Capital Market Terminologies by Nahid

7/29/2019 Capital Market Terminologies by Nahid

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Capital Market Terminologies

Capital Market

A capital market is a market forsecurities (debt orequity), where business enterprises

(companies) and governments can raise long-term funds. It is defined as a market in which

money is provided for periods longer than a year, as the raising of short-term funds takes place

on other markets (the money market). The capital market includes the stock market (equity

securities) and the bond market (debt). Capital markets may be classified as primary

markets and secondary markets. In the secondary markets, existing securities are sold and bought

among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Money Market

The money market became a component of the financial markets for assets involved in short-

term borrowing, lending, buying and selling with original maturities of one year or less. It

provides liquidity funding for the global financial system. The instruments bear differing

maturities, currencies, credit risks and structure. Therefore they may be used to distribute the

exposure.

Di stinguish between the money markets and capital markets:

The primary difference between the money and capital markets is maturity period of the

securities traded in them. The money market handles transactions within the short-term credit

instruments while the capital market handles transactions in long-term financial instruments.

Typically, a maturity period above one year would be categorized long-term and less than oneyear would be categorized short-term.

Stock Exchange

The stock exchange provides a sound and stable securities market where shares can be bought

and sold. The stock exchange provides listed companies with a channel seek capital fund from

the public and at the same time it provides the investors a place to buy and sell shares of the

listed companies. The exchange also monitors the market to ensure that it is working efficiently,

fairly and transparently.

Investment Banker

An investment banker is a financial specialist involved as an intermediary in the merchandising

of securities. They facilitate the flow of savings from those economic units that want to invest to

those units that want to raise funds. The three main functions of an investment banker are

underwriting, distributing, and advising.
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Share

Share capital (UK English) or capital stock (US English) refers to the portion of a

company's equity that has been obtained (or will be obtained) by trading stock to a shareholder.

Each share represents a small stake in the total paid up capital of a company.

The Primary share market

Primary share market allows companies to raise capital which can be utilized to grow the

business. Typically this is as an initial public offering (IPO) of shares. When the company lists

on the stock market they release a certain number of shares at a certain price. Investors who

believe in the companys ability to generate profits can then purchase these shares. Companies

have the ability to release more shares at a later date.

The Secondary Share Market

Secondary share market is the place where buyers and sellers of shares allow their shares to be

exchanged. Based on the economic laws of supply and demand the share prices fluctuate

depending on whether there are more investors interested in buying or selling shares in the

company. The stock market offers investors the opportunity to make money both over the short

and long term depending on which investment strategy they have.

Equity

Equity may refer to:

a) Equity (finance), the value of an ownership interest in property, including shareholders'

equity in a business.

b) Stock, the generic term for common equity securities is called stocks.

c) Home equity, the difference between the market value and unpaid mortgage balance on a

home.

d) Private equity, stock in a privately held company.

e) In the context of margin trading, the value of securities in a margin account minus what

has been borrowed from the brokerage.

Book closure / Record Date

While a company intends to hold any AGM/ EGM; it declares a book legislature closer provider/

Record Date to register the name of shareholders. Only shareholders whose names appear on the

register after the book closure/ Record Date are eligible to attend in the AGM/ EGM and also to

receive dividends & bonus shares and entitlement to right shares, if any.
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What is IPO?

IPO refers to Initial Public offering. IPO means while a company wants to raise fund from thegeneral public, it goes for public offering after completing necessary regulatory compliances.

What is 'Circuit Filter?

Circuit Filter is the maximum permissible deviation of the price (specified as percentage), of anaggressor order from the last trade price.

What is 'Market Lot?

A Market Lot is the smallest tradable unit for an instrument except those traded in the Odd lotbook. All order quantities can only be an integral multiple of the Market lot.

What is 'Odd Lot?

Stock market shares are generally bought and sold in market lots, which are easy to trade. Anynumber of shares less than the market lot makes an odd lot. Odd lots typically arise from bonusor rights issues.

What does TESA mean?

TESA (The Electronic Security Architecture) is The DSE trading system and is used to tradeOrdinary shares of listed companies, Mutual funds, Bonds and Debentures.

What is MSA?

MSA refers to Member Server Application. Brokers can use MSA to monitor and control theirtrader(s). There can be only one MSA per broker house. All the traders (TWS) have to connect tothe trading system through MSA.

