Iran's Stock Market
Tehran Stock Exchange
Tehran Stock Exchange was established in 1968, and has been the primary equities market in Iran. In 2005, the new Capital Market Law of Iran approved by parliament and in 2006, according to this Act,TSE was demutualized and established as a joint stock company with over 6000 shareholders and seven member board that include: brokers, financial institutions and individuals. TSE has enjoyed a reputation for having maintained an orderly market and a cost-effective trading capability since its inception.
The fully computerized trading system has helped boost the trading capacity and efficiency of the stock market. In 1994 electronic trading systems was launched. In 2007, TSE moved to the powerful trading system (powered by Atos Euronext) for meeting the high trading volume.
TSE has been awarded quality system certificate of ISO9001; in 2009 and also planned to obtain ISO27001 certification for its IT Security Management System.
Foreign Portfolio Investment
As with several emerging stock markets, the Tehran Stock market historically set several limitations on foreign investment. With the growth of Iran’s stock market and the development of economy, the Stock market Authorities have gradually relaxed these limitations on foreign investors. Since April 2010, the process for investment by foreign investors in the stock markets has been changed from the ‘permit’ system to the ‘repatriation’ system.
On 18th April 2010 Upon the recommendation of the Ministry of Economic Affairs and Finance, and by virtue of the paragraph 3 of article 4 of the Securities Market Law of I.R.I ratified in 2005, the Council of Ministers approved “The Regulations Governing the Foreign Investment in the Exchanges and OTC Markets”.
This has consequently simplified the application procedures for foreign investment in Tehran Stock Exchange.
According to Article 7 of this “Regulations” the restrictions imposed on the possession of shares by the non-strategic foreign investors on every exchange or OTC market are set forth as follows: The number of shares owned by the total foreign investors shall not exceed twenty (20%) percent of the total shares number of the companies listed on the exchange or on the OTC market or twenty percent (20%) of the shares number of any company listed on the exchange or on the OTC market.
The number of shares owned by each foreign investor in any company listed on the exchange or on the OTC market shall not exceed ten percent (10%) of the shares number of such company.
Based on Article 4 the foreigners/ foreign entities shall have to submit the required information and documents to the Organization along with an application based on the forms prescribed by the Organization so as to obtain a license for trading in securities on every exchange or OTC market.
Listing in TSE
TSE has two markets: cash market and futures market. The cash market, itself, divided into two markets.
First market (consisting of two boards) and second market. There is a separate market for participation certificate (Islamic Bonds). The futures market also, launched in the middle of 2010 with listing the single stock futures. Tehran Stock Exchange is working on an expansion of risk-hedge functions through such channels as the extension of trading products in response to investor’s needs. As of March 2011, 342 companies were listed in Tehran Stock Exchange. The listed companies are classified in 37 sectors according to IRIS Standard .Listed companies are provided with 10% tax exemption. And, companies with 20% free float shares are provided with 20% exemption according to a new approved bill.
Listing requirements at Tehran Stock Exchange is practically conformed to the global standards, and includes capitalization and free-float threshold, continuous listing qualification, as well as comprehensive information dissemination. Admission and trading of securities in Tehran stock market is done in two market and three boards.There are two separate markets for fixed income securities and derivatives that have their own listing requirements.
Stock (Equities) Market
The stock or equities market is one of the most well-known forms of investment since it is so often
discussed in the media. Stocks are a form of security. The stock of a particular company is divided into a certain number of shares. Each share represents a certain fraction of the company, so when an investor buys shares in a company they are actually buying a small fraction of the ownership of the company.
When the company enjoys success, the value of its stock will increase and the investment will grow. If the company experiences poor results, then the value of the stock can decrease. Investing in the stock or equities market can therefore be risky. Investors may also receive dividends from the company in which they have bought stock.
Stocks are listed on a stock exchange, through which they can be bought and sold at the current agreed prices. Some stock exchanges actually have a physical trading floor, but stocks are also traded virtually using computers and by phone.
Investments in the stock market are made by a wide range of different types of investors, from private individuals to professional fund managers and financial institutions.
The stock market is a popular choice for investments, but it also provides the companies that are listed on the stock exchanges with an important means of obtaining funds. By selling shares in the company, it is possible to add to the company’s value by raising capital. This capital can help the company to grow and develop. Tow type of investment instruments, related to the equity, are traded in Tehran Stock Exchange as following:
1) Common Stock
Only common stock is traded in the Tehran Stock Exchange. Each common stock has one voting right in assemblies and it’s holders in addition to the choice of the board members, can confirm or reject the manager’s actions by their vote.
