EQUITYEQUITY

ContentsContents

DefineDefineType of EquitiesType of EquitiesWhy and how it is traded in the MarketWhy and how it is traded in the MarketExerciseExerciseRole of various entities- Stock Role of various entities- Stock

Exchange, Prime Broker, Custodians, Exchange, Prime Broker, Custodians, NSCC etcNSCC etc

ReconciliationReconciliationMosiki ReportsMosiki Reports

Define - EquityDefine - Equity

Introduction:-Share capital, is capital Introduction:-Share capital, is capital raised by an entity through the sale of raised by an entity through the sale of common shares.common shares.

Equity is the term commonly used to Equity is the term commonly used to describe the ordinary share capital.describe the ordinary share capital.

Ordinary shares entitle the holders to all Ordinary shares entitle the holders to all distributed profits after the holders of distributed profits after the holders of debentures and preference shares have debentures and preference shares have been paid.been paid.

Types of SharesTypes of Shares

Ordinary Equity SharesOrdinary Equity Shares

Deferred Equity Deferred Equity

Preferred Equity Preferred Equity

Types - Ordinary Equity Types - Ordinary Equity SharesShares

Issued to the owners of a company.Issued to the owners of a company. The market value of a company's shares is The market value of a company's shares is

determined by the price another investordetermined by the price another investor is is prepared to pay for them.prepared to pay for them.

The market value of the public-quoted The market value of the public-quoted companies, ordinary shares is reflected on the companies, ordinary shares is reflected on the stock exchange (the "share price"). stock exchange (the "share price").

Typically, common stock shareholders receive Typically, common stock shareholders receive one vote per share to elect the company's board one vote per share to elect the company's board of directors.of directors.

Receive voting rights regarding other company Receive voting rights regarding other company matters such as stock splits and company matters such as stock splits and company objectives.objectives.

Types - Deferred Ordinary Types - Deferred Ordinary SharesShares

Form of ordinary shares, entitled to a Form of ordinary shares, entitled to a dividend only after a certain date or dividend only after a certain date or only if profits rise above a certain only if profits rise above a certain amount.amount.

Voting rights might also differ from Voting rights might also differ from those attached to other ordinary those attached to other ordinary shares.shares.

Types - Preferred Stock Types - Preferred Stock

Preferred stock is a mix between Preferred stock is a mix between regular common stock and a bond. regular common stock and a bond.

Is normally paid a guaranteed, Is normally paid a guaranteed, relatively high dividend.relatively high dividend.

Has first claim over common stock at Has first claim over common stock at the company's assets in the event of the company's assets in the event of bankruptcy. bankruptcy.

Owners of preferred stock generally Owners of preferred stock generally do not have voting privileges. do not have voting privileges.

Why might a company issue Why might a company issue ordinary shares?ordinary shares?

(1) The company might issue ordinary shares to raise more cash (1) The company might issue ordinary shares to raise more cash

If the company has never issued equity to the public, it's known as If the company has never issued equity to the public, it's known as an Initial Public Offer. an Initial Public Offer.

For example: The company might need cash for the expansion of For example: The company might need cash for the expansion of their production. If, for example, a company with 500,000 ordinary their production. If, for example, a company with 500,000 ordinary shares in issue, decides to issue 125,000 new shares to raise cash, shares in issue, decides to issue 125,000 new shares to raise cash, it has two choice (a) offer the new shares to existing shareholders, it has two choice (a) offer the new shares to existing shareholders, or (b) sell them to new shareholders instead.or (b) sell them to new shareholders instead.

Where a company sells the new shares to existing shareholders in Where a company sells the new shares to existing shareholders in proportion to their existing shareholding in the company, this is proportion to their existing shareholding in the company, this is known as a "rights issue".known as a "rights issue".

(2) The company might issue new shares to the shareholders of (2) The company might issue new shares to the shareholders of another company, in order to take it over.another company, in order to take it over.