Who are ARs?

AR refers to Authorized Representative. ARs are certified trader for trading during the tradeexecution time. They are appointed by the brokerage house and licensed by Securities andExchange Commission.

What is TWS (Trader Workstation)?

Traders (AR) can trade on the stock exchange using either TESA supplied workstation software

or through their own custom developed broker system. This kind of workstation is called TWS.


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What is CDBL?

The Central Depository Bangladesh Limited (CDBL) is a company set up the banks, stockexchanges and other institutions to operate the central securities depository in Bangladesh

Depository

A depository is like a bank for shares instead of money. Instead of holding shares in the form ofcertificates, investors have accounts in the depository and are able to move securities and settlestock exchange transactions by an electronic update of their accounts.

Depository Participant

A Depository Participant (DP) is described as an agent of the depository. They are the

intermediaries between the depository and the investors. The relationship between the DPs and

the depository is governed by an agreement made between the two under the Depositories Act.

Rights Issue

A rights issue is an issue of additional shares by a company to raise capital under a seasonedequity offering. The rights issue is a special form of shelf offering or shelf registration. With theissued rights, existing shareholders have the privilege to buy a specified number of new sharesfrom the firm at a specified price within a specified time. A rights issue is in contrast to an initialpublic offering, where shares are issued to the general public through market exchanges. Closed-end companies cannot retain earnings, because they distribute essentially all of their realized

income and capital gains each year.

Mutual Fund

A Mutual Fund is a trust Fund established with the intention of investing a pool of savings in

various types of securities for the benefit of investors. Initially a mutual fund collects the funds

from small investors and then they are invested into the securities of different types, thus

diversifying the portfolio. Due to diversification of investment and professional management,

investing through mutual fund carries lesser risk then investing individually.

Open-Ended Mutual Fund

Open-ended mutual funds are those Funds where subscription and redemption of units are

allowed on a continuous basis. These schemes do not have a fixed maturity period. Investors can

buy or repurchase the units at any time at NAV /NAV based prices declared by the fund manager

on daily or weekly basis.
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Closed-End Mutual Fund

Closed-end mutual funds are those Funds where the shares are initially offered to the public and

are then traded in the secondary market.

Asset Management Company

AMC refers to that kind of company which undertakes the task of floating and managing the

schemes delegated by the trustee. The company is usually considered professionally sound and

experts who are known for smart stock picks. AMC charges a fee for the services it renders to

the fund. The company acts as the investment manager of the fund under broad supervision and

direction of the trustees.

Key Players for launching a Mutual F und

Asset Manager:

The function of the asset manager includes:

Activities relating to regulatory protection and reporting, Preparation and distribution of prospectus, annual and periodic report of the Mutual Fund andother papers for the investors, Accounting activities and preparation of tax return and Insurance and other services.

Custodian:

Custodians are financial institutions that keep the securities of the mutual fund in safe custody. It

also retains the following documentation for the clients:

Statement of receipt and distribution of Securities & money; Detailed statement of registration of securities and Ledger of Accounts for each Client.

Sponsor:

The sponsor of the fund provides the primary capital for launching the fund. The constitution of

the mutual fund is set on a trust deed and it is executed by the sponsor in favor of the trustee ofthe fund (usually named in the trust deed). Sponsors of the fund can invest at least 10% or more.

The number of sponsors in any fund can be more than one.


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Trustee:

The trustee is considered to be the guardian of the fund and ensures compliance of SEC andother rules and oversees the implementation of the trust deed. The Trustee also safeguards theproperties of the fund for all its stake holders.

Merchant Bank

A merchant bank is a financial institution which is primarily engage in offering financial servicesand provides advice to corporations and to wealthy individuals. The term can be used describethe private equity activities of banking. Investment Banking is an American synonym ofmerchant banking. Investment Banks provide advice on mergers and acquisitions and sellingthem in relatively small lots to investors. In the context of Bangladesh, it includes all financialinstitutions that combine the functions of both development banking and investment banking.

Underwr i t ing

It is an arrangement whereby the underwriter undertakes to subscribe the unsubscribed portionof shares/debentures offered by any public limited company. This encourages theprospect ive issue rs to of fe r shares/debentures to the public for subscription and they can raisefunds from the publ ic.

