Capital Market - TM

ISLAMIC INSURANCE AND SOCIAL SECURITY
IAIB-4104 ISLAMIC INSURANCE AND SOCIAL SECURITY
ASSINGMENT FINANCIAL MARKET
TM.Rimsan SEU/IS/06/IA/036 FINAL YEAR FIRST SEMASTER 06/July/2011

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SOUTH EASTERN UNIVERSITY OF SRI LANKA OLUVIL
ISLAMIC INSURANCE AND SOCIAL SECURITY Table of Contents 1 Executive summary ........................................................................................................ 4 1.1 1.2 2 Importance of capital market to economic and social development of the country . 6 Characteristics of a good market............................................................................. 8
Available securities in capital market of Sri Lanka ......................................................... 10 2.1 Characteristics and transaction procedures .......................................................... 12
2.1.1 Fixed Income Securities ................................................................................... 12 2.1.2 Debt and Equity Securities ............................................................................... 13 2.1.3 Loans, Debt Securities, and Disintermediation ................................................. 13 2.1.4 Key Features and Terminology of Fixed Income Securities ............................... 14 2.1.5 A Comparison of Bond Sectors and the Sri Lankan Fixed Income Securities Market ..... 18 3 Primary financial markets ............................................................................................. 21 3.1 Types of share issues ............................................................................................ 21
3.1.1 Equity shares: .................................................................................................. 21 3.1.2 Preference shares: ........................................................................................... 21 3.1.3 Deferred shares: .............................................................................................. 22 3.1.4 Income Shares ................................................................................................. 22 3.1.5 Growth shares ................................................................................................. 22 3.1.6 Cyclical Shares ................................................................................................. 22 3.1.7 Defensive shares.............................................................................................. 22 3.1.8 Speculative shares ........................................................................................... 22 3.1.9 Cumulative & Non cumulative shares............................................................... 23 3.1.10 Redeemable & Non-redeemable.................................................................... 23 3.1.11 Convertible & Non-convertible shares ........................................................... 23 3.1.12 Bonus shares: ................................................................................................ 23 3.1.13 Other classifications of shares:- ..................................................................... 24 3.2 3.3 4 IPO methods- Initial Public Offering (IPO) ............................................................. 25 Private placement................................................................................................. 27
Secondary financial markets ......................................................................................... 28 4.1 4.2 4.3 4.4 Basic trading system ............................................................................................. 28 Pure auction market ............................................................................................. 29 Dealer markets ..................................................................................................... 29 Call and continuous markets ................................................................................. 29
4.4.1 Call Markets..................................................................................................... 29 TM.Rimsan - (SEU/IS/06/IA/036) Page 2
ISLAMIC INSURANCE AND SOCIAL SECURITY 4.4.2 Continuous Markets......................................................................................... 30 4.5 Automated trading system (pre open, open auction, regular trading, close) ......... 31
4.5.1 Automated Trading System (ATS) ..................................................................... 31 4.6 Pre- Open ............................................................................................................. 33 Open Auction ....................................................................................................... 33 Regular Trading .................................................................................................... 33 Market Close ........................................................................................................ 34 Types of orders (Market orders, limit orders) ........................................................ 34
4.6.1 Market Order................................................................................................... 34 4.6.2 Limit order ...................................................................................................... 34 4.7 Order attributes (Time qualifiers, volume qualifiers) ............................................. 35
4.7.1 Time qualifiers ................................................................................................. 36 4.7.2 Volume qualifiers ............................................................................................ 37 4.8 5 Margin trading ...................................................................................................... 37
Stock market indexes in Sri Lanka ................................................................................ 39 5.1 5.2 5.3 5.4 All Share Price Index (ASPI) ................................................................................... 40 Milanka Price Index (MPI) ..................................................................................... 40 Volume Weighted Average Price (VWAP) .............................................................. 41 Total Return Indices (TRI) ...................................................................................... 42
5.4.1 All Share Total Return Index (ASTRI)................................................................. 42 5.4.2 Milanka Total Return Index (MTRI)................................................................... 42 5.4.3 Sector Total Return Indices .............................................................................. 42 5.4.4 MBSL Mid-Cap Index ........................................................................................ 42 5.5 5.6 5.7 5.8 6 Dow Jones Sri Lanka Indices .................................................................................. 43 Dow Jones Sri Lanka Index (DJSL) .......................................................................... 43 Dow Jones Sri Lanka Titaus 20 Index(DJSL20) ........................................................ 43 Dow Jones Amana Sri Lanka Index(DJIMSL) ........................................................... 43
References.................................................................................................................... 44
The capital market is important to a countrys economic and social system. It plays the crucial roles of capital raising for both the public and private sectors promoting balance and stability in the financial system. Markets such as Sri Lanka are attractive for frontier market investors. In market financial securities, buyers and sellers engage in buy and sell transactions in a variety of securities such as stocks, bonds, foreign exchange and derivatives.
The report should be include the following

1 Executive summary
Sri Lanka is a country with a small open economy and an estimated population of 19.9 million growing at an annual average growth rate of 1.1 per cent. The economy has grown at an average of 5 per cent over the past 15 years. The gross domestic product (GDP) in 2006 was estimated to be $23.2 billion with a per capita income of $1,340 which places the country in the group of lower middle income countries in the world. The economy has moved to a path of high growth and has been able to maintain growth in real terms of over 6 per cent in the recent past. The economy achieved a growth rate of 8 per cent in the first half of 2006 and is estimated to grow by over 7 per cent in real terms during the year as a whole. The country expects to maintain an annual growth rate exceeding 8 per cent over the next 10 years enabling it to reach a per capital income level of around $3,000. The economic activities are broad-based and overall production is dependent on the performance of the three main sectors in the economy - services, industry and agriculture. The services sector has shown a steady growth in its share of overall production and at present accounts for over 55 per cent of the output of the economy. The main activities of this sector are international and domestic trade, financial services and transportation which account for 70 per cent of the output. The share of industry in total output has remained around 27 per cent during last three decades. At present, the factory, industry and construction sub-sectors account for over 75 per cent of total industrial output. The agriculture sector which was the major sector five decades earlier contributes only 17 per cent of the total output. The food and plantation crops sub-sectors account for over 80 per cent of the sector output which is highly sensitive to the prevailing weather conditions. Although Sri Lanka is an island economy with unlimited marine resources, the share fish production in overall output is less than 2 per cent. The capital market is important to a countrys economic and social system. It plays the crucial roles of capital raising for both public and private sectors, promoting balance and stability in the financial system, decreasing dependency on the banking sector, driving the economy forward and creating jobs, as well as being an alternative method for savings. The economy has been operating continuously with a domestic resource gap where the countrys investments are higher than national savings with the gap being financed from foreign sources. Both investments and national savings are on an upward trend and reached 26.5 per cent and 23.3 per cent of GDP respectively in 2005. This level of savings and investment is not adequate for the economy to achieve the targeted growth path in a sustainable manner. In view of this, the medium-term macroeconomic strategy expects to increase the countrys investment to over 30 per cent of GDP giving higher priority to the more productive sectors of the economy.
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The Government has reiterated the necessity of improving the fiscal position to ensure fiscal and debt sustainability in the country. Persistent high government budget deficits which were mainly financed by commercial domestic borrowings resulted in the stock of public sector debt mounting in recent years. Consequently, servicing of public debt became a major issue in the government budget and the management of public debt became a complex task which required drastic changes in the overall fiscal management of the economy. In view of the emerging threat to the fiscal position, the Government approved the Fiscal Management Responsibility Act (FMRA) in 2003 to improve fiscal discipline through rule-based fiscal management. Macroeconomic management in Sri Lanka has focused on fiscal and monetary policies to enable the economy to achieve sustainable high economic growth with balanced regional development. Fiscal policy has been formulated to achieve fiscal consolidation while monetary policy focused on prudent monetary management and an independent floating exchange rate system. This process has been complemented by broadening and deepening structural reforms to ensure efficiency in policy transmission and targeted outcomes are achieved in the future. Money market operations in Sri Lanka comprise two active markets. The first is the interbank call money market and the second is the Treasury bill (primary and secondary) market. Other money market operations such as those for commercial paper and central bank securities are not significant in the domestic market. A strong capital market will lessen the impact of economic fluctuations which can be compounded by the fast-flowing nature of capital. However, there are still many issues besetting the Thai capital market: few institutional investors, small retail investor base, limited financial products, high transaction costs, and lack of efficient regulatory enforcement are some examples. Moreover, Thailands capital markets in recent times have grown at a very slow pace. The size of the stock market compared to GDP is only 51% (as of June 2009) which is smaller than other countries in the region such as Hong Kong (845%), Singapore (202%), Malaysia (104%) and South Korea (66%). Should this trend continue, Thailands capital market will stagnate and become increasingly marginalized. Various studies have shown that inadequate development of the capital markets will impact its ability to raise, channel and monitor resources efficiently. In the end, this will lead to loss of growth opportunities, standard of living and prosperity. A capital market is a market for long term debt and equity securities, where business enterprises (companies) and governments can raise funds for long term investment. It is normally divided into two broad categories - the stock market and the bond market. The stock market is the market where equity securities such as stocks representing ownership shares in particular corporations issuing the securities are traded. These instruments are usually issued by big corporations and promise a return (in the form of dividends) based solely on performance of the issuing corporation. In addition, investors can gain from appreciation of stock prices. And the capital markets are markets where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income). Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do. The principal actors in the international
capital markets of the late 1990s were banks, non-bank financial institutions, corporations, and government agencies. Private capital became very important to development in the late 1990s. During the 1990s, the sources of capital for developing countries changed drastically. In 1990, a World Bank publication listed aggregate net long-term resource flows to developing countries (private and public sources of capital) as 101.9 billion U.S. dollars. Of that number, approximately 57% was from official loans or grants, and the remaining 43% came from private sources. Just five years later, in 1995, only 28% of the resources were from official sources, with the remaining 72% from private sources. During the course of those five years, official funding remained relatively constant. Private funding, however, skyrocketed. From the 1990 figure of $44 billion, private sources increased almost 400% to $167 billion. 1 In a market economy, the role of the capital market is very important. The good functioning of the capital market is vital in the contemporary economy, in order to achieve an efficient transfer of monetary resources from those who save money toward those who need capital and who succeed to offer it a superior utilization; the capital market can influence significantly the quality of investment decisions. The gathering of temporary capitals that are available in the economy, the reallocation of those that are insufficiently or inefficiently used at a certain moment and even the favoring of some sartorial reorganizations, outline the capital markets place in the economy of many countries. The well functioning of the capital market is a solid foundation for the insurance of a lasting growth, on a long term, of the national economy; the financial market and first of all the capital market represents in many countries and it also could represent in Romania, too the engine for the economic development. Although the capital market has suffered profound transformations in the developed countries during the last decades, the modernization was rather institutional and organizational and less from the specific mechanisms point of view. From some points of view, the transitional countries have made many progresses lately with a view to the capital market, especially the secondary one, approaching the level of the countries with tradition in the domain. Unfortunately, the modern infrastructures, computers, the preferment telecommunication system, the adequate software, are not enough. In order to have a functioning stock market mechanism, fulfilling its primordial function, we need savings, trust in the economys perspectives, and an increasing production. 2 1.1 Importance of capital market to economic and social development of the country
The importance of the capital market in an economy is given by the significant role played in the firms and states financing, by the weight of the direct financing among the financing modalities. Beside the apparent important thing the large transaction volume on the stock market what it really matters is the place which is taken by the (primary) capital market in the development of the joint-stock companies (direct financing), and this thing is sometimes forgotten, or appears as secondary.
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The global capital markets became critical to development in an open economy. Developing countries, like all countries, must encourage productive investments to promote economic growth. Domestic savings could be used to make productive investments. Typically, developing countries have suffered from low domestic savings rates (although this is not true of the Asian economies of the late 1990s). The global capital, however, developing countries added to domestic savings by borrowing savings from abroad. The capital market is an instrument for the economic development of a country. Provides an important alternative source of long-term finance for long-term productive investments. This helps in diffusing stresses on the banking system by matching long-term investments with long-term capital. Provides equity capital and infrastructure development capital that has strong socio-economic benefits - roads, water and sewer systems, housing, energy, telecommunications, public transport, etc. - ideal for financing through capital markets via long dated bonds and asset backed securities Provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization. The Savings and investment ratios are too low, below 10% of GDP.3 The capital market promotes public-private sector partnerships to encourage participation of private sector in productive investments. The need to shift economic development from public to private sector to enhance economic productivity has become inevitable as resources continue to diminish. It assists the public sector to close resource gap, and complement its effort in financing essential socio-economic development, through raising long-term project based capital. It also attracts foreign portfolio investors who are critical in supplementing the domestic savings levels. It facilitates inflows of foreign financial resources into the domestic economy. 4 Assists the Government to close resource gap, and complement its effort in financing essential socio-economic development, through raising long-term project based capital. The capital market not only reflects the general condition of the economy, but also smoothens and accelerates the process of economic growth. Various institutions of the capital market, like nonbank financial intermediaries, allocate the resources rationally in accordance with the development needs of the country. The proper allocation of resources results in the expansion of trade and industry in both public and private sectors, thus promoting balanced economic growth in the country The capital market facilitates lending to the businessmen and the government and thus encourages investment. It provides facilities through banks and nonbank financial institutions. Various financial assets like shares, securities, bonds, etc., induce savers to lend to the government or invest in industry. With the development of financial institutions, capital becomes more mobile, interest rate falls and investment increases. 5
3 4
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The capital market tends to stabilize the values of stocks and securities and reduce the fluctuations in the prices to the minimum. The process of stabilization is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities
1.2
Characteristics of a good market
Generally, investors have a variety of investment solutions to choose from. Some of them include stocks, bonds, US treasuries, foreign exchange and many others. However, regardless of which one you have selected the general condition of the market matters most regarding the success of the investments you will make. The basics characteristics that a beneficial market should possess are:

