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 Frequently Asked Questions |
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2- What is a Stock Exchange?
It is an organized market in which buying and selling transactions take place and the tradable commodities are securities. Trading does not take place between the selling investor and the buyer directly, but through qualified intermediaries known as brokerage firms. Transactions don't take place individually between the selling and buying broker, but through an automatic trading system that receives all buy and sell orders and matches between them according to the price and volume of each order. The stock exchange in Egypt is known as Cairo and Alexandria Stock Exchanges (CASE). |
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3- What is the difference between primary and secondary markets?
A primary market, or “the issuing market”, is where a security is issued and sold for the first time, either when a company issues capital shares on incorporation and sells them to founders or other investors, or when new shares are issued and sold in a period following incorporation for capital increase. The company can also issue bonds and sell them to investors. If securities are put for sale to all investors, this is called “public offering”. Securities can also be put for sale to a specific group of investors, which is called “private placement”. The price at which the security is sold in the primary market is called “the issuing price”. When the security is listed on the exchange it is traded among investors and the issuing company is not part of these transactions. Trading takes place with a price that differs from the issuing price and is called “the market price” or “the trading price”. This is determined according to the supply and demand of securities. Trading on the stock exchange is called “the secondary market” or "The trading market". |
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4- What are the types of securities traded on the Egyptian stock exchange at the present time?
There are two main types of securities that are traded on the Egyptian stock exchange at the present time and these are: shares and bonds. There is also a third type of securities issued by mutual funds, which are known as “mutual fund certificates”. |
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5- What are shares, their types and what are the advantages and risks of investing in them?
A share is a part-ownership of the issuing company. The investor has ownership rights among which are the right in a part of the profits of the company as well as the right in management through voting in the election of the board of directors, and other major decisions presented by the company. If the company is liquidated shareholders have the right to receive part of what has remained from the value of sold assets after paying the company’s debts. It is well known that the value of the share is not recovered except in cases like decreasing the value of capital or liquidating the company. In such cases the recovered value differs from the paid value on purchasing the share. There are several classifications for the different types of shares: - According to the return offered to the company: • Cash shares • Shares in kind - According to the ownership of the share: • Nominal shares owned by a specific investor • Bearer shares where the name of the owner is not determined - According to the type of share: • Common shares • Preferred shares The ownership of shares offers great benefits such as: • Increase in the value of the shares owned as a result of expansion of the company. • Dividends The investor may also face some risks like: • Fluctuation and variation in the profits of the company • Decrease in the shares’ price |
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6- What are bonds and what are their types?
A bond is a debt instrument whereby a party lends money to another party. It is a type of investment that results in a fixed or variable income. The issuer promises to pay the bondholder a predetermined rate of interest or coupon during the life of the bond, and to repay the face or par value of the bond (the principal) at maturity. Before taking the decision to buy, the following should be taken into consideration: • Maturity date Short-term bonds whose maturity dates range from 1 to 5 years Medium-term bonds whose maturity dates range from 5 to 10 years Long-term bonds whose maturity dates range from 10 to 30 years • Types of bonds: Fixed-return bonds that are issued at a fixed interest rate until they mature Variable-return bonds that are issued at a variable interest rate. The interest rates on bonds differ according to changes in circumstances, which are determined by the company issuing bonds. Zero-coupon bonds that have no interest rate to be paid therefore they are sold at a value less than the nominal value and are totally recovered at maturity, which equals the purchase price in addition to the total interest due during the life of the bond. Example:bonds with a value of L.E 20000, due after 20 years, can be bought at L.E 5.05 and after 20 years the investor will receive L.E 20000. |
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7- What are my rights in case I buy bonds?
Recovery Right Some bonds have a quick recovery right, which gives the issuer the right to recover the bond and pay the original amount to the investor at a certain date before maturity. Bonds are recoverable when interest rates decrease. Priority Right: It arouses during the liquidation of a company (for any reason). In this case the price resulting from selling the company’s assets is used in paying its debts and obligations to the creditors first, then to the bondholders. If there remained any liquidity, shareholders are paid. Thus creditors have priority over shareholders in case of liquidation. |
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9- What are the prices of bonds?