I ssue Management

Issue Management function of merchant Banking helps capital market to increase the supply of securities.

Being a Issue Manager these FIs provide assistance to the Private Limited Companies

intended to be converted into Public Limited Companies by way of obtaining necessary

permission from the re l e va nt au t ho r i t i e s , pr epa r in g pr o spec t us for public issue of

shares and debentures, involving itself in the collection of application money, scrutiny

of applications, arranging for lottery relating to allotment, if required, allotment of shares and

debentures, refund of application money etc.

Por tfol io Management

Portfolio means a collection of investments owned by an investor, an institution or

a mutual fund and portfolio manager means the entity responsible for investing a mutualfunds assets, mapping out investment strategy and managing day to day securities trading.

Portfolio Management is the process of building, managing and assessing an inventory ofcompany products and projects. One of the most important functions of merchant banking is to providePortfolio Management service to the customer.


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Demutualization

Demutualization is the process of converting exchanges from non-profit member-ownedorganizations to for profit, investor-owned corporations. More specifically Demutualization inthe context of a stock exchange, means separating ownership from the right to use the

exchanges trading system. In the mutual ownership model, a broker seeking to trade on theexchange had first to be approved as an owner. Conversely, only brokers who wished to trade onthe exchange would be approved as owners. If a broker resigned from the exchange or let thebusiness, its membership (ownership) would cease. Demutualization separates these roles so thatone no longer need be a shareholder (owner) to be granted trading privileges and one can be ashareholder without being a broker.

Composite Index:

A composite, or composite index, is an aggregation of components to produce a broad statistical

measure. A stockindex, for example, is a composite index as it combines individual stock pricesto produce one number that represents the market as a whole. The technique used to calculate thecomposite number varies; a composite may add values together and apply a multiplier, it mayadd values together while applying different weights to different components, or it may simplyaverage all the values together. Composites are not limited to stock markets. There are compositeindexes for bonds, corporate debt and currency exchange rates. Many economic indicators suchas the ConsumerPrice Index are composite indices. There are even composite indices ofcomposite indices, such as the widely reported Index of Leading Economic Indicators.Benchmarking of professional money managers is often done against a composite. Mutual-fundmanagers, for example, may have their performance measured relative to the S&P 500 Index.

What you should know to buy or sell

Investors follow many calculations of corporate performance when deciding if a stock isundervalued or overvalued. These range from the simple price-earnings ratio, or P/E, tofar more technical ways of attempting to discern whether a stock is trending up or down.Here are some of the most common.

RSI (Relative Strength Index): A technical momentum indicator that compares the size ofrecent gains to recent losses, in an attempt to determine overbought and oversoldconditions of an asset. Stocks with more or strong gains have a higher RSI than stocks

that had more or stronger losses.

SMA (Simple Moving Average): A simple, or arithmetic, moving average is the averagestock price over a certain period of time. It adds up the closing price of the security for agiven period and then divides the total by the number of intervals. Short term averages
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respond quickly to changes in the price of the stock, so appear less steady, and whilelong-term averages are slow to react.

EMA (Exponential Moving Average): A type of moving average that is similar to asimple moving average, except that more weight is given to the latest data. The

exponential moving average also known as exponentially weighted moving average.

Bollinger Band: A band that provides a relative definition of high and low, it wasdeveloped by famous technical trader John Bollinger. By definition, prices are high at theupper band and low at the lower band. The band usually plots two standard deviationsaway from a simple moving average. Because the standard deviation is a measure ofvolatility, the bands adjust themselves to market conditions. When the markets becomevolatile, the bands widen (move further away from the average); during less volatileperiods, the bands contract. The closer the prices move to the upper band, the moreoverbought the market, and the closer the prices move to the lower band, the more

oversold the market.

MACD (Moving Average Convergence Divergence): A trend-following momentumindicator that shows the relationship between two moving averages of prices. It is used tospot changes in the strength, direction, momentum, and duration of a trend in a stocksprice.

Divergence: This happens when a securitys price diverges from the MACD. It signalsthe end of the current trend.

Option Trading: An option is a contract between two parties giving the buyer the right, butnot the obligation, to buy or sell a security at a predetermined price on or before a predetermined

date. To acquire this right the buyer pays a premium to the seller of the contract.

There are two types of options available: call options and put options.

