Academic Study Notes on Financial Markets and Stock Exchange Operations

Security Types and Characteristics of Shares

Securities are broadly classified based on the nature of the income they provide. Fixed-income securities represent a debt where the capital and income are defined at the time of issuance (e.g., bonds), while variable-income securities represent a right to share in the issuer's profits and assets (e.g., shares). Shares are not exclusive to joint-stock companies; they can also be issued by limited joint-stock partnerships (spółka komandytowo-akcyjna). If a legal entity of another form wishes to become a dividend-paying entity, it must transform into a joint-stock company. Shares are registered first in the Central Securities Depository of Poland (KDPW) before subscriptions occur.

There is a distinction between bearer shares (akcje na okaziciela) and registered shares (akcje imienne). Generally, bearer shares are easier to transfer and sell. Preferred shares regarding voting rights are regulated by the Commercial Companies Code (KSH); since 2001, a single share can carry a maximum of two votes at the General Meeting (WZA). Previously, this range was two to five votes per share. Shareholders have a legal obligation to return illegal payments (wypłaty nieprawne), with the exception of dividends collected in good faith. Additionally, a stock split (podział akcji) results in an increase in the number of shares while the share capital and the total market value of the company remain unchanged.

Market Analysis and Technical Indicators

Fundamental analysis focuses on the "foundations," which include the general state of the economy and the specific financial condition of the issuer. This method is primarily used for long-term investments to identify companies whose shares are expected to reach higher prices than their current valuation. In contrast, technical analysis is used to determine the optimal timing for buying or selling by studying price charts and historical movements. A common tool in technical analysis is Japanese candlestick charts. A white body indicates that the closing price was higher than the opening price, symbolizing a bull market (hossa), while a black body indicates the opening price was higher than the closing price (bearish). The length of the body indicates the intensity of the pressure from either buyers or sellers.

Predictive patterns in technical analysis include the "Head and Shoulders" formation (głowa i ramiona), which signals a trend reversal, often appearing before a decline in prices. It consists of three peaks, with the middle one (the head) being the highest. The "Rising Wedge" (klin zwyżkujący) typically forecasts a continuation of a downward trend or the final phase of a bull market. The "Saucer" (spodeczek) is considered a trend reversal formation indicating a future price increase. Moving averages are also critical; a buy signal (K) is generated when the price line crosses an upward-moving average from below, while a sell signal (S) is generated when the price crosses a downward-moving average from above.

Debt Instruments: Bills and Bonds

Treasury bills (bony skarbowe) are short-term debt instruments with a discount nature, meaning they are sold below their nominal value and do not pay traditional interest. Their nominal value is $10\,000\,PLN$. On the primary market, they can only be purchased by Treasury Securities Dealers (DSPW) and the Bank Gospodarstwa Krajowego (BGK). Auctions for treasury bills usually take place on the first business day of the week. Commercial bills (bony komercyjne) can be issued in tranches as part of an issuance program (e.g., a $100\,million\,PLN$ program split into steps of $20\,million\,PLN$ and $50\,million\,PLN$). The risk of commercial bills depends on the issuer's creditworthiness.

Bonds are classified by their maturity and issuer. Municipal bonds (obligacje komunalne) are issued by local government units like communes (gminy), while corporate bonds (obligacje korporacyjne) are issued by enterprises. A bond with a 5-year maturity is considered a medium-term instrument. Zero-coupon bonds return only the nominal value to the bondholder at maturity. Bond prices on the secondary market are quoted as "dirty prices" (cena brudna), which include accrued interest. Bond price accuracy is typically quoted to $0.01\,pp$ (percentage point). Mortgage bonds (listy zastawne) are credit-based securities that can only be issued by specialized mortgage banks. Public mortgage bonds are guaranteed by public entities such as the State Treasury, NBP, EIB, or World Bank.

Trading Procedures and Order Types on GPW

The entire process for a company to go public on the Warsaw Stock Exchange (GPW) takes approximately 7 to 12 months (maximum 1 year). The final decision regarding the admission of a company to trading is made by the Stock Exchange Management Board (Zarząd Giełdy), though the board of the company initiates the decision to go public. Trading occurs in different systems: continuous trading (notowania ciągłe) and single-price auction systems (system notowań jednolitych). In the single-price system, the price is fixed twice a day, typically at 11:00 and 15:00. The continuous trading session starts with a pre-opening phase at 8:30 and concludes with a closing phase and post-trading (dogrywka) from 17:00 to 17:05.

