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Functions of Stock Exchange
Functions of Stock Exchange
A stock exchange, securities exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks.
History:
Karachi Stock Exchange is the biggest and most liquid exchange in Pakistan. It was declared the Best Performing Stock Market of the World for the year 2002. As on May 30, 2008, 654 companies were listed with a market capitalization of Rs.3, 746.203 billion (US$ 56.334 billion) having listed capital of Rs.705.873 billion (US$ 10.615 billion). The KSE 100TM Index closed at 12130.51 on May 30, 200
Trading:
The exchange has pre-market sessions from 09:15am to 09:30am and normal trading sessions from 09:30am to 03:30pm. It is the second oldest stock exchange in South Asia. The Karachi stock exchange has undergone a considerable deal of downturn partly due to global financial crisis and partly on account of domestic troubles. It remained suspended in excess of 4 months and resumed normal trading only on December 15, 2008. The KSE 100 Index and KSE 30 Index after hitting the low around mid January has now rebounced and recovered 20-25% till March 12th 2009.
Growth:
The KSE is the biggest and most liquid exchange in Pakistan and in 2002 it was declared as the Best Performing Stock Market of the World by Business Week. As of December 20, 2007, 671 companies were listed with the market capitalization of Rs. 4364.312 billion (US$ 73 Billion) having listed capital of Rs. 717.3 billion (US$ 12
billion). On December 26, 2007, the KSE 100 Index reached its ever highest value and closed at 14,814.85 points. Foreign buying interest had been very active on the KSE in 2006 and continued in 2007. According to estimates from the State Bank of Pakistan, foreign investment in capital markets total about US$523 Million. According to a research analyst in Pakistan, around 20pc of the total free float in KSE-30 Index is held by foreign participants. KSE has seen some fluctuations since the start of 2008. One reason could be that it is the election year in Pakistan, and stocks are expected to remain dull. KSE has set an all time high of 15,000 points, before settling around the 14,000 mark. Karachi stock exchange Board of Directors has recently (2007) announced plans to construct a 40 story high rise KSE building, as a new direction for future investment. Disputes between investors and members of the Exchange are resolved through deliberations of the Arbitration Committee of the Exchange. KSE began with a 50 shares index. As the market grew a representative index was needed. On November 1st, 91 the KSE-100 was introduced and remains to this day the most generally accepted measure of the Exchange. Karachi Stock Exchange 100 Index (KSE-100 Index) is a benchmark used to compare prices overtime, companies with the highest market capitalization are selected. To ensure full market representation, the company with the highest market capitalization from each sector is also included. In 1995 the need was felt for an all share index to reconfirm the KSE-100 and also to provide the basis of index trading in future. On August the 29th, 1995 the KSE all share index was constructed and introduced on September 18, 1995.
April 20 : Karachi Stock Exchange achieved a major milestone when KSE-100 Index crossed the psychological level of 15,000 for the first time in its history and
peaked 15,737.32 on 20 April, 2008. Moreover, the increase of 7.4 per cent in 2008 made it the best performer among major emerging markets.
May 23: Record high inflation in the month of May, 2008 resulted in the unexpected increase in the interest rates by State Bank of Pakistan which eventually resulted in sharp fall in Karachi Stock Exchange.
July 16 : KSE-100 Index dropped one-third from an all-time high hit in April, 2008 as rising pressure on shaky Pakistan's coalition government to tackle Taliban militants exacerbates concern about the country's economic woes
July 17 : Angry investors attacked the Karachi Stock Exchange in protest at plunging Pakistani share prices. August 18: KSE 100 Index rose more than 4% after the announcement of the resignation of President Perwez Musharaf but Credit Suisse Group said that Pakistan's Post-Musharraf rally in Stock Exchange will be short-lived because of a rising fiscal deficit and runaway inflation.
August 28 :Karachi Stock Exchange set a floor for stock prices to halt a plunge that has wiped out $36.9 billion of market value since April December 15: Trading resumes after the removal of floor on stock prices that was set on August 28 to halt sharp falls.
Some international examples of scripless trading are New York, Hong Kong and the London stock exchanges. These systems all vary from each other in one way or another. In Hong Kong for instance, the Central Clearing and Settlements System (CCASS) is employed for settlements. The CCASS is a computerized securities and settlements. Without automation and immobilization of certificates, the delivery and settlement of securities would become unmanageable, not to mention highly risky. System that has replaced the physical delivery system. Under the CCASS, certificates representing securities traded on the stock exchange In the Kuala Lumpur Stock exchange a semiscripless system is being used. A specific number of shares have been deposited with the central depository and the rest are traded physically.
and settlement of transactions. The Group of Thirty's recommendations have been adopted by the International Federation of Stock Exchanges and are supported throughout the international securities community. The CDC will act as a trustee for investors and all securities within the CDC will be registered in its name. CDC however will have no beneficial rights to these securities; it will hold them as a nominee on the investors' behalf. Therefore all rights and benefits, such as dividends, bonus, rights entitlements and voting rights, will remain with the actual owner of those securities.
volume.
