Stock

Exchange
&
Related Te
rms
Presented
By: Anum
Irfan

Stock Exchange
0 It is an organized and regulated financial

market where securities (bonds, notes,

shares) are bought and sold at prices
governed by the forces of demand and
supply.

Arbitrage
0 Arbitrage is basically buying in one market and

simultaneously selling in another, profiting from a

temporary difference. This is considered riskless profit
for the investor/trader.
0 EXAMPLE
0 An investor may buy a stock on a foreign exchange
where the price has not yet adjusted for the
constantly fluctuating exchange rates. The price of
the stock on the foreign exchange is therefore
undervalued compared to the price on the local
exchange, and the trader makes a profit from this
difference.

Ask & Bid

Ask
0 The lowest price a

seller is willing to
accept for a security,
also known as the offer
price.
0 An example of an ask in
the stock market would
be $8 x 1000 which
means that someone is
offering to sell 1000
shares for $8.

Bid
0 The highest price a

buyer is willing to
pay for a security.
0 An example of bid
at the stock market
would be $6 x 800
which means that
an investor is willing
to buy 800 shares at
a price of $6.

Basis Point
0 A unit is equal to 1/100th of 1%, and is used

to denote the change in a financial

instrument. The basis point is commonly
used for calculating changes in interest
rates, equity indexes and the yield of a
fixed-income security.
0 An interest rate of 5% is 50 basis points

greater than an interest rate of 4.5%. The

difference between 12.83% and 12.88% is
five basis points.
0 The relationship between percentage

changes and basis points can be summarized

Bear market VS Bull

Market
0 A market condition in

which the prices of

securities are falling,
and widespread
pessimism causes the
negative sentiment to
be self-sustaining. As
investors anticipates
losses in a bear
market and selling
continues, pessimism
only grows.

0 A market in which

the prices of
securities are
rising. It is
characterized by
optimism, investor
confidence and
expectations that
strong results will
continue.

Blue Chip Stocks

0 Stocks of well-established and financially

sound companies that have demonstrated

their ability to pay dividends in both good
and bad times.
0 These stocks are usually less risky than other
stocks.
0 EXAMPLE:
0 General Motor Corp
0 Fauji Fertilizers
0 Pakistan Oil field
0 United Bank

Call option
0 An option which gives the holder the right, but not the

obligation, to buy a fixed amount of a certain stock at a

specified price within a specified time. Calls are purchased
by investors who expect a price increase.
0 Investors use option to speculate and to hedge risks.
0 EXAMPLE:
0 IBM stock is currently trading at a $100 per share. An
investor purchases one call option contract on IBM with a
100 strike and at a price of $2.00 per contract. The actual
cost of this option will be $200 (100 shares x $2.00 = $200).
0 After a week IBM starts trading at $105 per share. This is the
right time for the investor to sell the shares in order to gain
profits from price difference.

Commission
0 The fee charged by an investment advisor or broker for

buying or selling securities as an agent on behalf of a

client.
0 EXAMPLE:
0 You would like to purchase 100 shares of Company XYZ
at $35 per share, and your broker charges a 2%
commission to make the trade.
0 The shares themselves would cost $3500 ($35 x 100
shares), but the broker would also need to be paid for
finding someone to sell the shares to you. For their
services, they would charge $70 ($3500 x 2%). The total
cost of the transaction would be $3500 + $70 = $3570.

Downtick
0 A transaction on an exchange that occurs at a

price below the previous transaction.

0 In order for a downtick to occur, a transaction
price must be followed by a decreased price. This
is commonly used in reference to stocks, but it
can also be extended to commodities and other
forms of securities.
0 EXAMPLE:
0 Stock ABC previously traded at $10. If its next
trade occurs at a price below $10, then ABC will
be on a downtick.

Equity options
0 An option contract on a stock.
0 The holder of an equity option has the ability

to buy or sell some number of stocks in a

certain company at a given price on or before
the expiration date.

Insider Trading
0 A trade one makes because one has relevant

information on a company that has not been

released to the public.
0 EXAMPLE:
0 A director may have access to a companys
financial state (high rate of dividend) prior to
its official announcement, and then buy or
sell that companys stock accordingly.
0 Insider trading is a serious crime when it is
done without proper authorization.

Issued and Outstanding

Securities
0 The situation where the number of issued

securities equals the number of outstanding

securities.
0 Stock currently held by company, including
restricted shares owned by the companys
officers and insiders Shares that have not
been repurchased by the company are not
considered outstanding stock.
0 The number of authorized shares that is sold
to and held by the shareholders of a
company, regardless of whether they are
insiders.

STOCK MARKET

What is stock market?

