Functionary of capital market

FUNCTIONARY OF CAPITAL MARKET


A Project Presented

By

Rehan EhsanContact# +92 321 [email protected]

To

Mr. Omer SaeedIn partial fulfillment of the requirements for course completion of

CORPORATE FINANCE

M.PHIL (FINANCE)(SEMESTER ONE)

LAHORE SCHOOL OF ACCOUNTING & FINANCEThe University of Lahore

Prepared By: Rehan Ehsan



Stock exchangeA stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives those advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors that, as in all free markets, affect the price of stocks.

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

The Role of Stock Exchange/Need of Stock Exchange:Stock exchanges have multiple roles in the economy. This may include the following:

1. Raising capital for businesses The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public

2. Mobilizing savings for investment When people draw their savings and invest in shares (through a IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms. Sometimes it is very difficult for the stock investor to determine whether or not the allocation of those funds is in good faith and will be able to generate long-term company growth, without examination of a company's internal auditing.

3. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire


http://en.wikipedia.org/wiki/Capital_(economics)

http://en.wikipedia.org/wiki/Investing

http://en.wikipedia.org/wiki/Shares


other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

4. Profit sharing Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle classfamily, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders.

5. Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

6. Government capital-raising for development projects Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need, in the short term, to directly tax citizens to finance development—though by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

7. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

8. Speculation The stock exchanges are also fashionable places for speculation. In a financial context, the terms "speculation" and "investment" are actually quite specific. For instance, although the word "investment" is typically used, in a general sense, to mean any act of placing money in a financial vehicle with the intent of producing returns over a period of time, most ventured money including funds placed in the world's stock markets is actually not investment but speculation.

OwnershipStock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange.



Examples are Australian Securities Exchange (1998), Euronext (merged with New York Stock Exchange), NASDAQ (2002), the New York Stock Exchange (2005), Bolsas y Mercados Españoles, and the São Paulo Stock Exchange (2007). The Shenzhen and Shanghai stock exchanges can been characterized as quasi-state institutions insofar as they were created by government bodies in China and their leading personnel are directly appointed by the China Securities Regulatory Commission.

What Are the Benefits of the Stock Market?The stock market is a large financial entity that serves many purposes. It allows the public to engage in corporate activity which can suit both investors and companies alike. The economy of a nation further benefits from stock market activity. While the stock market does not always perform well, its core function offers benefits to a society that are not possible without it.

1. Capitalization Companies require money and resources in order to expand their products and services and to reach more consumers. The public, in return, often benefits from the offerings from a company. But sometimes the capital needed to provide these products and services is too great for a company to fund alone. When a corporation decides to go public and become listed on a stock exchange, it offers shares of stock to any individual or institution who wishes to invest in the company. The initial public offering (IPO) immediately raises a large amount of capital quickly. A company can have millions or billions of dollars at is disposal nearly overnight after selling its shares to the public. This money is then used to develop new products and services which will hopefully influence society positively. The manufacture of goods is often an expensive process that requires the kind of capital that only public investing can provide.

2. Investment Returns While a company can benefit handsomely from an IPO, individual investors get access to potentially lucrative returns on their investment if the company performs well. This relationship is mutually beneficial to both parties. There is no guarantee of corporate success but the potential rewards match these risks. There is technically no limit to the profit that corporate investment can generate. Share prices can rise by extraordinary amounts and provide investors with excellent returns.

3. Economic Activity When companies perform well on the stock market, the economy benefits in many ways. Hopefully, a company develops products and services that are in high demand. As the public purchases these offerings from the company, income is generated at many levels. Stores sell goods from the company which affects businesses all over the country. The income generated by these sales is taxed which provides income to the government. As investors in a successful company make profits from their investments, they are more likely to go out and spend this money which further boosts economic activity by generating more income and more revenue. The stock market fuels this cycle repeatedly for thousands of companies that choose to go public.



How Stocks TradeMost stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.

Study of World Stock Market in Comparison with Pakistani Stock Market:Stock Market Indices:

• USA• Africa• Asia and Pacific• Canada• Europe• Middle East• South America

NASDAQ:The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the largest electronic screen-based equity securities trading market in the United States and second-largest by market capitalization in the world. As of January 13, 2011, there are 2,872 listings. The NASDAQ has more trading volume than any other electronic stock exchange in the world.