Investors also are not totally happy with the current system and face difficulties like:
1. 2. Large space requirements for safe keeping of The requirements as to the time of transfer (could
certificates. be up to 45 days), and formalities such as verification of transfer deeds. 3. In case of new issues, the time taken (at least two months) for the successful applicants to receive certificates and subsequent preparation, signature and verification of transfer deeds in order to render the certificates deliverable.
4.
certificates.
Then the issuers of the certificates have their own set of complaints
1. 2. 3. 4. 5. 6. Problems faced by issuers of securities. Printing and despatch of certificates of new issues Printing and despatch of certificates consequent to Issuance of duplicate certificates. Large space requirements for storing certificates. The carrying out of the following activities at the
time of book closure when thousands of certificates are lodged for transfer:
Checking genuineness of certificates Signature verification Checking correct value of transfer stamps Signature of Director for confirmation of transfer
Investors will not be required to register securities in their name in order to claim entitlements. This is because ownership will be theirs as soon as securities are transferred into their account. This will save valuable time which was previously spent in having certificates transferred or waiting for certificates of new issues to be received. Security of investment need no longer depend on genuineness of certificates In fact, according to Najam Ali, CEO; transfer will be instantaneous compared to 45 days or longer with the physical system. The lengthy and tedious activities undertaken by issuers at the time of book closure will be eliminated. Issuers need no longer be concerned with the dispatch and printing of certificates at the time of new allotments or at the time of distribution of bonus and right issues. The beneficiaries of the CDS will be the entire financial services industry, specifically all the major players of the capital market. These are investors, participants of the CDC, issuers of capital and their designated registrars/transfer agents (R/TA)
Deposit of existing and new securities into the depository Withdrawal of securities in the form of certificates from the depository to cater for investors who prefer to have physical possession of certificates.
Free transfer or book entry transfer of securities without any associated cash movement. Pledge/release/call like placing a lien on securities in favour of a lender which can only be released/called by the lender.
Stock borrowing or lending through the mechanism of transfer with or without associated money movement through the depository system.
Corporate action like bonus issues, rights entitlements, subdivision, consolidation and any other action that changes the number of securities held in a participant's account or
Delivery versus payment, book entry transfer of ownership of a security in exchange for payment to settle a transaction.
Cash only movement, movement of cash from one account to another without any associated securities movement.
Main Account: Each participant in the system will be allocated a main account by
virtue of being a participant in the CDS. This account will mainly be used as a transit account for movement of securities.
Group Client Account: This account is used for keeping securities which are
beneficially owned by the participant's clients. It will be used for clients who are not
willing to utilize the facility of opening separate sub-accounts. Each group account will contain the securities owned by a group of clients. The detailed break-up of the securities held by each client of such a group will be held by the participant and no such record will be maintained within the CDS.
Cash Account: Each participant in the system who opts to avail the Delivery vs.
Payment (DVP) facility will be required to deposit, in advance, a rolling settlement fund to be used for the settlement of his DVP obligations. The balance of the participant's rolling settlement fund will be stored in this account.
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Securities can also be pledged through the CDC. A participant, acting either on his own behalf or on behalf of his client, can place securities under pledge with an eligible pledgee from whom a loan is to be taken. Placing securities under pledge will result in securities being flagged as no longer available for transfer /delivery until such time as they are released from pledge or transferred on the instructions of the eligible pledgee to the account of a participant. Any benefits will however, still accrue to the pledgor. Sub accounts can be maintained by participants on behalf of their clients. The client, however, will not be able to operate the account himself. The relevant participant will handle all his transactions for him through this sub-account. The participant will open, maintain and operate this sub account in the name of the sub-account holder, so as to record his title to the securities in his account. A sub account holder will receive confirmation of his account balance from the relevant participant. Moreover, he can also request the CDC to directly confirm his balance. The Central Depositories legislation has specific provisions for protecting the subaccount holder. For example, a participant is not legally allowed to undertake any transfers, pledges or withdrawals from sub-accounts without specific instructions from the sub-account holder. Violation of this clause by a participant is punishable by a significant fine and imprisonment.
