay khaay received bonus, dividend Market Badla vs. ghuru Badla
NOTES OF ADVICE
Dont be overwhelmed by greed/ fear
Do your analysis, and understand market, industry and scrip dynamics Working on these might not enable you to make quick bucks but surely with adequate efforts and consistency you will surely benefit in the long run
Any thoughts ?
Thank You!