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In financial terms the word "market" has a meaning that is conceptual: a market is the interaction
of offers to buy ("bids") and offers to sell ("asks"). Physical location is a detail, and the market
may not have a single location²buyers and sellers may never meet face to face. The critical
component is the existence of the offers. A market maker is said to make a market in an item by
simply standing ready to buy or sell the item. In the extreme there are as many markets as market
makers, but markets can be grouped in various ways. One common grouping is by the item
traded. We will focus on the stock markets, as a part of the broader ¬ 

 ¬markets, using the
plural to indicate that there are many trading mechanisms.

Philadelphia was originally the leading financial center of the United States, with New York and
Boston as less important locations. In New York, trading was conducted in an area near the site
of the wall erected to separate the original Dutch colony from the indigenous inhabitants.
Trading in financial instruments was sparse and haphazard, often occurring through personal
contact in the area coffee houses. In the late 1700s, however, there was increased trading in the
Continental and Colonial war bonds that had been issued to finance the American Revolution.
Brokerage services were offered by some merchants as a secondary activity. On May 17, 1792,
24 New York brokers signed an agreement to trade a restricted list of securities among
themselves, and to charge a fixed commission of 0.25 percent. This was referred to as the
buttonwood agreement because the designated meeting place was in the open near a buttonwood
tree. The arrangement worked, and in the next year the association built the Tontine Coffee
House and moved trading to one of the rooms inside the building. Trading was conducted as a
"call" market. Several times each day the brokers would gather, each in an assigned seat, and the
names of the traded securities would be called out one at a time. As the name of a security was
read, the brokers would orally exchange offers to buy and sell in an "auction" process, until a
price was agreed on.

The buttonwood brokers faced considerable competition from other similar groups and was at
times overshadowed. By the 1860s, 11 exchanges had evolved in New York from outdoor
trading in the "curb markets"²outdoor markets where trading literally took place at the
curbstones, with different stocks being traded at particular lampposts or other similar, agreed
upon locations. In 1869 the original buttonwood association merged with the larger Open Board
and adopted continuous auction trading, rather than the periodic call system originally used. The
much-changed buttonwood association has endured, and still meets near the location of the wall
and the buttonwood tree²the location is now on Wall Street. It uses the name adopted in 1863:
New York Stock Exchange (NYSE). The NYSE is now the dominant, but not the only, U.S.
stock exchange. The remaining New York curb markets went through various associations and
combinations, eventually moving trading inside and merging into what is today the American
Stock Exchange (AMEX). The exchanges in Philadelphia and Boston continue, and a number of
other regional exchanges have come into existence.

Internationally, many exchanges were in existence before the beginning of U.S. markets. Some
of the foreign exchanges are large, and compete with U.S. exchanges for international
investments. The creation of new exchanges continues, particularly in emerging countries.

In addition to the formal, organized exchanges, stocks also trade in an extensive informal over-
thecounter (OTC) securities market. This market does not have a physical location: buyers and
sellers interact electronically. In fact, the number of stock issues traded is larger than the number
of issues traded on the organized exchanges, although both the volume of trades and the size of
the firms traded is generally smaller. For some securities, such as bonds or stock of small firms,
these informal markets are the principal trading mechanism
º
  
  

Securities markets may be classified by role into primary and secondary markets. The primary
market is the process by which new securities are issued and marketed. After the distribution
period, trading of the issue among investors is referred to as the secondary market.

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Capital for growth and new investments is the lifeblood of the firm. Large investors with the
means to invest directly are scarce and difficult to attract. By issuing securities, a firm has access
to a larger number of investors of varying means. This allows the firm to raise larger amounts of
capital at less cost than through seeking direct investment by individuals or from bank loans.
Without a primary securities market, new projects are difficult to finance, innovation slows, and
economic development stagnates.

The process of selling stock to the general public for the first time is called an initial public
offering (IPO). If the firm has previously issued stock to the general public, a new issue is called
a seasoned new issue. Given the infrequency of a stock issue for a firm, and the unfamiliarity of
the corporate financial officers with the complex process, it is logical for the firm to turn to an
investment banker. The investment banker is an expert in public offerings who provides three
services to the issuing firm. The first service is advice. The investment banker knows the
extensive legal requirements and other arrangements surrounding registration and sale of
securities, and guides the firm through the process. The investment banker is familiar with the
securities markets, and can help the firm choose the optimal form of security and design its
terms. The second service is marketing and distribution. The originating banker also provides
price support or stabilization for the issue during the distribution phase, standing ready to buy the
security to prevent or reduce price drops due to temporary imbalances. Notice of a public
offering in the financial press is in the form of tombstones, so named because of the similarity of
appearance. The tombstone describes the security and lists the originating banker and the
members of the syndicate.

