Investment and Portfolio Management
Where securities are traded:
Secondary Markets
Securities are traded in secondary markets. Secondary markets are those where already issued
securities are bought and sold by members. An exchange provides a facility for its members
to trade securities, and only members of he exchanges may trade there. Therefore,
membership or seat on stock exchange is valuable assets. The majority of the seats are
commission broker seats, most of which are own by the large full service brokerage firms.
The exchange members charges investors for executing trade on their behalf. The commission
that member can earn through this activity determine the market value of the seat. A seat on
NYSE has sold over the years for as little as $4,000 (in 1978) and as much as $2,650,000 (in
1999).
The NYSE is the largest single exchange. The shares of more than 3,000 firms trade there,
and daily trading volume is 1.04 billion shares in 2002. American stock exchange is national
in scope and smaller than NYSE.
Karachi Stock Exchange was established on September 18, 1947 and was incorporated on
March 10, 1949. It started with 5 companies and total paid up capital of Rs. 37 million. As of
December 8, 2009, 652 companies were listed with the market capitalization of Rs. 2.561
trillion (US$ 30.5 Billion) having listed capital of Rs. 717.3 billion (US$ 12 billion). On
December 26, 2007, the KSE 100 Index reached its highest value ever and closed at 14,814.85
points.
Over the Counter Market (OTC)
An informal network of the brokers and dealers who negotiate sales of securities. OTC market
is not a formal market. There are no membership requirements for trading or listing
requirements for securities. Thousand of dealers are listed with SEC as dealers in OTC
securities. Securities dealers quote the prices on which they are willing to buy or sell
securities. In 19971, the National Association of Securities Dealers Automatic Quotation
System (NASDAQ) was developed to offer via computer-linked system immediate
information on bid and ask prices for stocks offered by various dealers.
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Investment and Portfolio Management
The Bid price is the price at which a dealer is willing to purchase the security and Ask price is
the one at which the dealer will sell a security. Hence the ask price is always higher than a bid
price, and the difference, the bid-ask spread, makes up the dealer’s profit.
Trading on exchanges:
The participants:
The investor place an order with a broker. The brokerage firm which owns the seat on the
exchange, contacts its commission broker, who is on the floor of the exchange, to execute the
order. When the firm’s commission brokers are overloaded and have too many orders to
handle, they will use services of floor brokers, who are independent members of the
exchanges and own seats to execute order.
The specialist is central to the trading process. All trading in a given stock places at one
location on the floor of the exchange called the specialist’s post. At the specialist post’s is a
monitor called the display Book that presents all the current offers from the interested traders
to buy or sell shares at various prices a swell as the number of shares these quotes are good
for. The specialists manage the trading in the exchange.
Karachi Stock Exchange
Regulator:
The regulatory authority for the securities market and corporate sector in Pakistan is the
Securities and Exchange Commission of Pakistan. The Commission was established on
January 01, 1999 by dissolving the Corporate Law Authority which was formed in 1981 under
a Special Law. The Commission administers the compliance of the corporate laws in the
country. The Commission is run by the Commissioners under a Chairman.
Regulations:
The securities market and the corporate sector are regulated by the provisions of:
1. The Companies Ordinance 1984;
2. The Securities and Exchange Ordinance 1969 and Rules framed there under in 1971;
3. The Securities & Exchange Commission Act 1999.
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Investment and Portfolio Management
Membership:
Membership of KSE is limited and fixed at 200 and prospective members have to purchase a
seat from existing members. The price of the membership seat is freely negotiable between
the buyers and sellers, which varies according to the interaction of the forces of demand and
supply. The KSE does not interfere with these transactions. However, the membership is
allowed subject to fulfillment of criteria and qualification laid down by the Board.
Since June 1990, membership has been opened to corporate entities. Corporate members are
required to have a minimum paid up capital of Rs. 20 million and are also subject to criteria
fixed by the Board.
The Membership of KSE is also available to foreign entities provided that the Nominee
Director of the company is a citizen of Pakistan.
Listing Requirements and Procedure:-
Issue of capital is mainly governed by the Companies Ordinance 1984, Companies (Issue of
Capital) Rules, 1996 and Listing Regulations, Regulations Governing Over-The- Counter
(OTC) Market and criteria for listing framed there under. The listing application completed in
every respect along with offering document requires not more than 2 weeks for clearance of
the Exchange.
The main requirements of listing on the ready market
1. Minimum paid up capital of Rs.200 million.
2. Minimum public offer as required under the Listing Regulations and the Companies
(Issue of Capital) Rules, 1996.
3. Public offer of equity has to be subscribed by at least 500 applicants.
4. The offering document has to be cleared by the KSE before it is submitted to the
Securities Exchange Commission of Pakistan for approval.
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Investment and Portfolio Management
KATS
The Karachi Stock Exchange has a computerized trading system known as Karachi
Automated Trading System (KATS) to provide a fair, transparent, efficient and cost effective
market for the investors.
Delivery and settlement:
Clearing and Settlement is one of the most important aspects in the operation of the securities
business. It is the process of reporting, matching, correcting securities transactions and the
ultimate delivery or receipt of net balances.
Once the transaction of purchase or sale of security is executed, the same gets completion on
delivery and settlement thereof. If a company has not yet been entered in the Central
Depository System (CDS), the delivery of its shares is performed manually in physical form
through the Clearing House of the Exchange, otherwise the same is done electronically
through CDS as operated by a separate company namely Central Depository Company of
Pakistan Limited (CDC).
Central Depository System (CDS)
The system of electronic book-entry of securities i.e. CDS has been set up to eliminate
physical maintenance and transfer of securities. This system is in line with the international
practice and has replaced the manual system of physical handling and settlement of shares at
stock exchanges. Within the CDS, transfer of shares from one account to another account
takes place electronically. The CDS is managed by the Central Depository Company of
Pakistan Limited (CDC), which has been sponsored by the stock exchanges and leading local
and foreign financial institutions. Established under the Central Depositories Act, 1997, CDC
has emerged from an elementary settlement agency to a full fledged depository. It has
revolutionalized the financial market by making trading and settlement of securities
transparent, reliable, efficient and secure in eliminating risks.
Following are the advantages of the CDS:
• Electronic book entry system
• Records and transfers securities electronically.
• No physical change of hands of securities.
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Investment and Portfolio Management
• Strict confidentiality
• No risk of damaged, lost, forged and duplicate securities.
• Simple procedure involved in pledging of securities.
• No delays in delivery, settlement and transfer of securities due to speed.
• Instantaneous credit of entitlements (Bonus, Paid Rights, etc.) to investors.
• Significantly reduced the cost of investors.
Transaction Costs:
1. Brokerage on transactions is freely negotiable between the brokers and clients.
2. Stamp duty: Stamp duty is charged at 1.5% of the face value of the shares under the
physical form of transfer. There is no stamp duty for transfer settled through the
Central Depository System; however, there is a one-time stamp duty at the rate of One
Paisa per share at the time of deposit of securities in the CDS.
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