Following are the main financial products/instruments in dealt in stock market;
After the shares are made public through Initial Public Offering the same are then traded in secondary market (Stock Exchanges). The holders of such shares are members of the Company and have voting rights. There are various rights of shareholders as per law. For details, please visit SECP guide in reference to shareholder’s rights at www.secp.gov.pk.
Rights issue/Rights shares: Rights shares are issued when companies need to raise additional capital to finance their new expansion projects or to meet working capital needs, etc. in case of rights issue; existing investors have the right to subscribe to these new shares in proportion to their respective shareholdings.
Bonus Shares: Shares issued by the Companies to their shareholders free of cost by capitalization of accumulated reserves from the profit earned in the earlier years.
The term “Derivate” indicates that its value is entirely “derived” form the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivatives means a forward, future, option or any other hybrid contract of predetermined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date. Futures contracts are the organized/standardized contracts in terms of quantity, quality, delivery time and place for settlement on any date in future. The contract expires on pre specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future contract in cash. Trading in derivates is governed by the regulations of each exchange regarding Cash settled futures contract, deliverable futures contract, commodities futures contracts and Stock Index futures contract. These regulations are available on the webpage of the exchanges.
Bond is a negotiable certificate that promises fixed income on the value of the bond. It is generally issued by a Company or Government agency. Bond investors lend money to the issuer and in exchange, the issuer promises to repay the amount equal to the bond value on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the bond.
The two types of bonds available in the financial markets of Pakistan are Government Bonds and Corporate Bonds;
Government Bonds: The different types of bonds issued by the Government of Pakistan are Pakistan Investment Bonds, US Special Dollar Bonds, Wapda Bonds, National Saving Bonds, and Sukuk. These bonds provide fixed return or floating rate of return to the holder of the bond.
Corporate Bonds: Corporate bond (commonly known as Term Finance Certificate – TFC in Pakistan) is a debt instrument issued by companies to raise money to meet its financial requirements. Corporate Bonds are normally issued for a specific period of time with promise to repay the principle amount of the bond money plus interest to the bond holder. When you buy a bond, you are lending money to the company that issued it. The company promises to return your money, or principal, on a specified maturity date. Until that time, it also pays you a stated rate of return, usually semiannually. The interest payments you receive from corporate bonds are taxable. Unlike shares, bonds do not give an ownership interest in the issuing company.
Corporate bonds/TFCs can be of various types depending on the requirements of the issuer. It could be either based on fixed or floating rate of interest or it could be secured or un-secured or with or without Call and Put Option or it could be convertible or non convertible.
Investors can buy corporate bonds for number of reasons, which includes attractive yields, dependable income, safety, diversity and marketability etc.