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What is the Stock Exchange

What is the Stock Exchange


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What is the Stock Exchange
What is the Stock Exchange

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Published by: abdulhadiqureshi on Dec 13, 2008
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HISTORY/BACKGROUND 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 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 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. 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. 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

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 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. 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. 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. The Stock Exchange can be also seen as a control to regulate the Marketplace where listed public companies and traders buy and sell shares.

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. 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 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. 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 savings scheme always stays the same e.g. if you start with Rs.100,000 you will always have Rs.100,000 (other than any interest earned).changes in value according to the performance of 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, the share price may go down and the value of your investment will be reduced. Other factors, such as the performance of the stock market as a whole and the general economic climate, may also affect the price of your shares. Investment in shares is therefore investment in ‘risk capital’. The shareholders can be rewarded for taking this risk and the potential

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 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. 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 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. 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”. The aim of investing in stocks and shares is to buy at a low and sell at a high, but knowing when, is the problem. Many investors attempt to time the market: they try to figure out when the market is going up and buy into it before it does, and then figure out when it is going to crash and sell everything just before it does. Unfortunately such spot

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 listings look confusing at first, since they look like a mixture of numbers, but can be a very useful tool when tracking your stock's progress. The listings are organized into many columns, including the following information: Company name: This field is usually abbreviated in the listings, and listed 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. In addition to the stock listings, other useful information about companies is available in the Annual Reports that reflects the balance sheet, income statement and cash flows and states the reasons for changes in these financial statements during the year.

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 is very easy for the stock broking society but complex for the ordinary investor. History says Badla was born in the nineteenth century. Then, till today, the purpose has remained the same, the mechanism has hardly changed but the process has. These changes have made Badla Finance 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 forward to the next settlement. Here is where the client / Badla financiers steps in. The financier's block the money for taking delivery of shares purchased by the speculators. He gives the money to the exchange for shares bought. For this facility the speculator 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 same. "A" would like to carry forward his position to the next settlement by letting "C" (Badla Financier) take delivery at 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.

ORGANIZED READY MARKET: Stock exchange provides an organized ready market where the share of the enlisted join stock

companies are freely brought and sold through brokers and jobbers. It facilitates the marketability of shares. TURNING INVESTMENT INTO CASH: When a person purchases 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 facility to the security holders to cash their investment at a 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 central source of information on market activity and 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 TO CAPITAL FORMATION: The economy of every country 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. PROPER EVELUATION OF THE SECURITIES: The price of 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 of securities for the information and guidance of buyers and sellers. PROFITABLE USE OF CAPITAL: The market data of value of securities provided by the stock exchange enables to investors to shift the capital from non profitable concerns to the profitable once. This is really a great service from the investors point of view provided by the stock exchange. LOAN OPPORTUNITY: The securities purchase through the stock exchange can be used as security for taking loans from the commercial banks. INVESTMENTS BY BANKS: The stock exchange also provides opportunity to the commercial banks to invest their funds in the purchase of shares. As these securities are easily marketable and can

be cashed at any time, the banks are therefore able to maintain profitability as well as liquidity. FACILITIES FOR SPECULATION: Stock exchange enables genuine speculators to speculate and earn profit through fluctuations 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 against inflation because the yield on equity investment is comparatively higher than on prevailing deposit rates. PROFIT: By investing in shares one participates in profits of the company which are distributed by way of dividends. In addition to this bonuses or right shares are also issued by the company. EMPLOYMENT OPPORTUNITIES: By investing in shares one participant in industrial development and creates unemployment opportunities in the country.

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 had been estimated at 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 situation coupled with deteriorating law and order situation in the northern part of the country and the US threats of direct attacks in tribal areas, have not only shattered the confidence of foreign investors but also pulled out the local investors from the equity markets of the country. These major issues had pushed down the KSE-100 index from life high at 15,676 points recorded on April 18 to 10.491 points, reflecting a big decline of 5,185 or 33 per cent. On the other hand, so far KSE 100-Index saw decline of 1,204 points in three trading after the restoration of 5 per cent lower lock limit. “At the time market is quite unpredictable but good news and support of government by establishing proposed equity market fund can prop

up the stock market because local investors have already invested 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 increase in discount rates, fragile law and order situation 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,” Siddique said “All eyes are now on today’s meeting between SECP and stock 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,” Siddique said

1. Capitalization The amount of money invested in a company or the worth of the bonds and stocks of a company. 2. Fragile economic situation Economic Situation refers to GDP, GDP per capita, Inflation, and Dollar Price. There can be high inflation and low GDP. These sort of economic situation can affect the Stock Market in real sense. 3. Political uncertainty

Political Uncertainty causes the stock market to go down even to crash the market. 4. Foreign investors The role of foreign investment is important in Stock Market 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 and political uncertainty. 6. Equity markets It is the Market related to Capital Market.

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 reports books, newspaper, and the help taken form the CEMINAR library of SHAH ABDUL LATIF UNIVERSTITY KHAIRPUR and he central library of SHAH ABDUL LATIF UNIVERSITY. The primary data will be collected through the interviews surveys through the little speculators at least from the 15 small speculators.

6. SCOPE OF THE RESERCH: The data collected from the l
local share market of SUKKUR and the interview collected from the lower speculators 6.1 RESERCH LIMITATION: The limitations were for completing the research was of 2.5 months the researcher has received this data through the well behavior of the small speculators. And researcher will also thank them for good co-operation.

7. BIBLOGRAPHY: The data collected from the following
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 news channels are GEO NEWS, ARY ONE, AAJ TV and SAMMA )

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