WHAT IS 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.

Types of Stock Exchanges:

There are three stock exchanges in Pakistan.

 Karachi stock exchange; formed in 1947

 Lahore stock exchange; formed in 1971

 Islamabad stock exchange; formed in 1989

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

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What is Karachi stock exchange?

The Karachi Stock Exchange or KSE is a stock exchange located in Karachi, Sindh,
Pakistan. Founded in 1947, it is Pakistan's largest and oldest stock exchange, with many
Pakistani as well as overseas listings. Its current premises are situated on Stock Exchange
Road, in the heart of Karachi's Business District.

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

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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.

2008 Karachi Stock Exchange Crisis:

• 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

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 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.

What is the Central Depository?

The Central Depository System is an electronic book entry system to record and transfer
securities. This system changes ownership of securities without any physical movement
of certificates or necessity for execution of transfer deeds. The CDS is normally operated
by a Central Depository Company which records and transfers the beneficial ownership
of securities and works similar to a bank.

Securities will be deposited into the CDS and transactions will be effected electronically,
thereby removing the current need to count, verifies, store and transport countless
certificates. The components of the CDS include the hardware, software, networking
environment, legal frame work, participants and the CDC management.

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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 semi-
scripless system is being used. A specific number of shares have been deposited with the
central depository and the rest are traded physically.

Why do we need the Depository?

There are a number of advantages that the CDS brings with it but there are three main
reasons for the CDS.

The Stock Markets in Pakistan, in the last few years have registered exceptional growth,
especially with the entry of foreign investors in the local market. Trading volumes have
increased manifold and are likely to increase further with the passage of time and the
physical handling of certificates will become more cumbersome and time consuming

Secondly, the current delivery, settlement and transfer procedures have traditionally been
plagued by lengthy delays, risks of damage, loss, forgeries, duplication and considerable
investment in time and capital. Implementation of the CDS will not only minimize these
problems, but also assist in the development of the capital market.

Thirdly, the implementation of CDS in Pakistan will fulfill the recommendations made
by the Group of Thirty, a private international body whose charter is to raise awareness
and understanding of major international and financial issues. Its objective is to
standardize the settlement procedures and reduce associated inherent risks on a global
basis. The most important recommendation made by the Group of Thirty was to setup
securities depositories by major stock exchanges worldwide so as to facilitate delivery

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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.

The current system and its flaws

In the current physical system members face several problems like:

1. Increased volume of book keeping.

2. Increased volume of paper work.
3. Aggravated delivery problems due to increased
volume.
4. Greater risks of forgeries, etc.

Investors also are not totally happy with the current system and face
difficulties like:

1. Large space requirements for safe keeping of

certificates.
2. The requirements as to the time of transfer (could
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.

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 4. Investors' need for checking genuineness of
certificates.

Then the issuers of the certificates have their own set of complaints

1. Problems faced by issuers of securities.

2. Printing and despatch of certificates of new issues
to the allotees.
3. Printing and despatch of certificates consequent to
bonus and right issues.
4. Issuance of duplicate certificates.
5. Large space requirements for storing certificates.
6. 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

How will the CDS help?

Presently, brokerage houses, custodian banks and other financial institutions spend a lot
of valuable time on the physical handling of certificates and paperwork. The CDS will
cause a sharp decline in back office work by providing a convenient, efficient and
reliable means to settle securities transactions. Sudden increases in settlement volume
will no longer make a major impact on back office manpower requirements and not result
in problems of delivery, increased paperwork volume and book keeping.

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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)

The main operations performed in the CDS are as follows:

• 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, sub-
division, consolidation and any other action that changes
the number of securities held in a participant's account or

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 involves the determination of entitlement to beneficial
owners.
• 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.

Who will trade then?

As soon as a company is put on the CDS all physical trade will no longer be possible.
Now it will be the participants who will trade for their clients. These participants will be
limited to securities institutions such as stock brokers, financial institutions and some
qualified private investors. Retail investors will participate through these institutions.