Various order types exist to facilitate trading. PCR (Market to Limit) orders may be executed at different prices but have priority over limit orders. PKC (At the Market) orders are executed immediately at the best available price. WDC (valid until the end of the session) and WIA (Fill-and-Kill, allowing partial execution) are common validity types. For stock prices exceeding $100\,PLN$, the quotation accuracy is $0.05\,PLN$. Trading is protected by dynamic and static price collars (widełki). For mWIG40 stocks, the dynamic collar is $4.5\%$ from the reference price, while the standard static collar for shares is $10\%$. If static collars are exceeded, trading may be suspended to allow a balancing phase.

Investment Funds and Financial Products

There are two main types of investment funds: open-end (fundusze otwarte) and closed-end (fundusze zamknięte). Open-end funds issue participation units (jednostki uczestnictwa), which are not securities and can only be sold back (redeemed) to the fund itself. They are valued at least every seven days. Closed-end funds issue investment certificates (certyfikaty inwestycyjne), which are securities and can be traded on the stock exchange. These certificates are indivisible and are often issued as bearer instruments. Exchange Traded Funds (ETFs) on the GPW are designed to track stock indices but currently do not track currencies. Depository receipts, such as Global Depository Receipts (GDRs) and American Depository Receipts (ADRs), allow companies to seek capital in foreign markets. A sponsored issuance involves the active participation of the issuer, whereas unsponsored issuance does not.

Interbank Market and Reference Rates

The interbank market utilizes reference rates to determine the cost of money. WIBID (Warsaw Interbank Bid Rate) is the price at which banks buy money, while WIBOR (Warsaw Interbank Offered Rate) is the price at which they sell (lend) money. These are calculated as arithmetic means after rejecting extreme quotes (outliers). If 14 quotes are provided, 2 minimum and 2 maximum quotes are rejected. If 8 to 9 quotes are provided, 1 of each is rejected. If 6 to 7 quotes are provided, none are rejected. The POLONIA rate is a weighted average for overnight (O/N) deposits, calculated daily at 17:00 by the NBP. Interbank deposits are considered financial instruments. A deposit for one month typically starts on the second business day after the contract is concluded.

Market Segments and Indices

The GPW organizes companies into various segments and indices. The WIG index covers a broad range of companies on the Main Market, but not all without exception. WIG20 remains the blue-chip index. WIG-DIV includes companies that regularly pay dividends. WIG-ESG (formerly social responsibility indices) covers socially responsible companies. Specific sectors like banking, energy, and food have their own indices, though certain sectors like transport do not. The 250PLUS segment is reserved for companies with a market capitalization exceeding $250\,million\,EUR$. The Alert List (Lista Alertów) includes companies in bankruptcy or "penny stocks" whose average price is below $0.50\,PLN$. The Catalyst market facilitates debt instrument trading, with Bondspot hosting wholesale trade and GPW hosting retail trade.

Risk Management and Discussion

Investment risks are categorized into systematic risk (affecting the whole market) and non-systematic risk (specific to the issuer). Systematic risks include inflation, currency risk, and interest rate risk. Financial risk and event risk are often categorized differently. Risks such as market manipulation are determined by investors, while liquidity risk is determined by the capital market itself. To mitigate risk, investors use hedging (zabezpieczenie), as opposed to speculation (aiming for profit from price changes) or arbitrage. In Poland, the financial market is under the consolidated supervision of the Polish Financial Supervision Authority (KNF), and the "single passport" rule allows financial institutions to operate across the EU European Economic Area.

Questions & Discussion

Questions regarding specific scenarios were addressed:

1. If a dividend record date is Friday, to sell shares without losing the dividend right, the earliest one can sell is Tuesday (due to the T+2 settlement cycle).
2. The WIG20lev index moves in the same direction as WIG20 but with double the strength; thus, a 15-point increase in WIG20 results in a 30-point increase in WIG20lev.
3. A brief analysis was noted regarding the migration of Poles to the Schengen area after 2007, discussing economic causes and the phenomenon of return migration.
4. Buy-sell back operations involve financial costs usually borne by the seller of the instruments.
5. For a S/N (Settlement/Next) deposit placed on Thursday, the deposit ends on Monday (Friday being day 1, Monday being the next business day).