Call Options: Call options give the buyer the right, but not the obligation, to buy the underlying

shares at a predetermined price, on or before a predetermined date.

Put options: Put options give the buyer the right but not the obligation to sell the underlying

shares at a predetermined price on or before a predetermined date. The buyer of a put is only

required to deliver the underlying shares if they exercise the option.

Carry forward: The "carry forward" activities are mixed together with the spot market.

Suppose you buy 1,000 shares of Beximco at Tk. 3,500, your cash outflow (Expense) is Tk. 35

lakh. Instead of paying cash, you can ask your broker to find a borrower to finance your trade.

This process of buying stocks with borrowed money is Carry Forward (Badla) trading.


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Example:Suppose A has to buy 100 shares of a company at Tk. 50 each. But he doesn't have

enough money now. But the value of shares is very less now, so in order to buy the shares at

current prices, A can do a Carry Forward (Badla) transaction. Now there is a Carry Forward

(Badla) financier B who has enough money to purchase the shares, so on A's request, B

purchases the shares and gives the money to his broker. The broker gives the money to exchange

and the shares are transferred to B. But the exchange keeps the shares with itself on behalf of B.

Now, say one month later, when A has enough money, he gives this money to B and takes the

shares. The money that A gives to B is slightly higher than the total value of the shares. This

difference between the two values is the interest as Carry Forward (Badla) finance is treated as a

loan from B to A. The rate of interest is decided by the exchange and it changes from time to

time.

Short Selling: Short selling is when you sell a stockthat you don't actually own. Your stock

broker buys the stock. He or she then lends it to you, sells it, and credits your account with theproceeds. You promise to buy the stock sometime in the future to return the loan. This is called

covering the short and whole process is called short selling.

Exchange Traded Funds (ETFs):

ETFs are essentially index funds that are listed on an exchange and track the price performanceof the target index closely. The ETF trading value is based on the net asset value (NAV) of theunderlying stocks in the target index. E.g., a Nifty ETF will look to replicate CNX Nifty returns.ETFs are popular world over with nearly 60% of trading volumes on the American StockExchange (AMEX) captured by all types of ETFs. At the end of June 2011, the global ETF

industry comprised 2,825 ETFs from 146 providers on 49 exchanges around the world with totalassets of US$1.49 trillion (Source: www.ifaonline.co.uk).

The ETF advantage

Trade like stocks - You can buy and sell an ETF during market hours on a real time basisas well as put advance orders on purchase such as limits or stops. In case of conventionalmutual funds, purchase or sale can be done only once a day after the fund NAV iscalculated.

Low cost of investment - The passive investment style with low turnover helps keepcosts low. ETFs are known to have among the lowest expense ratios compared to othersschemes.

Diversification benefit - In case of Nifty ETF, you own the complete basket of 50 stocksand remain diversified.

Simple and transparent - The underlying securities are known and quantities are pre-defined (In case of conventional mutual fund schemes, one need to wait for the monthlyfactsheet). No form filling is required if you transact in the secondary market.Investment can be made directly from the fund house or the exchange.


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Supports small ticket investments - ETFs are a great tool for investors wanting to startwith a small corpus. The minimum ticket size is 1 unit (in case of IIFL Nifty ETF, 1 unitis approximately 1/10th of Nifty level, i.e Rs500, when Nifty is at 5000). Premium anddiscount also tends to be higher in the futures segment, than in ETFs.

ETFs are taxed like stocks - Investors can take advantage of special rates for short term

and long-term capital gains.Target audience

Long term investors First time investors Investors looking for a low cost diversified portfolio Traders who do not have enough capital to invest in index futures Institutional investors looking to temporarily park cash during portfolio transition Arbitrageurs to carry out operations with low impact cost

Concept of tracking error

The extent to which the NAV of the scheme moves in a manner inconsistent with themovements of the underlying Index on any given day or over any given period of time due to

any cause or reason whatsoever including but not limited to expenditure incurred by the scheme,dividend payouts if any, all cash not invested at all times as it may keep a portion of funds incash to meet redemption, purchase price different from the closing price of securities on the dayof rebalance of Index, etc.Points to note before investing in ETFs

Invest in ETFs with ample secondary market liquidity - Fund houses do depend onmarket makers and arbitrageurs to maintain liquidity to keep the price in line with theactual NAV.