Market Liquidity Low transaction costs Transparency Trends

Market Liquidity
Liquidity refers to the state of the market which best explains the easiness of entering and exiting the market. The process of executing trades involves:

Opening of a position Closing of the same position
Liquidity is connected with volume. The latter represents the number of trades that are executed. So, liquidity describes the easiness with which investors can enter and exit the positions they have established. If the market is liquid enough, then traders can execute large number of trades without any effect on the prices of the investments they make. Thus, markets can be qualified as beneficial to investors if they manage to offer them the possibility of making a large number of trades without any effect on the prices of stocks. In contrast, markets that lack liquidity will result in delays regarding the execution of trades. Additionally, the market order fills will result in different prices than the initially set ones at the time the order was placed. What is more, illiquid markets possess barriers to exiting the market when needed, which may result in higher cost of trades.
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ISLAMIC INSURANCE AND SOCIAL SECURITY Low Transaction Costs
Another factor that may be directly reflected on the liquidity of the market is transaction cost. The latter may have a negative effect on the profits you have during times of winning stocks. On the other hand, if you are incurring losses, transaction costs may deteriorate the condition. So, low transaction costs are a major trait of good markets. Active traders, in particular, look for markets that present low transaction costs since they execute numerous trades every day. Transaction costs may be classified as:
Explicit costs - e.g. commission fees Implicit costs - these costs may have hidden effects to the inexperienced
investor. Faulty executions tend to significantly increase transaction costs. This is observed in the case of having an artificially inflated actual price which greatly differs from the price at which the market clears the investment.
Degree of Transparency
In today's information age, investors have access to myriads of information through many sources. Thus, the transparency of the market is of high importance. It represents the ability of investors to easily get in touch with data concerning trading processes that take place on the market. Information is one of the best tools that you can have, thus you should try to stay informed as much as possible. The lack of knowledge may be directly reflected on your investment decisions. When you have the necessary knowledge you will be better able to construct your investment strategies that will eventually lead you to the achievement of your financial goals. Additionally, market transparency will enable you to stay focused and apply the necessary discipline, which are a prerequisite for successful investments in the dynamic stock market. Furthermore, market transparency enables investors to more accurately determine their level of risk tolerance, which is crucial in selecting investments that best fit to the investor's portfolio. In order to qualify a market as being transparent, it should provide investors with the possibility of executing trades by live prices. If this is not provided, investors will be ill at ease and delays in the fill of the orders may be experienced, which in turn may result in discrepancy between the fill price and the market rate.
Trends
The economy is characterized as following a particular pattern of ups and downs. If the market lacks this trending, investors may find it difficult to synchronize their trades which may lead to losses. Additionally, the application of technical analysis requires such cycles in
order for the price movement to be effectively used. Many analysts use past performances as basis for predicting future trends.6 To be successful at forex trading you need two main things - the knowledge and the right trading platform. For a trading platform we can recommend you Easy Forex. It offers unique features such as Inside Viewer, which will give you a unique insight of what other traders are doing, competitive spreads, 24/7 support, etc. Start trading from as little as $25.
2 Available securities in capital market of Sri Lanka In the recent past investing in the Capital & Share Market in Sri Lanka has shown a rapid growth. The Securities and Exchange Commission (SEC) regulates the securities market in Sri Lanka & grants License to Stock Exchanges, Stockbrokers & dealers etc. Foreign investors can freely purchase up to 100 percent of equity in Sri Lankan companies in permitted sectors. In order to facilitate portfolio investments, country funds and regional funds are also allowed to invest in Sri Lanka's stock market after prior approval. These funds should make transactions through Share Investment External Rupee Accounts maintained in commercial banks (SIERA). The Colombo Stock Exchange (CSE), while small by big emerging market standards, is one of the most efficient in the region. A fully computerized clearing and settlement system was introduced through the establishment of a Central Depository System (CDS) in1991. In 1997, the CSE commissioned a state of the art computer based automated order matching system. The CDS was linked real time with the automated trading system. These developments placed the CSE alongside the most technologically advanced exchanges in the world. In 1998 CSE became the first South Asian member of the world federation of Stock Exchanges. The CDS also gained the membership in the Asia-Pacific Central Securities Group (ACG) in the same year. The CSE officially launched its Debt trading System (DEX) in March 2004. DEX enables the trading of corporate debt instruments and the beneficial interest of Govt. bonds and treasury bills through the exchange. DEX has advanced features such as scrip less trading real-time exposure management, multiple settlement cycles and compatibility with web based technologies. Fifteen local and foreign joint venture brokers currently operate at the CSE. A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into debt securities (such as banknotes, bonds and debentures) and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is
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called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible. Securities may be classified according to many categories or classification systems: #- Currency of denomination #- Ownership rights #- Term to maturity #- Degree of liquidity #- Income payments #- Tax treatment #- Credit rating #- Industrial sector or "industry" #- Region or country Market capitalization #- State Securities that are represented in paper (physical) form are called certificated securities. They may be bearer or registered. Bearer securities are completely negotiable and entitle the holder to the rights under the security In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. Instead, the issuer (or its appointed agent) maintains a register in which details of the holder of the securities are entered and updated as appropriate. A transfer of registered securities is affected by amending the register. Non-certificated securities and global certificates -Modern practice has developed to eliminate both the need for certificates and maintenance of a complete security register by the issuer. There are two general ways this has been accomplished.
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Non-certificated securities - In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to maintain a legal record of their securities electronically. Global certificates, book entry interests, depositories - To facilitate the electronic transfer of interests in securities without dealing with inconsistent. This depository is called The Depository Trust Company, or DTC. Divided and undivided security - The terms "divided" and "undivided" relate to the proprietary nature of a security. Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. Fungible and non-fungible security -The terms "fungible" and "non-fungible" are a feature of assets. If an asset is fungible, this means that if such an asset is lent, or placed with a custodian, it is customary for the borrower or custodian to be obliged at the end of the loan or custody arrangement to return assets equivalent to the original asset, rather than the specific identical asset. In other words, the redelivery of fungibles is equivalent and not in specie. Over the past few years, Sri Lanka has been working to develop its local currency bond markets, particularly for government securities, but for corporate securities as well. This study considers the prospects for developing corporate bond markets in Sri Lanka and the impediments to such efforts. It covers issues ranging from economic policy to the specifics of trading, clearing and settlement, and ways to facilitate bond market development. The Sri Lankan bond market consists of government securities (T-bills and T-bonds), corporate and bank bonds listed at the stock exchange, and unlisted corporate bonds. Whereas government securities come under the central banks market rules and regulations, equities traded on a formal exchange must abide by SEC and CSE rules, although some changes have recently been made for corporate debt. There are many securities (like treasury bond, treasury bills, Yield, stocks, derivatives, agency securities. etc) are issued by capital market of Sri Lanka. Mainly two types of securities are fixed income securities and debt securities. 2.1 Characteristics and transaction procedures
2.1.1
Fixed Income Securities
Fixed Income Securities are tradable financial instruments that make up a series of predeterminable future cash flows. By virtue of being securities, they acquire the ability to be traded, meaning, that the holder of a security can sell the security to another party thereby transferring all the rights and obligations. Typically, these are debt obligations where debt obligations unlike equity form pre-determinable future cash flows. These debt obligations are securities and not loans, where the securities can be traded, whereas the loans are not tradable.
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ISLAMIC INSURANCE AND SOCIAL SECURITY 2.1.2 Debt and Equity Securities
Debt securities are those securities issued in confirmation of debt obligations. A debt obligation arises between a borrower and a lender. A debt security typically carries a maturity value, and a series of interest payments that make up a series of pre-determinable cash flows. Hence, they make up Fixed Income Securities (FISs). Equity Securities are those issued in confirmation of investments in the equity of a firm. While debt obligations create borrower and lender relationships, the equity securities result in ownership. Those who invest in equity securities become shareholders, whereas those who buy debt securities being lenders become debt holders of the issuer concerned. The term investment is commonly used to represent investment in equity as well as debt securities. Unlike a debt security, an equity security does not provide a pre-determinable series of cash flows Hence, they are not Fixed Income Securities. There are hybrid instruments such as preference shares and convertible debentures, or bonds that show both debt and equity characters, and can be classified as Fixed Income Securities depending on the extent to which the future cash flows can be predeterminable.
2.1.3 Loans, Debt Securities, and Disintermediation
A loan is a financial obligation between a borrower and a lender. The transaction is on a one to one basis, and the settlement too is between the two parties. The loan does not result in a tradable security. Hence, under normal circumstances, the lender cannot sell the loans without the consent of the borrower, except where there are provisions for transfer and assignment. A debt security too arises from a financial obligation between a borrower and a lender, but they create a tradable security as a result of the transaction. Such security can be traded by the debt holder (lender), without the prior consent of the issuer (the borrower). The foregoing analysis shows that there are two market segments arising from debt obligations viz. Debt Securities Market and Loan Market. The debt securities market can also be identified as the Fixed Income Securities market as the debt securities form Fixed Income Securities. In this market, the party having funds to invest directly invests with the borrower. Such investment is facilitated by two types of market players viz. debt brokers and dealers. In the loan market, the lending, typically, is done by a financial intermediary such as a bank or a finance company. The ultimate lender would be a depositor of such bank or the finance company. The intermediary assumes liability to the depositors, and raises funds which are in turn lent to the borrowers. Such borrowers are identified as Deficit Units, whereas the depositors are identified as Surplus Units. The financial institutions act as the intermediaries between the surplus units and deficit units. In the debt securities market, however, there is no such intermediation, and the surplus units directly invest with the deficit units. The obligations of the deficit units are direct to the surplus units and not to the intermediary. This is the key difference between the intermediary driven loan market and the disintermediation through the
debt securities market. However, even the securities market requires facilitation by market players such as dealers and brokers.
2.1.4 Key Features and Terminology of Fixed Income Securities Bills and Bonds
2.1.4.1
A Bill is a security that, typically, has a short maturity period up to one year. Further, the Bill is issued at a discount, and there is no coupon interest attached to the Bill. Treasury Bills are the most common of Bills that represent a segment of the Fixed Income Securities market.

