Professional Documents
Culture Documents
Group FAQ
Volume 1: Information
Compiled by
Revision
Last modified
Ali Ahmed
30
2007-02-22
Contents
[1]
Introduction ....................................................................................................... 7
[1.1]
Disclaimer
[1.2]
[1.3]
[1.4]
[2]
[2.1]
[2.2]
So how do I subscribe?
10
[2.7]
11
[3]
Shares .............................................................................................................. 12
[3.1]
12
[3.2]
12
[3.3]
12
[3.4]
12
[3.5]
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[3.7] So
[3.7.1]
[3.7.2]
[3.7.3]
[3.7.4]
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[3.7.4.1]
[3.7.4.2]
[3.7.4.3]
[3.7.4.4]
[3.7.4.5]
[3.7.4.6]
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[3.8] In Islam
16
[3.8.1] is trading halal? ..................................................................................... 16
[3.8.2] is day trading or contra-trading of stocks permissible under Shari'ah? .......... 16
[3.8.3] does trading in any stock exchange fall under speculative transaction which is
haram in Islam? .................................................................................................... 17
[3.8.4] what conditions does a share need to satisfy to be Shariah compliant? ......... 17
[3.8.5] how much Zakat am I liable to pay on the stocks I own? ............................ 17
[3.9]
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[4]
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How does the KSE defer from other stock exchanges in the world?
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Trading............................................................................................................. 28
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[5.7.24]
[5.8]
privatization? ..................................................................................... 40
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[6.1] What is
[6.1.1] a general meeting? ................................................................................
[6.1.2] an AGM or Annual General Meeting?.........................................................
[6.1.3] a board meeting? ...................................................................................
[6.1.4] Where can I get a schedule of future meetings of a company? .......................
[6.1.5] How do I get a list of recently made announcements? ..................................
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[6.3]
49
[6.4]
When will I receive the dividend / bonus shares as announced by the company?
50
[6.5] How long does it take for shares bought by filing rights shares to be traded as
normal shares?
50
[6.6]
50
[6.7]
50
[6.8]
50
[6.9] What impact do bonus shares and right shares have on the future earnings of a
company?
51
[6.10] Why are right shares not favored compared to bonus shares?
51
[7]
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[8.1]
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[8.3]
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Problems .......................................................................................................... 79
[9.1]
Brokerage
79
[9.2]
79
[9.3] Investments
79
[9.3.1] I lost all of my money in the crash. How do I get it back quickly? ................... 79
[9.4] Physical Shares
[9.4.1] I have some physical share certificates with me. How do I ..........................
[9.4.1.1] get them verified? .............................................................................
[9.4.1.2] transfer them to my or someone elses name? ......................................
[9.4.1.3] transfer them to my CDC account? ......................................................
[9.4.2] How do I recover my lost physical shares certificates? ..................................
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Resources ...................................................................................................... 81
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[11]
Contributors .................................................................................................. 84
[1] INTRODUCTION
[1.1] Disclaimer
2006-06-27
This FAQ was compiled with information gathered from various sources on the internet and no
authenticity of any of the information contained therein is guaranteed. I take no responsibility
for any loss of time, money or any other damages that you may incur as a result of following
the information contained in this FAQ. Almost all of it is based on the experiences and opinions
of its contributors. It could be totally wrong and you should treat it as such.
The author of this FAQ does not have any affiliation with any brokerage house, media firms or
corporation.
Free distribution of the this FAQ is encouraged, as are conversions to other formats as long as
no content is removed and the entire FAQ remains intact, including this notice, as well as the
source of this FAQ.
This FAQ attempts to answer some of the most Frequently Asked Questions on investing in
stocks in Pakistan (and reduce the redundancy of novice questions asked on the KSE100Stocks
Yahoo Group). It shall seek to cover all aspects of investing in the stock exchanges in Pakistan
and cater from the basics to the more professional questions related to the field.
This FAQ will NOT list any sort of tips or provide ways to download costly financial software
for free. If you want it, pay for it.
Each question/topic in this document is followed by a date so that you may know the last time
it was updated.
If you have a stocks-related problem and cant find a solution to it on this FAQ, make sure you
post your question to the KSE100Stocks Yahoo Group. If your question gets answered
satisfactorily, please mail me in your contribution so that it can be included in this FAQ for the
benefit of others.
Volume 1 contains all the frequently asked questions and there answers.
Volume 2 consists of detailed directions on all the information on the KSE website.
Volume 3 is a calculation sheet which automatically calculates answers for the values you
enter. The formulas used in this volume are all mentioned in volume 1.
If you are reading this, you are probably already a member of the KSE100Stocks Yahoo Group.
Nonetheless, the KSE100Stocks Yahoo Group is a community on the Yahoo! Groups website
created to discuss financial matters related to the stock exchanges in Pakistan.
Created in May 2004, its the first of its kind made for/by the Pakistani community on the
internet. Feel free to post questions here, discuss news or contribute your own bit of
knowledge for everyones benefit.
To become a member and gain access to all email discussions, files, etc., go to the
KSE100Stocks group homepage and click on Join. Since this is a service provided by Yahoo,
you need to be registered and signed in with a Yahoo account. On the membership page,
choose your email address, type of email delivery and click Join. You will then be told that
your membership awaits approval from the moderator. The approval shall come within a few
hours (unless you are a spambot).
on the web?
2006-06-27
On the groups homepage, click on Edit Membership, in method of delivery, choose Web
Only. This method will not send any emails to your email address and you can choose to read
them all on the group homepage.
Keep in mind, you will NOT be able to view attachments sent with messages as Yahoo no
longer allows their storage.
[2.3.2]
2006-07-17
Choose this option if you wish to receive all the group emails at your email address, but in a
single email in digest form. Via this option, you will NOT be able to view attachments sent with
messages. Additionally, all tables, graphics, etc. will be lost as the messages are converted to
plain-text.
To enable this choice, on the groups homepage, click on Edit Membership. In method of
delivery, choose Daily Digest.
[2.3.3]
2006-06-27
As each message sent to the group is delivered separately to your email address, this is the
only method that will allow you to view attachments sent along with them.
To enable this option, on the groups homepage, click on Edit Membership. In method of
delivery, choose Individual Emails.
8
The additional message preference choice of Fully Featured is unnecessary and has no effect
on delivery of attachments. If you select it, all emails, whether in plain text or with graphics,
will be converted to HTML that would add a lot of clutter of ads from Yahoo Groups. If you do
not select it, and choose Traditional instead, it will allow you to receive both plain text emails
as well as emails with graphics, tables and other formatting as is, without any modifications.
You are advised to select the Traditional option.
2006-06-27
[2.4.2]
via email?
2006-06-27
Simply send your email message to the groups address i.e. kse100stocks@yahoogroups.com
There may be a slight delay before your message appears on the group message board,
especially if you are using an email address other than that of Yahoo.
If sending an email fails, you may try posting a message directly to the message board on the
group homepage. See section [2.4.1].
receiving email?
2006-06-27
Make sure you chose the Individual Emails option or the Daily Digest option in the Edit
Membership page. See section [2.3.2] & section [2.3.3].
Email services other than Yahoo have a slight delay before they deliver the Yahoo Groups
message to your inbox.
Also have a look on the My Account page via the Yahoo Groups homepage, and make sure
there are no bouncing emails mentioned there.
[2.5.2]
opening attachments?
2006-07-03
Make sure you chose the Individual Emails option in the Edit Membership page. See section
[2.3.2].
If the attachment is included in this message you received, have a look at the attachment type
as well. Most attachments posted on the group are in these formats:
PDF requires Adobe Reader
DOC needs Microsoft Word (part of the Microsoft Office suite)
XLS needs Microsoft Excel (part of the Microsoft Office suite)
CSV needs any text editor (e.g. Notepad); may also require Microsoft Excel
ZIP or Z requires WinZip or WinRAR to unzip its contents
PPT needs Microsoft PowerPoint (part of the Microsoft Office suite)
If you still cant open the file, the file may possibly be corrupt. Ask the poster to personally
send you another copy.
[2.5.3]
2006-06-25
Make
-
sure:
You are a member of the group and have already been given approval.
You are not banned for breaking the groups rules.
Your messages havent been put on moderation by the moderator.
There are slight delays in the posting of messages as well, especially from email addresses
other than Yahoo. Contact the moderator if the problem persists, or see if there are technical
problems at Yahoo Groups.
[2.5.4]
2006-06-27
If you wish to delete a message you posted on the board due to any reason, follow these
steps: On the groups homepage, click on Messages on the left side of the page. Open your
message (or if you know the message number then search for it). Press the delete button that
appears on the message.
Keep in mind that messages once posted are immediately dispatched to all group members
who chose to receive individual emails for all group messages. Needless to say, using the
above method you only delete the message from the web and not the members individual
copies lying in their personal email accounts.
[2.5.5]
subscribing/unsubscribing?
2006-06-27
To subscribe or unsubscribe, visit the groups homepage and click Join or Leave respectively.
If there is a problem, contact the group moderator to help you perform that task.
[2.5.6]
2006-06-21
First, make sure that your internet connection is working fine and other websites work as well.
Next, check that you are signed-in with your correct Yahoo ID on the Yahoo Groups homepage.
You need to do this before you can perform any task on Yahoo Groups.
Also, make sure that none of your email addresses are bouncing. See last para of section
[2.5.1].
10
You can either choose to email files as an attachment to the group (if you think it will interest
everyone). Or, if the attachment is too large or meant for a smaller audience, you can upload
it to the groups Files section.
On the groups homepage, click on Files on the left-hand column. On this page, choose the
folder you wish to upload the file to by clicking on it. Then, click on Add File and in the new
window that pops up, double-click on the file you want to upload from your computer.
If the file is too large for the above, you can use any of the hundreds of free file-hosting
services on the internet to store your files. Some of these include: YouSendIt.com,
RapidShare.de, FileFront.com, Uploading.com, UploadPort.com, QFile.de, Badongo.com,
Upload2.net, MomoShare.com, ZUpload.com, UltraShare.net, RapidUpload.com, iHud.com,
SendMeFile.com,
MooLoad.com,
UploadIt.org,
SaveFile.com,
MegaShares.com,
TheUpload.com,
Slil.ru,
MegaUpload.com,
MyTempDir.com,
YourFileHost.com
&
TurboUpload.com.
Virii over the years have become smarter and can now send themselves to others using fake
names and addresses. When a virus infects a computer, it accesses any address books stored
on it and sends itself to all the addresses in it, using the names within for the From header
as well. This makes it hard to trace where the virus came from.
In most cases, if you receive a virus or an email with an obscene subject, it is almost always a
virus that has been intelligently replicating itself. Your best line of defense is your own
common sense to NOT open attachments that look suspicious or you did not expect to receive.
Make sure you keep the anti-virus software on your PC updated at all times. If it is not
updated, it will not be able to recognize a new virus when it sees one.
11
[3] SHARES
[3.1] What are they?
2006-10-19
Each share represents a small stake in the ownership of a company. You can buy large or
small lots to match the amount of money you want to invest. A companys share price can rise
or fall as a result of its own performance or market conditions.
Once the shares are brought and transferred in your name, your name will be entered in the
companys share register, which will entitle you to receive all the benefits of share ownership
including the rights to receive dividends, to vote at the companys general meetings and to
receive the companys reports.
If you decide to sell your shares you will need to deliver share certificates to the broker in time
for the transaction to be completed.
Companies issue shares to raise money from investors. This money is used for the
development and growth of their business.
Investment in shares can provide a higher rate of return over an extended period than most
other forms of savings. While in Pakistan one can choose to invest in
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shares can provide you with a regular stream of income through dividends as well as the
potential for your investments to grow in value. If the prices of shares go up, you can sell
them for more than you paid.
Securities are a broad term for shares, corporate bonds or any other form of paper investment
in capital market instruments.
With shares you get the rewards when the company does well and the price of the shares goes
up. But if the company performs badly, the share price may go down and the value of your
investment will be reduced. Other factors, such as the performance of the stock market as a
whole and the general economic climate, may also affect the price of your shares. Investment
in shares is therefore investment in risk capital (or venture capital). The shareholders can be
12
rewarded for taking this risk and the potential return on your money can be higher than that
on other investments. The risks can be reduced with careful planning.
Yes, a company can issue different types of shares such as ordinary shares, preference shares,
shares without voting rights or any other shares as are permissible under the law. They are
discussed in detail below:
[3.6.1]
2006-06-27
These are the most common form of shares, which entitle the owner to a share of the
corporation's profits as well as a share of the voting power in shareholder elections.
[3.6.2]
2006-06-27
Preference shares carry additional rights above and beyond those conferred by common stock:
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The core right is that of preference in dividends. Before a dividend can be declared on
the common shares, any dividend obligation to the preferred shares must be satisfied.
The dividend rights are often cumulative, such that if the dividend is not paid it
accumulates in arrears.
Preference shares have a par value or liquidation value associated with them. This
represents the amount of capital that was contributed to the company when the shares
were first issued.
Preference shares have a claim on liquidation proceeds of a company, equivalent to
their par or liquidation value. This claim gets higher priority to that of common stock,
which has only a residual claim.
Almost all preferred shares have a fixed dividend amount. The dividend is usually
specified as a percentage of the par value or as a fixed amount.
Some preferred shares have special voting rights to approve certain extraordinary
events (such as the issuance of new shares or the approval of the acquisition of the
company) or to elect directors, but most preferred shares provide no voting rights
associated with them.
Preferred shares, like other legal arrangements, may specify nearly any right conceivable.
Preference shares trade near (or less than) their par value in the market.
[3.6.2.1]
2006-07-09
These types of preference shares carry the option to be converted into common shares at a
prescribed date and price.
[3.6.2.2]
2006-07-09
These shares have a redemption privilege whereby the shareholder may, after a date specified
in the prospectus, force the company to redeem the shares. The redemption may in the form
of cash to shareholder (called hard redemption) or conversion to common shares to the
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shareholder (called soft redemption). There may also be time restrictions on the redemption
and conversion of the preference shares.
[3.6.3]
2006-07-18
Other than Ordinary Shares and Preference Shares, there are Modaraba Certificates, TFCs,
Government Bonds / Securities.
2007-2-22
When companies offer shares to the general public for the first time, it is known as floatation
or an Initial Public Offering (IPO). These shares can be bought directly from the company
without paying stockbrokers commission. You might see an advertisement in a newspaper
from a company issuing shares or your stockbroker might tell you about a company making an
IPO. Simply fill in the share subscription form and deposit the form along with subscription
cheque (or payorder whichever is applicable) in a branch of the designated bank(s). Study
the back of the form carefully to get all the details.
[3.7.1.1]
2007-02-22
If you choose to receive the shares directly into your CDC account, it should normally take 15
to 20 days.
If you choose physical delivery, it may take up to a month due to delays via post. Make sure
you qualified for the shares if balloting took place.