Bonds issued for the first time are usually sold at their nominal value. As for bonds that are traded on the secondary market, their prices vary according to the interest rate. When the bond’s price exceeds its nominal value, it is said that it is sold at a price higher than its nominal value, and if it is sold at a lower price it is said that it is sold at a discount rate. The bond is said to be sold at its nominal value when the selling price equals the bond’s nominal value. If the bond’s price does not include the accumulative interest, this price becomes the net price. Accordingly the buyer should not only pay the bond’s net price to the seller, but also he should pay the accumulative interest. |
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10- What are the advantages of investing in bonds?
Reducing risks through diversification: Most investors prefer to have a diversified investment portfolio to reduce risks. Periodic Income: Bonds have an estimated periodic income in addition to the nominal value of the bond at maturity. Therefore many investors invest in bonds to protect their invested money and increase it by receiving periodic cash flows they can depend on. A secure investment instrument: The quality of bonds is measured according to the credit ability of the issuing company; this can be detected by the ability of the company to fulfill its financial obligations. The higher the credit ability of the company the more secure bonds become. A suitable return: Some people would choose investing in corporate bonds because they offer higher return compared to government bonds. Higher return is usually accompanied by more risks. |
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12- What are mutual funds and what are their types?
Mutual funds are considered a means of investment to small investors who do not have neither the money needed to form a large portfolio nor the experience of investing in the stock exchange or the sufficient time to follow-up their investments on a continuous basis. Mutual funds are companies that collect money from a number of investors and invest this money in different types of securities in return for certificates issued for investors. Each certificate is a share for the investor in all securities that the mutual fund invests in. This leads to diversification of investments and distribution of risks. There are two types of mutual funds in Egypt: • Open-end funds: these are considered the most popular type and are characterized by the simplicity of buying and selling their certificates according to the prices determined as well as the value of the fund’s investments and the market price at any time. The management of the fund publishes the prices of certificates daily as a result of which the number of certificates and the value of the fund’s capital vary every day. • Closed-end funds: these are characterized by their capital stability; the number of issued and traded certificates are fixed and the fund does not perform daily transactions on certificates. Trading takes place on certificates on the stock exchange through a certified broker in return for a commission. The trading price is determined according to the supply and demand techniques. |
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13-How are listed securities traded?
Investors must open a trading account with one of the licensed members or brokerage firms. This requires filling the sample contract with the broker, who in turn executes the investor’s orders. It also requires signing a contract with a custodian who keeps accounts of securities balances and transactions executed. A code is issued for the investor at the stock exchange (other than the client’s account number with the broker). When a client makes a buy order both the custodian and the broker should make sure that the necessary funds are available before the execution of the trade. In case the client makes a sell order they should ensure that the securities being sold are available before execution of the order. The transaction includes a chain of related procedures, which starts with an order given by a client or customer to the member firm to buy (or sell) a specified number of shares of a given company at a specified price. This order will be queued into CASE electronic trading system terminal either at CASE trading floor or the members’ premises. The order is then sent through the trading system to CASE central computers. An order confirmation is immediately routed back to the member firm. Order is processed through the stock exchange. Misr Clearing, Settlement and Central Depository handles the Clearing, Settlement of the shares or bonds. The brokerage firm receives the transcripts of ownership or the physical shares themselves, and delivers them to the bookkeeper of the client. The stock exchange issues a daily bulletin on transactions over listed securities and it is published on its website as well as in the daily newspapers the following day. |
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14- How do clearance and settlement take place?
In the past securities were papers carrying the name of their owners. Few years ago Egypt developed the system for central depository of securities which cancelled the share warrant system. Nowadays the ownership of securities is registered automatically at MCDR who is responsible for the settlement of transactions through deducting purchase price from the cash account of the buying broker and adding it to the account of the selling broker. It also transfers the sold securities’ balances from the custodian of the selling investor to that of the buying investor. This settlement takes place on transactions over active securities determined by the stock exchange after two working days from the day of trading (T+2), while the settlement of transactions for the rest of listed securities takes place three days after the trading date (T+3). |
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15- What does CASE 30 price index represent?
