CHAPTER 19

Understanding
Securities and
Investments

Chapter Outline

Securities Markets
Stocks
Bonds
Other Investments
Buying and Selling Securities
Securities Market Regulation

What Are Securities?

Stocks and bonds
representing secured,
or asset-based, claims
by investors against
issuers

What is the Primary

Securities Market?

Market in which
new stocks and
bonds are bought
and sold

What is the Security and

Exchange Commission
(SEC)?

Federal agency that

administers
Pakistans securities
laws to protect the
investing public and
maintain smoothly
functioning markets

SECP
It Succeeded the Corporate law Authority and came into
existence on Jan 01, 1999.
The SECP board is directly answerable to the parliament.
Consist of 06 division

Security market
Non-banking financial sector
Company law administration
Enforcement
Insurance
Support services

What is an Investment
Bank?

Financial institution
engaged in issuing
and reselling new
securities

Investment Banking
Provides three important services:
They advise companies on the timing and financial
terms of new issues.
By underwriting (buying) new securities, they bear
some of the risks of issuing them.
They create the distribution networks for moving
new securities through groups of other banks and
brokers into the hands of individual investors.

What is the Secondary

Securities Market?

Market in which
stocks and bonds
are traded

Common Stock
Stock values are expressed in three
different ways:
Par value is the face value of a share of stock
at the time it is originally issued
Market value is the current price of a share in
the stock market
Book value is the value of a common stock
expressed as total shareholders equity divided
by the number of shares of stock

Investment Traits of
Common Stock
Common stocks are among the riskiest of all
securities.
Common stocks offer high growth potential.
Blue-chip stock is issued by a well-established
company with a sound financial history and a
stable pattern of dividend payouts
The Old Economy versus the New: Whats
a Blue Chip Now?

Preferred Stock
Preferred stock is usually issued with a
stated par value.
Dividends are typically expressed as a
percentage of par value.

Some preferred stock is callable.

Call price is the amount of payment specified in
the purchase agreement between the firm and
its preferred stockholders

Investment Traits of
Preferred Stock
Preferred stock has first rights to dividends.
Preferred stock is less risky than income
from the same firms common stock.
Cumulative preferred stock is preferred stock
on which any missed dividend payments must
be paid as soon as the firm is able to do so

What is a Stock
Exchange?

Organization of
individuals formed to
provide an
institutional setting in
which stock can be
traded

Stock Exchanges
The Trading Floor
Trading is allowed only at an actual physical
location called the trading floor.

Brokers are individuals or organizations

who receive and execute buy-and-sell
orders on behalf of other people in return
for commissions. Types include:
Discount Brokers
Online Trading
Full-Service Brokers

The Karachi Stock Exchange

Established on 18 Sept, 1947.
At the beginning 90 members were
registered
Listed Companies 690
Total 34 sectors

Market Indices
KSE began with a 50 shares index.
On Nov 01, 1991 the KSE-100 was
introduced.
KSE-100 is a capital weighted index
Consists of 100 companies
Represents 83% market capitalization.
All share index was introduced on Sept 18,
1995.

What is a Bond?
Security through
which an issuer
promises to pay the
buyer a certain
amount of money by a
specified future date

Types of Bonds
Government bond is issued by the federal
government
Municipal bond is issued by a state or local
government
Corporate bond is issued by a company as
a source of long-term funding.
Registered and Bearer (or Coupon) Bonds
Secured Bonds
Debentures

The Retirement of Bonds

Callable bonds may be called in and paid for by
the issuer before its maturity data
Sinking Fund provisions

Serial bonds are retired when the issuer redeems

portions of the issue at different preset dates
Convertible bonds can be retired by converting it
to common stock
Secondary Markets for Bonds
Nearly all secondary trading in bonds occurs in the
OTC market rather than on organized exchanges.

Government bonds in Pakistan

Issued By Government
Pakistan Investment Bonds
Euro Bond
Prize Bonds

Corporate bonds in Pakistan

Issued By Corporations
Term Finance Certificates
29 TFCs are registered and traded on Karachi Stock
Exchange

Other Investments
Commodities market is a market
in which futures contracts are
traded
Futures Contracts

Bull and Bear Markets

KSE launches OTC market

KARACHI: The Karachi Stock Exchange announced launch of over-the-counter (OTC)
market through listing of first ever Privately Placed Commercial Papers (CP) of Rs 1
billion of Engro Fertilizers Limited on the Exchange.
The CP will be listed on the Exchange w.e.f. Monday, January 17, 2011 and trading will
take place w.e.f. Tuesday, January 18, 2011 i.e. one day after the date of formal listing
as required under the Regulations.
The purpose of OTC market is to provide investors with an efficient and transparent
source of investment and encourage promoters to set up new industries or expand the
existing enterprises by raising funds in a cost-effective manner in a listing regime where
requirements are less stringent.
KSE endeavor to develop healthy, efficient and transparent OTC Market in line with the
international standards, which plays a pivotal role in the efficient working of the global
financial system and in generating the economic growth of the countries across the
world.
The KSE foresees the Pakistani capital market particularly the Debt Market growing
rapidly in the future to attain a place of pride amongst the leading Capital Markets of the
region.