Treasury Bills are a secure investment. The investor assumes the credit risk of the Government. This is known as Sovereign Risk and is presumed to be the safest in the country Bills are issued in tenures 91,182 and 364 days respectively Bills are tendered for every Wednesday and are issued on Friday, hence the maturity of a Bill will always be on a Friday. Central Bank accepts/rejects bids at the auction and the results are published Treasury bills that have been issued at earlier auctions are also available for purchase in the Secondary market Primary dealers provide liquidity in the secondary market by quoting a two-way price A 364-day basis is used to calculate prices Treasury Bill is a Negotiable Instrument issued by the Government of Sri Lanka to finance short-term government expenditure and/or maintain monetary policy. A Bond typically has a maturity in excess of two years. There is, of course, no hard and fast rule as to the definition of a period. The most common Bonds are those issued by the governments, being Treasury Bonds. Debentures are also instruments similar to Bonds. In most markets, the two terms are used interchangeably. In certain markets, unsecured corporate debt is called debentures, whereas secured debt and government securities are referred to as Bonds.
Treasury Bonds in Sri Lanka are currently issued in tenures of 2,3,4,5 and 6 years These bonds carry a semi-annual coupon Bonds are auctioned regularly by the Central Bank on behalf of the government, and bids are accepted only via Primary Dealers There is an active Secondary Market for Bonds with Primary Dealers providing liquidity via two-way pricing. A Treasury Bond is a tradable security issued by the Government in order to finance their borrowing requirement.7
A Bond typically has a maturity in excess of two years. There is, of course, no hard and fast rule as to the definition of a period. The most common Bonds are those issued by the governments, being Treasury Bonds. Debentures are also instruments similar to Bonds. In
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most markets, the two terms are used interchangeably. In certain markets, unsecured corporate debt is called debentures, whereas secured debt and government securities are referred to as Bonds. Different types of Fixed Income securities will be discussed later in the paper.
2.1.4.2 Par Value of a Bond
This is the value at which the instrument is recorded in the books of the issuer. This is most likely to be the maturity value and face value as well. Unless otherwise stated, a bonds par value is considered to be 100 units of the currency, e.g. LKR 100. Interest on a bond is calculated based on the par value.
2.1.4.3 Maturity Value
This is the value paid at the maturity of the bond. Generally, this is the same as the par value. This could also be the redemption value which is the value at which the bond will be redeemed.
2.1.4.4 Face value
This is the value stated on the face of the bond. It is most likely that the face value is the same as the par value and also the maturity value.
2.1.4.5 Coupon rate
The coupon rate is the rate at which interest is calculated on a Bond. The value of the interest payment is equal to the par value multiplied by the coupon rate.
2.1.4.6
Interest Coupons
The interest payments on a Bond are calculated based on the par value and the coupon rate as stated above. A bond will carry the interest coupons for the purpose of claiming the interest payments by the holders. The value of the interest coupon is the par value multiplied by the coupon rate. This value is called the coupon value.
2.1.4.7 Coupon Frequency
A bond may have interest payments taking place either semi-annually or annually. Some issuers do have interest payment made quarterly or monthly. 2.1.4.7.1 Annual Coupon Bonds
These bonds will pay interest once a year.
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2.1.4.7.2
Semi-Annual Coupon Bonds
These bonds will pay interest once in six months. The value of the semi-annual coupon will be calculated by multiplying the par value by the coupon rate, and then taking half of the value as applicable for six months.
2.1.4.8 Term to Maturity
This is the period to maturity from a given point of time. In other words, it is the unexpired period to maturity.
2.1.4.9 Issue Price
This is the price at which a security is issued to the market. The issue price is normally decided by the issuer, or allowed to be market determined where an auction process will determine the issue price.
2.1.4.10 Market Price
This is the price at which a bond is traded in the market. The bond price will vary according to the demand for and supply of bonds. This, in turn, would be a function of the interest rates. The price of a Bond is equal to the present value of its future coupon payments and the maturity proceeds. The rate of return applicable for discounting to arrive at the present value is the prevailing interest rate. If it is a government security, then, it is the risk free return applicable for the term of the bond. If it is any other type of bond, a credit risk premium may be applied over and above the risk free return. When interest rates go up, the present value of future cash flows will go down. Similarly, when interest rates go down, the present value goes up. Accordingly, the price of a bond will go down or up in the opposite direction to that of the change of the interest rates. Hence, the Bond prices have an inverse relationship to the changes of the interest rates.
2.1.4.11 Discounts and Premiums
A bond is traded at a discount, if the bond price is below par value. The difference between the par value and the price is the discount. A bond is traded at a premium, if the market price is above the par value. The price less the par value is the premium. A bond is supposed to sell at par if the price is equal to par value.
2.1.4.12 Yield to Maturity (YTM)
A bond has a series of cash flows associated with it. The bond holder pays the price to acquire it, and the price paid is the outflow. Then, he receives the regular coupons as a series of inflows, and finally, the maturity proceeds. The effective return that the bond holder gets, considering the outflow and the series of inflows calculated and considering the timing of the cash flows as well, is the Yield to Maturity (YTM) of the bond. The Yield to Maturity is the
IRR (Internal Rate of Return) of the investment in the bond. When the market interest rates go up, the YTM demand of a bond goes up. When the YTM goes up, the price goes down, as explained, given the inverse relationship.
2.1.4.13 Fixed Rate v Floating Rate Bonds
A fixed rate bond is a bond of which the coupon rate applicable for the entire tenure of the bond is fixed at the time of issue. Therefore, the coupon value will not change in the future. A Floating rate bond (A Floater) is a bond of which the coupon rate is linked to some kind of a reference rate with or without a margin. The reference rate has to be a transparent, and readily determinable rate. For example, a five-year floating rate bond may be issued with the rate stated as two percentage points over the six months Treasury Bill Rate. Accordingly, the coupon rate applicable on this bond will be re-priced every six months based on the prevailing Treasury Bill rate with the margin. The advantage of a floater is that the holder gets interest that varies based on the market interest rates. The disadvantage would be that the holder cannot fix the rate of return for the entire duration. In a floater, the coupon adjusts according to the market return. Therefore, when determining the price, both the coupon as well as the required interest rate are changed at the same time. If the rates go up, then the coupons go up, and also, the required return go up too. Hence, the present value of the future cash flows of the bond tend to be around the par value. Therefore, floating rate bonds have less price volatility. This is in contrast with the fixed rate bonds where the coupons are fixed, and hence, the cash flows are fixed. When the required return changes due to changes in the market interest rates, the bond price will keep changing.
2.1.4.14 Zero Coupon Bonds
A zero coupon bond is a bond of which the coupon rate is zero, and hence, no coupon payments. Treasury Bills are zero coupon instruments. A zero coupon bond is issued at a sufficient discount such that the value of the discount makes up the required return on the bond.
2.1.4.15 Deep Discount Bonds
These are bonds issued at significant discounts to the par value. The reason for the deep discount would be a very low coupon. The return not compensated by the coupon rate will be compensated by the deep discount.
2.1.4.16 Secured v Unsecured Bonds
A secured bond is issued with the backing of collateral so that in the event of default by the issuer the bond holder could take steps to realize the security. An unsecured bond does not have such backing of collateral.
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ISLAMIC INSURANCE AND SOCIAL SECURITY 2.1.4.17 Redeemable v Irredeemable Bonds
Typically, bonds are redeemable. The maturity value is paid at maturity. However, there are also bonds that may not be redeemable. They would be similar to shares issued by the company with no provision for buy back. The holder can convert the bond into cash by selling in the secondary market. Irredeemable bonds are extremely rare and not popular.8
2.1.5 A Comparison of Bond Sectors and the Sri Lankan Fixed Income Securities Market
Sri Lankan bond market is by and large dominated by the Government securities market. The Government is the single largest issuer of fixed income securities. The key reason for this is nothing but continuous fiscal deficits encountered by successive governments that make it necessary to go to the public to raise funds by way of borrowings. The following Table illustrates the total domestic government securities outstanding at the end of 2006. As indicated in the table the total outstanding local currency securities was Rs 1,143.7 bn. Of this, Rs 257.7 bn was in the form of Treasury Bills, while Rs 885.9 bn was in the form of Treasury Bonds. The total domestic public debt of Rs 1,475 bn also comprised of other forms of borrowings including Rupee Loans 116.7 bn which are non tradable loans that do not come under the fixed Income securities category. The total Treasury Bills outstanding as of December 26, 2007 was Rs 300.2 bn, whereas the total Treasury Bonds outstanding was Rs 1060.3 bn, totaling to Government Securities of Rs 1,360.5 bn. There are hardly any reported instances of government agencies or government corporations raising funds by issuing bonds in the domestic market. This, in fact, is a serious vacuum in the bond market and lost opportunities for the government agencies that have the potential to raise funds in this manner. In Sri Lanka, there are also no debt issues by the local governments. Hence, the Municipality Bonds are another missing sector. The Corporate Bond market in Sri Lanka is confined to a very limited number of issues of securities particularly the listed debentures issued by commercial banks to raise funds for capital adequacy purpose. The total outstanding amount of listed debentures is estimated to be around Rs 25 bn at the end of 2006. The above table illustrates the insignificant size of the Corporate Debt market particularly in relation to the Government Securities market.
Transaction procedures
Securities investment and trading are among the most publicized and exciting activities we observe in the financial services industry. Buyers and sellers of securities, trading either new issues or seasoned issues, are motivated by two basic reasons. The first reason trade
8
http://www.juliusandcreasy.com/inpages/publications/pdf/securitisation_in_sri_lanka.pdf