The third service provided by the investment banker is reduction of risk through the process of
underwriting. This is perhaps the most important service provided. A public offering is an
important event for a firm, and failure of an offering would be disastrous. In underwriting, the
investment banker guarantees the success of the issue by simply buying the entire issue from the
firm, accepting the risk that the security will not sell at the expected price. There are two reasons
the investment banker can accept the risk of underwriting. First, a syndicate, or temporary
association of investment bankers, is formed to underwrite, market, and distribute the issue. The
originating banker retains a larger portion of the issue and the accompanying risk than other
syndicate members, but this is often a small fraction of the total. Second, although the firm has
only one issue underway, the investment banker is able to diversify, spreading the risk by
participating in many issues. In some cases the investment banker will not accept the risk of the
offering by underwriting. Although underwriting appears to be part of the marketing and
distribution service, it is separable. In some cases the investment banker will decide that the risk
is unacceptable and refuse to underwrite the issue, providing instead a best efforts offering.

In a secondary distribution the stock being sold is not issued by the firm, but is a large amount of
previously issued stock held by an investor. The public offering may be accomplished more
rapidly and perhaps at better prices than piecemeal selling. There are some variations on the
issue process. Since 1982 firms have been permitted to register securities and then sell them
gradually over a two-year period. This shelf registration, so called because the securities are "on
the shelf awaiting sale, is attractive because it is a ready source of capital. Shelf registration is
also thought to have lower flotation costs, because the sale can be timed to take advantage of
attractive market conditions, and small sales avoid the possible depression of prices associated
with large offers. An alternative to a public offering is private placement. In private placement,
the issue is placed with a limited number of investors, usually institutions, instead of being
offered to the general public.

ºº
   

The firm is not directly affected by trading in securities after issue, and only receives proceeds
from the original issue of the security. As a result, it is sometimes thought that the secondary
markets are somewhat irrelevant, a place where investors gamble without any real economic
impact. This view is absolutely wrong. The secondary markets provide the liquidity and price
discovery that are necessary for the existence of an effective primary market.
Liquidity refers to the ability to convert an asset to cash quickly at a price reflecting the fair
(economically rational) value. Both conditions must be fulfilled, since any asset could be
converted to cash quickly if offered at a low enough price. Liquidity in tum depends on three
qualities. Depth is the presence of orders to trade at prices closely surrounding the market price.
Breadth requires that the size of these orders be sufficient to prevent wide price swings, given
trading volume. Resiliency refers to the speed with which mispricing due to temporary supply
and demand imbalances call forth new orders. If these qualities are lacking, the resulting poor
liquidity increases the risk of the buyer, since asset prices will fluctuate around fair value and the
asset may have to be sold at a price below fair value. Under such conditions, investors are
hesitant to invest, will demand a higher rate of retum, and often require extensive safeguards.
These conditions are often apparent in the  

 
market, in which firms that do not
have access to the primary securities markets seek funding. In short, without secondary market
liquidity a primary market for securities would not function well. Even the venture capital
market is aided by the secondary market, since one factor in investing is the likelihood that the
firm will grow enough to accomplish a public offering, so that the stock will become liquid. The
possibility of a secondary offering also encourages participation in public offerings by large
investors. The liquidity provided by an effective secondary market not only supports, but indeed
enables, an effective primary market. It is not surprising that developing countries establish
securities markets, since this mobilizes capital and facilitates economic growth.

Price discovery is the 


of assets. Through trading, an equilibrium price that represents
the consensus of the markets is established. This price is the result of information entering the
market, and it is also information in itself. It is a signal both to investors and to the firm's
  
as to the expected future of the firm. The secondary market affects access to the
primary through the signals from price discovery. If a firm's securities are given a low value,
signaling low expectations, issue of new securities is difficult if not impossible. Even if a
primary issue is possible, the cost of capital for the firm will be high, and the 


of
the firm will be small, slowing growth. In essence, by deciding which firms will receive capital
for new projects, the price discovery function of the secondary markets serves as the capital
budgeting process of the economy, setting its goals, priorities, and future. Rather than being
irrelevant gambling, secondary markets are a vital mechanism in the economy
[

 



The 
 or   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.

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¬
 
Karachi Stock Exchange is the biggest and most liquid exchange in Pakistan. It was declared the
³Best Performing Stock Market of the World for the year 2002´. As of Dec 8, 2009, 654
companies were listed with a market capitalization of Rs. 2.561 trillion (US$ 30.5 billion) having
listed capital of Rs. 705.873 billion (US$ 10.615 billion). The KSE 100TM Index closed at
9645.71 on June 19, 2010.By 30 july total market capitalisation of the KSE reached Rs2.95
trillion,approximately 35 billion dollars

º 
¬ ¬¬
ºc 

The exchange has pre-market sessions from 09:15am to 09:30am and normal trading sessions
from 09:30am to 03:30pm. [2] 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 12, 2009. By 30 july 2010 total market
capitalisation of the KSE reached Rs2.95 trillion,approximately 35 billion dollars.

ºº ü!


The KSE is the biggest and most liquid exchange in Pakistan and in 2002 it was declared as the
³Best Performing Stock Market of the World´ by Business Week. As of December 8, 2009, 652
companies were listed with the market capitalization of Rs. 2.561 trillion (US$ 30.5 Billion)
having listed capital of Rs. 717.3 billion (US$ 12 billion). On December 26, 2007, the KSE 100
Index reached its highest value ever 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.

