Working Of Lahore Stock Exchange

ASSIGNMENT ON TOPICS: DIFFERENCE BETWEEN COMMON AND PREFERRED STOCKS HOW STOCK EXCHANGE WORKS IN PAKISTAN

ASSIGNED BY: MAM. NAHEED MALIK FINANCIAL MANAGEMENT ASSIGNED TO: AAMIR SHEHZAD

FA08-MBA-002

JAHANZAIB

FA08-MBA-046

MUHAMMAD USMAN BASHIR

FA08-MBA-052

MUHAMMAD ADNAN MALIK

FA08-MBA-066

MUHAMMAD ANWAR

FA08-MBA-070

NEELAM JAVAID

FA08-MBA-114

RAZA ALI BHATTI

FA08-MBA-118

ROHAIL ISLAM

FA08-MBA-122

UMMAR LATIF

FA08-MBA-154

COMSATS INSTITUTE OF INFORMATION TECHNOLOGY M.A JINNAH CAMPUS LAHORE

CONTENTS:

What are stocks? ➢ Types of Stocks traded in Pakistan  Common Stocks  Preferred Stocks ➢ Difference Between Common and preferred stocks What is Stock Exchange? ➢ What is Index? ➢ How Stock Exchange works? ➢ Role of brokers in Stocks trade Conclusion

WHAT ARE STOCKS? Stocks are the shares in the ownership of a company. Stock represents a claim on the company's assets and earnings. Stockholders are the investors and become the owners of the company. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. A stock is represented by a

stock certificate. But now-a-days you won't actually get to see this document because your brokerage keeps these records electronically. Stock has

limited liability which means if the company faces the bankruptcy then stockholder is not personally liable for the debts of the company. Hence liability is limited up to the value of stocks.

TYPES OF STOCKS TRADED IN PAKISTAN: In Pakistan Stock markets there are two types of stocks:

1.1)Types of Stocks

COMMON STOCKS: In Pakistan mostly companies issue common stocks. Common stock represents ownership in a company and a claim or dividend on a portion of profits. Shareholder gets one vote per share to elect the board of directors who oversee the major decisions made by the management. Common stockholders entitled to dividend if and when declared by the board of directors. They have the last claim on the assets of the company after paying off creditors, bondholders and stockholders, that’s why Common stockholders are also known as “the residual”. Common stockholders invest in the firm only upon the expectation of future returns. They are not guaranteed any return, but merely get what is left over after all the other claims have been satisfied. Since the common stockholders receive only what is left over after all other claims are satisfied, they are placed in a quite uncertain or risky position with respect to returns on invested capital. As a result of this risky position, they expect to be compensated in terms of both dividends and capital gains of sufficient quantity to justify the risk they take.

VALUATION OF COMMON STOCKS: The zero growth modelof common stock valuation assumes a constant, nongrowing dividend stream. The stock is valued as a perpetuity and discounted at a rate ks: P0 =

P0 ks

The constant growth modelof common stock valuation, also called the Gordon model, assumes that dividends will grow at a constant rate, g. The stock is valued as the present value of the constantly growing cash flow stream: P0 =

D1 ks − g

The variable growth model of common stock valuation assumes that dividends grow at a variable rate. The stock with a single shift in the growth rate is valued as the present value of the dividend stream during the initial growth phase plus the present value of the price of stock at the end of the initial growth phase: N D0 × (1 + g1) t  1 DN + 1   P0 = ∑ +  × t N (ks − g 2)   (1 + ks ) t = 1 (1 + ks )

PREFERRED STOCKS: In Pakistan Preferred stocks are issued by very small number of companies. Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.

VALUATION OF PREFERRED STOCKS: The Preferred stocks can be valued with the help of following formula; Preferred stock valuation assumes a constant, non

growing dividend stream. The stock is valued as a perpetuity and discounted at a rate ks: P0 =

P0 ks

WHAT IS STOCK EXCHANGE? Stock exchange is place where buyers and sellers meet and decide on a price of stocks. The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. In Pakistan three Stock Exchanges are working; Karachi Stock Exchange (Guarantee) Ltd. Lahore Stock Exchange (Guarantee) Ltd. Islamabad Stock Exchange (Guarantee) Ltd. The stock exchange plays the following roles; The stock exchange admits companies for trading at their securities. It provides a market for raising capital by companies. It provides a market place for shares of listed public companies to be bought and sold, by bringing companies and investors together at one place. The exchange's role is to monitor the market to ensure that it is working efficiently, fairly and transparently.

WHAT IS INDEX? Everyday in business news it is heard that KSE 100 Index or LSE 25 Index increased or decreased by some points. Index shows the trade of shares of top companies in the market. In Karachi Stock Exchange 100 index shows the trade of shares of top 100 companies in the market. Lahore stock exchange index shows the top 25 companies’ shares.

HOW SHARES ARE TRADED? If an investor wants to purchase the shares of a particular company, he has to open an account with the Broker in the Stock Exchange. On the other hand the broker has the account and registered with the Stock Exchange. The registration fee is Rs.4 Million and broker is allowed to trade up to 25 times of his Net Capital. Investor can order in two ways, Limit Orders: In a limit order, the investor or client suggest the price at which the order is to be executed.

Market Order: Also known as at best order, the order is executed at the prevailing market rate.

1.2)How Shares are traded

Clients can purchase shares from their brokers on debt but it is necessary by SECP that client should pay at least 60% of the amount.

TRADING AND SETTLEMENT SYSTEM: The stock exchanges have introduced a computerized trading system to provide a fair, transparent, efficient and cost effective market mechanism to facilitate the investors. Before this system stocks were traded physically by bidding in the open hall which was very slow system. In Pakistan LSE is the first to introduce IT trading system, in which software”ULTRA” is used.

Ask Price Name of Company OAGRA

No. of Shares 1000

Price Per Share 80

Bid Price No. of Shares 1000

Price per Share 75

800 78 800 78 The trading system comprises of four distinct segments, which are:

Situation Not Traded Traded

T+3 Settlement System; Provisionally Listed Counter; Spot Transactions; and Futures Contracts.

T+3 SETTLEMENT SYSTEM: In the T+3 settlement system, purchase and sale of securities is netted and the balance is settled on the third day following the day of trade. It reduces the time between execution and settlement of trades, which in turn reduces the market risk. It reduces settlement risk, as the settlement cycle is shorter.

PROVISIONALLY LISTED COUNTER: The shares of companies, which make a minimum public offering of Rs.100 million, are traded on this segment from the date of publication of offering documents When the company completes the process of dispatch/credit of allotted shares to subscribers, through CDC it is officially listed and placed on the T+3 counter. Trading on the provisionally listed counter then comes to an end and all the outstanding transactions are transferred to the T+3 counter with effect from the date of official listing.

SPOT/T+1 TRANSACTIONS: Spot transactions imply delivery upon payment. transactions the trade is settled within 24 hours.

Normally

in

spot

FUTURE CONTRACT: A Futures contract involves purchase and sale of a financial or tangible asset at some future date, at a price fixed today.

HOW PRICE OF STOCK DETERMINED? At the most fundamental level, supply and demand in the market determines stock price. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.