Report on Stock Exchange

Principal of Economics

Report Title:
Stock Exchange

Tahir Sattar 2610

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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,
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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.
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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,
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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 could
finance their operation in one of two ways:
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1. Issue stock (or certificates of partial ownership in his company) to people who may be
interested in helping their venture out in return for a proportional share of the profits that
the 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 of
Shareholders.

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.
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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:
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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:
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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
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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 the
market 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
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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 Markets

Successful 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
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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 14.14 550,948,930,000
2 MCB 7.17 279,583,150,000
3 National Bank of Pakistan 5.43 211,726,900,000
4 Pakistan Petroleum 5.06 197,201,080,000
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5 Standard Chartered Bank 4.41 171,704,800,000

6 PTCL 4.28 166,810,800,000
7 United Bank Limited 4.13 161,025,160,000
8 Jahangir Siddiqui & Company 2.66 103,600,000,000
9 Pakistan State Oil 2.08 81,034,440,000
10 Allied Bank Limited 2.01 78,371,670,000
11 Nestlé Pakistan 1.93 75,280,250,000
12 Pakistan Oilfields 1.71 66,824,220,000
13 Fauji Fertilizer Company 1.68 65,607,390,000
14 ABN AMRO 1.63 63,666,370,000.
15 Engro Chemical 1.45 56,492,990,000
16 Arif Habib Securities 1.40 54,660,000,000
17 NIB Bank 1.27 49,320,250,000
18 Kot Addu Power Company 1.19 46,565,400,000
19 EFU General Insurance 1.16 45,300,000,000
20 Bank of Punjab 1.13 43,869,030,000
21 Fauji Fertilizer Bin Qasim 1.06 41,474,480,000
22 Bank Alfalah 1.03 39,975,000,000
23 Adamjee Insurance 1.01 39,258,300,000
24 Pakistan Tobacco Company 0.99 38,707,280,000
25 Sui Northern Gas Pipelines 0.98 38,300,100,000
26 Hub Power Company 0.98 38,128,240,000
27 Dawood Hercules Chemicals 0.91 35,549,620,000
28 Habib Metropolitan Bank 0.91 35,354,280,000
29 EFU Life Assurance 0.89 34,750,000,000
30 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.
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Karachi Stock Exchange-100 index continues to Decline

Pakistan 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.