Why Equity is tradedWhy Equity is traded

To make moneyTo make moneyFor long term investmentsFor long term investmentsGetting recurring income in the form Getting recurring income in the form

of Dividendsof DividendsGet better returns as compare to Get better returns as compare to

Fixed Income Markets/Banks etc Fixed Income Markets/Banks etc Protection against inflationProtection against inflationCompany takeoverCompany takeover

Trade Process FlowTrade Process Flow

Exercise - 1Exercise - 1

Investor A would like to invest Investor A would like to invest $100,000 in Vodafone shares. The $100,000 in Vodafone shares. The market value of the share is $25.25 market value of the share is $25.25 per share and SEC commission is per share and SEC commission is 0.05%. How many shares can be 0.05%. How many shares can be purchased by Investor A? purchased by Investor A?

Entities involved in the value Entities involved in the value chainchain

Stock ExchangeStock Exchange Broker/DealerBroker/Dealer Prime BrokersPrime Brokers CustodianCustodian DepositoryDepository Transfer AgentsTransfer Agents National Securities Clearing Corporation National Securities Clearing Corporation

(NSCC)(NSCC) Various MarketsVarious Markets

Stock ExchangeStock Exchange

Stock Exchange:-Stock Exchange:- Is a corporation or mutual organization which Is a corporation or mutual organization which

provides facilities for stock brokers and provides facilities for stock brokers and traders, to trade company stocks and other traders, to trade company stocks and other securities.securities.

Securities traded are shares issued by Securities traded are shares issued by companies, unit trusts and other pooled companies, unit trusts and other pooled investment products and bonds.investment products and bonds.

To be able to trade the above securities, it has To be able to trade the above securities, it has to be listed on the stock exchange.to be listed on the stock exchange.

Trade on an exchange is by members only,and Trade on an exchange is by members only,and it acts as a central location for recordkeeping it acts as a central location for recordkeeping for the trades done on the exchange.for the trades done on the exchange.

Stock exchange -cont-Stock exchange -cont-

Below are a few types of order platform the Below are a few types of order platform the exchange provides to execute the trades:- exchange provides to execute the trades:- Round Lot: - An order to buy or sell in multiples of Round Lot: - An order to buy or sell in multiples of

100 shares.100 shares. Odd Lot: - An order to buy or sell that involves Odd Lot: - An order to buy or sell that involves

less than 100 shares.less than 100 shares. Market Order: - An order to buy or sell at the best Market Order: - An order to buy or sell at the best

price currently available on the trading floor.price currently available on the trading floor. Limit Order: - An order to buy or sell when and if Limit Order: - An order to buy or sell when and if

a security reaches a specific price.a security reaches a specific price.

Broker/DealerBroker/Dealer Any individual or firm in the business of buying and selling Any individual or firm in the business of buying and selling

securities for itself and others must register with the SEC. securities for itself and others must register with the SEC. are called Broker/dealers.are called Broker/dealers.

When acting as a broker, he executes orders on behalf of When acting as a broker, he executes orders on behalf of his/her client.his/her client.

When acting as a dealer, he executes trades for his/her When acting as a dealer, he executes trades for his/her firm's own account. Securities bought for the firm's own firm's own account. Securities bought for the firm's own account may be sold to clients or other firms, or become a account may be sold to clients or other firms, or become a part of the firm's holdings. part of the firm's holdings.

All brokers charge commissions to execute orders. This fee All brokers charge commissions to execute orders. This fee varies widely depending on the type of additional services varies widely depending on the type of additional services they provide to his/her clients.they provide to his/her clients.

Brokers also provide a variety of services, such as personal Brokers also provide a variety of services, such as personal advice, retirement planning, and tax tips. advice, retirement planning, and tax tips.

To mitigate the risk, brokers charge margin to their clients, To mitigate the risk, brokers charge margin to their clients, by way of collateral, variation margin based on the by way of collateral, variation margin based on the exchange requirements towards the open positions.exchange requirements towards the open positions.

Prime BrokerPrime Broker..

A large bank or securities firm that A large bank or securities firm that give administrative and back office give administrative and back office support to hedge funds and other support to hedge funds and other professional investors. professional investors.

Prime brokers may also provide Prime brokers may also provide custodial, clearing and research custodial, clearing and research services.services.