[3.7.1.2]
2007-02-22
If an IPO receives more applications than the no. of shares offered for sale, then balloting
takes place. Sometimes, though, an IPO company may be provided a Green Shoe option by
its sponsors to allow for sale of more shares in case if theres an oversubscription. This is at
the discretion of the IPO company and may or may not be exercised. Either way, if the no. of
shares applied for via application still exceeds the total no. of shares available (initial + green
shoe), then balloting must take place.
A date for the balloting is usually announced in the newspapers.
[3.7.1.3]
2007-02-22
Balloting results for an IPO shares are posted in all the banks which sponsored the issue.
Check with the bank branch where you submitted the application to see if yours qualified.
Balloting results are also available in text form on the KSE website.
[3.7.2]
2007-02-22
14
When a public offering of shares is made a second time, it is known as an SPO. Otherwise, it is
exactly the same as an IPO (section [3.7.1])
[3.7.3]
Trading Market
2006-06-27
The most common way of buying/selling in stock market is through trading in the secondary
market. Through a stockbroker you can buy shares from existing investors who wish to sell
them and vice versa. For more on trading, see section [5].
[3.7.4]
2006-06-30
Other than dealing directly in shares, you can invest through a unit trust or investment trust or
let your investment be handled by an advisor, e.g. the National Investment Trust (NIT).
[3.7.4.1]
What is NIT?
2006-10-19
The National Investment Trust (NIT) is Pakistan's largest and oldest open-ended mutual fund.
Established in 1962, it invests in 500 out of 725 listed companies with significant holdings in
small to medium-sized companies. It has a track record of paying regular dividends since
1964. NITs official website is at NIT.com.pk
[3.7.4.2]
2006-10-19
Investors who wish to benefit from the upside potential of equities but are not in a position to
invest on their own as this is not an area of their expertise, or they do not have the time. NIT
is very appropriate to investors who wish to diversify and have a long-term Investment
horizon.
[3.7.4.3]
2006-10-19
You can open an account with a minimum investment of only Rs.5000 or more at anytime.
[3.7.4.4]
2006-10-19
To open an account, simply walk into any one of NIT's branch/booth or authorized bank, fill out
the application form, i.e. NIT-A, deposit the cash/cheque/pay order /demand draft and your
account will be opened immediately.
[3.7.4.5]
2006-10-19
You can redeem any or all of your Units at any time at the prevailing repurchase price based
on Net Asset Value (NAV). NIT's NAV does fluctuate. A unit holder may therefore, receive more
or less than his original cost upon redemption.
15
[3.7.4.6]
2006-10-19
Forward day pricing system is one under which the sale and repurchase prices are determined
at the close of the business day on the basis of NAV of that day. It helps reduce the
speculative element and expands the time duration of investment.
- It reflects the true value of the unit on the day the investor enters or leaves the fund
- It is an internationally recognized system for determining unit prices for open ended
mutual funds
- It eliminates the chances of arbitrage and discourages speculative manipulation against
the fund, which is otherwise possible in case of previous day pricing system.
[3.8] In Islam
[3.8.1]
is trading halal?
2006-10-19
[3.8.2]
Shari'ah?
2006-10-19
16
This kind of dealing is quite common where shares are bought and sold on the same day and a
closing deal system operates so that the difference (profit/loss) is calculated and this is
payable to or by the client.
By Dr. Muhammad Imran Ashraf Usmani:
Without having possession any thing cannot be sold further, in the above-mentioned case
where the subject matter is not delivered, it is not permissible to do the same business.
[3.8.3]
does trading in any stock exchange fall under speculative
transaction which is haram in Islam?
2006-10-19
[3.8.4]
what conditions does a share need to satisfy to be Shariah
compliant?
2006-10-19
Shariah prohibits investment in companies that have core businesses not consistent
with the Shariah principles such as tobacco, alcoholic beverages, gambling, interest
based financial services and businesses related to other haram products or services.
Ratio of haram e.g. interest income on deposits, shouldn't be greater than 5.0% of the
revenue.
Investments in non-Shariah compliant ventures should be less than 33.0% of total
assets.
Total un-Islamic debt to Assets ratio should be less than 45.0%.
For more information on Shariah-compliance, refer to books on the subject. A popular book in
this regard is one authored by Mufti Taqi Usmani.
Detailed financial information can be found in the companies annual reports.
Do understand that the KSE does NOT require these conditions, but are a matter of personal
preference.
It is advisable to thoroughly examine the background of the company according to the
principles of investment, as outlined in IslamiQ.com, such as the core activity, the percentage
of the contribution of non-halal income and the debt equity-ratio.
[3.8.5]
2006-10-19
For all business investments, shares, saving certificates, etc., zakat is to be calculated at the
rate of 2.5%.
17
Stock prices change every day because of market forces, i.e., because of change in supply and
demand. If more people want to buy a stock (demand) than sell it (supply), then the price
moves up. Conversely, if more people wanted to sell a stock than buy it, there would be
greater supply than demand, and the price would fall. This is the basics of economics.
What is difficult to understand though, is what makes people like a particular stock and dislike
another stock. If you understand this, you will know what people are buying and what people
are selling. If you know this you will know what prices go up and what prices go down! To
figure out the likes and dislikes of people, you have to figure out what news is positive for a
company and what news is negative and how any news about a company will be interpreted by
the people.
The most important factor that affects the value of a company is its earnings. Earnings are the
profit a company makes, and in the long run no company can survive without them. It makes
sense when you think about it. If a company never makes money, it isn't going to stay in
business. Public companies are required to report their earnings four times a year (once each
quarter). An earnings season is watched with great attention, the reason being that analysts
base their future value of a company on their earnings projection.
If a company's results are better than expected, the price jumps up. If a company's results
disappoint and are worse than expected, then the price will fall.
Stocks are volatile and can change in price very rapidly. At the most fundamental level, supply
and demand in the market determines stock price.
[3.10]
2006-07-10
[3.11]
2006-07-10
Don't even consider "tips" that tell you about "hot stocks". Consider the source:
There are many people in the market who put in all their time and effort in promoting certain
stocks. They do this because they have their money invested in those stocks. If they can get
enough people to buy the stock and they can get the stock price to rise, they will sell the stock
for a huge price, the stock price will crash and they will walk off to promote another stock.
18
Always use your own brain: It's extremely important. You must always use your own brain.
Relying on the advice of others, no matter how well intentioned it may be, is almost always a
complete disaster. Make sure you dig in and really examine the "facts about the companies"
before you invest. Ignore press releases which have very little substance, and rely on "hype"
to tell the company's story.
Only invest money you can afford to lose! Sure this is a basic point, but many, many
people miss it. You should only invest money that you can honestly afford to lose! Everyone
enters into investments with the idea of earning big profits, but in many cases, this never
works (especially if you are new to investing in the stock market!).
Judge your tolerance for risk before you invest. All investments carry a certain degree of
risk, and you have to decide whether you are a risk-taker or a risk-averse person. Depending
on the extent of risk you intend to take, you should pursue an investment strategy
(aggressive, moderate or conservative) that fits your risk profile.
Think before you leap. Dont put in your money until you have understood all relevant
information regarding the investment. Prepare yourself for the vigorous homework of analyzing
companys annual reports, accounts and other statements while keeping abreast of whats
happening in the industry, country and elsewhere that may affect your investment. Consult
your investment adviser/broker to get latest market information about shares you intend to
buy or sell. Be skeptical of any thing picked up from rumors, particularly if you cannot
rationally explain their choice.
Think long-term. Bear in mind that even in the best of securities/shares, there can be shortterm aberrations. It is important to have the power to hold your investments for longer
periods. Investments that are properly timed and based on strong fundamentals can be very
profitable for investors in the longer term.
Dont put all your eggs in one basket. Minimize risk by diversifying your investments
across various investment products. If equities are your sole investments, it makes sense to
diversify between different companies and sectors. In this way, loss made on some
investments can be absorbed by gains made in others, keeping the overall return on
investments positive.
You can also diversify your investment by investing in open-end funds managed under various
unit trust schemes. When investing in mutual funds check the rating of the instruments.
Beware of scams of quick profits or sky-high returns. If it seems too good to be true, it
probably is.
[3.12]
2006-06-27
Some investors choose to tuck away their investments for years while others trade frequently
and keep a close eye on how their shares are performing. You can check your shares
performance in various ways. A daily indicator of share price movements is available in many
newspapers and also on website of the relevant stock exchange. You may access this
information directly or through your stock broker/advisor.
Informative articles about many companies are regularly published in newspapers and
investment magazines. Your stockbroker may also provide valuable information. Some publish
newsletters for their clients, reflecting their views on the performance of selected companies.
Annual reports of companies also contain useful information. Some companies have
shareholder relations departments, which can help with factual information.
19
20
2006-07-05
Visit the KSE website and click on the Listed Companies section. It provides a list of all
companies as well as companies by sector.
[4.1.2]
2006-07-21
Visit the KSE website and click on any of the following sections on the left column for the
relevant information:
- De-listed Companies (Companies removed from listing due to violation of rules)
- Merged Companies (Companies that merged together)
- De-merged Companies (Companies that split into more divisions)
- Listings History (Details of all changes)
- Quotations (Companies applied or approved for listing or for IPO; companies approved
for buy-back of shares)
[4.1.3]
an address of a company?
2006-07-05
Visit the Address Book section on the KSE website and click on the company you want for its
address.
[4.1.4]
2006-07-21
Visit the Registrar's Addresses section on the KSE website and click on the registrar you want
for its address. This does not include the name of the companies who these registrars
represent. You should call the companys shares department for confirmation.
[4.1.5]
2006-07-05
Visit the KSE website and click on the Listed Companies section. It provides a list of all
companies including there symbols. Use the search function in your browser to find the
particular company name or symbol.
You may also use the Get a Quote page on the KSE website to get the name, and prevailing
prices of a company by querying its symbol.
A stock market index is a listing of stocks, and a statistic reflecting the composite value of its
components. It is used as a tool to represent the characteristics of its component stocks, all of
which bear some commonality such as trading on the same stock market exchange, belonging
to the same industry, or having similar market capitalizations.
21
Stock market indices may be classed in many ways. A broad-base index represents the
performance of a whole stock market and by proxy, reflects investor sentiment on the state
of the economy. The most regularly quoted market indices are broad-base indices including the
largest listed companies on a nation's largest stock exchange, such as the American Dow Jones
Industrial Average, the British FTSE 100 and the Japanese Nikkei 225. More specialized indices
exist tracking the performance of specific sectors of the market, or track companies of a
certain size, management, etc.
[4.2.1]
2006-07-21
An index may be classified according to the method used to determine its level.
In a price-weighted index such as the Dow Jones Industrial Average (DJIA), the price of each
component stock is the only consideration when determining the value of the index. Thus,
price movement of even a single share will heavily influence the value of the index even
though the price change is insignificant considering the value of the share and the size of the
company.
In contrast, a capitalization-weighted index such as the Hang Seng Index factors in the size
of the company. Thus, a relatively small shift in the price of a large company will heavily
influence the value of the index.
In a market-share weighted index, price is weighted relative to the number of shares,
rather than their total value.
[4.2.2]
2006-07-21
The calculation methodology followed takes a specific date in the recent past (in the case of
KSE100, it is 1st Nov, 1991), calculates the total market value on that date (by multiplying
total no. of shares with their market price) and sets the index to a base (e.g. 1,000 points) on
that date. Based on its market value, each company gets a percentage weightage in the index.
Hence, as the price of the companys share changes, so does the index level with respect to
the shares percent weighage.
You can get a detailed computational analysis at the KSE website Computation Method page.
[4.2.3]
2006-07-17
22
The KSE100 Index calculation at any time involves the same multiplication of share price and
shares outstanding for each of the KSE100 Index component stocks as shown in section
[4.2.2]. The aggregate market value is divided by the base value and multiplied by 1000 to
arrive at the current index number.
The formula for calculating the KSE100 Index is :
{ (Sum of Shares Outstanding * Current Price) / Base Period Value }*1000
You can get detailed info on recomposition rules at the KSE website Computation Method page.
[4.2.3.1]
Whats wrong with the current composition of the KSE 100 index?
2006-07-17
As the KSE 100 index is a capitalization-weighted index, a relatively small shift in the price of a
large company will heavily influence the value of the index. This is even further worsened by
the fact that for these large companies, only a small percent of shares are in free floatation.
Hence, for those shares in floatation in the market, heavy buying or selling can drive their
prices significantly. A corresponding significant change is therefore also represented on the
index and the majority of investors are mislead into thinking as if thats where the entire
market is headed.
For example, consider this partial market summary for June 12 th, 2006:
Symbol
OGDC
NBP
PTC
PPL
MCB
POL
PSO
LUCK
FFBQ
HUBC
Current
Rate
Price
Change
%
Change
Index
Weightage
(%)
Index
Points
Outstanding
Shares
(million)
131.35
226.25
41.20
215.50
219.35
319.00
298.75
108.90
29.90
23.70
6.25
3.25
1.95
10.25
1.85
11.20
6.95
5.15
1.00
0.60
5.00
1.46
4.97
4.99
0.85
3.64
2.38
4.96
3.46
2.60
22.61
6.42
6.22
5.92
4.49
2.52
2.05
1.15
1.12
1.10
106.74
9.15
29.22
27.91
3.76
8.77
4.73
5.39
3.71
2.76
4,300.93
709.07
3,774.00
685.82
511.84
197.12
171.52
263.38
934.11
1,157.15
Market
Capt.
(million)
564,926.95
160,427.37
155,488.80
147,794.51
112,271.94
62,881.79
51,241.48
28,681.54
27,929.89
27,424.56
A 5% change in OGDC (whose only 5% shares are under floatation) pulled up the market by
106 points, while a corresponding 5% change in PTC caused it to go up by 29 points,
considering that the weightage of the former stands at 23% and that of the latter at 6%.
Hence, the inconsistency.
The KSE-100 index is also NOT dividend-adjusted. This means that when a stock becomes exdividend after its SPOT trading and its price is adjusted for the difference in dividend / bonus /
right, the KSE-100 index does not reflect this change.
[4.2.4]
2006-07-17
Like the KSE100 index, the KSE All Shares index is also a capitalization-weighted index, but in
contrast, is composed of all the companies listed at the Karachi Stock Exchange. Launched on
September 18th, 1995, it is also not adjusted for dividends.
[4.2.5]
2006-07-21
23
The KSE-30 index is to be introduced on September 1st, 2006 and is designed to overcome
some of the shortfalls of the KSE 100 index.
