Security Trading

2 Securities suppliers. Primary market Treasury Central Bank Companies Financial institutions Mutual funds

3 Market’s participants. Secondary market Mutual funds, financial institution Pension funds Insurance companies Brokerage houses Individuals Others

4 Entry on the securities market Analyse on company investment needs and alternative ways to cover them Decision about issue, GA resolution Hire of issue advisor Preparing documents to SEC SEC Appointment Issue registration Choice of price settlement and distribution Underwriting (optionally)

5 Information from the companies register (address, name of board members, proxies, type of production, registered capital) Balance sheet checked by chattered accountant Costs and profits account (checked) Information from tax office about tax duty fulfilment Prospectus of issue or information memorandum Agreement with securities distributor or information about self distribution Agreement with publisher for prospectus publication (short form). Information about full prospectus availability Primary market. Required documents for appointment

6 Prospectus of issue. Contents Information about current and previous issue Extracts from balance sheet, company books etc. Dates from company register Big stock owners Risk types concerning the company stock Target of the issue Purpose concerning company development Other information having possible impact on stock

7 Bonds. Primary market T-Bonds are sold on action organised by the central banks. Only financial institution (not all) are admitted Corporate bonds are sold by the banks, mainly on interbank market Municipal bonds are sold like above

8 High majority of bonds are traded on interbank market Amount of bonds trading on the stock exchange is about few percent Corporate and municipal bonds market is usually established by banks assisting by the issue Bonds. Secondary market

9 Stock. Primary market New stock series (IPO) needs prospectus of issue, the next – information memorandum. Information memorandum is enough i n case small issue – 2,5 million euro New issues needs direct agreement SEC, the next (new series existed stock) are treated as admitted if SEC during 2 weeks has not declare any objections New stock is usually sold in system of subscription In this system potential investors declare the quote and maximum price by which they are able to buy. Issuer settles maximum price which allow to sold whole issue

10 Basic market. Requirements - own capital minimum 1 million € - at least 25% stock or 17 millions of capital owned by small investors Parallel market - company is not in process of bankruptcy Participants of the both markets are oblige to send quarterly information about economic results and compliments of rules of corporate governance. Warsaw Stock Exchange

11 Special facility for small issuers. Markets AIM type British AIM, Polish NewConnect are not regulatory markets, however conducted by the same company which conducts stock exchange This markets join trading public and private issue For private issue very short assemble of information is needed Chosen stock exchange members keep carry on each issuer („nomad” in London - all the time, authorised adviser in Warsaw – at least one year)

12 Qualitative segments There is the list of the companies (stocks), which excellent fulfil the pattern company friendly for investors There are two requirements - regularly meetings with investors - full compliance of the corporate governance rules

13 Corporate governance Best practices in: - General Assembly taking into account interest of all stock holders - chose of the board (some members independent from big owners - elimination the connections creating discrepant interest bord and CEO members - clear and fairly management rules

14 Stock exchange. Trading systems Order driving – orders are send by any price Prices driving – price are quoted by market makers Fixing – price is determine by the specialist in order to get maximum turnover

15 Basic order types Market order Limit order With limit of appearance Stop order On the opening, on the close Fill and kill Immediate or cancel Confidentionally order

16 Trading session. Phases Preopening – reception of orders, without transactions Opening – opening price determination Continuos trading Close Balancing activity of the specialists Afternoon preopening

17 Fixing The method to search the price maximizing the stock turnover in chosen moment To set up this price limit orders are necessary The modern stock exchanges use method two times daily (on the opening and on the close) Less liquid stock is traded only by this system

18 Transactions proceeding Client order is transfer to the stock exchange trading system Orders are matching on the best price If there isn’t a proper contra order, it is wrote down in the orders sheet Information about transactions are transfer to the Clearing House. It calculate the credit (debit) on the brokerage houses accounts, transfer securities and send orders to pay. The brokerage house make accounting operation on its clients accounts

19 Way of order Client put order personally or by phone ( internet) If it is sale order, proper securities should be on his account in the brokerage house. By buy order not the whole amount is required, credits are in use Brokerage house sent order from the own terminal to the trading system of the stock exchange After trading session brokerage house get the information about transaction. If order could be fulfil – is cancelled The results o9f operation are transferred to the clients

20 Short sale Short sale – sale of securities which are not possessed by the investor, repurchased until clearing time Many countries allow such operation only if securities are hired or there are special agreements with the real owners Pension funds, mutual funds are often the institution, which insure securities delivery Implementation – if price downfall is expected

21 Forbidden operation In the broker activity - churning (buy and sell without efforts for the best order performance - front running (put own order before client owner Price manipulation - match order (sending buy and sell order on the same price - intra trade (inducement daughter companies to buy/sell stock of mother company - pool (common market operations of investors) - wash sale (sale to get contemporary lost for the tax decrease)

22 Forbidden operation cont Unfairly information use - use of rumour, black PR - insider trading (use of information being not published)