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securities for cash or cash for securities is because of normal variation in consumption or business needs for cash. Traders making portfolio adjustments requiring offsetting changes in cash and securities in response to factors unrelated to events in the securities markets are called liquidity traders. An individual selling stock to finance a child's education or an insurance company buying bonds to finance future payment of claims are both liquidity traders motivated by their specific portfolio considerations. A second type of trader knows something that the rest of the participants in the market do not know. This information may be that a lawsuit has been filed or that a takeover attempt is imminent. Traders placing buy or sell orders based on private knowledge are called information traders. Information traders expect to profit because they buy securities at prices which are low relative to their true values or sell them at prices which are high relative to what they will sell for when the information the trader possesses becomes available to the market. Individual and institutional investors prefer securities to portfolio investments. A broker finds a buyer for a seller. Because most traders are not continuously buying and selling securities, they turn to professional brokerage firms to complete their trades. Often, a buyer or seller wants to trade sooner than would be required by waiting for a counterpart seller or buyer to show up in the market. Financial institutions which facilitate quick trades by buying or selling securities on their own accounts are called market makers or dealers in securities. When offering new securities to investors, firms raising funds require guidance as how to design and price newly issued securities in order to make them attractive to investors. This guidance is one of the functions performed by financial service firms assisting borrowing entities with securities origination. Brokers and dealers of securities buy and sell a wide range of financial instruments to flexibility for investors or issuers in their portfolio or balance sheet composition. The variety of securities makes it possible to fine-tune investments or fund raising to particular investor or borrower needs. Most of us are familiar with securities in the form of common stocks and various types of bonds. Stocks and bonds represent ownership or debt claims against the earnings and underlying income producing assets of firms. These traditional securities are a significant part of trading volume in today's markets. Stocks and bonds are important but relatively simple securities. To achieve an optimal combination of risks and returns against a variety of future economic scenarios, issuers and investors often look for more innovative securities designs. If these securities achieve a better risk and return combination in terms of investors' and issuers' preferences than existing securities, they will be more marketable. Classic examples are convertible bonds, preferred stock, and warrants. Newer examples are collateralized mortgage obligations and index options. There is an unlimited number of possible risks investors or borrowers may be concerned about. For example, a financial instrument which pays higher returns with higher inflation would offer protection against inflation risks. A security which pays off more if automobile demand drops might be useful to some particular investors. Conceptually there are an infinite number of possible future outcomes which could be of concern to individual investors and borrowers. Creating financial instruments which pay future cash flows under economic conditions offering new protection to market participants is a move toward completing the market. A complete securities market offers securities which pay returns under every conceivable
circumstance, for example which pays $1 if Mongolia attacks India next year and zero otherwise. It is not possible to define much less trade the infinite number of securities which would be necessary to complete financial markets. Practically speaking, financial markets will never be complete. With inventive and aggressive people active in the securities industry, however, there are always opportunities for inventing and trading new securities for which sufficient demand exists because customers desire security payoffs under circumstances important enough to worry about. Securities can be classified by type of issuer: foreign or domestic corporations, governments, or issues based on consumer borrowing. They can be classified by the nature of the claim on borrowers. Debt provides investors a fixed claim on the income and assets of issuers. Equity represent a residual claim against income and assets firms after other claims are met. Securities can be convertible into other securities, callable or redeemable for cash, and so forth. Securities can pay in any currency or in amounts indexed to commodities. Securities Originations: Relation Between Participants
(1), (2) Issuer (3)
Security Originator (3) (3) (Best Efforts)
Investor
Issuer
(1) Advising (2) Underwriting (3) Distribution9
Investor
And Sri Lanka is planning to introduce the Inter-bank electronic fund transfer system or SLIPS to the countrys capital market. The system will be introduced to all types of transactions taking place in the capital market. Accordingly, it will cover IPO payments, dividend payments for investors at the CSE and also share market transactions. They are looking at the entire clearing and settlement mechanism of the capital market. As of now, most of the transactions at the CSE are conducted via cheques. To engage in SLIPS transaction, what the investor requires is only have a bank account. Introducing this system will help reduce transaction time in the capital market. At present refunding of IPO cash takes about 10 days. Currently the SEC is holding discussions with the industry and the idea is to make the electronic fund transferring system mandatory for all capital market transactions in the future. Electronic Funds Transfer is movement of funds from one account to another without the corresponding piece of paper to authorize or prove that the transfer had occurred.
www.marshallinside.usc.edu/dietrich/FS-FI-ValueSecurities.doc TM.Rimsan - (SEU/IS/06/IA/036) Page 20
Primary financial markets
The financial market is divided in to two. Capital market and money market. Capital market is divided in two primary market and secondary market. So the primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. Primary markets creates long term instruments through which corporate entities borrow from capital market. Primary markets are markets where firms raise funds by issuing new securities, e.g. stocks, bonds, commercial paper, to finance new projects, expansion, construction of new buildings, R&D, etc., for which the firms do not have sufficient internal funds. Features of primary markets are:
This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." The financial assets sold can only be redeemed by the original holder.
3.1
Types of share issues 3.1.1 Equity shares:
These shares are also known as ordinary shares. They are the shares which do not enjoy any preference regarding payment of dividend and repayment of capital. They are given dividend at a fluctuating rate. The dividend on equity shares depends on the profits made by a company. Higher the profits, higher will be the dividend, where as lower the profits, lower will be the dividend.
3.1.2 Preference shares:
These shares are those shares which are given preference as regards to payment of dividend and repayment of capital. They do not enjoy normal voting rights. Preference shareholders have some preference over the equity shareholders, as in the case of winding up of the company, they are paid their capital first. They can vote only on the matters affecting their
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own interest. These shares are best suited to investors who want to have security of fixed rate of dividend and refund of capital in case of winding up of the company.
3.1.3 Deferred shares:
These shares are those shares which are held by the founders or pioneer or beginners of the company. They are also called as Founder shares or Management shares. In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends. Being the last claimants of the profits, they have a considerable element of speculation or uncertainty and they have to bear the greatest risk of loss. The market price of such shares shows a very wide fluctuation on account of wide dividend fluctuations. Deferred shares have disproportionate voting rights. These shares have a small denomination or face value. Deferred shares are not transferable if issued by a private company. Deferred shareholders do not enjoy the right of priority to have shares offered in case of the issue of shares by the company. If the company goes into liquidation the deferred shareholders can get refund of capital and participate in the surplus capital, if any, after the rights of preference and equity shareholders have been satisfied.
3.1.4 Income Shares
These are the shares of the companies which have stable operations. The companies have a high dividend payout ratio and when the dividends paid are high it implies that the profits saved for company is less and hence less opportunities of growth.
3.1.5 Growth shares
These are the shares of companies which have secured their positions in a particular industry. These shares have less dividend payout ratio and hence high growth potential.
3.1.6 Cyclical Shares
There is a definite business cycle that keeps on operating and these are the shares of that company whose performance varies with the stages of the cycle. It means to say that the prices of the shares are affected by the variations in the economy.
3.1.7 Defensive shares
These are the shares of the company whose performance does not change with the changes in the economy.
3.1.8 Speculative shares
These are the shares which are traded in the company which have a lot of speculations. Shares cannot be put into one category strictly because the characteristics of the shares are
overlapping in the sense that the blue-chip shares which are in great demand in the market fall under blue-chip shares and speculative shares.
3.1.9 Cumulative & Non cumulative shares
Suppose a company does not make any profits for two successive years and makes huge profits in the third year. Then the people who have cumulative shares will get the interest of the three years and in case of non-cumulative share holders they do not receive the interest of past two years.
3.1.10 Redeemable & Non-redeemable
The redeemable shares are redeemed within the life time of the company or before the company closes down or to say that these shares have a maturity period. In case of nonredeemable shares they mature only upon closing down of the company.
3.1.11 Convertible & Non-convertible shares
Classes of shares which can be converted to other forms of shares or securities are called as convertible shares. Whether they are converted to equity shares, debentures depend on the rules laid down by the company. If the shares are not convertible to any other security on their maturity period are called as non-convertible shares.
3.1.12 Bonus shares:
The word bonus means a gift given free of charge. Bonus shares are those shares which are issued by the company free of charge as bonus to the shareholders. They are issued to the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the shareholders from the company. It is bonus in the form of shares instead of cash. It is given out of accumulated profits and reserves. These shares have all types of preferences which are available to the existing shares. For example. two bonus shares for five equity shares. The issue of bonus shares is also termed as capitalization of undistributed profits. Bonus shares is a type of windfall gain to the equity shareholders. They are advantageous to the equity shareholders as they get additional shares free of cost and also they earn dividend on them in future.
3.1.12.1 Conditions for issue of bonus shares:
(i) Sufficient amount of undistributed profits: There must be sufficient amount of undistributed profits for the issue of bonus shares. (ii) Provision in the articles: There must be a provision in the articles of association regarding the issue of bonus shares. If there is a provision in the articles regarding the issue of bonus shares the company can issue bonus shares if there is no provision, the company cannot issue the bonus shares.
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(iii) Suitable Resolution: The Board of Directors must pass a suitable resolution in the Board meeting for the issue of bonus shares. (iv) Shareholders approval: The shareholders must give formal approval for the issue of bonus shares in the Annual General Meeting. (v) When a company can issue: A company can issue bonus shares only twice in a period of five years. (vi) Fully paid up shares: Bonus shares can be issued only when the existing shares are fully paid up.
3.1.13 Other classifications of shares:3.1.13.1 Blue Chip Shares
The shares of some of the companies which have been doing extremely well in the past few years. These are usually well established companies. The word blue-chip shares came into existence when IBM Company was doing very well and shares of that company were trading at higher prices. The companies which come under this umbrella are never fixed as the performance of some of the companies may suddenly fall down and some of the companies which never did well start to do extremely well. Hence it can be said that list of blue-chip companies keeps on changing each year. The companies which come under this are market leaders and have the potential to dictate terms.
3.1.13.2 Slow Growers
Large companies which have the growth rate equal to the industry growth rate or their growth is equal or slightly faster than the GDP (Gross Domestic Product).
3.1.13.3 Fast Growers
Shares of newly started successful companies which have a very good growth rate (the rate is usually 10 to 25 percent) per year.
3.1.13.4 Stalwarts
Shares of very large companies which have stable growth. The dividend payout ratio is high. These companies are growing but not rapidly as in the case of fast growers.
3.1.13.5 Turn-around
The shares of the companies which have started performing very well. These companies were fairing badly in the past and all of a sudden there is a turn-around in their performance.
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ISLAMIC INSURANCE AND SOCIAL SECURITY 3.1.13.6 Asset plays
The shares of the companies who are not given any recognition though they have a large asset base.10
3.2
IPO methods- Initial Public Offering (IPO)
The first sale of shares by a private company to the public. IPOs are often issued, seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue, best offer price and time to bring it to market. Also applicable to first sale of debentures and units of closed end funds. An IPO can either be an Offer for Sale or an Offer for Subscription. An initial public offering (IPO), referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:

Best efforts contract Firm commitment contract All-or-none contract Bought deal Dutch auction
A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup to 8% in some cases.
10
http://www.icasrilanka.com/journal/V42No4/Fixed%20Income%20Securities.pdf TM.Rimsan - (SEU/IS/06/IA/036) Page 25
Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. IPOs generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. A majority of investment banks also offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities. When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). Underwriters are middlemen between companies and the investing public. Two general types of primary market issues. One is IPO, e.g. Ebay had an IPO in 1998, selling 3.5m shares at $18, raising $63m for Ebay. Price went to $54 in a few days, the founder kept 14.7m shares, and was worth $700m on paper. Next is subsequent to an IPO, a firm could issue additional shares of stock at a later date, to raise additional funds, e.g. Allied Healthcare International sold 14.5m additional shares of stock to raise $71m in May 2004. There are several disadvantages to completing an initial public offering, namely:

Significant legal, accounting and marketing costs Ongoing requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and customers. 11
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http://www.slideshare.net/arunspeaker/finance-ipo
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3.3
Private placement
The sale of securities directly to an institutional investor, such as a bank, unit trust, insurance company, pension fund, foundation or retail investor, without an Initial Public Offering (IPO). Usually, the securities are bought for investment purposes rather than resale. Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors. In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated there under. Most private placements are offered under the Rules known as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds. Most private placements are offered under the Rules known as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds. Alternatively, a primary market sale can be through a private placement, where the entire issue is sold to a private investment group, usually an institutional investor such as a pension fund, or a group of institutional buyers.12 Private placement trading programs usually involves trading with medium term bank notes (MTNs) or Treasury Bills called T-Bills. PPP refers specifically to private placement trading programs with a high return on the investment associated with humanitarian project funding programs or Fed programs as compared to capital enhancement programs. These programs provide the traders with fresh issues of MTNs or T-Bills that produce high profit margins. This is known as the first tier. In the commercial world this would be called the B2B wholesale market. Now we all know that end users usually do not have access to the prices offered in the wholesale market, so they buy goods in the convenience store and not direct from the producer. Most of the time these programs require the investors to use a portion of their earnings for projects of humanitarian, social, or economic development in nature to make sure that part of these Profits are put back into the economy. Even after deducting the portion of earnings to be used for projects, the investor is still left with a very substantial profit for their own investments. Performing PPP programs are difficult to find and are not always available. Only a very restricted number of high-level traders can get access to these type of programs.
12
http://en.wikipedia.org/wiki/Private_placement
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Many capable investors have been looking around for PPPs for years and are unable to find a performing provider. Often they have wasted large sums of money by sending MT760s to banks and so called traders that simply cannot perform. Genuine programs are without risk to the investor what so ever, as the credit line raised against the capital is underwritten by the trading group. The (Investor) therefore is involved for the purpose of audit only, as it is by law that Financial institutions are not allowed to participate and therefore have to find a Private entity either a private person or company. At no time are the investors or better called Audit Fund Providers funds used for the trade. The procedures to enter are simple and fairly standard, however the Audit Fund Provider will have to adhere to strict compliance and non-disclosure. Many claim to be next to traders, this is 99.99% not the case. Traders are very busy people and have no time to sit down and have a chat. Therefore they have a structure in place where the first contact is with a compliance officer who will go through the submission papers and sort out the good from the nonsense. 13
4 Secondary financial markets Secondary markets are for the subsequent trading (buying and selling) of securities after a primary market issue, in the bond and stock markets (NYSE, AMEX and NASDAQ are all secondary markets for stocks). In the secondary market, funds are transferred from one investor to another (institutional or individual), without no effect on the cash flows of the issuing firm. Secondary markets provide an efficient, liquid market for the purchase and sale of securities at low transaction costs. Even though it gets no direct funds from sales of its securities in the secondary market, the issuing firm is very concerned about the prices of its stock, which is largely determined by the secondary market. The current market price reflects the current and expected future success of the firm, provides daily feedback about the firm's operations and the value of the firm (both to the firm and to investors). 4.1 Basic trading system
There are who are interested in the purchase of shares of different companies on one side ,while there are certain shareholders who are interested in selling the share they hold on the other. There for in order to match their needs the service of intermediary is essential. it is the brokering firms who fill this gap. Currently there are fifteen brokering firms who provide these intermediary service. each of them is a member of the CSE. each broker is linked with other co-brokers through the CSE. there they match their transaction. Earlier this was done at the trading floor operated in the CSE. at present it is done through an automated trading system. Now we will discuss how the sellers and buyers access the brokers. First the persons who are interested in buying or selling shares go through information about secondary market activities and find out the profitable shares to invest in or make a sale. Then they go to a brokering firm and place an order. Buyers place buy orders and sellers place sells orders. A buyers of shares has to open an account with the central depository system(CDS)before an
13
http://www.articlesbase.com/investing-articles/what-is-a-private-placement-program-1083242.html
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order is placed to buy shares. This has to be done by filling in an application form which is then handed over to the broker. 4.2 Pure auction market
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange. There are several variations on the basic auction form, including time limits, minimum or maximum limits on bid prices, and special rules for determining the winning bidder(s) and sale price(s). Participants in an auction may or may not know the identities or actions of other participants. Depending on the auction, bidders may participate in person or remotely through a variety of means, including telephone and the internet. The seller usually pays a commission to the auctioneer or auction company based on a percentage we of the final sale price. A market in which buyers enter competitive bids and sellers enter competitive offers at the same time. The price a stock is traded represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to sell at. Matching bids and offers are then paired together and the orders are executed. 4.3 Dealer markets
A market in which transactions occur between principals acting as dealers buying and selling for their own accounts, rather than between brokers acting as agents for buyers and sellers. One example is the market for Treasuries. The market for traders who are trading on their own accounts, as opposed to traders to conduct transactions on behalf of clients. Dealer markets exist to create the greatest liquidity possible for other transactions. One of the most prominent dealer markets is NASDAQ. See also: Dealer, Broker-dealer A market where dealers are assigned for specific securities. The dealers create liquid markets by purchasing and selling against personal inventory. Unlike auction markets, the benefit of this type of market is the rapid access that investors have to buyers and sellers of a particular
security. The best example of a dealer market is the Nasdaq.
4.4
Call and continuous markets 4.4.1 Call Markets
Where a stock can only trade at a specific time. Bids for the stock are collected and then traded at a specific time and at one price. It is typically only used for smaller markets.
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It is typically only used for smaller markets. A type of market in which each transaction takes place at predetermined intervals and where all of the bid and ask orders are aggregated and transacted at once. The exchange determines the market clearing price based on the number of bid and ask orders. A call market is contrasted to an auction market, where orders are filled as soon as a buyer/seller is found for any given order at an agreed upon price. In a call market, the price is set by the exchange so the market will clear, or almost clear, every time orders are filled. This is in stark contrast to the auction market, where prices are determined by buyers and sellers. Because the call market groups transactions together, there is a substantial increase in liquidity. Although liquidity is generally considered to be a good quality in any marketplace, sellers may lose some of the liquidity premium, which is can be substantial. Call markets may be structured in different ways, most notably with respect to the mechanism used for determining the clearing price. An auction where participants are physically present is typically organized as a price scan auction. In a price scan auction, an auctioneer announces tentative prices and participants respond with their buy/sell desires. The price search procedure continues until the value that best balances the buy and sell orders is found. Examples of this type of call include art auctions, tulip bulb auctions, the old call market system of the Paris Bourse, and the system currently used to open trading on the NYSE. Call market trading may also be structured as an open order book auction. This approach is used as the opening procedure in most electronic continuous markets. For example, the opening procedures for Torontos CATS, Tokyos CORES, Pariss CAC, and Australias SEATS are structured as open order book auctions. So too is the Arizona Stock Exchanges electronic call market.
4.4.2 Continuous Markets Where a stock can trade at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes. Continuous market is a stock market or exchange where securities are continuously priced and traded in an auction format when the market is open. Where a stock can trade at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes. A market with sufficient activity that a normal-sized trade can be made at any time without affecting the current market price. Continuous markets are any markets that are generating a level of activity that is healthy enough to allow a typical trade to take place without creating a significant impact on the current market price for the security. While the trading may be brisk, it remains constant enough that the activity does not lead to any strong indicators that would entice investors to begin executing larger orders to buy or sell. Essentially, a continuous market is very stable, experiences a consistent level of trading, and tends to maintain an equitable market price. In general, most financial analysts begin assessing the current status of a given market with the assumption that the current trading does indicate a continuous market. It is only when the analyst begins to notice some factors that are impacting the market price is an unusual manner that the market is deemed to be discontinuous in nature. For the most part, the
marketplace is understood to be continuous in nature, but tempered with the understanding that this status could easily change on any given trading day, given the right set of circumstances. For the conservative investor, a continuous market is often considered an advantage. This market condition makes it relatively easy to buy and sell various types of securities and make a little profit on the trades. Since the rate of volatility is relatively low with a continuous market, the trading options for the careful investor may appear to be more plentiful.
At the same time, more daring investors do not tend to ignore a continuous market. Since it is always possible for the relative equilibrium of this market to be impacted by any number of factors, the aggressive investor may monitor closely for signs that volatility is about to increase drastically. This allows the investor to execute orders that will generate a huge profit if the volatile conditions do come to pass. Depending on the circumstances and the size of the orders placed by aggressive investors, these actions can accelerate the occurrence of increased volatility and help move the continuous market into a discontinuous state. The best example of the globalization and modernization of the Spanish stock markets is, without doubt, the Continuous Market (SIBE), where trading of the most representative stocks of the Spanish economy is concentrated and which accounts for the highest trading volume.14
4.5
Automated trading system (pre open, open auction, regular trading, close)
4.5.1 Automated Trading System (ATS)
The Automated Trading System (ATS) is an online, real time system which is efficient, fault tolerant and transparent, and provides for the secondary trading of equity. The ATS provides;