The KSE-30 is a free float capitalization-weighted index that would include the 30 of the
companies with the largest free float capitalization. The selection criteria are based on the
market capitalization of free-float (as against market capitalization of paid-up capital) and the
liquidity of the stock. The difference this would cause is index weightage is shown below:
Take the example of OGDC. The share of OGDC was priced at Rs 135.25 (at the time of this
writing) and paid up capital comprises of Rs 43.009284 billion. Out of this, the free-float is a
mere 5% (slightly more than 215 million shares). The market capitalization is as following:
Market capitalization of paid-up capital (as is presently being used & widely accepted):
= 4,300,928,400 shares x Rs 135.25 = Rs. 581,700,566,100 (total capitalization)
Overall market capitalization (all shares) on 13th July 2006 = Rs 2,811,824,371,253
Share of OGDC in overall / total market capitalization = 20.68% (22.78% in KSE-100 Index)
Market capitalization of free-float (proposed for the KSE-30 Index):
= 215,046,420 shares x Rs 135.25 = Rs. 29,085,028,305 (free-float capitalization)
Overall market capitalization (all shares) on 13th July 2006 = Rs 2,811,824,371,253
Share of free-float capitalization of OGDC in overall market capitalization = 1.034%
To be
-
eligible for consideration in the KSE 30 free float index, major requirements include:
a company that traded for at least 75 days in a year,
a company not on the default counter, and
5% minimum free float.
Companies will be selected in the new index based on market capitalization and liquidity of the
company. The liquidity criterion will be based on average daily trading value over a period of
6-months, while the market capitalization will be based on market capitalization of the free
float. Final ranking will assign 50% weight each, for liquidity and market capitalization, and
from the resulting values the top 30 companies will qualify for the index. Based on current
prices MCB will have the highest weightage in the index with a 14% weight, closely followed by
NBP.
A free-float based index is regarded as a better benchmark in comparison to a full market
capitalization weighted index as it aids fund managers by enabling them to benchmark their
fund returns versus an investable index. This enables true comparison thereby facilitating
better evaluation of performance of fund managers.
[4.2.6]
Other indices
[4.2.6.1]
ABAMCO-30 Index?
2006-07-17
This index was formed by one of he countrys largest Asset Management Company ABAMCO
(recently re-named to JS ABAMCO) in May 2005 with a base level of 5,000 points. The index
composition is based on a criterion that includes:
- Free-float based market capitalization.
- Some level of discretion and subjectivity is involved in the selection of the constituent
stocks, based on the future growth & profitability potential of the constituent
companies.
- Exact proportion / weightage of each constituent stock is not disclosed to the public due
to the fact that ABAMCO manages an open-ended mutual fund (UTP-A30) based on this
24
index, which was launched on 29 th May 2006 with an opening NAV of Rs 50 per unit
(standing at Rs 50.26 on 30th June 2006).
The index is adjusted for dividends. The idea of this index is to have an investment-based
index. Thus some shares that can enter into the other indices solely on the basis of free-float
or higher trading volumes, might not be able to qualify for the ABAMCO-30.
Since inception the ABAMCO-30 index has considerably out-performed the benchmark KSE-100
Index. This is in accordance with the objective of this index, that is, to be an investmentbased index, whereby portfolio performance can also be linked. This is different from the
objective of the KSE-100 Index, the purpose of which is to show the collective change in the
index and its movements.
[4.2.6.2]
BR-30 Index?
2006-07-17
The Business Recorder, a renowned business daily, formed its BR-30 Index soon after the
March 2005 crisis with a view to show the changes in the index based solely on trading
volumes. The criteria for forming this index are:
- Highest trading volumes during the preceding six-months (top 30 volume leaders are
taken).
- Trading volumes during the preceding six-months has not been zero on any particular
day.
- This index is dividend adjusted.
Again this index cannot be compared with any other index since the objective it different from
the rest, that is, to capture liquidity alone. Even market capitalization is not considered.
[4.2.6.3]
NCEL-30?
2006-07-17
The National Commodity Exchange Ltd (NCEL) launched its own free-float capitalization based
index for the KSE, comprising of 30 stocks in the first quarter of 2006. Their criterion for
selection of stocks is as following:
-
Liquidity of the scrip based on impact cost and not liquidity based on trading
volumes. Here impact cost refers to the difference in price available between the
buying and selling rates. The lower the gap, the lower the impact cost. Generally (not
always) the higher trading volumes, the lower the impact cost.
This index is dividend adjusted. However, the NCEL has also provided a NCEL-30 Total
Return Index, in addition to the NCEL-30 Index to show the effect of total returns in
the market. Dividends are added back into this index. Thus at the close of 13th July
2006, the NCEL-30 stood at a level of 8,472.83, while the NCEL-30 Total Return Index
stood slightly higher at a level of 8,558.20.
Based on these parameters, a starting base of 10,000 points level was used as of 31st March
2006. The index is subject to six-monthly revisions.
[4.2.6.4]
SBP Index?
2006-07-20
25
This is the State Bank of Pakistan General Index of Share Prices. It was initiated in 2001, with
a starting base of 100 points. As of July 13th, 2006, it stood at 424.41 points against the KSE100 index level of 10,014.88. More information is available at the SBP website.
9:45am
2:30pm
2:15pm
12pm &
Monday to Friday
Friday
Monday to Thursday
2:30pm 4pm Friday
[4.3.1]
2006-07-20
People have the option to place their buy and sell orders in this 15-minute session. But there is
no trading in the pre-open session because trading only takes place in the next open market
session.
[4.3.2]
2006-07-20
As soon as the regular market opens, all buy and sell orders automatically become active and
all "matching total quantities of buy and sell orders are settled on proportion basis" with the
remaining get in the queue.
Some of the possibilities that can occur as the pre-open session automatically transits into the
open regular market are:
-
If there are equal quantities of shares in buy and sell orders in any scrip at any given
rate or market rates then all of these get settled as the market opens.
If quantity of buy orders is greater than sell orders, then the matching quantity will be
settled by the software in proportion horizontally and the remaining buy orders would
remain in the queue.
26
If the quantity of buy orders is less than sell orders, then the matching quantity will be
settled by the software in proportion horizontally and the remaining sell orders would
remain in the queue.
If there were only buy orders in the pre-open session, this means the regular market
will open with only buyers and no sellers.
Similarly, if there were only sell orders in the pre-open session, the regular market will
open with only sellers and no buyers. Of course, there will be no transactions as a
transaction requires both a buyer and a seller.
[4.4] How does the KSE defer from other stock exchanges in the world?
2007-02-11
This question in itself could require an entire essay on the topic but here we shall be brief. The
KSE is still relatively young. With a small market capitalization, the indices are easily movable
in either direction with heavy buying or selling of a few shares. Other than the handful of bhai
loog who head huge conglomerate finance groups, most buyers and sellers are small investors
and day traders who follow the market. The occasional foreign investment (trackable via SCRA
figures from the SBP website) also tends to maneuver the market in either direction.
The KSE also suffers from a lack of transparency. Insider trading is second nature. Hence when
sudden price movement takes place in a share with or without huge volumes, it is mainly due
to that reason. It is days or even weeks before the real reason for that movement becomes
public. By the time the small investors jump on the wagon, they are either only able gain a
small margin or are already too late.
But not all price movements in shares at the KSE are due to any fundamental reasons.
Technical analysis, while helpful at times, can be way off target. When any one of the big fish
set their eyes on a stock, there are no guarantees of the end result. And when too many of
those big fishes jump on in together, what we get are events such as the March 2005 crisis
pumping of prices to sky-high levels, only for shares to be dumped on the unwary small
investors who shall take the brunt of it.
At the KSE, one can make no predictions. Youll be a fool to believe a person who says he can.
So invest your money wisely.
27
[5] TRADING
[5.1] How does trading take place? What is KATS?
2006-10-19
KATS stands for Karachi Automated Trading System. The Karachi Stock Exchange introduced
the computerized trading system a few years ago to replace the age-old way of trading in
shares. The system is not only quick and efficient, but also cost-effective.
Computers are now used to enter trades for shares. Brokers have their agents use these
computers to enter the transactions you tell them to make. Due to the electronic nature, these
computers can be located anywhere in the Karachi Stock Exchange building, but most are in
the main trading hall on the ground floor. With stock trading now available on the internet, you
can virtually be anywhere on the planet and still be able to buy and sell shares, as long as you
have a working internet connection to your account with the broker.
Read through the sections below for more details.
[5.1.1]
2006-07-21
Normally, when you enter a buy or sell order, it will queue up behind the previously entered
orders. This is the vertical behavior of the KATS trading system. But the order processing
mechanism becomes different if a share is at an upper or lower lock. In this case processing is
done in a horizontal manner wherein the shares are distributed amongst the bidders equally.
For example, if three people have placed an order of 2,000 shares each for a share which has
a minimum trade lot of 500 and it is at an upper lock. What will happen now is that if a sell
order of 1,500 is received, each of the three people will get 500 shares with 1500 still
remaining in the queue. Same happens with the sell orders in the lower lock case. One pass is
made through each order for a minimum lot execution and then the next order is at the top of
the queue.
This might explain why only a small number of shares are received for your bid of a bigger
quantity when the share is trading at its upper/lower lock.
CDS, or the Central Depository System, is the name for the system via which electronic
transfer of securities takes place. It replaced the manual system of physical handling and
settlement of shares at stock exchanges. Within the CDS, transfer of shares from one client
account to another takes place electronically.
The CDS is managed by the Central Depository Company of Pakistan Limited, which has been
sponsored by the stock exchanges and leading local and financial institutions. The great bulk of
settlements are routed through CDS. CDC also offers Investor Account Services for individual
investors to maintain their account directly with the CDC.
More details in section [5.9].
[5.3.1]
2006-07-17
In the T+3 settlement system, purchase and sale of shares is netted and the balance is settled
on the third day following the day of trade, i.e. Transaction day + 3. For example, a
transaction made on Monday would be settled on Thursday and a transaction made on
Wednesday, would be settled on Monday next week.
For the securities declared to be eligible securities by the Central Depository Company the
KSE does not permit their physical settlement.
[5.3.2]
2006-06-27
Shares of a company are listed on the provisional listing counter if it has an initial public
offering available. Only those companies which have a minimum public offering of Rs. 150
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.
[5.3.3]
2006-07-17
Spot transactions imply delivery upon payment. Normally in spot transactions the trade is
settled within 24 hours, i.e. Transaction day + 1.
[5.3.3.1]
2006-07-11
Shares with a dividend/bonus/rights benefit go into SPOT trading before one week of their
book closure dates. This means that all transactions regarding sale/purchase of that particular
share will be done the same day, in contrast to the normal T+3 system in which your broker
gives/receives your sale/purchase transaction money within three days of trading date. This is
done to ensure timely delivery to the buyer so that s/he can avail the benefits of the payout.
On the day after the last day of SPOT, the stock price opens lower after subtracting the payout
benefits because now the buyer shall not be entitled to the said payout. Now the share
ownership transfer books of the company are closed and the stock is trading exdividend/bonus/right compared to CUM dividend/bonus/right earlier. For information on pricing
after SPOT date, see section [6.8].
[5.3.3.2]
2006-06-27
29
[5.3.4]
Futures Contract
2006-07-21
[5.3.4.1]
[5.3.4.2]
counter?
Where can I get the company names and dates for the futures
2006-07-21
You can either ask your broker, or refer to the KSE website Quotations page (link on left-hand
column on main page).
[5.3.4.3]
Where can I get the prices for shares in the Futures counter?
2006-07-21
See the Future Scripts price summary page on the KSE website (link on left-hand column on
main page).
You can either choose to get delivery of shares, i.e. pay in cash, or buy them on borrowed
money at a high margin. These are explained in detail below:
[5.4.1]
2006-07-17
When you pay cash for the settlement of a trade, it is considered as a delivery. After full cash
payment you have completed all obligations and the shares are credited to your account.
Delivery is usually made use of by investors who can hold the share for a period of time
without the urgent need for selling the shares, i.e. have the holding power to keep those
shares. This is beneficial in the regard that greater returns are made over longer periods of
time than day to day trades (but not always).
Needless to say, holding shares for a long period of time requires your belief in the growth and
profitability of that company. No point in buying and keeping shares of a loss-making company
just hoping you will get lucky and it will make a profit some day.
30
[5.4.2]
2006-07-17
Carry-Over Trading (COT) are equity repurchase transactions, better known, as badla. They
are an established form of transactions used in the stock market for temporary financing of
trades by speculators and jobbers.
[5.4.2.1]
2006-07-17
COT is charged by members on daily basis as the trade done by the client is based on T+3
system and it should be settled daily, i.e. if the client doesnt want to take delivery and wants
to go for COT.
For example, if you bought 1000 PSO for Rs. 300 on Monday but didnt want to take delivery,
youll ask your broker to do COT for the trade. As per COT system your 1000 shares of PSO
will be sold in COT on Monday and bought back (automatically under COT system) for
Tuesday. So your position of PSO will be NIL shares and you may need to pay for the loss or
profit for the Monday trades (Regular Purchase and COT Sale). Next day if you continue with
PSO in COT then the situation will continue for a day more. If you sell it in the market, your
trade will be settled as your buying was continuing through COT system. Hence, your need to
settle your trade (sutta) on a daily basis. If you had taken deliver of PSO then there was no
need for COT and you would have been required to pay on Thursday to your broker for the
single BUY trade of Monday.
[5.4.2.2]
2006-07-17
The system of 10 days COT means that the person who has asked for financing in COT can
continue to keep his trade in COT for 10 days without releasing it. Releasing his shares from
COT means selling in the open market or taking delivery to get out of COT system within 10
days. He will not be required to tell his broker to do COT for his trade.
[5.4.2.3]
2006-07-17
Day trading most commonly refers to the practice of buying and selling stocks during the day
such that at the end of the day there has been no net change in position: for every share of
stock bought an equivalent share is sold. A gain or loss is made on the difference between the
purchase and sales prices. A primary motivation of this style of trading is to reduce the risk of
holding a position overnight (where the open price may have significantly changed from the
previous day's closing price). Traders performing day trading are called day traders.
Day trading is not necessarily more risky than any other trading activity. However, the
common use of buying on margin (i.e. badla) amplifies gains and losses such that substantial
losses or gains can occur in a very short period of time. It is commonly stated that 80-90% of
day traders lose money.
[5.4.2.4]
2006-07-09
31
Day trading is very expensive, incurring multiple commissions and paying the bid-ask spread
multiple times, as compared to a buy and hold strategy. Detailed costs are shown in section
[5.5.1.4].
[5.4.3]
What is CFS?
2006-10-21
CFS stands for Continuous Funding Sytem. It replaced COT / badla financing in August 2005.
For more details, please visit the KSE website.
[5.4.4]
2007-02-22
Netting means offsetting sales and purchases by a broker in each security to reduce his
cumulative unsettled trades (called exposure). Netting methodology used to calculate exposure
(called netting regime) is important because all margins that exchange collects from a broker
to manage risk of broker default are a function of his exposure.
