Stock Exchange

1Report on Stock Exchange

Principal of Economics

Report Title:

Stock Exchange

Tahir Sattar 2610


1. INTRODUCTION:

The stock market makes an appearance in the news every day. You hear about it when it reaches a new high, in headlines like "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 we may find that we know very little about them. When we hear about stock exchange some questions arise in our mind such that: 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? To know the answer of these type questions we must have knowledge of Stock Exchange.

2. WHAT ARE SHARES?

A share represents the smallest recognized fraction of ownership in a publicly held business. Each such fraction of ownership is represented in the form of a certificate, known as the share certificate. Once the shares are brought and transferred in your name your name will be entered in the company’s share register, which will entitle you to receive all the benefits of share ownership including the rights to receive dividends, to vote at the company’s general meetings to receive the company’s reports. If you decide to sell your shares you will need to deliver share certificates to the broker in time for the transaction to be completed. The breaking up of the total ownership of a business into small fragments, each fragment represented by a share certificate, enables them to be easily bought and sold.

3. PRIMARY AND SECONDARY MARKETS:

A company cannot easily find takers for its securities (shares or debentures) from the public if they cannot subsequently trade these shares and debentures at will. In other words, a security cannot have a good primary market unless it has an active secondary market.

Primary market comprises the companies making the security issues, and the public at large subscribing to them. Primary market is where a company makes its first contact with the public at large in search of capital. Therefore, if one is wondering whether or not to invest in the new issue of a company, one is contemplating whether or not to participate in the primary market.

Secondary market comprises the buyers and sellers of shares and debentures subsequent to the original issue. For example, having subscribed to the share or debenture of a company,


if one wishes to sell the same, it will be done in the secondary market. Similarly, one could also buy the share or debenture of a company from the secondary market (if the company is listed in the stock exchange), without having to wait for that company to come out with a new public issue. Evidently, by their very role, stock exchanges are an important constitution of the capital market.

The two markets mentioned above are not to be understood as two physically segregated institutiions. Often the same parties may be involved in both the markets. Primary market merely alludes to the first purchase of a new share or debenture by the public directly from the issuing company, whereas secondary market refers to the subsequent trading in those shares and debentures. A stock exchange is the single most important institution in the secondary market for securities.

4. CAPITAL AND MONEY MARKETS:

Every company is in need of long-term capital as well as short-term capital. Long-term capital is required essentially for investment in land, buildings, plant and machinery and other fixed assets, which are prerequisites to the production of goods and services. Short-term capital or working capital, on the other hand, is required essentially for financing the day-to-day operations of the business, such as raw materials, work in progress, finished goods, trade debtors, etc.

Capital market is then a broad term which includes primary markets, secondary markets, term lending institutions, banks, investors, and just about anybody and everybody who is engaged in providing long-term capital (whether equity capital or debt capital) to the industrial sector.

Money market however includes all the agencies providing short-term capital (or working capital), as opposed to long-term capital, to the industry at large. Just like capital market, money market also has its own primary and secondary market s. Banks, under the control of state bank of Pakistan, play a major role in the working of money markets.

5. STOCK EXCHANGE:

The institution where this buying and selling of shares essentially takes place is the Stock Exchange. In the absence of stock exchanges, i.e. institutions where small chunks of businesses could be traded, there would be no modern business in the form of publicly held companies. Today, owing to the stock exchanges, we do not have to be electronics company; we can be part owners of one company today and another company tomorrow; we can be part owners in several companies at the same time; we can be part owners in a company hundreds or thousands of miles away.


We can convert our stock or shares in cash and we can change our ownership any time and transfer our shares to any other in the market Thus, by enabling the convertibility of ownership in the product market into financial assets, namely shares, stock exchanges bring together buyers and sellers (or their representatives) of fractional ownerships of companies, (much as buyers and sellers of vegetables come together in a vegetable market). And for that very reason, activities relating to stock exchanges (and its variations, as we shall see later) are also appropriately enough, known as Stock Market or Security Market. Also, just as a vegetable market is distinguished by a specific locality and characteristics of its own, mostly a stock exchange is also distinguished by a physical location and characteristics of its own.