For the first time, common stock is offered to the market through primary market and issuer must register it in the Securities and Exchange organization (SEO) and get the permission before public sale.
SEO confirms the adequacy and accuracy of information before the company’s supply of securities.
TSE’s listed companies are required to not issue other type of shares such as preference share.
The rights resulted from the capital raising belong to the current shareholders and is tradable on the exchange. Holders of these rights have priority in buying the new issued common stock. The purpose of granting priority, initially is maintaining the control of existing shareholders on the company. If a company gives priority right to its shareholders to buy stock, they can keep your ownership percentage in the company.
The bond market is an important market for investments that deal in the buying and selling of debt securities, which are usually exchanged in the form of bonds. Worldwide, in 2010, the value of bond trading in exchanges is estimated to be worth about 30 trillion US dollars.
A bond is a form of debt security. The issuer of the bond will owe a debt to the holder of the bond, which they will be obliged to pay together with the agreed rate of interest, upon a certain date, which is when the bond will reach maturity.
The interest that is to be paid on a bond is known as the coupon. In essence, the investor lends a certain amount of money to the institution that has issued the bond. The bond determines the terms under which the debt will be repaid, including the amount of interest that will be added onto the invested amount, and the date on which the debt will be paid. A bond is a contract between a lender (the investor) and a borrower (the issuer) which specifies the repayment of the debt, with interest, at a fixed date.
The bond market is commonly linked with government bonds because this is one of the largest and most liquid bonds markets. Government bonds are considered to be a form of investment that offers a very low risk to credit. The government bond market typically has an inverse relation to the interest rate, so it can be used to detect changes in interest rates.
Government bonds are not the only types of bonds. Other bond markets include corporate, municipal, funding and mortgage or asset backed bonds.
Bonds and stocks are two of the most well-known forms of investments, although bonds tend to be less widely understood than stocks. Both of these types of investments are securities, but when an investor chooses to place their money in a bond, they are becoming a creditor to the company or institution which issues the bond. When an investor buys stock in a company, they are obtaining an equity stake as owner of their small share in the company. Another important difference is that bonds usually have a fixed maturity date, while stocks can be held indefinitely. Tow type of bond, based on sharia’h, are traded in Tehran Stock Exchange as following:
1) Participation Certificate (Islamic Bond)
Based on “partnership Certificate issuing law” approved October 1376, participation Certificate, is a kind of Islamic bond that is issued with the specific statutory authorization or permit of central bank to providing a part of financial resources needed to create or complete governmental construction and developmental projects. Public corporations, municipalities, public institutions, NGOs, charity institutions and listed and cooperative companies can also issue partnership bond to create or complete the profitable manufacturing projects, preparing raw materials for producing and offering services.
A Fixed profit will be paid to the holder of partnership Certificate in accounts (prepaid) few time a year. Definitive profit of partnership Certificate will be paid to the holders at maturity and the amount is determined according to the nominal price and investment time. If the project results in loss, or the profit is less than the prepaid, issuer is responsible and prepaid is not refundable.
In 2005, Iran Khodro’s Participation Certificate was listed on TSE for the first time after 1979 revolution and was a milestone in the Iranian Capital Market.
Sukuk, which are often called Islamic bonds, cover Islamic investment instruments that are registered in the name of the bondholders.
Sukuks are always linked to underlying assets through a variety of contract structures such as Istisna, Ijara or Musharaka contracts. Holding a sukuk certificate represents ownership in the underlying asset. Sukuks are generally treated as a guaranteed Debt.
Although similar in structure to asset-backed securities, Sukuk’s issuer is obliged to pay the bondholder 100% of the redemption amount and a periodic distribution amount, regardless of how the underlying performs.
Securities and Exchange Organization is developing the regulation of new financial instrument Istisna (Sukuk Using Al-Istisna Structure), which is expected to be approved by the Supreme Council of Exchange early next year. On 13 March 2011, Mahan Airline issued Sukuk with the value of IRR 291 billion in Farabourse (Iran’s OTC market) to finance its network developmental projects for the first time in the Iranian Capital Market.
Six other companies have lodged their requests for issuing Sukuk to Securities Exchange Organization.
Another common investment market that people are interested in learning more about is the derivative market. This is a market that buys and sells derivatives. But what is a derivative? These are special securities that get their financial value from other securities that are called the underlier.
