What is the Stock Exchange

KARACHI STOCK EXCHANGE TURMOIL OF 16th JUNE 2008 1. INTRODUCTION HISTORY/BACKGROUND

The stock market makes an appearance in the news every day. You hear hear abou aboutt it when when it reac reache hes s a new new high high,, in headl headlin ines es like like "The "The Karachi Stock Exchange Average rose 50 index points today", when a certain stock plummets, or when the political scenario changes. Obviously, stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do we need a stock market? Where does the stock come from to begin with, and why do people want to buy and sell it? If you have questions like these, you've come to the right place. The Basic Idea Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The Karachi Stock Exchange (KSE) is an example of such a market.

In your your neighb neighborh orhood ood,, you you probab probably ly have have a superm supermark arket et that that sells sells groceries. The reason you go the supermarket is because everything you need to run your home is available under one roof. It's far more convenient than having to make 10 stops at different stores. The KSE is a supermarket for stocks. The KSE is like a big room where everyone who wants to buy and sell shares can go to conduct their transactions. The Exchange makes buying and selling easy. You do not have to actually travel to the Stock Exchange; rather, you can call a stock broker who does business with the Exchange, and he or she will go there on your behalf to buy or sell your stock. With an Exchange in place, you can buy and sell shares instantly. instantly. The Stock Exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, economic news and a range of other factors. Smart

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buyers and sellers take all of these factors into account before making decisions. Karachi Stock Exchange (KSE) is the biggest and most liquid exchange in Pakistan with the average daily turnover of 525.15 million shares and and ma mark rket et ca capi pita taliz lizat atio ion n of US $ 54.2 54.28 8 billi billion on.. The The inte intern rnat atio iona nall magazine 'Business Week' announced the KSE as the best performing worl world d stoc stock k ma mark rket et in 2002 2002.. Since ince then then the the KSE KSE co cont ntin inuo uous usly ly maintains the reputation as one of the best performing markets in the world. Since 1991, foreign investors have an equal opportunity together with loca locall inve invest stor ors s to oper operat ate e in the the seco second ndar ary y ca capit pital al ma mark rket et on the the Karac arachi hi Stoc Stock k Exch Exchan ange ge.. The The esta establi blish shme ment nt of the the new new poli policy cy for for foreign investors and initiated privatization in Pakistan has accelerated the development of the KSE, which had even 663 companies listed in 2006. In addition, companies have a choice to be listed on one of the two two ma mark rket ets s - the the read ready y ma mark rket et and and the the over over-t -the he-c -cou ount nter er (OTC (OTC)) market, which has lesser listing requirements. While the ready market requires listing companies to have minimum paid up capital of Rs 200 million (about UK ? 1.8 m), the companies with minimum of Rs 100 million can be listed l isted on the OTC market. market. The Karachi Stock Exchange trades the KSE-100 Index. It is a highlydiversified index of 100 largest capitalization companies' stocks from all sectors of Pakistan economy. A constantly revised index is a good indicator of the overall Exchange performance over a period of time. In 2005, 88% of the KSE total market capitalization was represented by the KSE-100 Index. The membership in the Karachi Stock Exchange is limited. Only 200 individual and corporate entities can register as members in the KSE. In 2005, 162 members traded actively on the Exchange. In addition, foreign corporate entities may also become the members of the KSE with the condition that the nominee member of the company is a citizen of Pakistan. An organized market place for securities featured by the centralization of supply and demand for the transaction of orders by member brokers for institutional and individual investors.





