Lecture 8 KSE- Settlement

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

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 capitalization Out of the 35 Sectors, 34 companies are selected i.e. one company from each sector

SELECTION CRITERIA The selection criteria for stock inclusion in the recomposed KSE 100 Index are: SECTOR RULE Largest market capitalization in each of the 34 sector of the Exchange, excluding Open – end Mutual Fund sector; CAPITALIZATION RULE The remaining 66 companies are taken up on the basis of market capitalization of companies in descending order.

SELECTION CRITERIA Close-end Mutual Fund Modaraba LIST OF SECTOR Leasing Companies Inv. Banks / Inv. Cos. / Sec. Cos Commercial Banks Insurance Textile Spinning Textile Weaving Textile Composite Woollen Synthetics & Rayon Jute Sugar & Allied Cement Tobacco Refinery Power Generation & Distribution Oil & Gas Marketing Companies Oil & Gas Exploration Companies Engineering Automobile Assembler Automobile Parts & Accessories Cables & Electric Goods Transport Technology & Communication Fertilizer Pharmaceutical Chemical Paper & Board Vanapati & Allied Leather & Tanneries Foods & Personal Care Products Glass & Ceramics Miscellaneous

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