EASDAQ:EASDAQ (European Association of Securities Dealers Automatic Quotation System) was a European electronic securities exchange headquartered in Brussels. Founded originally as a European equivalent to NASDAQ, it was purchased by NASDAQ in 2001 and became NASDAQ Europe. In 2003, it shut down operations as a result of the burst of the dot-com bubble. In 2007, NASDAQ Europe was revived as Equiduct and is currently operating under Börse Berlin.

Quote availability:NASDAQ quotes are available at three levels:

• Level 1 shows the highest bid and lowest offer—the inside quote.• Level 2 shows all public quotes of market makers together with information of

market dealers wishing to sell or buy stock and recently executed orders.• Level 3 is used by the market makers and allows them to enter their quotes

and execute orders.

Trading schedule:NASDAQ has a pre-market session from 7:00am to 9:30am, a normal trading session from 9:30am to 4:00pm and a post-market session from 4:00pm to 8:00pm (all times in ET).



Karachi Stock Exchange:The Karachi Stock Exchange or KSE is a stock exchange located in Karachi, Sindh, Pakistan. Founded in 1947, it is Pakistan's largest and oldest stock exchange, with many Pakistani as well as overseas listings. Its current premises are situated on Stock Exchange Road, in the heart of Karachi's Business District.

Trading:The exchange has pre-market sessions from 09:15am to 09:30am and normal trading sessions from 09:30am to 03:30pm.The Karachi stock exchange has undergone a considerable deal of downturn partly due to global financial crisis and partly on account of domestic troubles. It remained suspended in excess of 4 months and resumed normal trading only on December 15, 2008. The KSE 100 Index and KSE 30 Index after hitting the low around mid-January has now rebounded and recovered 20-25% till March 12, 2009. By 30 July 2010 total market capitalization of the KSE reached Rs2.95 trillion, approximately 35 billion dollars.

Market IndicesKSE began with a 50 shares index. As the market grew a representative index was needed. On November 1, 1991 the KSE-100 was introduced and remains to this date the most generally accepted measure of the Exchange. The KSE-100 is a capital weighted index and consists of 100 companies representing about 90 percent of market capitalization of the Exchange. In 1995 the need was felt for an all-share index to reconfirm the KSE-100 and also to provide the basis of index trading in future. On August 29, 1995 the KSE all-share index was constructed and introduced on September 18, 1995.

Lahore Stock Exchange:Lahore Stock Exchange (Guarantee) Limited is Pakistan's second largest stock exchange after the Karachi Stock Exchange. It is located in Lahore, Pakistan

LSE Index:LSE-25: The Lahore Stock Exchange Twenty Five company index also calculates the performance of stocks assuming that all rights issues and bonus share issues only increase the listed capital. In the case of bonuses or rights the prices of the shares are not adjusted as they are in the case of the LSETRI. However, the LSE25 assumes that dividends paid out by a component company are not reinvested. In summary, in the LSE25, no price adjustments are made when any component company issues cash dividends.The Lahore Stock Exchange Total Return Index calculates the performance of stocks assuming that all payouts are reinvested in the index on the ex-date. The LSETRI assumes that if a component company issues bonus shares or announces a rights issue it will increase the listed capital. Additionally, the LSETRI also assumes that all pay-outs by a component company are 100% reinvested in the index. Therefore, the LSETRI is adjusted against such payouts announced by any of index constituents on its ex-date allowing the index value to remain comparable over time.

Islamabad Stock Exchange:Islamabad Stock Exchange or ISE is one and youngest of the three stock exchanges of Pakistan and is located in the capital of Islamabad. Islamabad stock exchange (ISE) was incorporated as a guarantee limited company on 25 October 1989 in Islamabad



capital territory with the main object of setting up of a trading and settlement infrastructure, information system, skilled resources, accessibility and a fair and orderly market place that ranks with the best in the world. It was licensed as a stock exchange on 7 January 1992. For the first time, it started trading in July 1992.

Trading SystemInitially an outcry method of trading (a method of trading that uses verbal bids and offers in the trading pits) in shares was adopted which was replaced with the automated trading system (a computerized system for matching orders in securities) commonly called “ISE-CTS” in 1997. In the year 2002, ISECTS gave way to “ULTRA TRADE” trading system which is not only very efficient but also has extended trading capacity, internet trading functionality.

The computerized trading system has brought about much needed transparency in the securities trading. It has been designed in such a way to provide automatic matching of bids and offers for execution purpose. All orders are treated in strict price and time priority, thus ensuring a pure auction market where no order is overlooked or traded through. In this manner, the best trade is executed and passed on to the participants without human interference. Printed confirmation and status messages are immediately received by a member for each of his order.