Functions of a Prime BrokerFunctions of a Prime Broker

Hedge funds establish Prime Brokerage Hedge funds establish Prime Brokerage relationships to minimize operational and relationships to minimize operational and accounting-related issues and to curb costs through accounting-related issues and to curb costs through consolidated financing, while maintaining the consolidated financing, while maintaining the benefits of executing with many number of brokers. benefits of executing with many number of brokers.

When a fund designates a prime broker, it instructs When a fund designates a prime broker, it instructs all its executing brokers to settle its trades for cash all its executing brokers to settle its trades for cash with a single firm. with a single firm.

After the fund executes a trade, it reports the After the fund executes a trade, it reports the details to its prime broker who in turn, clears the details to its prime broker who in turn, clears the trade, custodies the securities, provides margin trade, custodies the securities, provides margin financing, lends stock to cover short sales, and financing, lends stock to cover short sales, and provides cash and position reports. provides cash and position reports.

Functions of a Prime Broker-Functions of a Prime Broker-cont-cont-

Confirms transactions with clients' counter-parties Confirms transactions with clients' counter-parties on the night of trade date. If there's any on the night of trade date. If there's any discrepancy between what the customer reports discrepancy between what the customer reports and what is in the Prime Brokerage system, the and what is in the Prime Brokerage system, the prime broker is responsible for communicating prime broker is responsible for communicating those breaks to the customer on the morning of those breaks to the customer on the morning of trade date plus one (T+1) and for settling any trade date plus one (T+1) and for settling any differences. differences.

Monitoring corporate actions, such as dividend Monitoring corporate actions, such as dividend payments and proxy-related information, collects payments and proxy-related information, collects all this information and provides it to the all this information and provides it to the investment managers.investment managers.

Providing multi-currency reports, valuing portfolios Providing multi-currency reports, valuing portfolios in local currencies and a base currency accurately in local currencies and a base currency accurately and regularly. and regularly.

Clients and CustodiansClients and Custodians

Clients / InvestorsClients / Investors: - Who buy or sell : - Who buy or sell securities in the market. i.e. Insurance securities in the market. i.e. Insurance Company, Corporate Firm, Mutual Fund, FII, Company, Corporate Firm, Mutual Fund, FII, Retail investors, Banking and Prime Brokers. Retail investors, Banking and Prime Brokers.

CustodiansCustodians:- :- (Local & Global) An agent, bank, trust (Local & Global) An agent, bank, trust

company, or other organization which holds company, or other organization which holds and safeguards an individual's, mutual and safeguards an individual's, mutual fund's, or investment company's assets for fund's, or investment company's assets for them. them.

DepositoryDepository

A bank or company which holds securities A bank or company which holds securities deposited by others, where exchanges of these deposited by others, where exchanges of these securities take place. Members do electronically securities take place. Members do electronically transfer stock and bond certificates to transfer stock and bond certificates to clearinghouse.clearinghouse.

Depository activity means every activity related to Depository activity means every activity related to the depository of securities, transfer of securities the depository of securities, transfer of securities ownership through book entry, including the pledge ownership through book entry, including the pledge of securities, to support the settlement of financial of securities, to support the settlement of financial positions.positions.

Objective of Depository:- Eliminate risks that have Objective of Depository:- Eliminate risks that have arisen in effecting transfer of shares through the arisen in effecting transfer of shares through the use of physical certificates in the Capital Market. use of physical certificates in the Capital Market. i.e. they can easily be mutilated, faked, or losti.e. they can easily be mutilated, faked, or lost

Registrar and Transfer Registrar and Transfer Agent Agent R&T agents perform three main functionsR&T agents perform three main functions

a) a) Issue and cancel certificates to reflect changes in Issue and cancel certificates to reflect changes in ownershipownership. .

