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ASSIGNMENT ON

TOPICS:
DIFFERENCE BETWEEN COMMON AND PREFERRED STOCKS
HOW STOCK EXCHANGE WORKS IN PAKISTAN

ASSIGNED BY:

MAM. NAHEED MALIK

FINANCIAL MANAGEMENT
ASSIGNED TO:
AAMIR SHEHZAD FA08-MBA-002
JAHANZAIB FA08-MBA-046
MUHAMMAD USMAN BASHIR FA08-MBA-052
MUHAMMAD ADNAN MALIK FA08-MBA-066
MUHAMMAD ANWAR FA08-MBA-070
NEELAM JAVAID FA08-MBA-114
RAZA ALI BHATTI FA08-MBA-118
ROHAIL ISLAM FA08-MBA-122
UMMAR LATIF FA08-MBA-154

COMSATS INSTITUTE OF INFORMATION TECHNOLOGY M.A JINNAH CAMPUS


LAHORE

CONTENTS:
What are stocks?
➢ Types of Stocks traded in Pakistan
 Common Stocks
 Preferred Stocks
➢ Difference Between Common and preferred stocks
What is Stock Exchange?
➢ What is Index?
➢ How Stock Exchange works?
➢ Role of brokers in Stocks trade
Conclusion

WHAT ARE STOCKS?


Stocks are the shares in the ownership of a company. Stock represents a
claim on the company's assets and earnings. Stockholders are the investors
and become the owners of the company. As you acquire more stock, your
ownership stake in the company becomes greater. Whether you say shares,
equity, or stock, it all means the same thing. A stock is represented by a
stock certificate. But now-a-days you won't actually get to see this document
because your brokerage keeps these records electronically. Stock has
limited liability which means if the company faces the bankruptcy then
stockholder is not personally liable for the debts of the company.
Hence liability is limited up to the value of stocks.

TYPES OF STOCKS TRADED IN PAKISTAN:


In Pakistan Stock markets there are two types of stocks:

1.1)Types of Stocks

COMMON STOCKS:
In Pakistan mostly companies issue common stocks. Common stock
represents ownership in a company and a claim or dividend on a portion of
profits. Shareholder gets one vote per share to elect the board of directors
who oversee the major decisions made by the management. Common
stockholders entitled to dividend if and when declared by the board of
directors. They have the last claim on the assets of the company after paying
off creditors, bondholders and stockholders, that’s why Common
stockholders are also known as “the residual”.

Common stockholders invest in the firm only upon the expectation of


future returns. They are not guaranteed any return, but merely get what is
left over after all the other claims have been satisfied. Since the common
stockholders receive only what is left over after all other claims are satisfied,
they are placed in a quite uncertain or risky position with respect to returns
on invested capital. As a result of this risky position, they expect to be
compensated in terms of both dividends and capital gains of sufficient
quantity to justify the risk they take.

VALUATION OF COMMON STOCKS:


The zero growth modelof common stock valuation assumes a
constant, nongrowing dividend stream. The stock is valued as a
perpetuity and discounted at a rate ks:

P0
P0 =
ks
The constant growth modelof common stock valuation, also
called the Gordon model, assumes that dividends will grow at a
constant rate, g. The stock is valued as the present value of the
constantly growing cash flow stream:

D1
P0 =
ks − g

The variable growth model of common stock valuation assumes


that dividends grow at a variable rate. The stock with a single
shift in the growth rate is valued as the present value of the
dividend stream during the initial growth phase plus the present
value of the price of stock at the end of the initial growth phase:
N D0 × (1 + g1) t  1 DN + 1 
P0 = ∑ +  × 
t = 1 (1 + ks )
t
 (1 + ks )
N
(ks − g 2) 

PREFERRED STOCKS:
In Pakistan Preferred stocks are issued by very small number of companies.
Preferred stock represents some degree of ownership in a company but
usually doesn't come with the same voting rights. (This may vary depending
on the company.) With preferred shares, investors are usually guaranteed a
fixed dividend forever. This is different than common stock, which has
variable dividends that are never guaranteed. Another advantage is that in
the event of liquidation, preferred shareholders are paid off before the
common shareholder (but still after debt holders). Preferred stock may also
be callable, meaning that the company has the option to purchase the
shares from shareholders at anytime for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity. A
good way to think of these kinds of shares is to see them as being in
between bonds and common shares.