High speed execution of transactions Order matching on Price - Time priority Information of price and volumes of securities being traded Online reporting of trades being executed & price indices Corporate announcements Information on status of pending orders Information on Client Holdings
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The trading sessions for equity as follows:
Market Phase Pre-open Open Auction Normal Trading Closing
Time 9:00 - 9:30 9:30
Days
Monday - Friday (Except Public Holidays) 9:30 - 14:30 14:30
An example of an early ATS is Instinet. This allows traders to input trades invisibly to the market, with a crossing price determined by a VWAP measure. Instinet also enables anonymous conversations and negotiations to take place between bidders, and so reduces informational costs to the participants. Recent platforms such as Algodeal have been launched to offer individuals the infrastructure to develop, back test and assess quantitative strategies. Successful strategies are ultimately funded by Algodeal to be traded live on the platform with a share of the profits. Trading systems are simply sets of rules that traders use to determine their entries and exits from a position. Developing and using trading systems can help traders attain consistent returns while limiting risk. In an ideal situation, traders should feel like robots, executing trades systematically and without emotion. It's very popular(profitable) to have automated trading system, specially for people who have no time to be all day looking in monitor, and waiting for market movement. Automated trading systems are created by converting the trading system's rules into code that the computer can understand. the computer then runs those rules through the trading software, which looks for trades that adhere to the rules. Finally, the trades are automatically placed with broker.
There are many trading programs that support automated trading systems. Some will automatically generate and place trades with the broker. Others will automatically find trades that fit the criteria, but require that the person place the orders with the broker manually. Moreover, fully automatic trading programs often require that use specific brokerages that support such features. We may also have to complete an additional authorization form.
Fully Automatic
Semi Automatic
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TradeStation
AmiBroker
Interactive Brokers
Tradecision
WealthLab
Automated trading systems have several benefits, but they also have their downsides. After all, if someone had a trading system that automatically made money all the time, he or she would literally own a money making machine.
Advantages: An automated system takes the emotion and busy-work out of trading, which allows you to focus on improving your strategy and money management rules. Once a profitable system is developed, it requires no work on your part until it breaks, or market conditions demand a change. Disadvantages: If the system is not properly coded and tested, large losses can occur very quickly. Sometimes it is impossible to put certain rules into code, which makes it difficult to develop an automated trading system. 15
Pre- Open During pre-open (9.00 am to 9.30 am) the system accepts orders. These orders can be amended and cancelled during pre-open. However, no trades take place during this stage. Orders during this period are held in the ATS and will be forwarded to the execution engine at Open Auction time. Open Auction During open-auction (09.30 am), the system temporarily closes the order book and starts matching orders. It establishes the opening price and determines the orders to be executed according to the rules for the open-auction period (Automated Trading Rule 4). Regular Trading
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During regular trading (09.30 am to 2.30 pm) new orders are continually matched to existing orders in the order book. If an order cannot be executed, it is stored in the order book. Market Close Market closes at 2.30 pm.
4.6
Types of orders (Market orders, limit orders)