6. ROLE OF THE STOCK EXCHANGE:

• The stock exchange admits companies for trading at their securities.

• It provides a market for raising capital by companies.

• It provides a market place for shares of listed public companies to be bought and sold, by

bringing companies and investors together at one place.

• The exchange’s role is to monitor the market to ensure that it is working efficiently, fairly

and transparently.

7. KARACHI STOCK EXCHANGE:

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 neighborhood, you probably have a supermarket that 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.

Karachi Stock Exchange (KSE) is the biggest and most liquid exchange in Pakistan with the average daily turnover of 525.15 million shares and market capitalization of US $ 54.28 billion. The international magazine 'Business Week' announced the KSE as the best performing world stock market in 2002. Since then the KSE continuously maintains the reputation as one of the best performing markets in the world.

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 1989.

Out of all the three Exchanges, the Karachi Stock Exchange is the premiere Stock Exchange of the country, with over 700 listed companies. It was established soon after the creation of Pakistan.

Since 1991, foreign investors have an equal opportunity together with local investors to operate in the secondary capital market on the Karachi Stock Exchange. The establishment of the new policy 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 markets - the ready market and the over-the-counter (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 on the OTC market.

8. SOME FACTORS OF STOCK EXCHANGES:

Broker:Traditionally, a stock exchange has been an association of individual members

called member brokers (or simply members or brokers). Formed for the express purpose of regulating and facilitating the buying and selling of securities by the public and institutions at large. The member brokers are essentially the middlemen, who carry out the desired transactions in severities on behalf of the public (for a commission) or on their own behalf. New membership to a stock exchange is through election by the Governing Board of that stock exchange.

Agent:A securities firm is classified as an agent when it acts on behalf of its clients as buyer or seller of a security. The agent does not own the security at any time during the transaction.

Capital Stock:All shares representing ownership of a company, including preferred and common shares.

Equity vs. Debt:To start a new business (or fund a new project) a company can raise money in two ways - byselling shares of equity or by incurring debt. If the owner of our ice cream parlor invested all their own savings to buy the materials necessary to start the business, they made an equity investment in the company. Equity is simply ownership of a corporation. Typically, ownership units in a corporation are referred to as stock.However, if our owner did not have necessary funds to start their own business they couldfinance their operation in one of two ways:


1. Issue stock (or certificates of partial ownership in his company) to people who may beinterested in helping their venture out in return for a proportional share of the profits thatthe company might generate.

2. Borrow money that will need to be paid back with interest.

Bid:The highest price a buyer is willing to pay for a stock. When combined with the ask price information, it forms the basis of a stock quote.

Government nominees include representatives of the Ministry of Finance, as well as some public representatives, who are expected to safeguard the public interest in the functioning of the exchanges. The board is headed by a President, who is an elected member, usually nominated by the government from among the elected members. The Executive Director, who is usually appointed by the stock exchange with government approval, is the operational chief of the stock exchange; his duty is to ensure that the day to day operations of the stock exchange are carried out in accordance with the various rules and regulations governing its functioning.

All companies wishing to raise capital from the public are required to list their securities on at least one stock exchange. Thus, all ordinary shares, preference shares and debentures of publicly held companies are listed in stock exchanges.

9. WHY DO COMPANIES ISSUE SHARES?

Companies issue shares to raise money from investors. This money is used for the development and growth of businesses of companies. A Company can issue different types of shares such as ordinary 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 of dividends, and a voting right at general meetings ofShareholders.

Advantages of issuing stock:

1. A Company can raise more capital than it could borrow.

2. A Company does not have to make periodic interest payments to creditors.

3. A Company does not have to make principal payments.

Disadvantages of Issuing Stock:

1. The principal owners have to share their ownership with other shareholders.


2. Shareholders have a voice in policies that affect the company operations.

10. ISSUE OF A SHARE AT PAR AND AT A PREMIUM:

In general, an ordinary share in Pakistan is said to have a par value (face value) of Rs.10, though some shares issued earlier still carry a par value of Rs.100. Par value implies the value at which a share is originally recorded in the balance sheet as equity capital. Equity capital is the same as ordinary share capital.