Lesser netting means higher exposure which in turns means higher margins that reduce
financial capacity of stock brokers to carry out speculative trading. Since brokers earn most of
their brokerage commission and trading profits from speculative activity, they are highly
sensitive to issues pertaining to exposures and margins.
Lets take a simple example. If on trade day T a broker at KSE buys 10,000 shares of OGDC in
regular segment at Rs135, then his exposure is Rs1.35 million. Against this exposure, he
submits to exchange initial margin, say 10 per cent of his exposure or Rs135,000. If market
price of OGDC falls by a rupee to Rs134, the broker also submits mark to market margin of
Rs10,000, which, like the initial margin, is submitted in the form of shares rather than cash.
However, if after a little while on the same day, broker sells 10,000 OGDC shares, then his
purchase is offset by his sale, that is, his exposure is netted down to nil and both his initial
margin and mark to market margin are freed for further trading.
If the shares are sold at a price higher than Rs135, broker makes a profit. In case of a loss,
broker submits the loss, again in the form of shares, which the exchange retains till he actually
settles it in cash on settlement day T+3.
KSE does not settle netted trades in full but only their profits and losses, the size and therefore
risk of settlement it assumes is greatly reduced. Since realised losses are collected in full,
exchange frees up margins on netted trades.
Brokers are supposed to take adequate margin from clients so that losses incurred by clients
do not lead to broker default. Not everyone complies. To compete for commissions, some
brokers allow trading on thin margins, knowing that due to netting the margins they have to
submit to exchange are going to be far less than what they should be collecting from their
clients.
As a result, speculators trade beyond their financial capacity, which, in volatile times,
threatens to create settlement crises. In the past, some attempts were made to deal with this
problem through regulations and monitoring but to no avail.
It is in this context that SECP has directed the exchanges to implement a new netting regime,
eliminating a number of nettings involved in calculation of exposure.
Please see the KSE website for more details.
32
You can either trade via your stockbroker or choose to do it yourself via the internet.
[5.5.1]
2006-07-11
Stockbrokers are your link to the stock market. Their job is to help you get the best price
available when you want to buy or sell your shares. Be careful in selecting your broker.
Brokers make money on whatever transaction you make. Whether you buy or sell, brokers will
make money. As brokers basically make money on transactions, they tend to encourage you to
trade. They dont really care about whether you make a profit or loss. They just care about
whether you are trading. The more money you are using for trading, the more they will make.
Because of this, it would be wise to not blindly follow your brokers advise. The broker will give
you hot tips etc. not because they are looking out for you and your profit, but because they
are thinking about their own personal profit.
[5.5.1.1]
2006-06-30
Visit the KSE website Downloads section and see the KSE Members List.
[5.5.1.2]
2006-06-30
Once you have decided the broker with whom you intend to deal, you should ensure that an
account is opened in your name by filling the account opening form. It is imperative that the
terms and conditions prescribed in the account opening form are read very carefully and well
understood. It will be in your interest if you give clear instructions as to who can operate the
account. It is preferred if the investor gives instructions that business can only be transacted in
the account on his instructions.
[5.5.1.3]
2006-07-14
When you have decided to buy/sell shares in a particular company contact your stockbroker.
You can ask to buy/sell a fixed number of shares or shares up to a certain value. Get the
contract note confirming your order immediately and check for the following information.
-
[5.5.1.4]
2006-07-12
Other than the cost of the shares, the broker will also charge you his commission, capital value
tax and other miscellaneous charges:
33
1.
Cost of Shares
On Purchase/Sale
2.
Brokers Commission
On Purchase/Sale
3.
On Purchase
4.
CDC Charges
On Purchase
With-Holding Tax
On Sale
6.
On Purchase/Sale
7.
National Clearing
Charges
On Purchase
8.
Stamp Duty
On Purchase/Sale
if in physical form
The above charges are added to the cost of shares if you made a purchase. In case of a sale,
they will be subtracted from the proceeds of the sale. Hence, the real cost per share will be the
total cost (from above) divided by the number of shares.
The list of charges will also be provided to you by your broker when opening an account.
[5.5.2]
2006-07-09
Online trading is just like having a normal trading account with your broker. The difference is
that you enter all buy or sell transaction yourself on the trading screen in your web browser.
There are some limitations with online trading that vary from one website to another, such as
trading in right shares or provisional trading.
[5.5.2.1]
2006-07-12
First, get an online trading account from a broker. See the Resources section [10.3] for some
options.
Youll also need a reasonably fast computer that can run the trading software via the web
interface without any glitches. This requirement varies with each broker.
Of priority should be the speed of your internet connection. Any delays in the line could end up
costing you a lot of money and distress as market prices for shares sometimes change very
rapidly. Some dial-up accounts work better than others in this regard, but you are still advised
to subscribe to a faster connection to avoid any surprises.
[5.5.2.2]
2006-07-11
An online trading account will cost you the same as a normal trading account with the
exception of a lower brokers commission. Please see section [5.5.1.4] for detailed costs. The
broker whos online trading facilities you may use may require an initial deposit as security.
You will also have to pay for the cost of an internet connection to your internet service
provider as well as any hidden costs such as your computer, telephone line, etc. that you may
incur.
34
[5.5.2.3]
2006-07-17
Due to the nature of online trading, the problem may lie in your computer rather than the
brokers, so be sure you diagnose the problem correctly.
If the problem persists and you are sure it is in the brokers services, you should call your
broker and ask them about it. If you experience such problems periodically, consider changing
your broker before it starts costing you a lot of money.
There is a limit set on the minimum no. of shares that can be traded in at the stock exchanges
for all shares. A quantity of shares less than that is referred to as an odd lot. The minimum no.
varies for each share being either 100 or 500, as decided by the KSE management, and
revised by it from time to time. A detailed listing is not currently available, so you have to
check in the KATS trading system (or ask your broker) for the limits set.
The need for having the lot limit has often been criticized by many as it was introduced when
trading of shares took place in physical form and odd lots made processing transactions too
cumbersome. But with the currently computerized trading system in place, such a restriction is
considered as an unnecessary hindrance for a lot of people.
[5.6.1]
2006-07-14
Odd lot no. of shares can only be traded in at a special time i.e.:
- Monday to Thursday: 12:15pm to 1:45pm
- Friday: 10:45pm to 11:45pm
Not all brokers provide the facility of trading in odd lots. Prices for odd lots are also (roughly
10%) lesser than the current market price for the same share.
If you have an odd quantity of shares (e.g. not in multiples of 100), it is often advised to buy
odd lots to complete the minimum requirement to avoid getting a lower value for the sale of
your odd quantity of shares.
Being able to buy/sell odd lots often requires patience as there are not always seller/buyers
available for them.
The KSE official website has a section available for the daily odd lot prices summary. Or, look
for Odd Lot Summary on the left-hand column on the main KSE webpage.
[5.7] What is
[5.7.1]
a stockbroker?
2006-07-04
It is a member of the stock exchange who deals in shares for clients and advises on
investment decisions.
35
[5.7.2]
a nominee
2006-07-04
A person or company holding securities on behalf of others, but who is not the owner of such
securities.
[5.7.3]
settlement?
2006-07-01
Once a deal has been made, the settlement process refers to the transfer of stocks from seller
to buyer and arrangement of the corresponding exchange of money between buyer and seller.
[5.7.4]
primary market?
2006-07-05
The primary market is that part of the capital markets that deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain funding through
the sale of a new stock or bond issue. This is typically done through a syndicate of securities
dealers. The process of selling new issues to investors is called underwriting. In the case of a
new stock issue, this sale is called an initial public offering (IPO) (see section [3.7.1]).
Dealers earn a commission that is built into the price of the security offering, though it can be
found in the prospectus.
[5.7.5]
secondary market?
2006-07-05
The secondary market is the financial market for trading of securities that have already been
issued in an initial private or public offering. Once a newly issued stock is listed on a stock
exchange, investors and speculators can easily trade on the exchange, as market makers
provide bids and offers in the new stock.
In the secondary market, securities are sold by and transferred from one investor or
speculator to another. It is therefore important that the secondary market be highly liquid and
transparent.
[5.7.6]
bear?
2006-07-02
It refers to an investor who anticipates a falling market and, therefore, sells the security in the
hope of buying it back at a lower price.
[5.7.7]
bull?
2006-07-02
It refers to an investor who anticipates a rising market and, therefore, buys the security in the
hope of selling it later at a higher price.
[5.7.8]
2006-06-30
Since the stock markets in Pakistan are rather immature at this time, the stock exchanges
management decided to put in certain measures to prevent the too steep fall or rise in the
price value of a stock. Upper and lower locks are one of such mechanisms, wherein a rise or
36
fall of 5% (10% or 20%) in the change in price of a share cannot exceed the said limit
(depending on the current rules in place, which are changing ever so frequently, especially in a
falling market). Once that limit is reached, an upper or lower lock (also referred to as circuit
breaker) sets in and no buying or selling can take place in that share.
[5.7.9]
2006-07-05
A blue chip stock is the stock of a well-established company having stable earnings and no
extensive liabilities. Most blue chip stocks pay regular dividends, even when business is faring
worse than usual. They are valued by investors seeking relative safety and stability, though
prices per share are usually high. Typically, such stocks are perceived to offer reliable returns,
low yield, and low risk. Many blue chips are components of popular indices.
[5.7.10]
2006-07-05
These are companies with extremely large market capitalization, or "market cap", which is the
product of the number of shares outstanding and the price of the stock.
[5.7.11]
2006-07-17
It is the value of a share set by the company issuing it. It is not related to market value. The
par value varies for each share, and is usually set at Rs. 10. Other commonly used par values
are Rs. 3.50, 4, 5, 50 & 100.
[5.7.12]
order?
2006-07-12
A market order is a buy or sell order to be executed by the broker immediately at current
market prices. As long as there are willing sellers and buyers, a market order will be filled.
A market order is the simplest of the order types. Once the order is placed, the customer has
no control over the price at which the transaction is executed. The broker is merely supposed
to find the best price available at that time. In fast-moving markets, the price paid or received
may be quite different from the price quoted.
A limit order is an order to buy a security at no more (or sell at no less) than a specific price.
This gives the customer some control over the price at which the trade is executed.
A buy limit order can only be executed by the broker at the limit price or lower. For example, if
an investor wants to buy a stock but doesn't want to end up paying more than Rs. 20 for the
stock, the investor can place a limit order to buy the stock at any price up to Rs. 20.
37
A stop order (sometimes known as a stop loss order) is an order to buy or sell a security once
the price of the security reaches a specified price, known as the stop price. When the specified
price is reached, the stop order is entered as a market order. Stop orders are used to try to
limit an investor's exposure in the market.
A sell stop order is an instruction to sell at the best available price after the price goes below
the stop price. A sell stop price is always below the current market price. For example, if an
investor holds a stock currently valued at Rs. 50 and is worried that the value may drop,
he/she can place a sell stop order with the broker at Rs. 40. If the share price drops to Rs. 40
for whatever reason, the broker will sell the stock at the next available price. This can limit the
investor's losses (if the stop price is at or below the purchase price) or lock in at least some of
the investor's profits (if the value of the security has risen between when the security was
purchased and the stop order placed).
A stop-limit order combines the features of a stop order and a limit order. Once the stop price
is reached, the stop-limit order becomes a limit order to buy (or to sell) at no more (or less)
than a specified price.
[5.7.13]
2006-07-05
The total value of all the securities in a fund divided by the number of shares in the fund is
called the net asset value, often abbreviated NAV. The market price of a fund share is often
higher or lower than the NAV: when the fund's share price is higher than NAV it is said to be
selling at a premium; when it is lower, at a discount to the NAV.
[5.7.14]
mutual fund?
2006-07-05
A mutual fund is a form of collective investment that pools money from many investors and
invests the money in stocks, bonds, short-term money market instruments, and/or other
securities. In a mutual fund, the fund manager trades the fund's underlying securities,
realizing capital gains or loss, and collects the dividend or interest income. The investment
proceeds are then passed along to the individual investors. The value of a share of the mutual
fund, known as the net asset value (NAV), is calculated daily based on the total value of the
fund divided by the number of shares purchased by investors.
It is a regulated investment company with a pool of assets that regularly sells and redeems its
shares for profits.
An open-ended fund is equitably divided into shares (or units) which vary in price in direct
proportion to the variation in value of the funds net asset value. Each time money is invested
new shares or units are created to match the prevailing share price; each time shares are
redeemed the assets sold match the prevailing share price. In this way there is no supply or
demand created for shares and they remain a direct reflection of the underlying assets.
38
Most open-end funds are actively managed, meaning that a portfolio manager picks the
securities to buy, although index funds are now growing in popularity.
Index funds are open-end funds that attempt to replicate an index, such as the KSE 100, and
therefore do not allow the manager to actively choose securities to buy. The assets of an index
fund are managed to closely approximate the performance of that index. Since the composition
of an index changes infrequently, an index fund manager makes fewer trades, on average,
than does an active fund manager. For this reason, index funds generally have lower trading
expenses than actively-managed funds, and typically incur fewer short-term capital gains
which must be passed on to shareholders. Additionally, index funds do not incurr expenses to
pay for selection of individual stocks (proprietary selection techniques, research, etc.) and
deciding when to buy, hold or sell individual holdings. Instead, a fairly simple computer model
can identify whatever changes are needed to bring the fund back into agreement with its
target index.
[5.7.15]
short-selling?
2006-07-01
It is the act of borrowing stock to sell with the expectation of price reduction with the intention
of buying it back at a cheaper price. Short-selling is popularly used by market giants to control
market prices.
Short-selling is also illegal in Islam as you are selling that which you do not own.
[5.7.16]
long position?
2006-07-01
When an individual purchases securities of a company he is said to have a long position in the
companys shares. For example an owner of shares in PTCL is said to be long PTCL or has a
long position in PTCL. If you are long, you would like the share price to go up.
[5.7.17]
insider trading?
2006-07-01
39
The purchase or sale of shares by someone who possesses inside information on a companys
performance which has not been made available to the market and which might affect its share
price. In Pakistan, such deals are a criminal offence, yet too rampant.
[5.7.18]
option?
2006-07-04
It is the right (but not the obligation) to buy or sell securities at a fixed price within a specified
period.
[5.7.19]
equity?
2006-07-15
[5.7.20]
yield?
2006-07-15
The aggregate return earned on an investment taking into account the dividend/interest
income and its present capital value.
[5.7.21]
capital gain?
2006-07-17
Gain is the amount by which the selling price of an asset exceeds the purchase price. Hence,
gain is the income you realize when an asset is sold in profit. It does not include dividends or
any other type of income.
Capital gains are not currently taxed. Capital gains taxe are said to be imposed from the year
2007 onwards.
[5.7.22]
investment company?
2006-07-15
It is a company which issues shares and uses its capital to buy securities and shares in other
companies.
[5.7.23]
free float?