4.6.1 Market Order
A Market Order is an order to buy or sell a stock at the best current market price. A market buy order is an order to buy at the lowest ask price, and a market sell order is an order to sell at the highest bid price. The purpose of a market order is to get a trade executed immediately at the best market price. A market order is a buy or sell order to be executed immediately at current market prices. As long as there are willing sellers and buyers, market orders are filled. Market orders are therefore used when certainty of execution is a priority over price of execution. A market order is the simplest of the order types. This order type does not allow any control over the price received. The order is filled at the best price available at the relevant time. In fast-moving markets, the price paid or received may be quite different from the last price quoted before the order was entered. A market order may be split across multiple participants on the other side of the transaction, resulting in different prices for some of the shares.
4.6.2
Limit order
A limit order is an order to buy a security at not more, or sell at not less, than a specific price. This gives the trader control over the price at which the trade is executed; however, the order may never be executed ("filled"). Limit orders are used when the trader wishes to control price rather than certainty of execution. A buy limit order can only be executed at the limit price or lower. For example, if an investor wants to buy a stock, but doesn't want to pay more than $20 for it, the investor can place a limit order to buy the stock at $20 "or better". By entering a limit order rather than a market order, the investor will not buy the stock at a higher price, but, may get fewer shares than he wants or not get the stock at all. A sell limit order is analogous; it can only be executed at the limit price or higher. Both buy and sell orders can be additionally constrained. Two of the most common additional constraints are Fill Or Kill (FOK) and All Or None (AON). FOK orders are either filled completely on the first attempt or canceled outright, while AON orders stipulate that the
order must be filled with the entire number of shares specified, or not filled at all. If it is not filled, it is still held on the order book for later execution A limit order is an order that specifies a price limit. A limit buy order specifies the maximum buy price, and a limit sell order indicates the minimum selling price. The purpose of a limit buy order is to ensure that the price paid to buy a security does not exceed the maximum price the investor is willing to pay. Thus, a limit buy order provides protection to the buyer. Similarly, a limit sell order provides some protection to the seller in that the security will not be sold below the price which the investor has specified. 4.7 Order attributes (Time qualifiers, volume qualifiers)
Until the introduction of Eurex Release 10.0 on November 26, 2007, orders and quotes in the Eurex system remained in the order book - even in the case of a system outage. Once the trading system was reset to the pre-trading phase, the original order was still available in the order book. In order to enhance overall system performance, with Release 10.0 we introduced order attributes for products that are matched according to price/time priority. Members can now select whether their orders will be backed up in the event of a system failure. By instituting these order attributes Eurex adopted a major technological upgrade that greatly has optimized order-specific processing as well as system-wide performance. The following order attributes can be assigned: "Persistent" Orders A "persistent" order is an order that will stay in the order book after a trading interruption. The priority of your order remains unchanged and your spot in the order book depends on price/time priority. "Persistent" orders are always written to disk to prevent them from being lost during an emergency. Such orders will remain in the book until their validity expires. "Non-Persistent" Orders A "non-persistent" order is processed without the extra step of being written to the disk at the Eurex host level. This means as opposed to "persistent" orders, "non-persistent" orders will not be resubmitted to the order book after a trading interruption. Therefore they cannot be retrieved anymore from the Eurex system after such an emergency case. Thus traders do not have the uncertainty that their "non-persistent" orders are matched after the restart of the system.
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In the new system an investor is given number of ways in which an order could be placed. These options are referred to as qualifier .order qualifiers. Order qualifiers are available on price time.(validity period of the order) and volume. Each of these alternatives may have their own advantages and disadvantages. therefore it is advisable for any investor to consult a broker before he/she decided on an qualifier. In the new system an investor is given number of ways in which an order could be placed. These options are referred to as qualifier .order qualifiers. Order qualifiers are available on price time.(validity period of the order) and volume. Each of these alternatives may have their own advantages and disadvantages. therefore it is advisable for any investor to consult a broker before he/she decided on an qualifier.
4.7.1 Time qualifiers
An order to execute a specified transaction at a specific time. If the order is not executed at that time, it is either cancelled or becomes a market order or a limited price order (depending on the specifications of that particular order). Customer order that sets the time limit during which the order can be executed and after which it is cancelled. Also called time order. A time order is a way of asking the court to give us more time to pay a loan agreement if we have fallen behind with the payments. It can change:
the amount we have to pay each month how long the loan will last in some cases it is also possible to change the interest rate.
A time order is particularly useful if we have a secured loan and our lender is threatening to repossess our home. Sometimes a time order can only help with how much we should pay every month on the payments we have missed, leaving the ongoing monthly payments unchanged. This might mean the court also needs to look at changing or freezing the amount of interest being added to the arrears and possibly the interest rate on the whole balance under the agreement. This is the case if the lender has only sent an arrears notice (or in some cases a
default notice) but the whole loan has not been called in. This is more likely where we have only had an arrears notice, as under the terms of most agreements the whole loan is called in automatically when the lender sends a default notice to us..
4.7.2 Volume qualifiers
There are three way of placing order in terms of volume .they are the minimum fill size fill or kill and immediate or cancel .in the minimum fill size order the investor together with his order specifies a minimum numbers of shares that should be purchased. For example Mr. A places an order to buy 10000 shares of royal ceramics, with the minimum lot size of 1000 shares. So even if there is a matching sellers in the database, a trisection will not occurs unless the seller is willing to trade 1000 shares or more. if there is a seller prepared to sell 200 shares of royal ceramics at the price stated by a that trade will not match .on the other hand if there is another seller prepared to sell 1800 royal ceramics shares at the price stated by a all18oo shares will be traded as it meets As minimum fill size of 1000.
4.8
Margin trading
The purchase of stocks by borrowing a portion of the investment using stocks as collateral. In other words, margin trading is a leveraged transaction whereby the investor pays for the stock using investor's own money and funds borrowed from the broker. In Sri Lanka, Stockbrokers can provide a margin up to 50%. Margin buying is buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one's own cash used. This difference has to stay above a minimum margin requirement, the purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan. In the 1920s, margin requirements were loose. In other words, brokers required investors to put in very little of their own money. Whereas today, the Federal Reserve's margin requirement limits debt to 50 percent, during the 1920s leverage rates of up to 90 percent debt were not uncommon. When the stock market started to contract, many individuals received margin calls. They had to deliver more money to their brokers or their shares would be sold. Since many individuals did not have the equity to cover their margin positions, their shares were sold, causing further market declines and further margin calls. This was one of the major contributing factors which led to the Stock Market Crash of 1929, which in turn contributed to the Great Depression, a troubling financial time in the 1930s. However, as reported in Peter and Eugene N. White's 1994 paper Was the Crash of 1929 Expected, all sources indicate that beginning in either late 1928 or early 1929, "margin requirements began to rise to historic new levels. The typical peak rates on brokers' loans
were 40-50 percent. Brokerage houses followed suit and demanded higher margin from investors. It's all about leverage. Just as companies borrow money to invest in projects, investors can borrow money and leverage the cash they invest. Leverage amplifies every point that a stock goes up. If you pick the right investment, margin can dramatically increase your profit. A 50% initial margin allows you to buy up to twice as much stock as you could with just the cash in your account. It's easy to see how you could make significantly more money by using a margin account than by trading from a pure cash position. What really matters is whether your stock rises or not. The investing world will always debate whether it's possible to consistently pick winning stocks. We won't weigh in on that debate here, but simply say that margin does offer the opportunity to amplify your returns. We'll keep with the numbers of $20,000 worth of securities bought using $10,000 of margin and $10,000 of cash. Cory's Tequila Co. is trading at $100 and you feel that it will rise dramatically. Normally, you'd only be able to buy 100 shares (100 x $100 = $10,000). Since you're investing on margin, you have the ability to buy 200 shares (200 x $100 = $20,000). Buying on margin is borrowing money from a broker to purchase stock. Margin increases our buying power. An initial investment of at least $2,000 is required (minimum margin). You can borrow up to 50% of the purchase price of a stock (initial margin). You are required to keep a minimum amount of equity in your margin account that can range from 25% - 40% (maintenance margin). Marginable securities act as collateral for the loan. Like any loan, you have to pay interest on the amount we borrow. Not all stocks qualify to be bought on margin. We must read the margin agreement and understand its implications. If the equity in your account falls below the maintenance margin, the brokerage will issue a margin call. Margin calls can result in you having to liquidate stocks or add more cash to the account. Brokers may be able to sell our securities without consulting you. Margin means leverage. The advantage of margin is that if we pick right, you win big. The downside of margin is that we can lose more money than you originally invested. Buying on margin is definitely not for everybody. Margin trading is extremely risky. Dec 30, 2010 (LBO) - Sri Lanka's markets regulator has granted stock brokers two extra days from January 01, 2011 to force-sell securities of buyers who are in default of the usual settlement period to recover their funds, a statement said. The Securities and Exchange Commission (SEC) said it has taken note of concerns of stock brokers and allowed them to grant a brief grace period to buyers who are in default of settlement by T+3. "Accordingly stockbrokers will be granted an additional two days to force-sell securities of buyers which are in default of settlement by T+3 in order to recover the monies owing to them by such defaulting client," it said In November, the SEC said it has extended a deadline to cut credit given by brokers to their clients by six months to June 2011, with half the credit
to be cut down by March 2011. The SEC said it had decided to extend the December deadline following representations from market participants. Sri Lanka's stocks have almost doubled this year partly helped by margin buying and also purchases by a state run pension fund. The SEC had asked brokers who had given credit to clients to cut their positions by December 2010 and transfer remaining positions to licensed margin providers. Analysts said that unless corrected speculative stock bubbles can crash steeply having economy-wide implications. 16
5 Stock market indexes in Sri Lanka A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds An index may also be considered as an instrument (after all it can be traded) which derives its value from other instruments or indices. The index may be weighted to reflect the market capitalization of its components, or may be a simple index which merely represents the net change in the prices of the underlying instruments. 17 Large companies not ordered by any nation or type of business. Wilshire Global Index BBC Global 30 FTSE/Mondo Visione Exchanges Index MSCI World S&P Global 100 S&P Global 1200 Russell Global 10000 Launched 17/01/07 FTSE Global 100 The Global Dow - Global version of the Dow Jones Industrial Average Dow Jones Global Titans 50 Index Dow Jones Global Total Stock Market Index
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Bodrenko 52 Index ( B 52 Index )18 There are more stock market indexes are using worldwide. But Sri Lankan stock markets are using very few indexes like All Share Price Index (ASPI), Milanka Price Index (MPI), Volume Weighted Average Price (VWAP), Total Return Indices (TRI), Dow Jones Sri Lanka Index (DJSL), Dow Jones Sri Lanka Titaus 20 Index(DJSL20), Dow Jones Amana Sri Lanka Index(DJIMSL). 5.1 All Share Price Index (ASPI)
The value-weighted price index, which incorporates all the voting ordinary shares listed on the Colombo Stock Exchange (CSE). The base year is 1985, and the base value of the index is 100. This is the broadest and the longest measure of the level of the Sri Lankan stock market. This is the broadest and the longest measure of the level of the Sri Lankan stock market.