It should be noted that when a company issues shares at a premium, it is able to raise the required amount of capital from the public by issuing a fewer number of shares. For example, while a new company promoted by first time entrepreneurs intending to rise say, Rs. One crore, has to offer 10 lakh ordinary shares at Rs.10 each (at par), an existing company may arise the same amount by offering only 2.5 lakh shares at Rs.40 each (close to the market value of its shares). The latter is said to have issued its share at a subscription price of Rs.40 (Rs.10 in of the former case), at a premium of Rs.30 (being the excess of subscription price over par value). In such a situation in Pakistan, the company’s books of accounts will show Rs.10 towards share capital account and Rs.30 towards share premium account.

A company cannot raise equity capital in excess of the limit authorized in its Memorandum of Association (a document detailing the terms and conditions under which a company is incorporated under the company law) at any time, without undergoing certain legal formalities. This limit is known as authorized capital.

11. WHY DO INVESTORS BUY SHARES?

Studies have shown that over a twenty-year span, investment in shares has provided greater returns than most other forms of savings. Shares can provide you with a regular stream of income through 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.

12. WHAT ARE DIVIDENDS?

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. Shares of a particular company are offered by the following methods:


13. METHODS OF OFFERING SHARES:

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 project funding, business planning and implementation; 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 price and at a ratio equivalent to their existing shareholding. 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.

The Process of Issuing Securities

Corporations sell stock to the public as one way to raise capital. Before it can issue new stock, a corporation must first file registration statements with the Securities and Exchange Commission (SEC) a twenty-day wait is required before it can sell the stocks. The issuing company may make their registration statement public with a preliminary prospectus called a red herring that summarizes the registration statement. Basic information about the new offering is also provided, including how many shares are being offered and which brokerage companies will distribute the stock to the public. At the time of issue, a final prospectus is presented. This includes the price of the stock (its offering price).

The Prospectus

Prospectuses are legal documents that explain the financial facts important to an offering. They must precede or accompany the sale of a primary offering. The law requires companies selling primary offerings to send prospectuses to anyone who wants to buy a primary offering. Prospectuses may also be used to solicit orders. Customers should read a prospectus carefully before purchasing any primary offering. Prospectuses include but are not limited to the following:


Offering price

Legal opinions about the issue

Underwriting method

The history of the company

Other costs related to investing in the stock

The management team

The handling of proceeds

The prospectus must be provided to customers before they complete any transactions. It must also include the SEC's disclaimers that it does not approve or disapprove of the stock being offered, and that it does not judge the prospectus' statements for accuracy.

14. Companies must advertise before issue its Stock:

A new issue of stock is allowed to be advertised before it is actually sold, although it may not b sold during the actual registration period. Registered representatives are allowed to accept oral solicitations from clients. They are not allowed to sell any shares of the new stock. Neither are they allowed to affirm any offers of sale.

Registered representatives may send red herrings, or preliminary prospectuses, to clients. Information in these documents will discuss why the stock is being sold and the offering timetable. Red herrings are only issued for information purposes. Tombstone advertisements are ads that announce the new stock. Their sole purpose is to function as communication. They are not prospectuses. They are called tombstones because they provide prospective buyers with the "bare bones" information: the name of the stock, the issuer and how to obtain a red herring.

15. STOCK MARKET TERMS:

Understanding Bull & Bear Markets


Simply put, bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is high, jobs are plentiful and inflation is low. Bear markets are the opposite--stock prices are falling, and the view is that they will continue falling. The economy will slow down, coupled with a rise in unemployment and inflation. In either scenario, people invest as though the trend will continue. Investors who think and act as though the market will continue to rise are bullish, while those who think it will keep falling are bearish.The basics of bull and bear markets will be reviewed in this tutorial. Specifically we will cover the following:__ What Drives Bull and Bear Markets?__ Predicting Bull and Bear Markets__ Investing During Bull Markets__ Investing During Bear Markets

What Drives Bull and Bear Markets?