2006-07-21
Generally Free-float refers to those non-sponsor shares that are actually available for sale in
the market. However, there can actually be two definitions of free-float, both of which yield
only slightly different results:
- All shares, other than controlling shares held by sponsors of the company.
- All non-sponsor shares available in CDC electronic form.
For the purpose of the index, free float is defined as the easily tradable electronic shares,
which would exclude sponsor holdings, government holdings, associate companies holdings
and physical shares
[5.7.24]
privatization?
2006-07-01
40
In order to handle the clearing of all the three stock exchanges (Karachi, Lahore & Islamabad)
of the country under one roof, the National Clearing and Settlement System (NCSS) was
introduced. NCSS is managed by Central Depository Company of Pakistan Limited.
Central Depository Company of Pakistan Limited (CDC) was incorporated in 1993 to manage
and operate the Central Depository System (CDS). CDS is an electronic book entry system to
record and transfer securities. Electronic book entry means that the securities do not physically
change hands and the transfer from one client account to another takes place electronically.
An IBM led consortium along with the management of the company implemented CDS in
Pakistan.
The aim of CDC is to operate as a central securities depository on behalf of the financial
services industry so as to contribute to the country's ability to support an effective capital
market system which will attract institutional and retail level investors from Pakistan and
abroad.
Some of the benefits of the implemented CDC system include:
a) Reduced workload due to paperless settlement.
b) Reduced manpower and requirements.
c) Instantaneous transfer of ownership.
d) No stamp duty on transfers in CDS.
e) No risk of damaged, lost, forged or duplicate certificates.
f) No impact in case of sudden increase of settlement volumes.
g) Instant credit of bonus, rights and new issues.
h) Substantial reduction of paperwork during book closure.
i) Convenient pledging of securities.
j) Substantial reduction in time & capital investments.
Not all companies are included in the CDS system. They all need to pass an eligibility criteria
and an induction process before they can qualify. For more information, see the CDC Pakistan
website.
For a list of companies currently in CDS, see the securities ISIN page on the CDC Pakistan
website.
[5.9.1]
2006-07-02
41
[5.9.1.1]
[5.9.1.2]
Group accounts
[5.9.1.3]
Investor accounts
2006-07-02
Investor Account Services allows investors to directly open and maintain accounts in CDS for
electronic settlement of securities. With an investor account, you have direct access to all your
securities. The account can be operated only on your instructions.
If you have an account with a broker, he already maintains your shares in a CDC sub-account
in your name. Hence, you dont need a separate CDC investor account.
But, you should get a separate investor account if
- you want direct and exclusive control of all of your shares
- you trade with more than 1 broker and want all your shares in one account
- you have a large number of shares and/or keep them for a long period of time
Investor accounts have a greater cost associated with their maintenance. See section
[5.9.1.3.7]
To open an Investor account, you need to fill out the Investor Account Opening Form which
can be obtained from the CDC's Investor Account Services department. You can also get the
form by mail through a written request or by telephonic request. See their contact page for
contact details.
You are required to submit the following with the application form:
In case of an Individual Investor:
- an attested copy of Computerized National Identity Card
- Zakat Declaration/Affidavit (if applicable).
- Power of attorney (if applicable).
- National Tax Number (NTN) certificate (optional).
For non-residents:
- Copies of Passport, duly attested by Pak Consulate Office.
For foreigners:
- Proof of nationality duly attested by Notary Public.
Any person authorized by the investor can operate the account on his behalf. However, the
Investor has to submit a power of attorney along with his specimen signature authorizing the
relevant person to operate the account on his behalf.
See the CDC investor account services page for any other details.
42
Physical shares need to have their transfer deeds duly filled out and verified by the respective
companys shares registrar. See section [9.4.1.1]. Once that is done, you may take the
physical shares along with their transfer deeds and have them deposited into your CDC
account at the CDC investor account services shares deposit facility by filling our the respective
form. You will be charged a deposit fee (see section [5.9.1.3.7]) deducted directly from your
account and be required to affix a shares transfer stamp (@ Re 0.01 per share, i.e. a Rs. 5
stamp for a certificate of 500 shares) on the back of the transfer deed.
You can also handover your physical shares to your broker to have them deposited into your
CDC account.
Write an instruction to your broker (or fill-out a form he provides you with) to transfer the
shares from you sub-account with the broker to your personal CDC investor account. The
transfer itself takes minutes since it is done electronically, but the overall process may take
longer depending on your broker.
You have to sell your shares via your broker. Once the trade is done, you handover to your
broker a CDC check in your brokers name bearing the name and number of shares you just
sold. These shares are then transferred to your brokers account and on to the buyer to settle
the trade.
[5.9.1.3.7] What are the costs involved with a CDC investor account?
2006-07-21
Annual Fee
2.
3.
Transaction Fee
4.
Custody Fee
5.
Withdrawal Fee
6.
Securities Deposit
Processing Fee
43
For a detailed list, see the CDC schedule of fees and deposits page.
You need to maintain a positive cash balance in your CDC account to be able to
deposit/withdraw shares. The above charges are directly deducted from this cash balance.
For example: If you buy 10,000 shares of HUBCO on 1st January, sell the same on 31st
December and these are the only shares maintained in your CDC account for the entire year,
the total cash amount deducted will be (assuming theoretically that the market value of the
share remains at Rs. 25):
Annual Fee
Rs. 500
Rs. 500
Rs. 100
Transaction Fee at
purchase
Rs. 40
Transaction Fee at
sale
Rs. 40
Custody Fee
Rs. 37.5
Rs. 10
Total
Rs. 727.5
[5.9.1.3.8] How many people can jointly hold a CDC investor account?
2006-07-02
As many as four persons/investors can jointly hold an account. You should have that specified
in the account opening application form as to how the account will be operated i.e. singly,
jointly, or in any other combination.
[5.9.1.3.9] How long does it take for IPO shares to get into a CDC account?
2007-02-22
After any necessary balloting, it normally takes 15 to 20 days. See IPO (section [3.7.1]) for
more details.
[5.9.1.3.10]
2007-02-11
[5.9.1.3.10.1] post?
2007-02-11
Youll already be receiving account statements via post or courier from the CDC on a quarterly
basis if you have an active account. If not, call the CDC helpline to ask for them.
44
IVR is part of the CDC Access service. You have to activate IVR (Interactive Voice Response)
service for your CDC account to access your account over the phone. To do so, fill out the form
available from the CDC office or the CDC website. Once you complete this form and submit it,
you shall be able to call the CDC call center (0800-CDCPL or 0800-23275) to generate your TPIN and access your account details over the phone. This will allow you to see the current cash
balance, the list of securities available and their respective quantities and print out a statement
via your fax machine.
More information is also available at the IVR section of the CDC website.
CDC web-access is part of the CDC Access service. It allows you to access your CDC account
via the internet with the login and password youve been provided by the CDC. To obtain these
login details, fill out the CDC Access form available on the CDC website or from the CDC office
and submit to their office. Within 2 days you shall receive an email with your access details.
CDC web-access will allow you to see the entire list of shares in your account, their quantities,
cash and shares activity, any pending notices, etc.
45
a general meeting?
2006-07-21
[6.1.2]
2006-07-21
It is a statutory requirement that every limited company must hold an AGM within the first 18
months of incorporation and then within 15 months of the previous meeting in each
subsequent calendar year.
[6.1.3]
a board meeting?
2006-07-21
[6.1.4]
2006-07-21
Perhaps the best source would be the KSE website Quotations page, mentioned on the lefthand column on the main page.
These schedules are also printed in most financial daily newspapers.
A popular alternative is the website of one of these financial dailies: Business Recorder. Click
on the Stocks and Bonds link on the main page. Once there, look for a news item titled
Board Meetings. Clicking on it will you get the updated list of board meetings. You can
navigate using a small green colored bar near the bottom of the page.
[6.1.5]
2006-07-02
The list of recently made announcements is made available in almost all financial daily
newspapers.
They are also made available on the KSE website Announcements page. An archive of older
announcements is also available in the Downloads section of the KSE website. Direct link.
(Cash) Dividends?
2006-07-17
These are that part of a companys profits which is distributed among shareholders, usually
expressed in rupee per share or percentage to paid-up capital.
46
[6.2.1.1]
2006-07-12
The gross dividend amount you are eligible to receive is calculated as:
= No. of shares held at book closure date x dividend in rupees per share
If the dividend is announced in percentage, it will be calculated as:
= No. of shares held at book closure date x % dividend x par value of share
Deductions include:
- Withholding tax on the dividend amount which is:
5% for public or insurance companies
7.5% for power generation entities
10% for all others
10% of that part of dividend based on non-capital gains for mutual funds
- 2.5% Zakat on the face value (par value) of the share
For example, if HUBCO (a share with a face value of Rs. 10) announces a dividend of Rs. 2 per
share (or 20%), your eligible 10,000 shares will give you a dividend of:
Gross Amount
Rs. 20,000
Withholding Tax
- Rs. 1,500
Zakat
= 10,000 x 10 x 0.025
- Rs. 2,500
Net dividend
Rs. 16,000
You can get a Zakat exemption certificate and provide a copy to the CDC for your investor
account or to your broker for your sub-account to avoid deduction of Zakat from your income.
[6.2.2]
2006-07-17
Also known as stock dividend, bonus shares can be considered as dividends paid in stock
rather than in cash. They are an offer of free additional shares to existing shareholders that a
company may decide to distribute further shares as an alternative to increasing the dividend
payout. Also known as a "scrip issue" or "capitalization issue".
New shares are issued to shareholders in proportion to their holdings. For example, the
company may give one bonus share for every five shares held i.e. 20% bonus shares.
[6.2.3]
Right shares?
2006-07-01
Right shares are additional shares issued to existing shareholders when companies want to
raise more capital. They are (often) ranked pari passu (equivalent) to the shares of the
company.
Shareholders have a choice in deciding to pay for these right shares or selling them in the
market.
[6.2.3.1]
2006-07-01
47
Depending on the current market value of the companys share, company might offer the right
share at a premium over their par value.
The total price you will have to pay per share will be:
Price per right share = Par value + Premium
Hence, total for ALL right shares will be = Price per right share x No. of right shares.
[6.2.3.2]
2006-07-02
If you received the allotment of right shares in your name, fill out page 4, including your CDC
account/sub-account number, name and signature (of all joint holders, if any) and hand it over
with a bank draft / check / cash of the required amount to the banker(s) mentioned on page 2
of the letter of right on or before the last date of payment. Get page 1 signed and stamped by
the bank clerk as receipt. The shares will be automatically credited to the CDC account/subaccount in the mentioned period.
If you bought the right shares from the market, you should fill out the blanks in page 3
instead. Do not forget to write your CDC account/sub-account number there at the bottom of
the page. On or before the day of payment, go to the bank mentioned on page 2 of the letter
of right. Pay the required amount and get the page one signed and stamped by the Bank
Clerk, as receipt. The shares will be credited to your CDC account/sub-account, at mentioned
time.
You may be asked for an attested copy of the CNIC of all joint holders when making payment.
[6.2.3.3]
2006-07-02
If you have more than 1 letter of rights and the denominations you wish to pay for are
available, only pay for those letters of right, as described in section [6.2.3.2].
If you have only 1 letter of right or wish to divide (or split) the letter to a lower denomination
for payment, contact the company with the right share, as explained in page 2 of the allotment
letter. The company will split the allotment letters for you so that you can pay for the number
of shares which you desire and choose to sell the rest in the market.
Also read the instructions on splitting shares on page 2 of the right shares.
[6.2.3.4]
What if I dont want to pay for the right shares? What is
renunciation?
2006-07-03
Renunciation is the case when you do not wish to pay for the right shares, but want to sell it to
someone else. To do this, fill in your name and sign on top of page 3 of the right share
documents, and hand them over to your broker. He will get them verified from the company
and sell them for you in the market. Make sure this is done several days before the last date of
payment of right shares. A copy of your CNIC may also be required by the company.
In case you do not wish to sell the right shares in the market, but want to give them to
someone else or purchase in someone elses name, read page 3 of the letter of rights carefully.
Procedure will be as follows:
48
The renunciator (in whose name the rights were issued) should sign (top of) page 3 and
get the signature verified by the registrar or the company, whoever is relevant in this
case. A copy of your CNIC may also be required for verification.
The buyer (renouncee - who wishes to pay for the shares in his own name) should fill in
the blanks (at the bottom) in page 3. Do not forget to write your CDC account/subaccount number, therein.
On or before the day of payment, go to the bank mentioned on page 2 of the letter of
right.
Pay the required amount and get page 1 signed and stamped by the bank clerk as
receipt.
The shares will be credited to your CDC account/sub-account in the mentioned time
period.
[6.2.3.5]
2006-07-11
Unpaid right shares are traded in the market with the same symbol as the other shares but
with an R appended as a suffix. For example, the right shares for ENGRO will be listed as
ENGROR.
The right shares are traded in the market on the difference in price of the right share (i.e. sum
of its fair value and premium, if any) and the market value of that companys share. In most
cases as the price for the ready shares varies, so does the price for right shares, e.g. if the
market value of ENGRO is Rs. 150, the right share has a fair value of Rs. 10 with a premium of
Rs. 90, the value with which it will trade in the market will be near Rs. 50, as 150 (10 + 90).
The unpaid right shares trade up to one week ahead of their last day of payment/renunciation,
so that the shares can be delivered to the buyer in reduced time so that s/he can make
payment or renunciate (selling unpaid rights in the market to another person instead of
choosing to pay for them) well in time. After the last date, trading stops any right shares not
paid for or renunciated by that date shall become waste papers. Subsequent to that date, the
main stock would continue to be traded with the capital of the company raised by the
amount received through its Right shares.
Bear in mind that the total price you pay (to buy the letter of rights from the market and to
subscribe to those rights) is often the same as buying the ready shares of that company from
the market, i.e.:
Total Cost = Par value + Premium + Payment to acquire right shares from market
[6.2.3.6]
2006-06-27
Contact the companys office. Send them a letter and they will respond to it by letting you
know of the process. They will usually ask you to provide an indemnity bond on Rs. 100 worth
stamp paper duly authorized by a notary public. A specimen of the indemnity bond they
require may be given by the company.
49
As the book closure date marks the end of the SPOT period, one can also say that you should
keep the shares till the last day of the SPOT trading period. After SPOT, you can sell your
shares as you have already become eligible for the dividend / bonus / right shares.
Also see section [5.3.3.2] for more info on book closure dates.
[6.4] When will I receive the dividend / bonus shares as announced by the
company?
2006-06-27
It normally takes 25-30 working days after book closure for the dividends / bonus shares to
reach you. Check the financial newspapers for companies announcements on dispatch of
documents.
[6.5] How long does it take for shares bought by filing rights shares to be
traded as normal shares?
2006-07-09
Normally 45 days.
First, verify that the dividends / bonus shares / right shares have been issued and dispatched
to all shareholders. Companies normally announce in the newspapers when they send the
same to their shareholders.