VALUATION OF PREFERRED STOCKS:


The Preferred stocks can be valued with the help of following
formula; Preferred stock valuation assumes a constant, non
growing dividend stream. The stock is valued as a perpetuity
and discounted at a rate ks:

P0
P0 =
ks

WHAT IS STOCK EXCHANGE?


Stock exchange is place where buyers and sellers meet and decide on a price
of stocks. The purpose of a stock market is to facilitate the exchange of
securities between buyers and sellers, reducing the risks of investing. In
Pakistan three Stock Exchanges are working;

Karachi Stock Exchange (Guarantee) Ltd.


Lahore Stock Exchange (Guarantee) Ltd.
Islamabad Stock Exchange (Guarantee) Ltd.

The stock exchange plays the following roles;

The stock exchange admits companies for trading at their


securities.
It provides a market for raising capital by companies.
It provides a market place for shares of listed public companies
to be bought and sold, by bringing companies and investors
together at one place.
The exchange's role is to monitor the market to ensure that it is
working efficiently, fairly and transparently.
WHAT IS INDEX?
Everyday in business news it is heard that KSE 100 Index or LSE 25 Index
increased or decreased by some points. Index shows the trade of shares of
top companies in the market. In Karachi Stock Exchange 100 index shows
the trade of shares of top 100 companies in the market. Lahore stock
exchange index shows the top 25 companies’ shares.
HOW SHARES ARE TRADED?
If an investor wants to purchase the shares of a particular company, he has
to open an account with the Broker in the Stock Exchange. On the other hand
the broker has the account and registered with the Stock Exchange. The
registration fee is Rs.4 Million and broker is allowed to trade up to 25 times
of his Net Capital. Investor can order in two ways,

Limit Orders: In a limit order, the investor or client suggest the price at
which the order is to be executed.
Market Order: Also known as at best order, the order is executed at the
prevailing market rate.

1.2)How Shares are traded

Clients can purchase shares from their brokers on debt but it is necessary by
SECP that client should pay at least 60% of the amount.

TRADING AND SETTLEMENT SYSTEM:


The stock exchanges have introduced a computerized trading system to
provide a fair, transparent, efficient and cost effective market mechanism to
facilitate the investors. Before this system stocks were traded physically by
bidding in the open hall which was very slow system. In Pakistan LSE is the
first to introduce IT trading system, in which software”ULTRA” is used.

Ask Price Bid Price


Name of No. of Price Per No. of Price per Situation
Company Shares Share Shares Share
OAGRA 1000 80 1000 75 Not
Traded
800 78 800 78 Traded
The trading system comprises of four distinct segments, which are:

T+3 Settlement System;


Provisionally Listed Counter;
Spot Transactions; and
Futures Contracts.

T+3 SETTLEMENT SYSTEM:


In the T+3 settlement system, purchase and sale of securities is netted and
the balance is settled on the third day following the day of trade. It reduces
the time between execution and settlement of trades, which in turn reduces
the market risk. It reduces settlement risk, as the settlement cycle is shorter.
PROVISIONALLY LISTED COUNTER:
The shares of companies, which make a minimum public offering of Rs.100
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.

SPOT/T+1 TRANSACTIONS:
Spot transactions imply delivery upon payment. Normally in spot
transactions the trade is settled within 24 hours.

FUTURE CONTRACT:
A Futures contract involves purchase and sale of a financial or tangible asset
at some future date, at a price fixed today.

HOW PRICE OF STOCK DETERMINED?


At the most fundamental level, supply and demand in the market
determines stock price.
Price times the number of shares outstanding (market capitalization) is
the value of a company. Comparing just the share price of two
companies is meaningless.
Theoretically, earnings are what affect investors' valuation of a
company, but there are other indicators that investors use to predict
stock price. Remember, it is investors' sentiments, attitudes and
expectations that ultimately affect stock prices.
There are many theories that try to explain the way stock prices move
the way they do. Unfortunately, there is no one theory that can explain
everything.