What causes bull and bear markets? They are partly a result of the supply and demand for securities. Investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These forces combine to make investors bid higher or lower prices for stocks. To qualify as a bull or bear market, a market must have been moving in its current direction (by about 20% of its value) for a sustained period. Small, short-term movements lasting days do not qualify; they may only indicate corrections or short-lived movements. Bull and bear markets signify long movements of significant proportion. There are several well-known bulls and bears in history. The longest-lived bull market in U.S. history is the one that began about 1991 and is still climbing. Other major bulls occurred in the 1920s, the late 1960s and the mid-1980s. However, they all ended in recessions or market crashes. The best-known bear market in the U.S. was, of course, the Great Depression. The Dow Jones Industrial Average lost roughly 90 percent of its value during the first three years of this period.There were also numerous others throughout the twentieth century, including those of 1973-74 and 1981-82.

Predicting Bull and Bear Markets

Investors turn to theories and complex calculations to try to figure out in advance when themarket will scream upward or tumble downward. In reality, however, no perfect indicator has been found. In their attempts to predict the market, economists use technical analysis. Technical analysis is the use of market data to analyze individual stocks and the market as a whole. It is based on the ideas that supply and demand determines stock prices and those prices; in turn; also reflect the moods of investors. One tool commonly used in technical analysis is the advance-decline line, which measures the difference between the number of stocks advancing in price and the number declining in price. Each day a net advance is


determined by subtracting total declines from total advances. This total, when taken over time, comprises the advance-decline line, which analysts use to forecast market trends.Generally, the A/D line moves up or down with the Dow. However, economists have noted that when the line declines while the Dow is moving upward, it indicates that the market is probably going to change direction and decline as well.

Investing During Bull Markets

A key to successful investing during a bull market is to take advantage of the rising prices. For most, this means buying securities early, watching them rise in value and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly. Investors often attempt to buy securities as they demonstrate a strong and steady rise and sell them as the market begins a strong move downward. Portfolios with larger percentages of stocks can work well when the market is moving upward. Investors who believe in watching the market will buy and sell accordingly to change their portfolios. Speculators and risk-takers can fare relatively well in bull markets. They believe they can make profits from rising prices, so they buy stocks, options, futures and currencies they believe will gain value. Growth is what most bull investors seek. The opposite of all this is true when the market moves downward.

Investing During Bear MarketsSuccessful investing in bear markets can involve many different strategies. Some investors try to secure their assets in less volatile securities such as fixed-income bonds or money market securities. Others wait for the downward trend of prices to subside. When it does, they begin buying. Still others seek to take advantage of the falling prices.

When the market goes down, portfolios with a greater percentage of bonds and cash fare well because their returns are fixed. Many financial advisors emphasize the value of fixed income and cash equivalent investments during market downturns. Another strategy is to simply wait for the downward prices to reverse themselves. Investors who wish to remain invested in stocks may seek out companies in industries that perform well in both bull and bear markets -- shares in these companies are called defensive stocks. The food industry, utilities, debt collection and telecommunications are popular defensive stocks.

However, There is no guarantee that a defensive stock will perform well during any market period.Finally, some investors attempt to exploit profits from the downward price movements. One method is to sell at the beginning of a downward turn, when prices are still high. Proponents of this strategy wait for prices to bottom out before reinvesting in the market. However, as simple as it sounds, this process involves the nearly impossible task of timing


the market. Another, more complicated way to attempt to profit from falling prices is called selling short.

16. Index:

A statistical measure of the state of the stock market, based on the performance of stocks.Examples are the KSC-100 Index; S&P/TSX Composite Index (Comprises the majority of market capitalization for Canadian-based, Toronto Stock Exchangelisted companies. It is the leading benchmark used to measure the price performance of the broad, Canadian, senior equity market. It was formerly known as the TSE 300 Composite Index). and the S&P/TSX Venture Composite Index.