The participants of CDC will be able to settle their transactions within the CDS through
five types of accounts, namely:

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.

House Account: Used for securities owned beneficially by participants. Holding a

house account is optional and any number of such accounts may be created by a
participant.

Sub-account (Client Account): This account is used for keeping securities

belonging individually to each of the clients of a participant. A participant may open any
number of sub accounts he requires and maintain these sub-accounts on behalf of his
clients.

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

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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.

How does it work?

This is perhaps the most common question and pops up in every mind. The first step of
course will be to deposit the certificates in the CDC if a transaction is to be made. The
CDC will declare securities eligible for deposit in the CDS. A participant will initiate a
deposit transaction either on his own behalf or on behalf of his client. The certificates
after due verification by the issuer will be canceled and the nominee holding of CDC will
be increased in the relevant register of the issuer. At the same time, the beneficial owners'
account will be credited in the CDS.

However there are investors who might want to keep their certificates. There is no
compulsion that all certificates be deposited with the CDC. So this option will be
provided by the CDC to cater for investors who prefer to keep certificates. Withdrawn
certificates however will not be eligible to be used to settle a market trade. In order to be
traded in the market they will have to be redeposit into the CDS.

Participants may also apply to issuers or their appointed registrar/ transfer agent in order
to withdraw securities by sending them the prescribed withdrawal form. Sub-account
holders, will affect withdrawals through their participants. Once the withdrawal form has
been approved by the issuer, he will issue a certificate/s in the name of it's beneficial
owner and reduce CDC's nominee holding accordingly.

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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 sub-
account 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.

Corporate actions will be handled by the CDC in the following

manner:

Notice of meetings: The law requires that notice of a general meeting be given by the
issuer to its shareholders at least 21 days before the meeting. The depository will produce
a list of beneficial owners containing the relevant details. This will enable the issuer or its
appointed registrar, to issue notices of meetings to the right people.

Dividends: The CDC will prepare a list of beneficial owners who are to receive
entitlements from the issuer. This report will be prepared on the last day before the start
of the book closure period announced by the concerned company. These lists will be sent

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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

Security and confidentiality

Strict confidentiality is one of the key features of CDS. No unauthorized person will have
access to information, including CDC employees. Legal safeguards will also ensure that
strict confidentiality is maintained. Security measures have been implemented at various
levels. IBM RS/6000 is accessible through a series of passwords. The Local Area
Network (LAN)~~ as well as the Wide Area Network (WAN), have been equipped with
sophisticated protective mechanisms to secure the entire system against piracy or breach
of confidentiality. A series of checks have been installed in the network so as to restrict
unauthorized access and minimize security risk. In addition, backups of the data will be
made daily to reduce data loss risk. The system is connected to a UPS with further
backup by two standby generators. The database also maintains audit trails and log
reports daily. There is a disaster recovery program in the event of disruption of service to
the users.

Unique features of the CDS

There are some unique features to the CDS in Pakistan which have been implemented in
Pakistan. A lot of credit for this goes o the foreign consultant Albert Anderson who had
learnt a lot from the failed Taurus project in England.

One unique feature is that participants will be able to interact independently with the
CDS with no involvement whatsoever of the CDC employees. Their job will be simply to
keep the system up and running. Apart from that all buying, selling pledging of shares
will be done by the participants as per the instructions of their clients.

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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.

The major Pakistani indices:

In Pakistan the main index monitored by investors is the KSE 100™ or KSE 30™. This
index monitors the performance of the 100 and 30 top traded companies (Respectively) in
the Pakistan.

The index’s focus on the biggest and the most liquid Pakistani companies, also known as
‘blue chips’, means it is the one newsreaders and newspapers refer to when they talk
about the performance of the stock market. But the strong returns made by certain
companies within this index means that in recent years it has become heavily dominated
by three major sectors: banks, oils and cement.

