1. Concentrated Ownership
(percentage of shares held by the major shareholder)
• Generally accepted assumption is that owners desire to
maximize profits or wealth. At the same time managers have
other interests (high compensation, low effort levels, expense
preference, empire buildings etc). Therefore, owners need
some sort of control over managers to achieve their objective.
Ownership concentration is one of the pre-requisites to
influence on managers activities.
• However, using 102 listed companies, Pathirawasam (2011)
finds that ownership concentration does not have a significant
positive relationship with company performance in Sri lanka.

2. Concentrated Ownership
(percentage of shares held by the major shareholder)
• In developed markets average ownership
concentration is at a lower level.
• In Sri Lanka ownership concentration is very
high.
• When the ownership is concentrated, price
manipulation could be possible.
• In a ownership concentrated firm, share supply
curve may be inelastic.
• However, the share demand curve is elastic. As a
result of that share price manipulation may be
possible.

3. Share Supply Curve
P
Q

4. Share Demand Curve
P
D
Q

5. Equilibrium Price
P S
p2
p1
D2
D1
Q1Q2 Q

6. • If the share supply is also elastic, market will
establish a fair price.
• As the number of shares issued is a constant,
allowing short selling would be a one
possibility to have elastic supply curve.

7. Merging Trading
• Margin account provides overdraft facilities to
buy securities.
• With a merging account the investor must pay
part of the purchasing cost in cash and can
borrow the rest from the brokerage firm.
• Securities purchased under margin should be
deposited with the brokerage firm.

8. Ex. Ms. Smith purchased on margin 100 shares of XYZ Ltd.
Share certificate is retained with the brokering firm and benefits
due to purchase of share are transferred through the brokering
firm.
Financial reports Financial reports
Dividend Dividend
Broker Mr. X
Voting right Voting right

9. Initial Margin Requirement
• The minimum percentage of the purchase price that
come from the investor’s own fund.
• Ex. Ms. Smith purchases on margin 100 stocks of XYZ
lid. For 50 Rs per share. If the initial margin is 60%.
The investor must pay the broker 3000 Rs
(50*100*0.6). The remainder (2000) is a loan from
the broker.

10. Marked to the Market
• Compute actual margin regularly to maintain the necessary
margin requirement (maintenance margin is determine by the
exchange).
Market Value Loan
Actual m arg in
Market Value
• If XYZ stock fell to Rs 25 per share then the actual margin would
drop to 20% [2500-2000)/2500].
• If the actual margin is below the maintenance margin, broker will
issue a margin call.

11. Short Sales
• In SS the investor sells a security first and buys it
back later.
• SS is accomplished by borrowing stock certificates
and repay the loan with certificate (not by money).
• With in three business days, the short seller’s broker
must borrow and deliver the appropriate securities
to the buyer.

12. The Borrowed Securities May Come
From
• The inventory of securities owned by the
brokerage firm.
• The holdings of an institutional investor that is
willing to sell securities.
• The inventory of securities held by brokerage
firm for investors who have margin accounts
with the broker firm.

13. Ex: Before Short Sale
Mr. Lane owns 100 shares of XYZ company , which are being held for him by
Brock, Inc.
Forwards
everything
Dividends, annual
XYZ Brock Inc Mr. Lane
reports, voting rights

14. The Short Sale
• Ms. Smith paces an order with her broker at Brock to short
sell shares of XYZ (Mr. Lane believes that the price of XYZ
stock is going to rise in the near future, whereas Ms. Smith
believes that it is going to fall). Here Brock takes the 100
shares of XYZ that it is holding on behalf of Mr. Lane and sells
them for Ms. Smith to Mr. Jones.

15. Ex: The Short Sale
Mr.
Jones
Pays Purchase Receives stock
Price certificate
Notified that Mr. Jones Allows stock
XYZ Brock Inc Mr. Lane
now owns stock To be lent
Provides initial
margin
Mrs. Smith

16. After The Short Sale
• If XYZ announce dividends it will go to Mr. Jones and not to
Brock on behalf of Mr. Lane. However Mr. Lane is also
expecting the dividend. Therefore the Brock will charge that
amount form Mr. Smith and transfer to Mr. Smith. Normally
annual reports are received by Brokering firms free of charge.
Therefore Brock will mail a copy to Mr. Lane.

17. Ex: After the Short Sale
Mr. Jones
Annual reports Annual
XYZ Brock Inc Mr. Lane
Reports, Divide
nds
Provides cash
to make up
for dividends
Mrs. Smith

18. How to Avoid the Risk that the Borrower
will not Repay the Loan
1. cash proceeds from the short sale are not given to the short
seller. They are held with Broker firm until the short seller
repays the loan.
2. Short seller must also give the broker initial margin applied
to the amount of the short sale.
3. Establish a maintenance margin that protects the brokerage
firm from losing money in a situation where share price
increase after short sale.
Actual margin= (short sale proceeds + initial margin)-loan
loan

19. • Ex. 100 shares of XYZ were sold at a price of Rs 100 per share.
In this case proceeds of Rs. 10000 from the short sale are
held in Ms. Smith’s account, but she is prohibited from
withdrawing them until the loan is repaid. If the initial margin
requirement was 60%, she must give her broker 6,000
(.6*10000).
• If XYZ stock rises to Rs. 130 per share, the initial margin in Ms.
Smith’s account will be 23% = *(100*100+6,000)-
(130*100)]/(130*100)= 3000/13000. If the maintenance
margin requirement is 30%. The account is under margined
causing Ms. Smith to receive a margin call.

20. Rate of Return
• Ms. Smith short sold XYZ stock at a price of Rs 100 per share.
If she later repays the short loan when the stock is selling for
Rs75 per share and just after XYZ has paid a Rs1 per share
cash dividend. Then her rate of return is,
(100-75-1)/(0.6*100)=24/60 =40%
Return of a person who had purchase the stock on cash basis
(75+1-100)/100 = -24%