Brokerage Transactions Stock Market LECTURE 10 Brokerage Transactions Stock Market

Type of Orders Broadly classified: Two types of orders Market Orders Limit Orders

Market Orders Orders that are to be executed immediately at current market price Quantity Bid Ask/ Offer 1000 279 500 279.49 100 278.5 400 279.50 278.4 280.50 278.1 5000 280.25 278 6000 281 277.5 200 281.1 10000 277.21 281.2

Limit Orders Investor may specify price at which he is willing to buy or sell First come, first serve rule applies KSE allows decimal pricing where the minimum possible spread is .01, earlier it was .05 There are further two types of limit orders Stop Loss orders Stop Buy orders

Types of limit orders Stop Loss order: The stock has to be sold if its price falls bellow stipulated level Allow investor to avoid unexpected losses Also useful in very uncertain markets Maximum variation in prices is 5% per day One can place stop loss order at 3% and avoid the 2% loss, if anything abnormal happens with the stock

Stop-Buy Orders: Specifies that a stock should be bought when price of a security rises above a limit It is usually used with short-sell to limit possible losses from short position At KSE, orders have a validity of one day

Broker’s Commission; Live Trade Online

Settlement Orders executed at KSE are settled within 3 working days This requirement is called T+3 Purchaser delivers the cash to his broker who delivers it to the seller’s broker Brokers net out their transactions each day and only net quantity is transferred or received Investors may keep shares in CDC account or may keep physical shares

Suppose C buys 5000 shares of NML from Y INVESTOR B INVESTOR C INVESTOR A Suppose C buys 5000 shares of NML from Y BROKER 1 Suppose A sells 4000 shares of NML to Z CLEARING HOUSE BROKER 2 INVESTOR Z Broker 2 must provide 1000 shares to Broker 1 within 3 days INVESTOR X INVESTOR Y

Buying on Margin When investors buy shares they have easy access to a source of debt, called brokers call loan or buying on margin Broker may have funds, if not, the broker borrows from financial institutions at badla rate Badla or CFS session Intra-day trades do not have margin cost Greater up-side potential, but also greater downside risk

Margin Financing Margin requirements: suppose if margin is 50% Margin: the portion of the purchase price contributed by investor Margin requirements: suppose if margin is 50% Then investor must provide at least Rs.10000 for purchasing Rs.20000 worth of shares Assume: purchased 200 shares of FFC at Rs.100 each with Rs.10000 of equity and the rest for debt Margin = Equity/Value of stock 10000/20000= .5 or 50% What will happen if price of FFC drops to Rs.70

What is Margin Account A margin account is a loan account by a share trader with a broker which can be used for share trading. The funds available under the margin loan are determined by the broker based on the securities owned and provided by the trader, which act as collateral over the loan. The broker usually has the right to change the percentage of the value of each security it will allow towards further advances to the trader, and may consequently make a margin call if the balance available falls below the amount actually utilised. In any event, the broker will usually charge interest and other fees, on the amount drawn on the margin account

Margin Buying Margin buying refers to the buying of securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value—the difference between the value of the securities and the loan—is initially equal to the amount of one's own cash used. This difference has to stay above a minimum margin requirement, the purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan.

Margin Calls When the stock market started to contract, many individuals received margin calls. They had to deliver more money to their brokers or their shares would be sold. Since many individuals did not have the equity to cover their margin positions, their shares were sold, causing further market declines and further margin calls. This was one of the major contributing factors which led to the Stock Market Crash of 1929, which in turn contributed to the Great Depression.

Margin Financing and Falling prices of securities If FFC price falls to Rs70, loss to the investor will be (200x30) = 6000. His margin will now be: (10000-6000)/(200x70) = 4000/14000 = 28% The investor will be asked to deposit Rs.3000 so that his equity increases and the margin reaches the 50% mark again i.e (4000+3000)/14000 = 7000/14000 = 50%

KSE 100 Index Index is a statistical tool that measures percentage changes in a variable The KSE-100 Index was intorduced in November 1999 with base value of 1,000 points. The Index comprises of 100 companies selected on the basis of sector representation and highest market capitalisation Out of the 35 Sectors, 34 companies are selected i.e. one company from each sector

KSE 100 Index Suppose we have the following 3 companies in our index: Suppose Rs.1070000 is equal to 1000 points Company Share price Shares Market Capitalization FFC 100 2000 200000 OGDC 90 8000 720000 Engro 150 1000 150000 Total 1070000

Index = 1000x(Mkt cap / Base Mkt ca) Nest day the prices change and we have the following data: Index = 1104000/107000 = 1.031x1000 = 1031 Company Share price Shares Market Capitalization FFC 105 2000 210000 OGDC 92 8000 736000 Engro 158 1000 158000 Total 1104000

Interpretation The index improved from 1000 points to 1031 point Means that the improvement is 31 points in 1000 point or 3.1 percent in 100 as compared to the base period In other words, the share prices of companies in the 100 index have risen by 3.1 percent as compared to prices in the base period