Sometimes postal mail or couriers may also experience delays of several days. If enough time
has passed and you still havent received the documents, contact the shares registrar of the
company or the company itself and tell them about the problem.
If a company has announced a dividend, bonus shares or right shares, after the book closure
dates, the XR, XD or XB suffix is added to the scrips name on the trading panel to indicate
this.
XR Ex-Rights is the condition meaning that this company has recently given right shares to
its shareholders
XD - Ex-Dividend means the company has given a dividend
XB Ex-Bonus means the company has given bonus shares.
[6.9] What impact do bonus shares and right shares have on the future
earnings of a company?
[6.10]
51
Technical analysis is the study of a shares trend in price and volume for the purpose of
forecasting future prices and movement. Primarily, technical analysis is conducted by studying
charts of past behavior. Many different methods and tools are used in technical analysis, but
they all rely on the assumption that price patterns and trends exist in markets, and that they
can be identified and exploited.
Technical analysis is not concerned with why a price is moving (e.g. poor earnings, difficult
business environment, poor management, or other fundamentals) but rather whether it is
moving in a particular direction or in a particular chart pattern. Technical analysts believe that
profits can be made by trend following. In other words if a particular stock price is steadily
rising (trending upward) then a technical analyst will look for opportunities to buy this stock.
Until the technical analyst is convinced this uptrend has reversed or ended, all else equal, he
will continue to own this security. Additionally, technical analysts look for various price
patterns to form on a price chart and will take positions in anticipation of the expected move
following that pattern. The tools of technical analysis are believed to assist the technician in
determining when trends have formed, ended, etc. and when particular patterns are unfolding.
For example, a popular technical analysis tool is a stock price's 200 day moving average. This
is defined as the average closing price of a stock over the past 200 trading days. (There are
many variations of moving averages in technical analysis though.) A stock that has been
trending higher will have a history of an increasing daily stock price and an increasing 200 day
moving average. Though the daily stock price fluctuates (up 50 paisas on day 1, down 20
paisas on day 2, up 10 paisas on day 3, etc.), the 200 day moving average changes much
more slowly and traces a smooth curve that follows the current price on a chart. When the 200
day moving average is violated by the daily stock price, a technical analyst uses this as strong
evidence that a price trend has ended and that possibly a new one has begun to the opposite
direction.
The obvious problem in this example is: what if in the near term share price climbs back above
its 200 day moving average after the technician sells his stock? If the technical analyst follows
his own rules then he might be buying stock back at a higher price than he just sold plus
commissions. This is a substantial component of some of the criticisms of technical analysis.
Technical analysis says false signals or whipsaws are an unavoidable part of using technical
analysis. To a technical analyst, the costs of these whipsaws are far outweighed by catching a
stock at the beginning of a new long term trend. Some research disputes this assertion
however.
Since there is a frequent use of mathematical formulas in technical analysis, a strong base in
mathematics will make the analysis easy.
[7.1.1]
2006-07-14
52
[7.1.1.1]
2006-07-14
The object of trend-trading is to go long at the transition from Phase 1 to Phase 2 (previous
graph) and to exit before Phase 4. Some models also short the market during Phase 4, but
this should be left to experienced traders.
Successful systems are built around the following principles:
-
Selecting securities
Use Stock Screens to identify potential Market Leaders.
Market direction
Decide on the Time Frame that you are trading.
Confirm the Market Direction using a suitable trend indicator.
Trend direction
Using the same indicator check the Trend Direction of each security.
Entry signals
Take Entry Signals from a suitable momentum oscillator.
Use Trailing Stops to time entry and exit points.
Stop losses
Set Stop Losses as soon as your trade is confirmed.
Do not exceed the Maximum Acceptable Loss.
Be technically consistent when Setting Stop Levels.
Adjust Stop Levels over time to protect your profits.
Exit signals
Take Exit Signals from a suitable trend indicator.
Be cautioned however. These are typical steps that a trader will follow in deciding what stocks
to buy, when to buy them and when to sell. It is not a magic formula, but consistent use
should enhance your investment performance.
Trading methods can be compared to a carpenter's tools: Skilled use can produce outstanding
results but unskilled use may lead to injury. Learn to use your trading tools properly before
committing any capital. Study the behavior of the indicators over several years, learn their
strengths and weaknesses and how they interact with each other and with the market. Start
with a small amount of capital and only increase this when you are confident that you have a
winning strategy.
[7.1.1.2]
2006-07-14
When selecting stocks, focus on market leaders rather than laggards and only invest in
businesses that you understand. If you are not confident in your ability to separate the good
from the bad then use a stockbroker's or financial advisor's recommendations. Alternatively,
consider investing in a good growth fund and switch in/out with the primary trend.
Use Stock Screens to compare the relative performance of all stocks over the past 12 months.
Analyze the top 10 per cent:
-
Have sales and earnings per share grown strongly over the past 3 years?
53
Have sales and earnings per share growth accelerated in recent quarters? Be on the
alert for cost reductions and layoffs that may enhance short-term performance at the
expense of long-term growth.
Look for sustainable competitive advantage and strong growth prospects.
Does the company have a competitive edge? Examine their products or services: do
they have better technology; stronger brands; copyrights or patents; or greater
expertise; that gives them an advantage over competitors?
Use Stock Screens to identify the industry sectors that show the best relative performance.
Select stocks from top industry sectors:
-
Look for two or more market leaders in the same industry sector.
Compare the relative performance of industry sectors over the last 3 years and look for
market leaders from these sectors.
Select stocks that are clear of major resistance levels. Look for market leaders that have
recently made new highs or turnarounds that are well below major resistance levels.
[7.1.1.3]
2006-07-14
The overall market influences the performance of smaller markets and individual stocks. Study
the big picture first before looking at any shares in isolation.
-
Time Frame - Decide on the cycle that you are going to trade:
Long-term (or primary) trends that are measured in years;
Intermediate (or secondary) trends of 3 weeks up to 6 months;
Short-term cycles of less than 3 weeks; and
Intra-day trends
[7.1.1.4]
2006-07-14
It is also possible to use an oscillator such as the Money Flow Index or MACD to time your
entry points. In fact, some analysts do not use indicators at all and base their entry points on
breakouts above resistance levels.
Set the Indicator Time Frame to suit the cycle being traded. There is a trade-off between
indicator responsiveness and reliability: a very short time frame may provide earlier, but
occasionally incorrect, signals. Trailing stops help to compensate for this.
Trailing Stops are useful for weeding out premature or false signals and help to alleviate some
of the psychological pressure on traders - by providing automatic entry and exit points.
[7.1.2]
What is
[7.1.2.1]
Support?
2006-07-12
54
The support level is the lowest price a security trades at, over a period of time. The longer the
price stays at a particular level, the stronger the support at that level. Some traders believe
that the stronger the support at a given level, the less likely it will break below that level in the
future. It is said that if a security breaks prior levels of support only by a small portion, it will
drop sharply until a new level of support is reached.
[7.1.2.2]
Resistance?
2006-07-12
The resistance
often the price
the resistance
resistance, the
[7.1.2.3]
level is the highest price a security trades at over a period of time. The more
reaches a particular level of resistance and fails to break through, the stronger
at that level. For this reason, many traders believe that the stronger the
less likely the price will break through that level.
Trend?
2006-07-18
Market moves in a trend. The trend is simply the direction of the market. Market moves in
zigzags. These zigzags resemble a series of successive waves with fairly obvious peaks and
troughs. It is the direction of those peaks and a trough that continues market trend. Whether
those peaks and troughs are moving up, down, or sideways tells us the trend of the market.
Trend is usually broken down into three categories, i.e. major, intermediate and near term
trend.
- Major trend is usually for a year or so.
- Intermediate trend is usually for three weeks or more.
- The near term trend is usually defined as anything less than two or three weeks.
Each trend becomes a portion of its next larger trend. For example, the intermediate trend
would be a correction in the major trend. In a long term up trend, the market pauses to
correct itself for a couple of months before resuming its upward path. Secondary correction
would itself consist of shorter waves that would be identified as near term dips and rallies.
[7.1.2.4]
Trend line?
2006-07-18
The basic trend line is one of the simplest of the technical tools employed by the chartist, but
is also one of the most valuable. An up trend line is a straight line drawn upward to the right
along successive reaction lows. A down trend line is drawn downward to the right along
successive rally peaks.
The principal trendline is an upsloping line drawn through lower extremes of price for a
security that is in an up trend, or its mirror image, a downsloping line drawn through the upper
extremes of the price action for a security that is in a down trend. This differs from the trend
lines defined using least squares regression or similar methods, where the data points are
distributed on both sides of the line.
The other, less widely used type of trendline is an upsloping line drawn through high extremes
in an uptrend, or a down sloping line drawn through lower extremes in a downtrend.
Trend lines are used in many ways by traders. One way is that when price returns to an
existing principal trendline it may be an opportunity to open new positions in the direction of
the trend, in the belief that the trendline will hold and the trend will continue further. A second
way is that when price action breaks through the principal trendline of an existing trend, it is
evidence that the trend may be going to fail, and a trader may consider trading in the opposite
direction to the existing trend, or exiting positions in the direction of the trend.
55
[7.1.2.5]
Breakout?
2006-07-12
A breakout occurs when prices pass through and stay through an area of support or resistance.
[7.1.3]
[7.1.3.1]
2006-07-18
Scallops, Ascending:
Ascending formations have a J shape and have two price peaks with a
rounded price recession in between Ascending Scallops often show a U
Shape volume trend that gets heavier over time.
56
Horn Bottoms:
When the horn lengths are at least twice as long than most spikes.
Double Bottoms:
A double bottom occurs after a downward price trend.
Its shape is like a big W. And it takes some time to complete the
formation pattern.
Wedges, Falling:
It is a profitable formation to trade. The highest price after the
breakout is approximately the beginning of trend line.
Two drawn support and resistance lines are downward sloping to the
right side that eventually must intersect.
Rectangle Tops:
Stock price oscillates between two horizontal trend lines before
breaking upward. Looks like bridge iron support structures. The price
will bounce up and down within a price range. This pattern does take
time to form before one can make good money.
57
Diamond Tops:
Prices usually trend up to the formation. Diamond top need not form at
the top of a price chart. Diamond pattern forms after a downward price
trend. Trend lines surrounding the minor high and lows resemble a
diamond.
[7.1.3.2]
market indicators?
2006-07-18
Market indicators add significant depth to technical analysis because they contain much more
information than price and volume. A typical approach is to use market indicators to analyze
where the overall market is headed and then use price/volume indicators to determine when to
buy or sell an individual security. The analogy being all boards rise in a rising tide, it is
therefore much less risky to own stocks when the stock market is rising.
58
[7.1.3.3]
Moving average?
2006-07-18
Adding the security's prices for the most recent time periods and then dividing it by number of
periods calculates the simple moving average. This calculation is done for each period in the
chart. The classic interpretation of a moving average is to use it to observe changes in prices.
Investors typically buy when security's price rises above its moving average and sell when the
price falls below it's moving average.
Mathematically, it is the unweighted mean of the previous n data points. For example, a 10day simple moving average of closing price is the mean of the previous 10 days' closing prices.
If those prices are p1 to pn then the formula is
When calculating successive values, a new value comes into the sum and an old value drops
out, meaning a full summation each time is unnecessary,
In technical analysis there are various popular values for n, like 10 days, 40 days, or 200 days.
The period selected depends on the kind of movement one is concentrating on, such as short,
intermediate, or long term. In any case moving average levels are interpreted as support in a
rising market, or resistance in a falling market.
In all cases a moving average lags behind the latest price action, simply from the nature of its
smoothing. An SMA can lag to an undesirable extent, and can be influenced too much by old
prices dropping out of the average. This is addressed by giving extra weight to recent prices,
as in the WMA and EMA below.
A weighted average is any average that has multiplying factors to give different weights to
different data points. But a weighted moving average (WMA) has the specific meaning of
weights which decrease arithmetically. In an n-day WMA the latest day has weight n, the
second latest n-1, etc, down to zero.
59
When calculating the WMA across successive values, it can be noted an amount p 2 to pn+1
drops out of the numerator each day. The WMA can thus be calculated starting with the above
formula but then stepping successively with just additions and subtractions, not a full set of
multiplications:
Totaltoday = Totalyesterday + p1 pn + 1
Numeratortoday = Numeratoryesterday + np1 Totalyesterday
The graph at the right shows how the weights decrease, from
highest weight for the most recent days, down to zero.
This can also be rewritten as follows, showing how the EMA steps towards the latest price, but
only by a proportion of the difference (each time):
Expanding out EMAyesterday each time results in the following power series, showing how the
weighting factor on each price p1, p2, etc, decrease exponentially:
In theory this is an infinite sum, but because 1- is less than 1, the terms become smaller and
smaller, and can be ignored once small enough. The denominator approaches 1/, and that
60
value can be used instead of adding up the powers, provided one is using enough terms that
the omitted portion is negligible.
The N periods in an N-day EMA only specifies the factor. It isn't a stopping point for the
calculation in the way N is in an SMA or WMA. The first N days in an EMA do represent about
86% of the total weight in the calculation though. The power formula above gives a starting
value for a particular day, after which the successive days formula shown first can be applied.
[7.1.3.4]
Accumulation/distribution index?
2006-07-12
Accumulation/Distribution index is an indicator that shows the cumulative total volume, adding
or subtracting each day's volume in proportion to where the close is between the day's high
and low.
First a close location value is formed:
This ranges from -1 when the close is the low of the day, to +1 when it's the high. For instance
if the close is 3/4 the way up the range then CLV is +0.5. The accumulation/distribution index
adds up volume multiplied by the CLV factor, i.e.:
The starting point for the acc/dist total, i.e. the zero point, is arbitrary, only the shape of the
resulting indicator is used, not the actual level of the total.
The name accumulation/distribution comes from the idea that during accumulation buyers are
in control and the price will be bid up through the day, or will make a recovery if sold down, in
either case more often finishing near the day's high than the low. Vice versa for distribution.
[7.1.3.5]
2006-07-12
Average True Range (ATR) is an indicator based on trading ranges smoothed by an N-day
exponential moving average. The range of a day's trading is simply high low. True range
extends it to yesterday's closing price if that was outside today's range, i.e.
True range = max(high,closeprev) min(low,closeprev)
The average true range is then an N-day exponential moving average of the true range values.
The idea of ranges is that they show the commitment or enthusiasm of traders. Large or
increasing ranges suggest traders prepared to continue to bid up or sell down a stock through
the course of the day. Decreasing range suggests waning interest.
[7.1.3.6]
Bollinger bands?
2006-07-12
Bollinger Bands is a tool that evolved from the concept of trading bands and can be used to
measure the relative highness or lowness of price.
61
[7.1.3.7]
2006-07-18
MACD is calculated by subtracting a 26-day moving average of security's price from a 12-day
moving average of its price. The result is an indicator that oscillates above and below zero.