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to the concerned issuer or his appointed R/ TA, and dividends will be dispatched accordingly. Bonus Shares: In case of bonus shares, upon receipt of information from the issuer, the depository will increase the positions held by each participant by the amount of bonus share issued. Rights Issues: Will be dealt with in a manner similar to bonus shares. Beneficial owners will be credited automatically with their entitlements. This will ensure that trading in 'unpaid rights' can start immediately. Share Sub-division & Consolidation: In the case of share sub-division & consolidation, the CDC wilt calculates the new share balances which the shareholders in the Depository System will be entitled to, based on their existing share holdings. On the date when the sub-division or consolidation is approved by the issuer, a program will be run which will replace the old balances with the new share balances calculated above.
Misconceptions
When one buys or sells the whole process will be exactly the same as it is today. Securities will continue to be bought and sold through brokers and there will be no change in the existing trading practices. The only change will be at the time of settlement; instead of physical deliveries, electronic book entry settlement will be made. As opposed to most misconceptions, trading activities and other practices like "badla, borrowing or lending of shares, short selling and blank selling are independent of the workings of the CDS. This system is simply an electronic vehicle to facilitate the delivery, settlement and transfer of securities. Trading practices in securities will remain as they were before. Investors will still instruct their brokers to buy or sell, settlement and clearing will continue as per the existing system. Electronic book entry deliveries will still be made by the participants and not by the CDC staff. There are group accounts which will replace the current "benami" accounts. The CDC will not check short selling
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or blank selling. It is not the CDC's job to interfere in transactions, only to ensure that deliveries are made on time, and that payments are made. Apart from these, there will not be any change in the practices or malpractices at the stock market
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Another unique feature is that the shares that are to be deposited will not be sent to the CDC but to the registrars who will check to see that all is in order, intimate the CDC and the shares will be registered. The participant has a record of the shares and the owner is issued a slip of paper which shows his ownership. This reduces the work load on the CDC and also allows them to concentrate more on the task at hand, maintaining the depository. The second and perhaps most unique feature of the CDC is that all shares that are deposited with the depositories around the world are then secured in a vault. The number of shares keeps on increasing as years go by and additional space is needed. Not only is this a hassle with security concerns plaguing the management but it also a great additional cost. In the depository system that has been incorporated in Pakistan, the need for a vault has been eliminated because the shares, once they have been registered with the CDC after the approval of the registrars will be destroyed. If some shareholder decides to withdraw his shares from the CDC later on, he will be issued a jumbo certificate for all the shares that he owns. In other words, even if he owns a million shares, he will have just one certificate denoting his ownership with all the relevant details. Among other things this has contributed substantially to reducing expenses for the CDC.
The future
In the future, the development of computerized trading will complement the CDS which is designed to take on the load of the predicted increase in trading volumes. Also there are plans to establish a clearing corporation somewhere down the line which will further bring the three exchanges closer together and geographical boundaries will more or less cease to exist. There is no doubt that this is the future. It may take time to be fully optimized but we foresee no more than simple teething problems. The CDS is the only answer to the myriad problems facing the small investors at the market and several leading brokers are in favor of its early implementation, encompassing all the listed securities.
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Acknowledgment: We wish to acknowledge the kind cooperation of Mr. Najam Ali, Mr. Ejaz Ali Shah and Mr. Mirza Anwar Hussain for their support in the compiling of this article.
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Listing of Securities
All corporate securities like shares, stocks, bonds, debenture etc. are not allowed to be dealt with in the stock exchange. Every stock exchange maintains a list containing the names of selected companies whose securities can be traded in that stock exchange. This list is called official trade list Unlisted securities cannot be dealt in the stock exchange.The company which wants its securities to be traded in a recognised stock exchange should apply to the stock exchange and get its name included in the official trade list.
Meaning of Listing
The inclusion of the name of a company in the official trade list of a stock exchange is called listing. Earlier, listing optional. Listing is now made compulsory for all public companies, however, subject to certain exemptions.
Advantages of Listing
Listing gives the company a higher status. It enables a company to enjoy the confidence of the investing public. By widening the market for the securities it helps the company to raise the future finance easily. It provides price continuity for securities. It facilitates the correct evaluation of securities in terms of their real worth.
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1 The formation of the Central Depository Company (CDC) in 1997 and its role in
creating a transparent, efficient and secure environment for the exchange of securities. The infrastructure provided by the CDC and development of the Central Depository System (CDS) have made public offerings and trading effective and efficient for issuers and investors. The mere evidence that nearly 61% of Oil & Gas Development Corporation (OGDC) and 37% of Southern Sui Gas Corporations (SSGC) Initial Public Offerings (IPO) were subscribed using the CDS highlights their continued effort towards revolutionizing the financial market.
2 The divestment policy of the Government of Pakistan (GOP) by public offer of shares
of state owned enterprises termed Privatization for People have kept investors interests alive in the equities market.
