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 Pakistan’s 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”: What’s 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 firm’s 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 TFC’s 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