Example: - when a company declares a stock dividend or stock Example: - when a company declares a stock dividend or stock split, the transfer agent issues new shares. Transfer agents split, the transfer agent issues new shares. Transfer agents keep records of who owns a company’s stocks and bonds and keep records of who owns a company’s stocks and bonds and how those stocks and bonds are held—whether by the owner in how those stocks and bonds are held—whether by the owner in certificate form, by the company in book-entry form, or by the certificate form, by the company in book-entry form, or by the investor’s brokerage firm in street name. They also keep investor’s brokerage firm in street name. They also keep records of how many shares or bonds each investor owns.records of how many shares or bonds each investor owns.

b) b) Act as an intermediary for the companyAct as an intermediary for the company. A transfer . A transfer agent may also serve as the company’s paying agent to pay agent may also serve as the company’s paying agent to pay out interest, cash and stock dividends, or other distributions to out interest, cash and stock dividends, or other distributions to stock- and bondholders. In addition, transfer agents act as stock- and bondholders. In addition, transfer agents act as proxy agent (sending out proxy materials), exchange agent proxy agent (sending out proxy materials), exchange agent (exchanging a company’s stock or bonds in a merger), tender (exchanging a company’s stock or bonds in a merger), tender agent (tendering shares in a tender offer), and mailing agent agent (tendering shares in a tender offer), and mailing agent (mailing the company’s quarterly, annual, and other reports).(mailing the company’s quarterly, annual, and other reports).

c) c) Handle lost, destroyed, or stolen certificatesHandle lost, destroyed, or stolen certificates. Transfer . Transfer agents help shareholders and bondholders when a stock or agents help shareholders and bondholders when a stock or bond certificate has been lost, destroyed, or stolen.bond certificate has been lost, destroyed, or stolen.

National Securities Clearing National Securities Clearing Corporation (NSCC)Corporation (NSCC)

National Securities Clearing Corporation (NSCC) National Securities Clearing Corporation (NSCC) subsidiary, handles post-trade processing for all subsidiary, handles post-trade processing for all equity, municipal and corporate bond transactions equity, municipal and corporate bond transactions in the U.S. market.in the U.S. market.

It ensures post-trade processing capacity to It ensures post-trade processing capacity to handle not only average trading volumes, but also handle not only average trading volumes, but also the unpredictable spikes that can occur in the the unpredictable spikes that can occur in the market. market.

It offers a guarantee that, if a participant defaults It offers a guarantee that, if a participant defaults for any reason, all transactions that have entered for any reason, all transactions that have entered NSCC’s system with the details confirmed and that NSCC’s system with the details confirmed and that have reached the guarantee stage, will settle. have reached the guarantee stage, will settle.

To minimize the risk, they charge different types To minimize the risk, they charge different types of margins to the brokers / dealers for all the open of margins to the brokers / dealers for all the open trades.trades.

MarketsMarkets

• NYSE-New York Stock ExchangeNYSE-New York Stock Exchange

• NASDAQ- National Association of NASDAQ- National Association of Securities Dealers Automated Quotations Securities Dealers Automated Quotations

• AMEX-American Stock Exchange AMEX-American Stock Exchange

• OTCBB-Over-The-Counter Bulletin Board OTCBB-Over-The-Counter Bulletin Board --

IFS - Reconciliation ProcessIFS - Reconciliation Process

Reconciliation is done between prime broker Reconciliation is done between prime broker and IFS dataand IFS data

Entire recon is having three primary Entire recon is having three primary activitiesactivities

Downloading of Broker data from website or via E-mailsDownloading of Broker data from website or via E-mails Generate reports from iGLS systemGenerate reports from iGLS system Reconcile Broker data with IFS dataReconcile Broker data with IFS data

Types of reconciliationTypes of reconciliation Position ReconPosition Recon Cash ReconCash Recon Market Value ReconMarket Value Recon Corporate Action ReconCorporate Action Recon Financing ReconFinancing Recon

Recon Process – Contd.Recon Process – Contd. All the breaks must be investigated and All the breaks must be investigated and

suggest the best resolution of the same. suggest the best resolution of the same. The reasons for the breaks are:The reasons for the breaks are:

Difference in the quantity booked by IFS and brokerDifference in the quantity booked by IFS and broker Trades booked at different prices by IFS and brokerTrades booked at different prices by IFS and broker Different commission booked by IFS and brokerDifferent commission booked by IFS and broker Difference in factors booked by IFS and brokerDifference in factors booked by IFS and broker Corporate action booked by IFS only not by broker Corporate action booked by IFS only not by broker

and vice-versaand vice-versa Option expired by Broker not by IFS and vice-versaOption expired by Broker not by IFS and vice-versa

THANK YOUTHANK YOU