0 Market in which shares of listed companies

are issued and traded either through

exchanges or over the counter market.
0 It is also known as EQUITY MARKET

Top brokers
0 KASB securities
0 AKD securities
0 BMA trade
0 IGI trade
0 SCS trade
0 Taurus securities
0 MM securities
0 Foundation securities
0 Arif Habib securities
0 Sunrise capital
0 Burj capital
0 Invest capital
0 Elixir securities

Major participants
0 Local investors.
0 Foreign investors
0 Mutual funds
0 Institutions
0 Banks

DIFFERENT STOCK PRICE

INDICES
0 KSE GENERAL INDEX (1995=1000)
0 KSE 100 Index (1991=1000)
0 KSE-30 Index
0 SBP GENERAL Index
0 BR (BUSINESS RECORDER)

Financial
Derivative
s

What are they?

0 A derivative is a financial instrument which

derives its values from the value

(performance) of underlying entities, such as
an asset, index or interest rate.
0 In practice, it is a contract between two
parties that specifies conditions (especially
the dates, resulting values and definitions of
underlying variables, the parties contractual
obligations, and the notional amount) under
which payments are to be made between the
parties.

0 The most common underlying asset include:

0 Commodities, stock, bonds, interest rates and

currencies.
0 Generally used as an instrument to hedge
risks, but can also be used for speculative
purposes.
0 Each time a derivative is traded, one of the
two parties is bound to suffer a loss (zero
sum game)

Types?
Option
s

Derivativ
es

Call Option
Put Option

Future
s

Swaps

Commodity
Futures
Financial
Futures

Interest rate
swap
Commodity
swap
Credit default
swap
Currency swap
Equity swap

Options Trading
0 An option is a contract which gives the

owner the right, but not the obligation, to buy

or sell an underlying asset or instrument at a
specified strike price on or before a specific
date.
0 Two types:
0 - Call options
0 -Put options

Futures
0 A financial contract obligating the buyer to

purchase an asset (or the seller to sell an

asset), such as a physical commodity or a
financial instrument, at a predetermined
future date and price.
0 The primary difference between options and
futures is that options give the holder the
right to buy or sell the underlying asset at
expiration, while the holder of a futures
contract is obliged to fulfill the terms of
his/her contract.

0 The contracts are negotiated at a futures

exchange, which acts as an intermediary

between the two parties. The party agreeing
to buy the underlying asset in the future, the
buyer of the contract, is said to be long,
and the party agreeing to sell the share in the
future, the seller of the contract is said to
be short.
0 Two types:
0 Commodity Futures: are mostly grains such
as wheat, metals such as gold, silver and
minerals like oil.
0 Financial futures: include currency, bonds and
stocks and can also be intangible assets or
referenced items, such as stock indexes and
interest rates.

0 In finance, a forward contract or simply a

forward is a non-standardized contract

between two parties to buy or sell an asset at
a specified future time at a price agreed upon
today.

Difference between Forward Contracts and

Future
Contracts
Future Contracts
Forward
Contracts
1. Negotiated directly by

the buyer and seller

2. Customized to the
customer needs.
Usually no initial
payment required.
Usually used for
hedging
3. High counterparty
risk
4. Not regulated

1. Quoted and

traded on the
Exchange
2. Standardized.
Initial margin
payment required.
Usually used for
speculation
3. Low counterparty
risk
4. Government
regulated market
(the Commodity
Futures Trading
Commission or
CFTC is the

SWAPS
0 An exchange of streams of payments over

time according to specified terms. The most

common type is an interest rate swap, in
which one party agrees to pay a fixed interest
rate in return for receiving a adjustable rate
from another party.

Interest Rate Swap

Foreign Exchange Swaps

Commodity Swaps
0 A swap in which exchanged cash flows are

dependent on the price of an underlying

commodity. A commodity swap is usually
used to hedge against the price of
commodity.

Credit Default Swap

0 The buyer of a credit default swap receives

credit protection, whereas the seller of the

swap guarantees the credit worthiness of the
debt security. In doing so, the risk of default
is transferred from the holder of the fixed
income security to the seller of the swap.

Derivative Market In
Pakistan
0 In Pakistan derivative market was developed in 2001

and is currently regulated by the SBP.

0 In Pakistan, the derivatives market is in the nascent
stage. It has just started to emerge with few contracts
of forward trade agreements, plain vanilla swaps and
currency options. The total volume of transactions is
around Rs5 billion.
0 Derivative market is deeply regulated by the SBP. It
regulates the OTC market for
Foreign currency options
Forward rate agreements
Interest rate swaps

Derivative Market In
Pakistan
0 All derivative agreements require formal approval of

the central bank, given on a case-to-case basis,

considering the concerned banks potential of risk
management.
0 Authorized derivative dealers only include:
City bank
Deutsche Bank
Faysal Bank
HBL
SCB
UBL

Derivative Market In
Pakistan
0 Financial derivatives are designed to manage

overall risk profile and profitability of any

business. But there are risks involved in the
derivative products themselves which
translates into the grain of one is the loss of
the other. That is the major reason why SBP
has been highly cautious of the derivative
market.
0 The major implications for SBP have been to
ensure that the risks of derivatives are fully
understood by local firms and banks before
opting for a full-blown expansion in derivative
market.