There are three Stock Exchanges in Pakistan, namely 1. Karachi Stock Exchange; formed in 1947, 2. Lahore Stock Exchange; formed in 1971, 3. Islamabad Stock Exchange; formed in i n 1989. Out of all the three Exchanges, the Karachi Stock Exchange is the prem premie iere re Stoc Stock k Exch Exchan ange ge of the the co coun untr try y, with with over over 700 700 list listed ed companies. It was established soon after the creation of Pakistan. The term ‘shares’ can be best defined as ‘represented ownership in part of a company. When you buy a share in a company you become a joint owner of the business and share in the future of that business. This is also known as equity Stud Studie ies s have have show shown n that that over over a twen twenty ty-y -yea earr span span,, inve invest stme ment nt in shares has provided greater returns than most other forms of savings. Shar Shares es can prov provid ide e you you with with a regu regular lar stre stream am of inco income me thro throug ugh h dividends as well as the potential for your investments to grow in value. If the prices of shares go up, you can sell them for more than you paid. This is called capital gain. Dividends are returns paid to shareholders out of the profits of the company. Returns can be in the form of cash or additional shares of the company called bonus shares. Dividends are usually paid once or twice a year depending upon the company’s profit distribution policy This is one of the ways in which shares differ from deposit accounts. The principal amount of money you put in a bank or any fixed income sav sa vings ings schem cheme e alw always ays stay stays s the sa sam me e.g. e.g. if you star startt with with Rs.100,000 you will always have Rs.100,000 (other than any interest earn earned ed). ).ch chan ange ges s in value alue ac acco cord rdin ing g to the the perf perfor orma manc nce e of the the company. With good management, the value of your investment in shares of a company can grow over time so that your shares are worth more than you paid for them. This is capital growth Buying shares can offer advantages over saving in deposit accounts: your investment may increase in value besides paying you dividends. You share the rewards when the company does well and the price of the shares goes up. But if the company performs badly, badly, the share price





return on your money can be higher than that on other investments. You can reduce your risks with careful planning. Companies issue shares to raise money from investors. This money is used for the development and growth of businesses of companies. A Comp Compan any y ca can n issu issue e diff differ eren entt type types s of shar shares es such such as ordin ordinar ary y shares, preference shares, shares without voting rights or any other shares as are permissible under the law. These give shareholders a stake in the company’s equity as well as a share in its profits, in the form form of divid ividen ends ds,, and and a voting ting righ rightt at gene generral meeti eeting ngs s of shareholders.

Shares of a particular company are offered by the following methods: An initial public offering (IPO) is the sale of equity in a company, generally in the form of shares of common stock. These shares trade on a recognized stock market. A company goes public; to raise capital for for proj projec ectt fund fundin ing, g, busi busine ness ss plan planni ning ng and and im impl plem emen enta tati tion on;; for for marketing purposes

A rights issue gives the existing shareholders the right to subscribe for new ordinary shares at an issue price lower than the prevailing market pric price e and and at a ratio atio equi equiv valen alentt to thei theirr exis existi ting ng shar shareh ehol oldi ding ng.. Companies carry out a rights issue when they want to raise additional funds to finance their capital requirements. Stocks in publicly traded companies are bought and sold at a stock market also known as a stock exchange. This is the most common way of buying and selling shares. Things you should know about Equities

Stocks and shares are the most volatile asset class in terms of price movements and thus, the most risky. Hence, do not invest directly in the stock market unless you can bear a fall in price without it having any impact on your day-to-day living standard. Remember the saying: “the greater the reward, the higher the risk”. risk”.





on accuracy is usually impossible to achieve, so what you can do is try to catch a portion of each big swing. You buy when the upswing has begun, and sell as the downswing starts. But for this to work, you must be able to control your greed, as you do not know exactly when the top or bottom is reached. The stock market can be said to be driven by two emotions: greed and fear. People get caught up in the boom fever and pay silly prices for unworthy shares - this is greed driving bull markets. In bear markets, people get carried away with the ruling negativity and are overeager to believe the worst rumors - this is fear dominating bear markets. You must step away from the crowd and not let them take over your rational reasoning and action. Tracking stocks

To track how your stocks are doing, you have to look at stock listings. Stock listings are published in most of the newspaper (e.g. Dawn). The list listin ings gs look look co conf nfus usin ing g at firs first, t, sinc since e they they look look like like a mi mixt xtur ure e of numbers, but can be a very useful tool when tracking your stock's progress. progress. The listings are organized organized into many columns, columns, including including the following information: Company name: This field is usually abbreviated in the listings, and listed alphabetically. alphabetically. Symbol: This field is a one to five character symbol used as a sort of nickname for the company. Volume: The volume is the amount of stocks that were traded the day before. High, Low and Close: These are the highest and lowest price of the stock the day before, and the closing price for the day before. This is an indicator of how much the price of the stock fluctuated throughout the previous day. Net change: This is the change of the price of the stock from the previous day. This gives you an idea whether the price is dropping or rising.