62
When the MACD is above zero, it means the 12-day moving average is higher than the 26-day
moving average. This is bullish as it shows that current expectations (i.e. the 12-day moving
average) are more bullish than previous expectations (i.e. the 26-day average). This implies a
bullish, or an upward, shift in the supply/demand lines. When the MACD falls below zero, it
means that the 12-day moving average is less than the 26-day moving average, implying a
bearish shift in supply/demand line.
A 9-day moving average of the MACD (not of the security's price) is usually plotted on top of
the MACD indicator. This line is referred to as the signal line. The signal line anticipates the
convergence of the two moving averages (i.e., the movement of the MACD toward the zero
line).
Figure 1: Shows the MACD (the solid line) and its signal line (the dotted line)
By plotting a 9-day moving average of the MACD, we can see the changing of expectations
(i.e., the shifting of the supply/demand lines) as they occur.
Mathematically, It shows the difference between a fast and slow exponential moving average
(EMA) of closing prices. Fast means a short-period average, and slow means a long period
one; the standard periods are 12 and 26 days:
63
A signal or trigger line is then formed by smoothing this with a further EMA. The standard
period for this is 9 days,
[7.1.3.8]
Momentum?
2006-07-12
Momentum and rate of change (ROC) are simple technical analysis indicators showing the
difference between today's closing price and the close N days ago. Momentum is simply the
difference,
Rate of change scales by the old close, so as to represent the increase as a fraction,
Momentum in general refers to prices continuing to trend. The momentum and ROC indicators
show that by remaining positive while an uptrend is sustained or negative while a downtrend is
sustained.
A crossing up through zero may be used as a signal to buy, or a crossing down through zero as
a signal to sell. How high (or how low when negative) the indicators get shows how strong the
trend is.
The way momentum shows an absolute change means it shows for instance a Rs. 3 rise over
20 days, whereas ROC might show that as 0.25 for a 25% rise over the same period. One can
choose between looking at a move in dollar terms or proportional terms. The zero crossings
are the same in each, of course, but the highs or lows showing strength are on the respective
different bases.
[7.1.3.9]
Pivot point?
2006-10-19
Pivot points are frequently used by traders as a means to calculate resistance and support
levels which are, in turn, used as visual cues to execute trades but have proven themselves
more useful in currency trading than equities markets.
64
Basic pivot point trading is based on two prevailing tendencies. If a days price action begins
above the pivot point, prices will tend to stay above that point (fulcrum) until it reaches a
resistance point. Conversely, if a days pricing action begins below the pivot point, the price
will tend to stay below that point until it reaches a support point. A resistance level is a price
that tends to prevent further upward movement. A support price is a price action point that
tends to prevent further downward movement.
In its simplest form pivot point trading is based on these two tendencies and is also knows as
"trading between the lines". The most popular and hence the most successful form of pivot
trading is based on reversals. Simply put, when price approaches a pivot above, a trader waits
for a reversal at that point and sells. The opposite is true when price action is moving
downward. The patient pivot trader waits for a bounce off the pivot of support and places an
order to buy.
If the market opens or later trades at the extremes R2 or S2, pricing will exhibit a tendency to
trade back toward the pivot point. Hence, traders tend to avoid buying high (at R2) or selling
at the low (S2). The wisdom of this is even greater the further the price moves away from the
days pivot point.
There are a number of formulas traders use to calculate resistance and support levels and they
are based on a variety of factors but those based on price are the most popular if, for no other
reason, they are the easiest to calculate. Pivot trading begins with the calculation of the pivot
point which is an average of the previous days high (H), low (L) and closing price (C).
Pivot Point = (H+L+C)/3
Once the days pivot point has been calculated, traders turn to the calculation of the initial
resistance (R1) and support (S1) levels which assumes that trading will continue pretty much
in the same range as the previous day.
Resistance Level 1 = (2*PP) - L
Support Level 1 = (2*PP) - H
A second set of resistance and support points, R2 and S2, are used in the event that the price
breaks through the previous days trading range and continues until it meets a second higher
level of resistance or lower level of support.
Resistance Level 2 = (PP-S1) + R1
Support Level 2 = PP - (R1 - S1)
Some traders attend to the calculation of extreme price fluctuations (R3, S3) but only a small
minority of them actually trade on them because such price movements are a sure sign of
volatility.
Resistance Level 3 = (PP-S2)+R2
Support Level 3 = PP - (R2-S2)
You can calculate pivot points online at the FortunateGroup.net website.
Unlike most other investment charts, point and figure charts do not present a linear
representation of time. Instead, they show trends in price. The aim of point and figure charting
is to filter out the "noise" (unimportant price movement) and focus on the main direction of
the price trend.
65
Point and figure charts are usually used for longer term price movements. They can be used
very successfully to day trade by clearly identifying the key points of supply and demand.
There are two typical ways to plot point and figure charts - using closing prices, or with
high/low prices, the most common being high/low. Closing prices are useful when charting
price movement for funds or suchlike where there is no real way to get the intraday prices for
that fund.
[7.1.3.10.1]
2006-07-18
Point and Figure chart display an X when prices rise by the box size (a specified value) and
display an O when prices fall by the box size.
Each column can contain either Xs or Os, but never both. In order to change columns (e.g.,
from X column to O column), prices must reverse by the reversal amount (another specified
value) multiplied by the box size. For example, if the box size is 5 paisa and the reversal
amount is three boxes, and then prices must reverse direction 15 paisas (5x3=15) in order to
change columns. If you are in column of Xs, the price must fall 15 paisas to change to a
column of Os, the price must raise 15 paisas to change to a column of Xs.
The changing of columns identifies a change in trend of prices. When a new column of Xs
appears it shows that prices are rallying higher. When a new column of Os appears, it shows
that prices are moving lower. Because prices must reverse direction by the reversal amount,
the minimum number of Xs to Os that can appear in a column is equal to the reversal
amount. The common practice is to use the high and low prices to decided if prices have
changed enough to display a new box.
The Relative Strength Index (RSI) is a popular oscillator. Initially chartists used to recommend
a 14-day RSI for analyzing the market. But nowadays the 9-day and 25-day RSIs have also
gained recognition.
The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of
analyzing the RSI is to look for divergence in which the security is making a new high, but the
RSI is failing to surpass its previous high. This divergence is an indication of an impending
reversal. When RSI turns down and falls bellow its most recent trough, it is said to have
completed a failure swing. The failure swing is considered a confirmation of the impending
reversal.
Five uses of the RSI:
- Tops and bottoms: RSI tops above 70 and bottoms below 30. It usually forms these
tops and bottoms before the underlying price chart.
- Chart formations: RSI often forms chart patterns such as head and shoulders or
triangles that may or may not be visible on the price chart.
- Failure swings: When the RSI surpasses a previous high or falls below a recent low.
- RSI shows, sometimes more clearly than price themselves, level of support and
resistance.
- Divergences: It occurs when the price makes a new high (or low) that is not confirmed
by a new high (or low) in the RSI. Prices usually correct and move in the direction of
the RSI.
66
This can be rewritten as follows to emphasize the way RSI expresses the up as a proportion of
the total up and down (averages in each case):
Large surges and drops in securities will affect RSI, but it could just be a false buy or sell. The
RSI is best used as a complement with other technical analysis indicators.
The stochastic oscillator shows the latest closing price in relation to the trading range of the
past N days. Two oscillator lines are calculated, called %K and %D, each ranging from 0 to
100. %K is the closing price within the past N-days trading range, ranging from 0 when the
latest close is a new N-day low, up to 100 for a new N-day high:
The usual N is 14 days, i.e. a fortnight's worth of past data, but this can be varied. Levels
near the extremes 100 and 0, for either %K or %D, indicate strength or weakness
(respectively) with prices making or approaching new N-day highs or lows.
Levels above 80 and below 20 can be interpreted as overbought or oversold, but not on their
own, only with other factors. Lane recommended waiting for a return back through those
thresholds, ie. when the oscillator goes above 80, wait for it to fall below 80 before selling; or
vice versa on going below 20 wait for a rise back above 20 before buying; which in effect
means waiting for a bit of a reversal. Or alternately levels 80 and 20 might be traded when
some other technical indicator suggests a non-trending market.
%D acts as a trigger or signal line for %K. A buy signal is given when %K crosses up through
%D, or a sell signal when it crosses down through %D. Such crossovers can occur too often,
and to avoid repeated whipsaws one can wait for crossovers occurring together with an
overbought/oversold pullback, or only after a peak or trough in the %D line.
Some traders consider the basic %K and %D too volatile, giving too many signals and too
many whipsaws. This is addressed by forming slow stochastics. %K values are first smoothed
by a 3-day simple moving average, and then the %D formed by a further 3-day SMA on that.
This slowed %K is the same as the fast %D, but it's easiest just to think of the slow form
as first inserting an extra smoothing.
Hammer:
If it occurs after a significant
downtrend, it is bullish. If the line
occurs after a significant up-trend,
it is called a Hanging Man. A
Hammer is identified by a small
real body and a long lower
shadow. The body can be empty or
filled.
Piercing line:
This is a bullish pattern and the
opposite of a dark cloud cover.
The first line is a long filled line
and the second line is a long
hollow line. The second line
opens lower than the first line's
low, but it closes more than
halfway above the first line's real
body.
Morning star:
A bullish pattern. This signifies a
potential bottom. The "star"
indicates a possible reversal and
the bullish (empty) line confirms
this. The star can be empty or
filled-in.
Hanging Man:
These lines are bearish if they
occur after a significant uptrend. If
this
pattern
occurs
after
a
significant downtrend, it is called a
Hammer. They are identified by
small real bodies and a long lower
shadow. The bodies can be empty
or filled-in.
69
Evening star:
This
is
a
bearish
pattern
signifying a potential top. The
Evening
star
indicates
a
possible reversal and the bearish
(filled-in) line confirms this. The
star can be empty or filled-in.
Doji star:
A star indicates a reversal and a
doji indicates indecision. Thus, this
pattern usually indicates a reversal
following an indecisive period. One
should wait for a confirmation
before trading a doji star.
Shooting star:
This pattern suggests a minor
reversal when it appears after a
rally. The star's body must
appear near the low price and
the line should have a long upper
shadow.
Long-legged doji:
This line often signifies a turning
point. It occurs when the open and
close are the same, and the range
between the high and low is
relatively large.
Dragon-fly doji:
This line also signifies a turning
point. It occurs when the open
and close are the same, and the
low is significantly lower than the
open, high, and closing prices.
Gravestone doji:
This line also signifies a turning
point. It occurs when the open,
close, and low are the same, and
the high is significantly higher than
the open, low, and closing prices.
Star:
It indicates reversal. A star is a
line with a small real body that
occurs after a line with a much
larger real body, where the real
bodies do not overlap. The
shadows may overlap.
70
Spinning tops:
These are neutral lines. They
occur when the distance between
the high and low, and the
distance between the open and
close, are relatively small.
Doji:
This line implies indecision. The
security opened and closed at the
same price. These lines can appear
in several
different
patterns.
Double doji lines (two adjacent
doji lines) imply that a forceful
move will follow a breakout from
the current indecision.
Harami:
This pattern indicates a decrease
in momentum. It occurs when a
line with a small body falls within
the area of a larger body.
In this example, a bullish
(empty) line with a long body is
followed by a weak bearish
(filled-in) line. This implies a
decrease
in
the
bullish
momentum.
[7.1.4]
Harami cross:
This pattern also indicates a
decrease in momentum. The
pattern is similar to a harami,
except the second line is a doji
(signifies indecision).
2006-07-11
You can get the daily opening, high, low, closing prices and volumes for each share from the
KSE website Downloads section in Excel-compatible CSV format. Choose the date you need the
data for and you will have a variety of data to select from.
The same is also available from websites of various brokerage houses in CSV and text format,
such as Moosani Securities Daily Prices page.
There is also a variety of data sorted in different categories on the KSE website, Market Data
section on the left column.
If you are in need of live data during trading hours, please see section [8.2].
[7.1.5]
2006-10-19
[7.1.6]
2006-07-14
Technical analysis software is used to analyze quantitative data in several securities and
financial markets, especially price data, volume data and sentiment data
71
There is a variety of other software available for technical analysis. Search engines like Google,
Yahoo or MSN should get you what you need. Some popular software is:
-
MetaStock
Microsoft Excel
AMIBroker
ChartAlert (Indian)
Ensign
MATLAB
MoV - Merchant of Venice (Australian)
TA-Lib (open-source)
TeleTrader
TradeStation
TradingSolutions
[7.1.7]
2006-07-09
Go to the respective vendors site and pay for the software (via your credit card), or simply
download it from the site if it is licensed for free.
While the software costs hundreds of dollars, the piracy rampant Pakistani retail markets
should allow you to get them for a quarter of a hundred rupees. P2P networks are also
proliferating with software.
Do understand that you are essentially stealing by using pirated software. If you like it, it
deserves to be paid for.
Fundamental analysis is a stock valuation method that uses financial and economic analysis to
predict the movement of stock prices.
The fundamental information that is analyzed can include a company's financial reports, and
non-financial information such as estimates of the growth of demand for products sold by the
company, industry comparisons, and economy-wide changes, changes in government policies,
dividends paid, the way a company manages its cash, the amount of debt a company has, and
the growth of a company's revenues, expenses and earnings, etc.. The idea is to find
companies which are most likely to show profit growth in the future, and which are being
under priced by the market.
To a fundamentalist, the market price of a stock tends to move towards its real value or
intrinsic value. If the intrinsic/real value of a stock is above the current market price, the
investor would purchase the stock because he knows that the stock price would rise and move
towards its intrinsic or real value. If the intrinsic value of a stock was below the market price,
the investor would sell the stock because he knows that the stock price is going to fall and
come closer to its intrinsic value.
[7.2.1]
2006-07-13
To start finding out the intrinsic value, the fundamentalist analyzer makes an examination of
the current and future overall health of the economy as a whole. After you analyzed the overall
economy, you have to analyze firm you are interested in. You should analyze factors that give
72
the firm a competitive advantage in its sector such as management experience, history of
performance, growth potential, low cost producer, brand name etc.
Earnings multiples such as the P/E ratio may be used to determine value, where cash flows are
relatively stable and predictable. An important caveat here is that the P/E ratio is ultimately
not an objective measure because it must be interpreted; a high P/E ratio might show an
overvalued stock, or it might reflect a company with high potential for growth.
Other valuation techniques include discounted cash flow models, and dividend yield analysis.
Accounting book value at first glance appears to be a valuation technique, but is not designed
to assign a market value to the firm.
In large organizations fundamental analysis is usually performed in three steps:
-
As more and more companies make their annual reports available on their website, they are
permitted not to send them by post. You can get the links to the companies quarterly results
on their websites on the KSE website Quarterly Results section (left column on main page).