ETFs track the target index Any investor wanting an exposure to a particular targetindex like Nifty will do well by investing in ETFs. The objective of ETF is to be theindex rather than beat the Index.

Always invest in key benchmarks ETFs rather than sectoral funds - Investing in sectoralETFs is prone to higher volatility compared to key benchmark ETFs like Nifty.

Cost of trading on the exchange - Investor will have to bear the cost of brokerage andother applicable statutory levies e.g., Securities Transaction Tax, etc, when the units arebought or sold on the stock exchange.


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Valuation Methodologies

Goodbody Stockbrokers apply a range of valuation methodologies in the production of EquityResearch, within which the following are the main methods adopted:

1. Share-based multiples include: Forward price/earnings (P/E) ratios, based on adjusted earnings Forward price/cash-earnings ratios Price to net asset value (NAV) per share and Dividend yields

2. Enterprise-based valuation multiples include:

Forward earnings before depreciation, interest, tax, depreciation or amortisation(EBITDA) ratios

Forward perating cash-flow ratios Enterprise value (EV)/sales ratios and

EV/invested capital ratios

3. Cyclical consideration

In the case of average earnings multiples, consideration is given to the stage of the relevantindustry cycle, as it may not be appropriate to apply average multiples towards the peak ortrough of a cycle. In such cases, earnings multiples prevailing at the corresponding stages ofprevious cycles may be used.

4. Asset based valuations

In the case of asset-based valuations, reported tangible net assets generally provide a floor to acompany's valuation. However, in many cases, company financial statements can understate the

underlying economic value of a company's assets and a ratio such as return on invested capital toweighted average cost of capital (ROIC/WACC) may provide a more appropriate indicator of thebook value multiple.

5. Company comparisons

The ratings of similar companies (peer groups) may be taken into account as a proxy for theaverage ratings for particular industry sectors. Such ratings are commonly used in analysts' sum-of-the-parts (SOTP) valuations.

6. Cash flow based valuation

In discounted cash-flow (DCF) models a company's forecast future free cash-flows are

discounted by its weighted WACC. However, due to the inherent uncertainties involved inforecasting long-term cash-flows, analysts tend to adopt a range of both WACC and terminalvalues within the DCF models, producing a range of alternative valuations.

7. Other valuation techniques


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In some instances, other valuation metrics may be used. For instance, for airlines metrics perpassenger and / or available seat kilometre flown may be used for inter-company and valuationpurposes.

Index Methodology of CSEWhat is stock market index and how does it construct?

A stock market index is a number that indicates the relative level of prices or value of securitiesin a market on a particular day compared with a base-day figure, which is usually 100 or 1000.There are many different ways of constructing an index. One of the most common methods isillustrated by the following simple example.The values of a market portfolio at the close oftrading on Day 1 and Day 2 are recorded below:

Trading days Value of portfolio Index

DAY 1 (base day) Tk 20,000 1000

DAY 2 Tk 21,000 1050

We take Day 1 as the base day. The index on that day will be taken as a standard. The value assigned

to the base day index is 1000 in this example. On Day 2 the value of the portfolio has changed from

Tk 20,000 to Tk 21,000, a 5% increase. Therefore, the value of the index on Day 2 will change to

indicate a corresponding 5% increase in market value. The computation follows the procedure below:

2'sportfolio value

Day 2's index = ------------------------------------------------- * Base Day's (Day 1) index

Base Day's (Day 1) portfolio value

Tk 21,000

= ---------------- * 1000

Tk 20,000

= 1050

Day 2's index is 1050 as compared to the 1000 of day 1. The above illustration only serves as an

introduction to how a particular index is constructed. The daily computation of an index is more

involved especially when there are changes in market capitalization of constituent stocks, e.g., rights

offers, stock dividend etc. The primary objective of constructing market indices is to measure the

performance of the market. The indices provide vital information about the current and historical

behavior of the market. Stock market indices differ from one to another basically in their sampling

and/or weighting methods.

Sampling Method

There are some market indices that are composed of all stocks listed in a market, e.g., the American

Stock Market Index and the Hong Kong Stock Exchange All-Ordinaries Index etc.

In general, an index based on a larger percentage of the total number of listed stocks will be more

representative than that one based on a smaller percentage. Although an index that consists of all


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listed stocks can be considered as more representative, a number of stocks may have very few

transactions, the quoted price of these stocks may not reflect their true market value. An index may

still be highly representative even if it consists of only a relatively small percentage of the total

number of stocks. Here, the sample selection process plays an important role.

