1. Lecture 8
KSE- Settlement

2. 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

3. 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

4. Broker’s Commission; Live Trade Online

5. 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

7. 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

8. 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

9. 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 for purchasing Rs worth of shares
Assume: purchased 200 shares of FFC at Rs.100 each with Rs of equity and the rest for debt
Margin = Equity/Value of stock /20000= .5 or 50%
What will happen if price of FFC drops to Rs.70

10. Margin Financing and Falling prices of securities
If FFC price falls to Rs70, loss to the investor will be (200x30) = His margin will now be:
( )/(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 ( )/14000 = 7000/14000 = 50%

11. 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

12. 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.

13. 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

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

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

16. 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