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thebuyers and sellers and help them in making a deal. Brokers charge a commission from both the parties for their service. Brokers are experts in estimating trends of price and can effectively advice their clients in getting a fruitful gain. Brokers get orders from investing public and execute the orders through Jobbers and they are entitled to a prescribed sale of brokerage.
A. Remiser
He acts as an agent of a member of a stock exchange. He obtains business for his principal ie., the member and gets a commission for that service. -189- -190-
B.Authorised clerk
The authorised clerks are mere employees of the members, appointed by the member of stock exchange. The authorised clerks transact business on behalf of their employers on the floor of the stock exchange. They are paid a salary, plus a commission
To promote the savings and for them to be canalized towards of carrying through investment projects that otherwise wouldnt be possible you need that the issuing institution of the securities to be admitted for quoting. The negotiations will be done on the primary market. To provide liquidity to the investors. The investor can recuperate the money invested when needed. For it, he has to go to the stock exchange market to sell the securities previously acquired. This function of the stock market is done on the secondary market.
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To guarantee the legal and economic security of the agreed contracts. To provide official information about the quantities that are negotiated and of the quoted prices. To fix the prices of the securities according to the fundamental law of the offer and the demand.
Specifying a bit more and centering on the two main agents that intervene in the market, investors and companies, we could do the following classification: Functions done by the stock exchange market in favor of the investor:
o o
It permits him the access to the profitable activities of the big companies. It offers liquidity to the security investments, through a place in which to sell or buy securities. It permits for the investor to have a political power in the companies in which he invests its savings due that the acquisition of ordinary shares gives him the right (among other things) to vote in the general shareholders meetings of the company in question. It offers the possibility of diversifying your portfolio by enlarging the field of strategy of investments due to alternative options, as could be the derived market, the money market, etc.
With respect to the function done by the stock exchange market in favor of the companies:
o
It supplies them with the obtaining of long-term funds that permits the company to make profitable activities or to do determine projects that otherwise wouldnt be possible to develop for lack of financing. Also, this funding signifies a less cost than if obtained at other channels. The securities quoted at the stock exchange market usually have more fiscal purpose advantages for the companies.
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It offers to the companys free publicity, which in other way would suppose considerable expenses. The institution is objecting of attention of the media (television, radio, etc.) in case any important change in its owners (the share holders).
There also exists a constant following (newspapers) of the quotations. Therefore we can see how the stock exchange market supposes a great advantage to the companies, but there are also some inconveniences to have in mind:
First of all, they need of a series of conditions to be apt to enter to the quotations, not all the companies that apply can do it. The issuing of shares may suppose a loss of power for the founders of the company. Anyway, this is very relative because it will depend on the grade of atomization on the participations of the new shareholders and of the percentage of shares that the founders keep over the total capital of the company.
If for example a 49% of the share capital is in hands of the founders, these could loose the control of in case the other 51% would be in hands of one main shareholder. However, this rarely happens, due that the share capital that usually goes to the stock market tends to be distributed between a great number of shareholders that acquire modest participations in respect to that of the capital of the company the founders may still keep control with share capital is distributed between a great number of participants.
Now then, the property of these shares implies the possession of certain rights over the company in which you participate.
These are: political rights, among which appears the possibility of participating in the general share holders meetings and in the administration of the company by means of the execution of your rights to vote; and the economic right, which embraces the possibility of receiving dividends, preferential rights of subscription, the transmission of shares (selling) and the right to the liquidity value.
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This last implies that at the moment in which the company is liquidated, what remains is proportionally divided between the shareholders. The possession of all these rights is what reduces the power of the founders.
The shares may pass to be property of unknown people to the founders. At the moment in which they are object of quotations at the stock exchange market any supplier of capital may have them. If its a company that previously knew all its shareholders, considering this as an asset of value to the company. The stock market quotation may generate an important change that will not always be positive.
The companies that are quoted at the stock market offer a better transparency, in a way that the general public may have access to any information related to their evolution and activities.
This makes them have a greater control and to supervise every movement done.
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.
4. Redistribution of wealth
Stocks exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.
5. Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privatelyheld companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat (2003), are among the most widely scrutinized by the media).
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shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.
Conclusion
In comparison to earlier years, currently the stock market is considered a viable investment avenue for individual and institutional investors. This report has presented a history of the market, its trends, its recovery since September 2001 and future expectations of growth. Having analyzed alternative forms of investments available in Pakistan, the KSE today provides higher returns to investors. Despite certain barriers to growth, there exist strong fundamentals, which according to analysts would bring the
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index level to 16,000 points thus making the stock market a profitable investment opportunity
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