In January 2009 All Share Price Index was at 1533.79 End of the trading session as at 09/07/2010 (Friday) All Share Price Index was at 4505.69. A growth of 2971.90 points (193.76%) for the period. These performance helps Colombo Stock Exchange to be No 01 position in terms of growth in Asia for year 2009, & to retain the No 02 position in the World in 2009. Colombo Stock Exchange is among one of the best performing stock markets in Asia so far for year 2010 as well. During this period ASI touched the 30 day moving average in six times ( A,B,C,D, & E points) & fell down to 90 day moving average only in a single time (C) during the period of month of November 2009. Milanka Price Index (MPI)
5.2
The value-weighted price index, which incorporates only 25 selected stocks listed on the CSE. These stocks represent the largest and the most liquid 25 stocks. The base date is December 31, 1998, and the base index value is 1000. The constituent stocks in the index are revised bi-annually. Sri Lankas Milanka Price Index (MPI) is to be changed from July 1 for the second half of 2010, by adding three financial, two manufacturing and a healthcare group stocks, the Colombo Stock Exchange (CSE) said. Merchant Bank Of Sri Lanka (Mbsl), Janashakthi Insurance, Pan Asia Banking Corporation (Pabc), Chevron Lubricants, Acl Cables And Nawaloka Hospitals would be the latest addition on the MPI list for the second half of 2010, a CSE statement said. Companies that have been dropped from the MPI include Aitken Spence, C W Mackie, Ceylinco Insurance, Ceylon Tobacco, Hotelservices (Ceylon) And Tokyo Cement. The Milanka index, one of the two main indices on the Colombo Stock Exchange, tracks the 25 most liquid stocks weighted on market capitalization during the previous year. The Colombo Stock Exchange introduced the Milanka Price Index (MPI) on 4th January 1999. The MPI comprises of 25 companies and they are selected by considering their performances over the last four quarters. The base index was set as 1000 points as at 31 st
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December 1998.The Milanka price index, which incorporates only 25 selected stocks listed on the CSE. The Milanka Price Index is one of the principal stock indices of the Colombo Stock Exchange in Sri Lanka. It is composed of a select group of 25 stocks, a list which is reviewed each quarter, as opposed to the Colombo Stock Exchange's "All Share Price Index", which uses all of the ~250 stocks on the exchange to calculate an index value. Companies that qualifies after the above 3 steps are ranked based on their performance according to the criteria explained above & the first 25 companies as per the ranking are selected to be included in the MPI. In ranking the companies, the following weight age is assigned: (a) Average Market Capitalization 50% (b) Number of Trades 25% (c) Turnover/Average Market Capitalization 25% The MPI for the 1 st Quarter 2005 comprises 25 companies in 8 sectors. The index represents around 10% of the listed companies and accounts for around 40% of the total market capitalization of the CSE. 5.3 Volume Weighted Average Price (VWAP) The VWAP is arrived at by dividing the total value traded during the period by the total volume of shares traded during the same period of every traded security. The CSE publishes the volume weighted average price (VWAP) based on trades executed during the last one hour of trading. The VWAP is taken as the Closing Price for each security at the end of each trading day. VWAP is a trading acronym for Volume-Weighted Average Price, the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price a stock traded at over the trading horizon. VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market. It is sometimes argued[by whom?] that such execution reduces transaction costs by minimizing market impact (the adverse effect of a trader's activities on the price of a security). VWAP can be measured between any two points in time but is displayed as the one corresponding to elapsed time during the trading day by information provider. VWAP is often used in algorithmic trading. Indeed, a broker may guarantee execution of an order at the VWAP price and have a computer program enter the orders into the market in order to earn the trader's commission and create P&L. This is called a Guaranteed VWAP execution. The Broker can also trade in a best effort way and answer to the client the realized price. This is called a VWAP target execution; it incurs more dispersion in the answered price compared to the VWAP price for the client but a lower received/paid commission. Trading algorithms that use VWAP as a target belong to a class of algorithms known as volume participation algorithms. The VWAP is calculated using the following formula:
where: PVWAP = Volume Weighted Average Price Pj = price of trade j Qj = quantity of trade j j = each individual trade that takes place over the defined period of time, excluding cross trades and basket cross trades19. Or
5.4
Total Return Indices (TRI)
Total return Index measures market performance, including price movements (capital gain/loss), rights offered to current shareholders allowing them to purchase additional shares, usually at a discount to market price (rights offering), and income from dividend payments (dividends) assuming they are reinvested in securities. The calculation of total return Index is adjusted in line with modifications in the values of stocks that result from changes in the number of stocks. The number of stocks may change due to public offerings, exercised warrants, or conversions of preferred to common shares , in order to eliminate all effects other than price movements from the index. Unlike the ASPI and the MPI discussed above that reflect only the returns based on charges in the market price. TRI takes into account the dividend income too. Applying this formula to ASPI and MPI and sector indexes the following indexes are worked out.
5.4.1 5.4.2 5.4.3 5.4.4 All Share Total Return Index (ASTRI) Milanka Total Return Index (MTRI) Sector Total Return Indices MBSL Mid-Cap Index
MBSL Mid-Cap Index in calculated on the basis of 25 medium sized companies with market capitalization range of Rs 1.030 billion. The list of companies is revised annually and profitability and liquidity too are taken into in their selection.
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5.5
Dow Jones Sri Lanka Indices
There are three indices calculated by Dow Jones and Company relating to the Sri lanka stock market . 5.6 Dow Jones Sri Lanka Index (DJSL)
The Dow Jones Sri Lanka Index (DJSL) declined marginally to close at 168.32 points. Generally Dow Jones Indexes is a leading full-service index provider that develops, maintains and licenses indexes for use as benchmarks and as the basis of investment products. It measure the performance of the largest stocks within countries, sectors and regions. The flagship index of the series - the Dow Jones Global Titans 50 Index includes the world's largest multinational companies. DJSL covers 95% of the market on a float market capitalization basis. Each Dow Jones Country Titans Index is computed on both a price and total-return basis. Dividend payments are not taken into account in the price index, whereas dividend payments are reinvested in the index sample of the total-return index. Only extraordinary and special cash dividends are included in the index. Special dividends from non-operating income continue to be included in the index calculation. 5.7 Dow Jones Sri Lanka Titaus 20 Index(DJSL20)
DJSL 20 measures the price movements of 20 companies selected on the basis of size of stock and liquidity. Dow Jones Sri Lanka Titaus 20 Index(DJSL20)measures the price movements of 20 companies selected on the basis of size of stock and liquidity. The index was created in reaction to increased market globalization, providing representation of companies headquartered in countries around the world. The Dow Jones Titans 20 Index (DJSL20) shed 0.19 points to close at 172.33 points. 5.8 Dow Jones Amana Sri Lanka Index(DJIMSL)
The Dow Jones Amana Sri Lanka Index(DJIMSL) gained 2.74 points to close at 1,166.25 points. Dialog was the main positive contributor to this index as well, whilst the main negative contributor was Lanka Hospitals with its weighted average share price declining by Rs. 0.75. The Dow Jones Islamic Market Amana Sri Lanka Index (DJIMSL) marginally gained 2.08 points to close at 1152.15 points. There were no positive contributors to this index, while the main negative impact on the index came from Hemas Holdings and Chevron Lubricants as their weighted average share price declined by Rs. 1.75 and 0.25 respectively. Information provided by Amana Securities Ltd.20
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References
1. Books 1.) Gunawardana.Y.W., (2009), Stock market and Investment Alternative, P&P Associates (Pvt.) Ltd-Rajagiriya, pp.16, 35
2.) Open University of Sri Lanka , OVERVIEW OF FINANCIAL MARKETS IN SRI LANKA VOLUME 1-5. 3.) rpj;jPf;.vk;.it.vk;.> (1997)> gq;Fr; re;ij KjyPLk; nraw;ghLfSk;> ELB
publications-Kalubowila, gg.205-211 2.
1.) 2.) 3.) 4.) 5.) 6.) 7.) 8.) 9.) 10.) 11.) 12.) 13.)
Web addresses
www.icasrilanka.com/journal/V42No4/Fixed%20Income%20Securities.pdf en.wikipedia.org/wiki/Order_(exchange) http://cfa-studynotes.blogspot.com/2008/11/call-vs-continuous-markets.html http://daytrading.about.com/od/daytradingbasics/a/OrderTypes.htm http://en.wikipedia.org/wiki/Exempt_market_dealer http://en.wikipedia.org/wiki/Margin_%28finance%29 http://en.wikipedia.org/wiki/Private_placement http://en.wikipedia.org/wiki/Secondary_market http://highered.mcgrawhill.com/sites/0073405132/student_view0/ebook/chapter1/ch body2/1_6_financial_markets_and_the_corporation.html http://wiki.fool.com/Secondary_market http://www.ac-markets.com/forex-education/forex-order-types.aspx http://www.bmfbovespa.com.br/Pdf/bovespanews_25102002.pdf http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074433335&r.i=1074433 247&r.l1=1073858808&r.l2=1073859227&r.l3=1074429027&r.s=sc&r.t=RESOURCES&ty pe=RESOURCES http://www.cma.or.ke/index.php?option=com_content&task=view&id=42&Itemid=107 www.capitaltrust.lk/ http://www.sltda.gov.lk/node/166 http://www.cse.lk/static/TradingSessions.htm http://www.igidr.ac.in/~susant/PDFDOCS/ShahThomas2001_smallmarkets.pdf http://www.imf.org/external/np/speeches/2005/040105.htm http://www.indiastudychannel.com/resources/109152-Types-Shares.aspx http://www.investopedia.com/terms/d/dealersmarket.asp http://www.investopedia.com/university/systemcoding http://www.investorwords.com/1302/dealer_market.html http://www.ipoinitialpublicofferings.com/ http://www.juliusandcreasy.com/inpages/publications/pdf/securitisation_in_sri_lanka. pdf http://www.network54.com/Forum/611718/ http://www.sec.or.th/sec/executive_summary_041109_eng.pdf http://www.tradechakra.com/economy/sri-lanka/foreign-investments-in-capitalmarkets-376.php http://www.uiowa.edu/ifdebook/ebook2/contents/part3-II.shtml http://www.undp.org/legalempowerment/reports/National%20Consultation%20Repor ts/Country%20Files/23_Sri%20Lanka/23_6_Sri_Financial_Sector.pdf http://www2.ilo.org/public/english/region/asro/bangkok/paper/privatize/chap6.pdf www.kgandhi.anindia.com
14.) 15.) 16.) 17.) 18.) 19.) 20.) 21.) 22.) 23.) 24.) 25.) 26.) 27.) 28.) 29.) 30.) 31.) 32.)
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ISLAMIC INSURANCE AND SOCIAL SECURITY

IAIB-4104 ISLAMIC INSURANCE AND SOCIAL SECURITY

ASSINGMENT FINANCIAL MARKET

TM.Rimsan SEU/IS/06/IA/036 FINAL YEAR FIRST SEMASTER 06/July/2011

SOUTH EASTERN UNIVERSITY OF SRI LANKA OLUVIL

4.4.1 Call Markets..................................................................................................... 29 TM.Rimsan - (SEU/IS/06/IA/036) Page 2

ISLAMIC INSURANCE AND SOCIAL SECURITY

The report should be include the following

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

http://papers.ssrn.com/sol3/papers.cfm?abstract-id=951278 TM.Rimsan - (SEU/IS/06/IA/036) Page 6

ISLAMIC INSURANCE AND SOCIAL SECURITY

http://www.cma.or.ke/index.php?option=com_content&task=view&id=42&Itemid=107 http://www.centralbank.org.ls/publications/Econo_Rev_August_2009.pdf 5 http://www.preservearticles.com/201012281813/functions-and-importance-of-capital-market.html TM.Rimsan - (SEU/IS/06/IA/036) Page 7

ISLAMIC INSURANCE AND SOCIAL SECURITY

Characteristics of a good market

Market Liquidity Low transaction costs Transparency Trends

Opening of a position Closing of the same position

ISLAMIC INSURANCE AND SOCIAL SECURITY Low Transaction Costs

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

Fixed Income Securities

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

These bonds will pay interest once a year.

ISLAMIC INSURANCE AND SOCIAL SECURITY

Semi-Annual Coupon Bonds

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY 2.1.4.17 Redeemable v Irredeemable Bonds

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

(1), (2) Issuer (3)

Security Originator (3) (3) (Best Efforts)

(1) Advising (2) Underwriting (3) Distribution9

www.marshallinside.usc.edu/dietrich/FS-FI-ValueSecurities.doc TM.Rimsan - (SEU/IS/06/IA/036) Page 20

ISLAMIC INSURANCE AND SOCIAL SECURITY

Primary financial markets

Types of share issues 3.1.1 Equity shares:

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY 3.1.13.6 Asset plays

IPO methods- Initial Public Offering (IPO)

http://www.icasrilanka.com/journal/V42No4/Fixed%20Income%20Securities.pdf TM.Rimsan - (SEU/IS/06/IA/036) Page 25

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

Call and continuous markets 4.4.1 Call Markets

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

http://www.wisegeek.com/what-is-a-continuous-market.htm TM.Rimsan - (SEU/IS/06/IA/036) Page 31

ISLAMIC INSURANCE AND SOCIAL SECURITY

The trading sessions for equity as follows:

Market Phase Pre-open Open Auction Normal Trading Closing

Time 9:00 - 9:30 9:30

Monday - Friday (Except Public Holidays) 9:30 - 14:30 14:30

ISLAMIC INSURANCE AND SOCIAL SECURITY

http://www.investopedia.com/university/systemcoding/#axzz1RSzVT2e0 TM.Rimsan - (SEU/IS/06/IA/036) Page 33

ISLAMIC INSURANCE AND SOCIAL SECURITY

Types of orders (Market orders, limit orders)

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY

ISLAMIC INSURANCE AND SOCIAL SECURITY