Concept of ‘Badla’

Badla is a mechanism to carry forward a speculative trade. It is also known as the Carry over Transaction (COT). Badla Finance in simple terms means putting money on interest. The mechanism mechanism is very easy for the stock broking broking society society but complex complex for the ordinary investor. History says Badla was born in the nineteenth centur century y. Then, Then, till today today,, the purpos purpose e has remain remained ed the same, same, the mechanism has hardly changed but the process has. These changes have made Badla Finance safer, safer, more secure and transparent to clients besides a fair business practice for the stockbrokers A person buys shares with the intention to make profits but without blocking money. The purchase at the end of the settlement is carried forw forwar ard d to the the next next sett settle leme ment nt.. Here Here is wher where e the clie client nt / Ba Badla dla financiers steps in. The financier's block the money for taking delivery of shares purchased by the speculators. He gives the money to the exch exchan ange ge for for share shares s boug bought ht.. For For this this faci facili lity ty the the spec specul ulat ator or pays pays interest to the financiers. This interest is known as Badla. The financier gives money to his broker who in turn, hands over the same to the Exchange. The shares are retained by the Exchange under custody, on behalf of the broker's client. Since the shares and the money lie with the Exchange, broker's risk is also eliminated. Example: If "A" has purchased 1000 shares of MCB @ Rs. 50 per share in Settlement 1, he has to take delivery from "B" who has sold the sam sa me. "A" "A" woul would d like like to ca carr rry y forw forwar ard d his his posi positi tion on to the the next next sett settle leme ment nt by lett lettin ing g "C" "C" (Bad (Badla la Fina Financ ncie ier) r) take take deliv deliver ery y at the the prevailing interest rate. In settlement 2 "A" will have to purchase the shares at a higher badla rate as determined by the Exchange. If the Badla was Rs. 0.20 in settlement no.1, "A" will have to buy MCB @ Rs. 50.20 per share from "C". The difference in purchase price in settlement no.1, and sale price in settlement no.2, is the earning for the Badla Financier. Financier.







companies are freely brought and sold through brokers and jobbers. It facilitates the marketability of shares. TURNING TURNING INVESTM INVESTMENT ENT INTO INTO CASH: CASH: When When a person person purcha purchases ses share he wants assurance than in time of need his investment will be turned into cash at a short notice. The stock exchange provides the facilit facility y to the security security holders holders to cash cash their their invest investmen mentt at a short short notice. The easy marketability of shares increases their liquidity. The liquidity turn increases the value of the shares. PROPER CANALIZATION OF THE CAPITAL: The stock exchange is the centr central al source source of inform informati ation on on market market activity activity and trends trends in securities. The general index of share price motivates the investors to purchase securities in order to earn the regular income form their savings. AID AID TO CAPI CAPITA TAL L FORM FORMAT ATIO ION: N: The The econ econom omy y of ever every y co coun untr try y moves on the wheels of capital. The establishment of the efficient and economic business units requires large amounts of capital. The join stock companies pool the recourses of large number of individuals with the liability limited to the extent of their shares the person who have invested in the securities are sure that their investment can be turned into cash through the stock exchange. The resources of the people are thus mobilized for caring on the productive activity on a large scale. Stock exchange thus contributes considerably to the capital formation. PROP PROPER ER EV EVELU ELUAT ATIO ION N OF TH THE E SECU SECURI RITI TIES ES:: The pric price e of the the shares are determined by the forces on demand and supply in the share market. The function of the stock exchange is to exhibit daily the price price of securi securitie ties s for the informat information ion and guidance guidance of buyers buyers and sellers.