For those annual reports not available on the internet, the companies printed annual reports
are also available at the stock exchange building for a small fee.
Better yet, go to the KSE website, and click on the Analysis Reports link on the left column,
under the Companies tab. It will list all details on all of the companies financial and operating
positions throughout the years, current management, office and factory locations, as well as,
there respective ratios, payouts, prices,
[7.3.1]
What is
[7.3.1.1]
Annual Report?
2006-07-18
Annual report provides an insight to the company's yearly performance. Annual reports include
a balance sheet, income statement, auditor's report, and a description of the company's
operation. We find most important data in the annual and quarterly reports released by the
management.
73
Financial statements are required by law and must include a balance sheet, income statement,
and a statement of cash flows and auditors report and relatively detailed description of the
company's operations and prospects for the upcoming year.
Seeing annual reports an investor assesses the company by its profitability, growth, stability
and the rate of dividends.
[7.3.1.2]
Balance Sheet?
2006-07-18
The balance sheet highlights the financial status of a company at a single point in time. This is
important; the cash flow and income statements record performance over a period of time.
While a balance sheet is a snap shot in time.
[7.3.1.3]
Income Statement?
2006-07-18
The income statement is the most popular financial statement in an annual or quarterly report.
The income statement includes figures such as revenue, net income and earning per share
(EPS).
[7.3.1.4]
2006-07-18
Cash Flow is similar to the Income Statement in that it records a company's performance over
a specified period of time, usually over the quarter or year. The difference between the two is
that the income statement also takes into account some non-cash accounting item such as
depreciation. The cash flow statement strips away all of this and tells you how much actual
money the company has generated. Cash Flow shows us how the company has performed in
managing inflows and out flows of cash. It provides a sharper picture of the company's ability
to pay bills, creditors, and finance growth.
[7.3.2]
What is
[7.3.2.1]
2006-07-01
The EPS is a profitability indicator calculated by dividing the earnings available to common
stockholders during a period by the average number of shares actually outstanding at the end
of that period, i.e.:
EPS
e.g., if a company XYZ announces a profit of 10 million, and it has 2,500,000 outstanding
shares, then its EPS would be
EPS = 10,000,000/2,500,000
[7.3.2.2]
= 4 Rs/share.
2006-07-01
The P/E ratio is a measure of the level of confidence (rightly or wrongly) investors have in a
company. It is calculated by dividing the current share price by the last published earnings per
share.
74
P/E ratio = Market Value per Share / Earnings Per Share (EPS)
For example, if a company is currently trading at Rs. 43 a share and earnings over the last 12
months were Rs. 1.95 per share, the P/E ratio for the stock would be 22.05 (Rs. 43/Rs. 1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from
the estimates of earnings expected in the next four quarters (projected or forward P/E). A third
variation uses the sum of the last two actual quarters and the estimates of the next two
quarters.
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the
whole story by itself. It's usually more useful to compare the P/E ratios of one company to
other companies in the same industry, or to the market in general, or against the company's
own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their
investment to compare the P/E of a technology company (high P/E) to a utility company (low
P/E) as each industry has much different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how much investors are
willing to pay per Rs. of earnings. If a company were currently trading at a multiple (P/E) of
20, the interpretation is that an investor is willing to pay Rs. 20 for Rs. 1 of current earnings.
It is important that investors note an important problem that arises with the P/E measure so
not to base their investment decision on this measure alone. The denominator (earnings) is
based on an accounting measure of earnings which is susceptible to forms of manipulation
making the quality of the P/E only as good as the quality of the underlying earnings number.
[7.3.2.3]
2006-07-11
The PEG ratio is calculated by dividing the P/E with the projected growth in earnings:
PEG = (P/E) / (projected growth in earnings)
For example, a stock with a P/E of 30 and projected earning growth next year of 15% would
have a PEG of 30 / 15 = 2.
Technically speaking, the lower the PEG number, the less you pay for each unit of future
earnings growth. So even a stock with a high P/E, but high projected earning growth may be a
good value. Hence, we are interested in stocks with a low PEG value.
The ratio is especially helpful in finding out the reason for a low P/E of a share. If the PEG ratio
is big (or close to the P/E ratio), this is probably because the projected growth earnings are
low. This is the kind of stock that the stock market thinks is of not much value. On the other
hand, if the PEG ratio is small, or very small as compared to the P/E ratio, then it is a valuable
stock with high projected earnings. This is the kind of fundamentally strong stock that the
market has overlooked for some reason.
As the PEG ratio relies on the projected % earnings, these earnings are not always accurate
and so is the PEG ratio.
[7.3.2.4]
2006-07-21
75
It is a measure used by owners of common shares in a firm to determine the level of safety
associated with each individual share after all debts are paid accordingly.
In simple terms it would be the amount of money that a holder of a common share would get if
a company was to liquidate, i.e. total assets minus intangible assets (patents, goodwill)
and liabilities. Book value per share should not be thought of as an indicator of economic
worth, since it reflects accounting valuation (and not necessarily market valuation).
[7.3.2.5]
break-up value?
2006-07-21
It is the net asset value of a company divided by total number of outstanding shares, where
the net asset value is calculated by total assets minus current liabilities and the total number
of outstanding shares is the number of shares currently held by investors, including sponsors.
For bank shares, market price / breakup value multiple is a parameter that is used to evaluate
reasonability of their market price.
[7.3.2.6]
2006-07-02
[7.3.2.7]
EY?
[7.3.2.8]
76
Televised media is probably your best source for breaking news. For more detailed and indepth news, you should consider subscription of a financial daily newspaper, such as the
Business Recorder.
Keep in mind that the nature of the stock market and the effect of favorable / unfavorable
news on it is constantly used by those in the media for personal gain.
on my computer?
2006-07-11
Live prices are the current trading prices of shares in the market. Live data is not available for
free. You can only get such data either via a computer connected to the KATS terminal at the
stock exchange, or through an online brokerage house which provides them to you through
their online trading account.
An online trading account is considered advantageous in this regard as it may also provide you
with a better interface as well as graphs on the prevailing market prices.
Some brokerage houses do provide an updated feed of prices on their websites for free, but
these are updated at specific intervals, and hence not the current prices. See section [10].
Perhaps the best free source for the purpose would be the KSE Market Watch software
available after filling out the download form on the KSE website. Prices are updated every 5
minutes. The program is a little unstable, though, and may be sluggish when there is a great
load on the KSE computer servers.
You could also give a shot at the flash-based Market Tracker page on the KSE website. Its
update frequency is similar to the rest of the KSE website i.e. 10 minutes.
[8.2.2]
on my mobile phone?
2007-02-22
Some brokerage houses provide the ability to receive periodic market updates via SMS. This is
at a cost and at long intervals.
If you have internet access via GPRS, you can access the resources mentioned below:
Pocket Stocks
http://www.trading.com.pk
http://wap.kapadia.com.pk
The AKD stocks update software is also available (for mobile phones with java capabilities).
Please contact the FAQ author for a copy.
[8.2.3]
on my PDA?
2006-07-05
77
Palm (e.g. Treo, Tungsten, etc.), PocketPC (e.g. i-mate, iPaq, etc.) and Symbian (e.g. Nokia
Communicators, Sony Ericsson, etc.) based PDAs (Personal Digital Assistants) have the
software available to download the current market prices. This software come at a cost and
can be downloaded from resources such as Handango, PalmGear, etc. All of this software
requires GPRS connectivity from your service provider.
Unfortunately, Yahoo Finance, which provided these market prices, has stopped updating
prices for stocks in Pakistan. There is currently no alternative available. Meanwhile, the details
in section [8.2.2] also apply in this case.
Brokerage house reports are not always available for free and are often only sent via email or
available on the web for their clients.
The KSE100Stocks group often has valuable research reports sent in by contributors and is
your best source for such information.
on a website?
2007-02-22
You can manage your portfolio on the KSE website at the My KSE page. However, you can only
add a limited number of stocks.
The Yahoo Finance website used to offer this facility but stopped updating the value of shares
at the end of 2005.
Brokerage houses offering online trading accounts allow you to view the portfolio you hold with
them in your account.
You can also create your portfolio on the websites of some brokerage houses such as S. C.
Securities. See the website list (in section [10.2]).
[8.4.2]
on the computer?
2007-02-22
There is a large variety of software available for this purpose. You are recommended to browse
an online software directory such as Download.com to get an idea of the choices available. Top
choices are: Quicken and TradeTrakker.
Bear in mind that not all software is free. Some may even require manual entry or importing of
share prices from other sources.
[8.4.3]
on my PDA?
2006-07-05
Most software on PDAs offering live market prices offer portfolio management as well. Please
see section [8.2.3]
There are also conduits available that serve as mirrors to their computer counterparts. Please
browse the software directories at Handango.com, PalmGear.com, etc.
78
[9] PROBLEMS
[9.1] Brokerage
[9.2] My broker is cheating me by buying/selling on my account without
permission.
2007-02-22
It actually depends. If a client is doing work just in deliveries, then the broker can't sell his
securities. But if he is working in Badla or Futures and he has got a margin call and additional
money has not been deposited to the account, then the broker is authorized to sell the
securities to square the position until the deficit is met.
You should write about your problem to the SECP. For contact details see their website.
[9.3] Investments
[9.3.1]
2006-06-21
You dont.
[9.4.1.1]
2006-07-03
Fill out the transfer deed form. You can get it from your broker or buy a pad from the
stationers.
Enter the shareholders name, folio number, certificate number, shares numbers from the
share certificate on the transfer deed and have it signed. Have a witness sign it as well. Send
the transfer deeds to the respective companys shares registrar. The same will be returned to
you with the companys stamp as verification.
Keep in mind that with verified transfer deeds attached to a share certificate, the shares
belong to the person who bears them. So keep them in a safe place.
[9.4.1.2]
2006-07-03
[9.4.1.3]
2006-07-03
79
[9.4.2]
2006-07-13
Write to the company and explain to them the problem. They will respond to you with a
detailed set of instructions (varying for each company) to:
- Provide them with an indemnity bond on Rs. 100 worth stamp paper, duly authorized
by a notary public. The text to be printed will be provided.
- Print an advertisement in 1 Urdu or 1 English daily newspaper about the missing
shares. Sample Urdu and English text may be provided.
- Attach copies of the above and send to the company.
I have lost the cash dividend that I received. How do I claim it?
2007-02-22
Contact the company or its registrar. They will check from their records whether some one has
cashed it yet and issue you a duplicate if not. They may ask you to give an indemnity bond on
Rs. 50/ stamp paper duly notarized. They will also provide you with draft/specimen of the
indemnity bond.
Actually they should not ask for indemnity bond when dividend is not cashed. They can stop
payment if it is still valid. Usually dividend warrants expired within six month from date of
issue.
80
[10]
RESOURCES
2007-02-22
KSE100Stocks Group
http://groups.yahoo.com/group/kse100stocks
This should not be considered as any sort of endorsement or recommendation of the following.
It is provided only for the sake of convenience.
Karachi Stock Exchange
Lahore Stock Exchange
Islamabad Stock Exchange
Securities & Exchange Commission
http://www.lahorestock.com
http://www.lse.net.pk
http://www.ise.com.pk
http://www.secp.gov.pk
http://www.sbp.org.pk
http://www.mufap.com
[10.1]
http://www.kse.com.pk
http://www.kse.net.pk
http://www.ksefascom.com
http://www.khistocks.com
http://www.ksedata.com
http://www.ksestocks.com
http://www.tezimandee.com
http://www.vis.com.pk
http://www.reuters.com
http://www.bloomberg.com
http://www.pakistaneconomist.com
http://www.bluechipmag.com
News sources
2006-06-17
Business Recorder
Dawn
Daily Times
[10.2]
http://www.brecorder.com
http://www.dawn.com
http://www.dailytimes.com.pk
Brokerage houses
2006-07-15
http://www.amzakaria.com
http://www.adamsecurities.com
http://www.alfa-tec.com
http://www.alfalahsec.com
http://www.ashrafi.com.pk
81
http://www.arifhabib.com.pk
http://www.atlasbank.com.pk
http://www.coe.com.pk
http://www.elixirsecurities.com
http://www.elixirsec.com
http://www.escortsbank.net
http://www.finexsecurities.com
http://www.firstcapital.com.pk
http://www.fnetrade.com
http://www.fs.com.pk
http://www.gslpk.com
[10.3]
http://www.bmacapital.com
http://www.investcapital.com
http://www.investfinance.com.pk
http://www.ismailiqbal.com
http://www.js.com
http://www.jahangirsiddiqui.com
http://www.jovcoltd.com
http://www.kapadia.com.pk
http://www.kasbsecurities.com
http://www.kabsec.com
http://www.livesecurities.com
http://www.stockspk.com
http://www.mzhsecurities.com
http://www.moosani.com
http://www.themotiwala.com
http://www.nomanabid.com
http://www.orixbank.com
http://www.rafionline.com
http://www.shermansecurities.com
http://www.taurus.com.pk
http://www.wefspk.com
http://www,zcs.com.pk
2006-07-15
ACE Securities
http://www.acexs.com
AKD Trade
http://www.akdtrade.com
AMZ Trade
http://www.amztrade.com
http://www.bmatrade.com
Cliktrade Ltd.
Eastern Capital Ltd.
Fawad Yusuf Securities (Pvt.) Ltd.
KASB Direct
Live Trade Online
82
http://www.cliktrade.com
http://www.ecltrade.com.pk
http://www.easterncapital.com
http://www.fysltrade.com
http://www.kasbdirect.com
https://www.livetradeonline.com
http://www.marstradeonline.com
http://kapadia.ikats.com.pk
[10.4]
http://www.tradeonline.com.pk
http://rafi.ikats.com.pk
http://www.scsecurities.net
http://www.weonline.biz
http://www.zafarstocks.com
2006-07-04
Investing Glossary
http://www.investorwords.com
Investor Guide
http://www.investorguide.com
Investor's Encyclopedia
Turtle Trader
http://www.investopedia.com
http://www.turtletrader.com
83
[11]
CONTRIBUTORS
2006-07-20
Much of the information contained in this FAQ was collected from various posts made at the
KSE100Stocks Yahoo Group and from across the internet, and presented in here in readable
form by me.
Ali Ahmed (author)
[shadesofmundane@yahoo.com.au]
This would not have been possible without the valuable contributions from:
Rafique (aka Mediaman)
[mediaman313 at yahoo.com]
[khistocks at yahoo.com]
[irfanshafqat at yahoo.com]
Mohammed Kabani
[mkabani2002 at yahoo.com]
Shahnawaz Nadir
[shahnawaziba at yahoo.com]
Taufiq Usman
[eskdaletu at yahoo.com]
Fahad Khalid
[phaaad at gmail.com]
Zia Khatri
[zia_khatri at yahoo.com]
Waqas
[kse_speculator at yahoo.com]
84