Remote Trading or Internet Trading has been implemented in ISE on 23 June 2003. Now Brokers can trade from anywhere in the world using remote trading software of ISE with the same robustness as working on the LAN.

Settlement SystemWhen ISE was established T+7 settlement cycle was used for settlement of shares. T+3 was introduced in 2001 which has been replaced by T+2 settlement cycle in August 2007 to reduce the overall settlement risk in the market.

Members/BrokersCurrently Islamabad Stock Exchange has 120 members against 200 as allowed to the exchange, in terms of Article 3(a) of Articles of Association. Of 120 members, 26 are individual and 94 are corporate members.

Listed CompaniesThere are 261 companies listed in Islamabad Stock Exchange at the moment. However, number of listed companies varies from time to time due to delisting, mergers and default of companies.

Unified Trading SystemIslamabad Stock Exchange joined hands with Lahore Stock Exchange on 30 April 2007 to establish a Unified Trading Platform to help in bringing increased liquidity in the market, improving price discovery, maximizing transparency, increasing turnover, broadening investor base, curtailing risks and distortions in trade, providing cost effective service to the investing public and enhancing the image of both the Exchanges.

Indexes



On 1 January 2004, ISE launched its own capital weighted index which is ISE-10 index with a base date of Dec 31, 2002 and a value of 1000. Before its launch ISE was using index of KSE-100. ISE also has a price weighted index called ISE Network Index which was launched on November 1996.

Investors’ ProtectionInvestor Protection Fund has been established in ISE for the protection of investors. ISE took the initiative to introduce system audit of brokers in 2002 and made it compulsory for maintaining internal control on members. To increase market transparency and improve its surveillance capacity, the Unique (Client) Identification Number (UIN) System was launched at pre trade level in August 2006 in ISE. Also a new risk management structure (RMS) was introduced in December 2006 in ISE. New RMS included, among others, a new netting regime; a margining system based on value at risk (VAR) and capital adequacy. The VAR is a state of the art risk management system practiced internationally that takes into account risk associated with each share based on historical data. System audit of brokers was introduced in 2003 and made necessary.

How are the world’s stock markets rated?The world’s renowned indices evaluating stock markets all around the globe were developed by the Financial Times Stock Exchange, a London-based major global stock index compiler, and Morgan Stanley Capital International, an index provider in the United States. Both the FTSE and MSCI indices classify countries around the globe into different categories based on a result of an evaluation. The best category for both indices is a group with developed countries. Then, what is so good about being placed in this group? The FTSE and MSCI indices are used by global investors who operate large-size funds such as overseas asset managers, institutional investors, hedge funds and pension funds when determining where to invest such huge sum of money. Therefore, these indices play a key role to benchmark the performance of the investment of funds estimated at $2.5 trillion and $3.5 trillion, respectively. In the case of the MSCI index, even merely 1 percent of fluctuations can shift $35 billion worth of money which may have a huge influence on not only certain stocks but also a country’s overall stock market.

What is the MSCI?The MSCI index has been calculated by Morgan Stanley Capital International, the affiliated company of Morgan Stanley, since 1969. Over 3,000 types of indices are being operated by MSCI based on region and sector. Among them, ACWI (All Country World Index) and Emerging Markets Index are the ones that Korea is closely correlated with. The MSCI ACWI consists of 45 country indices including 24 developed and 21 emerging market country indices while the MSCI Emerging Markets Index, designed to measure stock market performance of emerging markets, is comprised of 21 emerging market country indices such as Korea, Indonesia, China, Brazil, Colombia and Taiwan. Countries are classified into three different groups - developed, emerging and frontier.

What is the FTSE?The FTSE index, the world’s second most powerful indices following the MSCI index, has been announced by the FTSE, an independent company jointly established by the Financial Times and the London Stock Exchange, since 1999. The FTSE



operates over 100,000 indices including FTSE 100 Index, FTSE techMARK 100, FTSE World Index. The FTSE index is classified into seven main groups: global equity, regional and partner, fixed income, real estate, alternative investment, responsible investment and investment strategy. In terms of country classification, FTSE divides countries into four major categories: developed; advanced emerging; secondary emerging; frontier.



Detailed Analysis of Two Companies Scripts(Unilever) & (Nestle)



NESTLE PAKISTAN LIMITED:

More than just offering food and beverages, Nestlé Pakistan is a leading health, wellness and nutrition company. We believe that good food is necessary for a good life. In fact, health and nutrition is more dynamic than ever. Food has evolved from being a necessity to becoming an expression of how we live. This is why Nestlé Pakistan products are developed to provide a safe and healthy source of nutrition to all family members.