be ca cash shed ed at any any time time,, the the bank banks s are are ther theref efor ore e able able to ma main inta tain in profitability as well as liquidity. liquidity. FACILITIES FOR SPECULATION: Stock exchange enables genuine speculators to speculate and earn profit through fluctuations fl uctuations in prices. RIBA FREE MODE OF INVESTMENT: The equity investment is the Riba free mode of investment. As such there is a growing popularity of equity in all the countries in all the world now. I t is a considered a hedge hedge agains againstt inflati inflation on becaus because e the yield yield on equity equity invest investme ment nt is comparatively higher than on prevailing deposit rates. PROFIT: By inve invest stin ing g in shar shares es one one part partic icip ipate ates s in prof profit its s of the the company which are distributed by way of dividends. In addition to this bonuses or right shares are also issued by the company. company. EMPLOYM EMPLOYMENT ENT OPPORTU OPPORTUNIT NITIES IES:: By investing in shares one parti particip cipan antt in indu indust stri rial al deve develo lopm pmen entt and and crea create tes s unem unempl ploy oyme ment nt opportunities in the country. country.

3. RESEARCH PROBLEM Karachi Stock Exchange (KSE) has lost a massive market capitalization of Rs363 billion in just three trading days after the restoration of 5 per cent upper and lower locks limits on July 11. The overall decline in the KSE capitalization capitalization had been estimated estimated at Rs1519 Rs1519 billion from April 18 to July 16, 2008. On April 18, the benchmark KSE 100-Index reached the all time high, at 15,676 points but prolong political uncertainty and fragile economic situatio situation n couple coupled d with with deteri deterior orati ating ng law and order order situat situation ion in the





up the stock stock market market becaus because e local local invest investors ors have have already already invest invested ed their funds, so it’s now the government turn to inject investment at the stock markets,” CEO of Dalal Securities M Siddique Dalal said. “Employees Old-Age Benefits Institution (EOBI), State Life Insurance Company, National Investment Trust (NIT), private and public sector banks have capacity to pour fresh funds into the share markets,” he added Although share prices at attractive levels but the investors are still concerned to further invest in the share markets due to the expected incr increa ease se in disc discou ount nt rates ates,, frag fragil ile e law law and and orde orderr situ situat atio ion n and and burgeoning political confrontation. At the moment stock markets are in the grip of confidence crisis and only the government could restore the confidence of the markets, he added.

“I don’t see formation of equity market fund soon, it takes few weeks for launching the fund,” fund,” Siddique said “Al “Alll eyes eyes are are now now on toda today’ y’s s me meet etin ing g betw betwee een n SECP SECP and and stoc stock k markets, it is being expected that mechanism of the equity market fund will be finalized. If the Rs50bn support fund is launched, it may act as a catalyst for the stock market,” market,” Siddique said

4. VARIABLES





Political Uncertainty causes the stock market to go down even to crash the market. 4.

Foreign investors

The The role role of fore foreig ign n inve invest stme ment nt is im impo port rtan antt in Stoc Stock k Mark Market et in particular and in economy in general. 5.

Local investors

The investment of local investor is most important because the local investor is the basic investor of the Stock market. Local investor is very sensitive to economic situation si tuation and political uncertainty. uncertainty. 6.

Equity markets

It is the Market related to Capital Market.

5. RESERCH METHODES 5.1TYPE OF STUDY: For this proposal the study done through the researching form the local stock markets and the type of study shows the relation between the variable and observed set of data and expected data. 5.2

DATA COLLECTION: For this study the secondary data will be collected through the research from magazines KSE annual repo report rts s book books, s, news newspa pape perr, and and the the help help take taken n form form the the CEMINAR libra SHAH ABDUL ABDUL LATIF LATIF UNIVER UNIVERSTIT STITY Y library ry of SHAH KHAIRPUR and he central library of SHAH ABDUL LATIF UNIVERSITY.





7. BIBLOGRA BIBLOGRAPHY: PHY: The The data data co coll llec ecte ted d from from the the follo followi wing ng books, newspapers, websites and news channels. 1. The book of business law by (

)

2. The newspapers are as DAWN, KAWISH, JUNG, RIASAT. 3. The websites are as: www.dawn.com www.geo.tv 4. The The news news chan channe nels ls are are GEO GEO NEWS NEWS,, ARY ARY ONE, ONE, AA AAJJ TV and and SAMMA

What is the Stock Exchange

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