KSC-100 index:

Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period of time. In determining representative compaines to compute the index on, companies with the highest market capitalization are selected. However, to ensure full market representation, the company with the highest market capitalization from each sector is also included.Contents

History

The index was launched in late 1991 with a base of 1,000 points. By 2001, it had grown to 1,770 points. By 2005, it had skyrocketed to 9,989 points. It then reached a peak of 12,285 in February 2007.[1] KSE-100 index touched the highest ever benchmark of 14,814 points on December 26, 2007, a day before the assassination of former Prime Minister Benazir Bhutto, when the index nosedived.[2] The index recovered quickly in 2008, reaching new highs near 15,500 in April. However, by November 22, 2008 during the global financial crisis of 2008 it had fallen to 9,187

Top 30 KSE 100 Index companies

The following is a list of 30 companies with the highest market capitalization volume and their respective weightages in the index and account for over 80% of the KSE index as of February 20, 2009:

Number Company Name Weightage (%) Market Capitalization (PKR)1 OGDCL 14.14 550,948,930,0002 MCB 7.17 279,583,150,0003 National Bank of Pakistan 5.43 211,726,900,0004 Pakistan Petroleum 5.06 197,201,080,000


5 Standard Chartered Bank 4.41 171,704,800,0006 PTCL 4.28 166,810,800,0007 United Bank Limited 4.13 161,025,160,0008 Jahangir Siddiqui & Company 2.66 103,600,000,0009 Pakistan State Oil 2.08 81,034,440,00010 Allied Bank Limited 2.01 78,371,670,00011 Nestlé Pakistan 1.93 75,280,250,00012 Pakistan Oilfields 1.71 66,824,220,00013 Fauji Fertilizer Company 1.68 65,607,390,00014 ABN AMRO 1.63 63,666,370,000.15 Engro Chemical 1.45 56,492,990,00016 Arif Habib Securities 1.40 54,660,000,00017 NIB Bank 1.27 49,320,250,00018 Kot Addu Power Company 1.19 46,565,400,00019 EFU General Insurance 1.16 45,300,000,00020 Bank of Punjab 1.13 43,869,030,00021 Fauji Fertilizer Bin Qasim 1.06 41,474,480,00022 Bank Alfalah 1.03 39,975,000,00023 Adamjee Insurance 1.01 39,258,300,00024 Pakistan Tobacco Company 0.99 38,707,280,00025 Sui Northern Gas Pipelines 0.98 38,300,100,00026 Hub Power Company 0.98 38,128,240,00027 Dawood Hercules Chemicals 0.91 35,549,620,00028 Habib Metropolitan Bank 0.91 35,354,280,00029 EFU Life Assurance 0.89 34,750,000,00030 Lucky Cement 0.86 33,593,480,000

The Karachi Stock Exchange trades the KSE-100 Index. It is a highly-diversified 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. The Stock Exchange can be also seen as a control to regulate the Marketplace where listed public companies and traders buy and sell shares.


Karachi Stock Exchange-100 index continues to DeclinePakistan Times Staff Report

The slide of the market persisted mercilessly giving another shock to the KSE-100 index which shed yet another 255 points to the 7709 point level. Since the 10510 points intra-day high on March 16, 2005, the KSE-100 index is down by 2800 points or 27% so far.

However, a frantic activity was seen on the part of the stock exchange and the regulators over the weekend in order to provide badla financing to the beleaguered investors and brokers.

Market Behavior

Contrary to the market behavior last week, today’s session depicted a highly volatile behaviour and at one time the index made a high at 8002 points. However, as usual OGDCL plunged to its lower circuit level.

Other heavyweights quickly followed suit with PTCL, PSO, POL and PPL closing at their lower caps.

Nonetheless, some positive activity was witnessed in secondary stocks as TRG, KESC, Telecard, PIA, Chakwal Cement and Fauji Cement posted respective gains of 14.3%, 10.5%, 2.3%, 5.5%, 4.4% and 1.1%.

Major drama was witnessed in FFC as at one time the scrip soared to its upper cap but then towards the end of the session, it came under selling pressure.

However, the scrip still managed to show a net gain of 0.9% to Rs128.35. PICIC too depicted an increment of 5.0% to the Rs85.00 level.

The market’s crash, though still continuing, has placed a number of scrips at attractive levels. The fertilizer and banking scrips however managed to attract attention of the investors even in the worst prevailing conditions.

Stock Exchange

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