CASE 30 Price Index was designed by the stock exchange to detect the activity of the market. It includes the top 30 companies in terms of trading and activity. It is a price index measuring the return on investment from the change in market value of the stock (capital appreciation/depreciation) only. |
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16- How can I get a code at the stock exchange?
This happens through the brokerage firm. The required documents are as follows: • ID (for those over 18 years) • Birth certificate (for those under 18 years) • A request from the brokerage firm to be filled and sent to the coding department at the stock exchange with the previously mentioned documents The request is submitted by either the dealer himself or his representative by a power of attorney for dealing with securities or a full power of Attoreny. • If the dealer is 21 he can submit the request by himself or his trustee, but if he is under 21 it is submitted by his father, if the father is not present then his grandfather from his father (not his mother) submits the request. • If he suffers from any mental disorder (declared legally incompetent), this is done by the person undertaking his duties according to a court order. • If he is sanctified with a criminal penalty, the request is submitted by the person undertaking his duties according to a court order. The coding department provides the brokerage firm with the client’s code, which he has to keep in order to be able to deal with any company later. |
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17- What are the steps for opening an account with the brokerage firm?
-In case it is the first time for the client to deal in securities, he has to get a code, or to transfer this code from a company to another if he already has one. - He then can open an account at the brokerage firm he chooses by signing an agreement contract. Note: The CMA’s website includes a list of different brokerage firms. - The client signs the agreement contract with the brokerage firm and another contract with the custodian. There are samples of these contracts at the brokerage firm that are filled by the client and sent to the custodian for signing. - The client then deposits the desired amount of money. - He can trade in securities through any brokerage firm. - It is advisable that the client reviews his securities’ balances at the firm once every month to make sure that transactions are being executed according to his orders. It is also advisable that the client reviews his cash balances at the firm once every month. |
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18- How can I get information on a brokerage firm?
There is a list of all licensed companies on the CMA’s website: www.cma.gov.eg. It is advisable that the client reviews this site so that he might not fall in the mistake of dealing with a company that has no license. There is also: • The stock exchange website: www.egyptse.com • MCDR website: www.mcsd.com.eg • The financial information network: www.mistnews.com • Other economic and financial websites. |
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19- What are the steps of opening an account with the custodian?
An agreement contract is signed at the brokerage firm when the client is dealing for the first time. The custodian sends a copy of these contracts to the brokerage firm who ensures the client’s signature on the contract and re-send it to the custodian. |
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20- How can I subscribe in a specific company?
Shares are placed for subscription for a company at incorporation or a state -owned company. - After acquiring the code and signing the contracts with the brokerage firm and the custodian, a subscription request is submitted after depositing the desired amount of money, according to the shares the dealer wants to subscribe in, and taking into consideration the maximum number of shares stated in the prospectus. - The client should follow-up the result of his subscription with the company who has to give him the original copy of the allocation certificate specifying the number of shares he has subscribed in. |
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24-What do “Shares of Capital Increase for old shareholders” mean?
When company increases its capital it takes into consideration priority rights of old shareholders, according to a provision in the by laws or the general assembly’s decision on capital increase. Subscription is restricted to the percent of capital shares and has a specific timing. If the subscription period ends without covering it, the remaining shares are offered for old shareholders without being restricted to a specific percent. |
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25-How is the opening price modified in case of capital increase?
In case of capital increase, the opening price is determined the day following the end of the subscription period. It is determined according to the last trading price in addition to the specified value of subscription in each share. If the increase is by one share for each share, the division would be by two. If it is by two shares for each share, the division would be by three. Example: If the price of the share is L.E 100 to its owner till 1/1/2006, and the increase is by one share for each share with a subscription value of L.E10, the opening price for the trading session of 2/1/2006 would be calculated as follows: 100+10=110/2= L.E55 |
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26- What are the steps of opening an account with a portfolio management company?