Most of well-known stock market indices of the major stock markets in developed countries are still

considered as highly representative since their constituent stocks comprise a high percentage of total

value of the market. For example, the Hang Seng Index (Hong Kong) is composed of 33 constituent

stocks comprising approximately 70% of total value. FOX index (Finland) is composed of 25 most

traded shares which is correspond to roughly 80% of the total market value and ATX 50 (Australia)

comprises 84% of the capitalization and 97% of the turnover of all Australian stocks.

Weighting Method

There are, in general, three different weighting methods, namely, value-weighted, equally-weighted

(or un-weighted), and price-weighted.

Value-weighted method may be considered as a most appropriate method than others for both the

bourses of the country (DSE & CSE) since the existing indices of the bourses have been calculating

under value-weighted method. For a value-weighted index, the weight of each constituent stock is

proportional to its market share in terms of capitalization. We can assume that the amount of money

invested in each of the constituent stocks is proportional to its percentage of the total value of all

constituent stocks. Examples include all major stock market indices of Hong Kong, London and many

others.

Computation of Value Weighted Indices and Adjustments for Changes in Market Capitalization

The computation of a value-weighted index is useful to think in terms of evaluating the performance of

a portfolio of securities. Some adjustments need to be made due to changes in market capitalization

of the portfolio's constituent stocks. The adjustment procedures are discussed in detail below.

To make our computation simple, we need to keep the number of constituent stocks small. Let us

assume that the index is composed of only three stocks: A, B and C.

Day 1 (base day): Market Data of Constituent Stocks on Day 1

Stock Shares Outstanding Closing Price Market Value

A 20 10 200

B 5 8 40

C 10 5 50

Aggregate Market Value (AMV) = 290

The market value of each stock at closing is given by the product of the number of shares outstanding

and the closing price. For stock A, for instance, it is 20 shares times Tk.10 which yields Tk.200. The

aggregate market value (AMV) of all constituent stocks is the sum of the market value of each stock.

The AMV of day 1 is Tk.290. Day 1 will be taken as the base day on which the index is set at 1000

Day 2: Market Data of Constituent Stocks on Day 2


A 20 10 200


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B 5 9 45

C 10 5.5 55


As there is no change in capitalization, no adjustment is needed on Day 2. The AMV is equal toTk.300. The computation of the index on Day 2 follows the procedure below:

Day 2's AMV

Day 2's index = --------------------*Day 1's index

Day 1's AMV

300

= ------- * 1000

290

= 1034.4828

It should be clear that the change in the index value shows the relative change in the aggregate

market value of the constituent stocks. There is a 3.45% increase in AMV (also in index) on Day 2

relative to Day 1 (the base day).

Adjustment to Changes in Capitalization

Adjustments need to be made from time to time as a result of changes in capitalization of the

constituent stocks. They are discussed in detail below:

Day 3 (Ex-Bonus)

Company Aissues 50% bonus shares. Its shares are to be traded ex-bonus at the ratio of "1 for 2",

i.e., one share will be given as bonus for every 2 shares held. This issue of shares is going to change

the total number of shares outstanding on Day 3. The adjustment is shown below:

20(1+2)

New Total No. of Shares Outstanding of Company A = ------------

2

= 30

Market Data of Constituent Stocks on Day 3


A 30 7 210

B 5 8 40

C 10 6 60


Therefore,


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Day 3's AMV

Day 3's index = ---------------------- * Day 2's index

Day 2's AMV

310

= ----------- * 1034.4828

300

= 1068.9656

Note that the closing price of Company A on day 3 is Tk. 7/- determined by demand and supply

factors in the market against the theoretically adjusted price (to the extent of disclosure) of Tk. 6.67

made on day 2 after closing market / on day 3 before starting market.

If the company issuing bonus share also recommends / declares cash dividend, then the

cash dividend (to the extent of disclosure) should also be adjusted in the aforesaid

theoretical price.