KSE All-Share index™ literally measures the performance of all the shares listed on the
Karachi Stock Exchange’s main market. So it includes the KSE 100™, KSE 30™ and
KMI 30™ companies and other medium and smaller companies in a variety of industries
such as media, building and construction and technology, and etc.

Because of the dominance of a few major Pakistani companies, the KSE All-Share™ is
still heavily influenced by the performance of companies in the KSE 100™ and KSE
30™, for example, the KSE 100™ and KSE 30™ together make up the major percentage
of the KSE All-Share™ index by market capitalization.

If you want to get the full picture of what is going on in the Pakistani stock market you
need to not only look at the performance of the KSE All-Share™ and KSE 100™ but
also the KSE 30™ index, which covers the major free float companies in the market.

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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.

Classification of listed securities

Listed securities may be classified into two categories:

(i) Cleared Securities
(ii) Non-cleared Securities
Cleared securities are the securities in which forward trading can be done. So they are
also known as “securities on forward list”. No-cleared securities are traded in spot
transactions. They are called ‘securities in cash list’.

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Factors Affecting Investors Interest in the KSE

In addition to the factors briefly mentioned above, the following factors have and will
continue to have a positive impact on the market, including:

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 Corporation’s (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.

OPERATORS AT STOCK EXCHANGE

Members of stock exchange

a) Jobbers
Jobbers are security merchants dealing in shares, debentures as independent operators.
They buy and sell securities on their own behalf and try to earn through price
changes.Jobbers cannot deal on behalf of public and are barred from taking
commission.In India, they are called Taravaniwalas.

b) Brokers
Brokers are commission agents, who act as intermediaries between buyers and sellers of
securities. They do not purchase or sell securities on their behalf. They bring together

17
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.
Non-members acting for members:
Some non-members with limited rights are allowed to enter the house and to act on
behalf of members. There are two types of such agents.
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

Functions of stock exchange

Although the stock exchange market has multiple functions, its main activities are
two:

o To promote the savings and for them to be canalized towards of carrying

through investment projects that otherwise wouldn’t 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.
o 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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Other functions of the stock exchange market as an organization are:

o To guarantee the legal and economic security of the agreed contracts.

o To provide official information about the quantities that are negotiated and
of the quoted prices.
o 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 It permits him the access to the profitable activities of the big companies.
o It offers liquidity to the security investments, through a place in which to
sell or buy securities.
o 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.
o 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 wouldn’t be possible to develop for lack of financing. Also, this
funding signifies a less cost than if obtained at other channels.
o The securities quoted at the stock exchange market usually have more
fiscal purpose advantages for the companies.

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 o It offers to the company’s 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 it’s 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.

Other Function of the stock exchange:

1. Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public.

2. Mobilizing saving for investment

When people draw their savings and invest in shares, it leads to a more rational allocation
of resources because funds, which could have been consumed, or kept in idle deposits
with banks, are mobilized and redirected to promote business activity with benefits for
several economic sectors such as agriculture, commerce and industry, resulting in a
stronger economic growth and higher productivity levels and firms.

3. Facilitating company growth

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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 privately-
held 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).

6. Creating investment opportunity of small investor

As opposed to other businesses that require huge capital outlay, investing in shares is
open to both the large and small stock investors because a person buys the number of

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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.

7. Govt. capital- raising for development project

Governments at various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or housing estates by
selling another category of securities known as bonds. These bonds can be raised through
the Stock Exchange whereby members of the public buy them, thus loaning money to the
government. The issuance of such bonds can obviate the need to directly tax the citizens
in order to finance development, although by securing such bonds with the full faith and
credit of the government instead of with collateral, the result is that the government must
tax the citizens or otherwise raise additional funds to make any regular coupon payments
and refund the principal when the bonds mature.

8. Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces.
Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial crisis
could eventually lead to a stock market crash. Therefore the movement of share prices
and in general of the stock indexes can be an indicator of the general trend in the
economy.

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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