-If the client is dealing for the first time, he has to provide the necessary documents for obtaining a code. - He signs an agreement contract for opening an account with the portfolio management company. - The client, or any of his representatives, signs the above-mentioned contract as well as the contract with the custodian of the company. There are samples of these contracts at the company, which the client has to fill and send to the custodian. - The client deposits the desired amount of money. - The portfolio management company forms a securities portfolio by the client’s name. - It is advisable that the client reviews his account at the company every three months. |
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27- How can I perform transactions at the stock exchange?
Transactions on the stock exchange are performed through a brokerage firm that receives buy and sell orders on securities and executes them on the exchange. Execution takes place according the securities’ price. The following steps explain how execution of transactions takes place: Regarding Purchase Transactions: - A client wishes to buy securities. - He contacts the brokerage firm. - States the order, price, quantity and type of the security he desires to buy. - The brokerage firm informs the floor broker with the client’s orders. - The order is entered to the automatic trading system. - The stock exchange provides each brokerage firm with a list of all executed purchase transactions. - The stock exchange sends data of all transactions executed during the trading session to MCDR through the computer system. - MCDR informs custodians of the transactions concerning them. - The custodian matches the data received with the registered client’s orders and sends his approval automatically, adding the securities to the client’s account. - The settlement member provides his cash account in the clearing bank with the money sufficient to settle the transactions. - Clearing banks inform MCDR with the present cash accounts of the settlement members by sending the file through the computer system. - MCDR increases the cash accounts of the settlement members on the automatic settlement system. - The brokerage firm receives a list of all settled transactions. - The brokerage firm provides the custodian with the execution notice. Regarding Selling Transactions: - A client wishes to sell securities. - He contacts his brokerage firm. - He states the order, price, quantity, and the type of security he desires to sell. - The order is entered to the automatic trading system. - The selling broker sends the order automatically to the custodian to ensure that the client’s account is suitable for executing such operations. - After the custodian receives the order he informs the broker with either the efficiency of the client’s account to execute the requested order or the inefficiency of his account. - The stated quantity of securities is reserved throughout the specified period of the selling order. If there is no period specified, the quantity is reserved for the period specified by the regulations of the central depository system. - The stock exchange provides the brokerage firm with a list of all executed selling transactions. - The stock exchange sends data of all transactions executed during the trading session to MCDR through the computer system. - MCDR informs custodians of the transactions concerning them. - The custodian matches the data received with the registered client’s orders and sends order transfers automatically to the brokerage firm. - The brokerage firm receives a list of all settled transactions. - The brokerage firm provides the custodian with the execution notice. |
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29- What does “Over the Counter Market” mean?
When brokerage firms and market intermediaries deal in securities that are not listed on the exchange, they are said to be dealing over the counter or on a deals market, where transfer of the ownership of shares takes place on a specific group of shareholders, and the role of the broker is limited to registering the deal at the exchange and issuing certificates for transfer of ownership. A new trading system has been developed known as “Orders Market”, which includes companies that were actively traded on the exchange but de-listed due to their non-compliance with the exchange listing rules. |
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30- What are the steps for trading over the counter?
Over the counter market includes companies whose securities are not listed on the exchange, however they are traded there but are not committed to abide by the listing rules of CASE. Trading over the counter takes place from 9.45 am to 11.15 am. It is divided into two main tiers: Orders Market: Where trading takes place on de-listed companies which the exchange approves trading on. Deals Market: Where ownership of shares is transferred to companies that are not listed on the exchange. |
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31- How to deal through the investment manager?
- The client provides the necessary documents for obtaining the code, if he is dealing for the first time. - He then signs an agreement contract to open an account at the portfolio management company. - The client, or any of his representatives, signs the above-mentioned contract in addition to another contract with the custodian. - He then deposits the desired amount of money. - The portfolio management company forms a securities portfolio with the client’s name. - It is advisable that the client follow-up his investments |
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