Day 4 (Ex-Rights)

Stock C has declared 40% rights share at the ratio of "2 for 5" at Tk.1.50 each including a premium of

Tk. 0.5 each. The offer expires on Day 4 (i.e. ex-rights). As mentioned earlier, it is useful to treat the

constituent stocks as a portfolio held by an investor. In the computation of the index on Day 4, the

investor is assumed to exercise the rights. Therefore, the new number of shares outstanding for stock

Cis given below:

10(2+5)

New Number of Shares Outstanding for Stock C = ----------

5

= 14



A 30 6.5 195

B 5 9.2 46

C 14 4.5 63


Since all rights are exercised, capitalization adjustment needs to be made on day 3 after closing

market / on day 4 before starting market. The number of shares outstanding increases by 4. This will

cause an increase in capitalization by Tk.6 (= 4*1.50). The adjusted AMV on Day 3 after closing

market / on day 4 before starting market in the index computation on Day 4 will be:

310 + 6 = 316

Therefore,

Day 4's AMV

Day 4's index =--------------------------------- * Day 3's index

Adjusted Day 3's AMV

304

= ---------- * 1068.9656

316

= 1028.3720


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1028.3720 - 1068.9656

Percentage change = ------------------------------- * 100%

1068.9656

= -3.80%

The index dropped from 1068.9656 to 1028.3720. This can be interpreted as a 3.80% decrease in

AMV.

Day 5 (Replacement)

Stock B is replaced by stock D, which has a closing price at Tk.11.5 on Day 4 and its number of shares

outstanding is 20. Market Data of Constituent Stocks on Day 5


A 30 7 210

D 20 11 220

C 14 5 70


The adjustment on Day 4's AMV in computing Day 5's Index follows a procedure as if the stock

replacement had taken place on Day 4. The adjusted AMV on Day 4 is given as:


A 30 6.5 195

D 20 11.5 230

C 14 4.5 63


Therefore, Day 5's AMV

Day 5's index = --------------------------------- * Day 4's index


500

= ------ * 1028.3720

488

= 1053.6598

Day 6 (Addition)

Stock Eis added to the index as a constituent stock on Day 6. Stock E has a closing price of Tk.4 and

the number of shares outstanding is 40 on Day 5.



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A 30 7.2 216

C 14 4.8 67.2

D 20 12 240

E 40 4.5 180

Aggregate Market Value (AMV) = 703.2

Since the number of stocks has changed, we need to compute the adjusted AMV for Day 5 in

computing Day 6's index. Day 5's adjusted AMV will be equal to the original AMV plus the market

value of stock E on Day 5. This is equal to Tk.500 + 160 (4*40) = 660.

Day 6's AMV

Day 6's index = ---------------------------------- * Day 5's index


703.2= ------- * 1053.6598

660

= 1122.6266

Any new issue should not be considered in the computation of index for x days from the date of first

trade. x may be a single digit parameter e.g. x = 1, 2, 3...... days. Here, in DSE and CSE, x is

equal to 1.

Shares issued under Repeat Public Offer (RPO), conversion, amalgamation, acquisition etc.

should be treated as new issue (addition) and adjusted to give effect in the index on the

following day of crediting/ issuing of those shares as per the guideline of Day 6.

Day 7 (Deletion)

Stock C is deleted from the index's constituent stocks. The new total number of stocks is reduced to 3.



A 30 7 210

D 20 12.3 246

E 40 5 200


The adjusted AMV on Day 6 will be a reduction by the amount of market value of stock C on Day 6.

Day 6's adjusted AMV will be equal to Tk 703.2 - 67.2 = 636.Day 7's AMV

Day 7's index = --------------------------------- * Day 6's index


656


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= ----- * 1122.6266

636

= 1157.9293

Day 8 (Ex-Dividend)

Cash dividends of Tk .50 per share are declared for stock E and Day 8 is to be ex-dividend. Market

Data of Constituent Stocks on Day 7


A 30 7.2 216

D 20 12.3 246

E 40 4.6 184


No adjustment is needed, as there is no change in capitalization.646

Day 8's index = ------- * 1157.9293

656

= 1140.2779

Note that the price of stock E drops. This is a normal phenomenon as a stock goes ex-dividend. Day

8s index records a decrease as well.

Note that the closing price of Company E on day 8 is Tk. 4.6 determined by demand and supply

factors in the market against the theoretically adjusted price (to the extent of corporate disclosure) of

Tk. 4.50 made on day 7 after closing market / on day 8 before starting market.

Documents

Capital Market Terminologies by Nahid