Raito Analysis:

NESTLE PAKISTAN LIMITED

2010 2009

Liquidity RatiosCurrent Ratio 0.85 0.85Quick Ratio 0.38 0.37Cash Ratio 0.05 0.04Working Capital Ratio (0.06) (0.07)

Operating RatiosWorking Capital Turnover (35.42) (33.25)

Profitability RatiosGross Margin 26.96% 28.91%Net Margin 11.06% 10.17%Return on Equity 102.05% 94.56%Return on Assets 12.41% 11.26%Interest Coverage Ratio 359.76% 354.43%Interest to Long-Term Debt -28.41% -28.05%Operating Expense/Sales 2.59% 3.73%

Leverage RatiosLong-Term Debt/Equity 99.85% 95.12%Total Debt/Total Assets 24.28% 22.65%



GROWTH AND DIVIDENTS CALCULATIONS: 1

g=growth 2010 2009Calculatio

ns

Earning Growth

90.69

66.27 0.37

Real Growth 51487302 41155822 0.25

Growth = ROE x RR

ROE= Net Profit/ Common Share holder Equity

ROE= 0.74

Retention Rate= 1- Payout Ratio

Payout Ration= DIVIDENT/NPAT

Payout Ratio= 0.72

RR= 0.28

Growth= 0.21

2 Ke= CAPM=

Rfr + Beta



( Rmkt- Rfr)

Rfr= % 13.5

Rmk=% 18.3

Beta= 1.0

CAPM= 0.18

3

Di=Do x (1+g)

Do= 30 per Share

Growth= 0.21

Di= 36

4 Po= Di/Ke-g Di=36 Ke=0.21 g=0.18

Po= 1,200

current share price= 3967.76



UNILEVER PAKISTAN LIMITED:No matter who you are, or where in the world you are, the chances are that our products are a familiar part of your daily routine. Every day, around the world, people reach for Unilever products.

Raito Analysis:

UNILEVER PAKISTAN LIMITED

2010 2009

Liquidity RatiosCurrent Ratio 0.83 0.78Quick Ratio 0.40 0.27Cash Ratio 0.20 0.03Working Capital Ratio (0.11) (0.14)

Operating RatiosWorking Capital Turnover (28.88) (24.73)

Profitability RatiosGross Margin 32.63% 34.92%Net Margin 7.33% 8.00%Return on Equity 134.27% 137.21%Return on Assets 17.70% 19.76%Interest Coverage Ratio 317.19% 309.32%Interest to Long-Term Debt 1583.05% 1533.44%Operating Expense/Sales 11.13% 12.94%

Leverage RatiosLong-Term Debt/Equity 2.67% 2.89%Total Debt/Total Assets 0.71% 0.83%

GROWTH AND DIVIDENTS CALCULATIONS:

1

g=growth 2010 2009Calculatio

ns

Earning Growth 246 230 0.07

Real Growth 44671507 38187582 0.17



Growth = ROE x RR

ROE= Net Profit/ Common Share holder Equity

ROE= 0.92

Retention Rate= 1- Payout Ratio

Payout Ration= DIVIDENT/NPAT

Payout Ratio= 0.91

RR= 0.09

Growth= 0.08

2

Ke=

CAPM= Rfr + Beta ( Rmkt- Rfr)

Rfr= % 13.5

Rmk=% 18.3

Beta=



1

CAPM= 0.18

3

Di=Do x (1+g)

Do= 157 per Share

Growth= 0.08

Di= 170

4 Po= Di/Ke-g Di=170 Ke=0.18 g=0.08

Po= 1,700

current share price= 1607.60



DATA ANALYSIS of TWO COMPANIES SCRIPTS:

NEW INVESTORS:Based on the above Financial Statement analysis of both the companies, it is feasible to invest in Unilever Pakistan Limited compare to Nestle Pakistan Limited. Buy the shares of Unilever as this will going to be high forecasted prices in forgeable future.

For Existing Investorsit is feasible for the existing investors that in case for Nestle Pakistan Limited they need to Purchase the shares as these are at low cost to date and will be having much 18% more dividend in Year 2012.For in case of Unilever Pakistan Limited investors who already have shares of UPL can sell them as this has high prices.


Functionary of capital market

Economy & Finance

Transcript of Functionary of capital market