This underlier can be anything from a commodity to a mortgage, it really all depends on the type of security that the person is interested in.
There are new standards that are recommended for the derivative market which includes higher capital standards in place, risk management that is much stronger than it has been in the past years, those firms that are participating should be monitored by the government and rules that all those participating in should be held to.
When participating in the derivative market, as stated before people can have the option of choosing futures in order to purchase the security in the future. Are derivative markets risky? Almost any kind of investment market is a bit risky for those that enter only because no one knows from one minute to the next what could happen with the product or service that is being bought and sold.
However, there is money to be made through derivative market, which many people know since this is how they make their fortune. The person must understand how to read the information that they are given and basically have a good gut instinct to make it in the market. It is not a market for those that are just entering into the investment world. To learn more information about investments, including the derivative market or other types of markets, visit related websites.
In Iran, all financial instruments and contracts have to be in compliance with the Islamic rules. TSE with cooperation of the Sharia’h Committee of SEO, after 2 years of research and receiving the comments from market participants, prepared the draft regulations and listing requirements of derivatives and referred it to the board of SEO. Finally, in the middle of the year, SEO approved the derivatives regulation and communicated to TSE. At the time being, TSE launched single stock futures at July 2010 as well as will introduce options in the early of 2011.
1) Single Stock Futures
Tehran Stock Exchange (TSE) began trading of single stock futures, as a new investment instrument, on 25 July 2010. TSE offered 10 futures contracts based on 10 listed companies by March 201 and planed to reach 30 companies until the end of 2011.
The stocks have being selected due to their substantial underlying liquidity and several tests. The futures contracts will be denominated in Iranian Rial and settled physically. Their maturity dates will be of two month cycles. The leverage for futures contracts is set at 1-to-10. TSE will only deal in the derivatives through electronic trading.
All transactions will be cleared and settled by CSD Iran, the Iranian clearing house. The launch of Single Stock Futures Market has been accomplished following the recent introduction of the new Futures Trading System (SAMA), designed specifically for the Futures Market of Iran by the IT department of Tehran Stock Exchange with cooperation of Iran Mercantile Exchange.
Arrangements are under process for launching new futures contracts based on TSE’s 30 blue-chipportfolio.
2) Stock Options
Tehran Stock Exchange planned to introduce equities options contracts at the Exchange, which will be occurred until the end of summer 2011.
Besides, TSE’s authority reported about the Exchange’s proposal to the Iranian Securities and Exchange Organization (SEO) for establishing currency futures and gold ETFs markets. The proposal is being inspected by the regulators before ratification.
Mutual fund For diversifying the investment instruments and developing the investor base, SEO give permission to brokerage firm to establish and manage Mutual funds from 2007. investors and individuals who lack of adequate analytical power don’t have enough time to analyze the market for choosing the right shares can refer to the brokers and buy the units of mutual funds.
Until the end of June 2011 investor can invest in 60 mutual funds. At the time being, mutual funds are classified in two methods; Size: Big and small, investment type: fixed income and Hybrid.
What are your rights as a stockholder?
As part owner of the corporation, stockholders are granted several rights.
Rights to receive dividends. When dividends are declared by the company’s Board of Directors, shareholders are entitled to these dividends, but in proportion to the number of shares held. However, shareholders cannot claim dividends when the company decides not to declare any.
Voting rights. The common stockholders have the right to vote and to decide on a broad range of corporate issues, e.g. reorganizations, mergers, issuance of new stock and, last but not the least, the election of the company’s Board of Directors at the stockholders’ meetings.
Pre-emptive right. This is the right given to existing stockholders to purchase additional shares before they are offered in the general public, usually at a lower price. For example, a corporation decides to issue additional shares to the public and gives the right to all of its stockholders to subscribe to the new shares at the ratio of 1:2. For every 2 shares owned, present shareholders have the option to buy one additional share, if they so desire.
Limited liability and last claim to the company’s assets liquidation. If the company in which you own stocks goes bankrupt your total loss as a stockholder is limited to the amount that you paid for the security. You have the claim against the company’s remaining assets; however, you’re the last behind all other creditors, such as suppliers, employees and bondholders. The biggest risk you face is the loss of capital that you have invested because the company’s stock becomes worthless.
Neither the corporation, the banks from which it borrowed money, nor the bondholders to which it owes money have any claims on your personal assets.
How Can I Invest in Stocks?
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