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 1, 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.

 ºº
 ¬¬

’ º :

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.

’  º:

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.

’ 
 c" :

Angry investors attacked the Karachi Stock Exchange in protest at plunging Pakistani
share prices.

’ 
 c# :

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.

’ 

¬
c:
 KSE 100 Index rose more than 4% after the announcement of the resignation of President
Pervez Musharraf 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.

’ 

¬
º

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.

’    c$:

Trading resumes after the removal of floor on stock prices that was set on August 28 to
halt sharp falls.
Ñ   ¬ 


The Karachi Stock Exchange is maintaining two indices, which are in place i.e. KSE 100 Index
and KSE All Share Index. Both the said indices are market capitalization-based indices. The
KSE 100 Index was introduced in 1991 and comprises of 100 companies selected on the basis of
sector representation and highest market capitalization, which captures over 80% of the total
market capitalization of the companies listed on the Exchange. Out of 35 Sectors, 34 companies
are selected i.e., one company from each Sector (excluding Open-End Mutual Fund) on the basis
of the large market capitalization and the remaining 66 companies are selected on the basis of
highest market capitalization. This is a total return index i.e. dividend, bonus and rights are
adjusted. The same methodology is applicable in the case of All Share Index, which includes all
the listed companies, (except Open-End Mutual Funds).

1. KSE 100 index

2. KSE 30 index

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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

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¬
 
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. 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. The index recovered quickly in 2008, reaching new highs near 15,500 (citation
needed) in April. However, by November 22, 2008 during the global financial crisis of 2008 it
had fallen to 9,187
Ñcº  c  ¬

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, 2008:


     % 
 &'( 

)
&(

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

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

Ñc 
 ¬

KSE began with a 50 shares index. As the market grew a representative index was needed. On
November 1, 1991 the KSE-100 was introduced and remains to this date the most generally
accepted measure of the Exchange. The KSE-100 is a capital weighted index and consists of 100
companies representing about 90 percent of market capitalization of the Exchange. 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 29, 1995 the KSE all share index was constructed and
introduced on September 18, 1995.

ÑcÑ 
*º+
¬¬ c 

’ º :

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.

’  º:

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.

’ 
 c" :

Angry investors attacked the Karachi Stock Exchange in protest at plunging Pakistani
share prices.

’ 
 c# :

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.

’ 

¬
c:

KSE 100 Index rose more than 4% after the announcement of the resignation of President
Pervez Musharraf 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.

’ 

¬
º :

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.

’    c$:

Trading resumes after the removal of floor on stock prices that was set on August 28 to
halt sharp falls.
Ѻ   ,     

The primary objective of the KSE-30 Index is to have a benchmark by which the stock price
performance can be compared to over a period of time. In particular, the KSE-30 Index is
designed to provide investors with a sense of how large company¶s scrips of the Pakistan¶s
equity market are performing. Thus, the KSE-30 Index will be similar to other indicators that
track various sectors of country¶s economic activity such as the gross national product, consumer
price index, etc.

Globally, the Free-float Methodology of index construction is considered to be an industry best

practice and all major index providers like MSCI, FTSE, S&P, STOXX and SENSEX have
adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float
Methodology in 2002.

KSE-30 Index is calculated using the ³Free-Float Market Capitalization´ methodology. In

accordance with methodology, the level of index at any point of time, reflects the free-float
market value of 30 companies in relation to the base period. The free-float methodology refers to
an index construction methodology that takes into account only the market capitalization of free-
float shares of a company for the purpose of index calculation.

Free-float Methodology improves index flexibility in terms of inclusion any stock from all the
listed stocks. This improves market coverage and sector coverage of the index. For example,
under a Full-Market Capitalization Methodology, companies with large market capitalization and
low free-float can be included in the Index. However, under the Free-float Methodology, since
only the free-float market capitalization of each company is considered for index calculation, it
becomes difficult to include closely held companies in the index while at the same time
preventing their undue influence on the index movement.

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’ The Company which is on the Defaulters¶ Segment / Non-Compliant Segment and/or its
trading is suspended, declared Non-Tradable (i.e. NT) in preceding 6 months from the
date of recomposition shall not be considered for inclusion in KSE-30 Index;
’ The Company will be eligible for KSE-30 Index if its securities are available in the
Central Depository System;
’ The Company should have a formal listing history of at least two months on KSE;
’ The company must have an operational track record of at least one financial year and it
should not be in default(s) of the Listing Regulations;
’ The Company should have minimum free-float shares of 5% of total outstanding shares;
 ’ The Company will be eligible for KSE-30 Index if its securities are traded for 75% of the
total trading days;
’ The Open-End and Closed-End Mutual Funds will not be eligible for inclusion in the
KSE-30 Index

Ñ    

The companies which qualify the prerequisites will be selected on the basis of highest
marks obtained as per the following criteria:

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)


The scrip should include in the Top Companies, ranked on the basis of free-float market
capitalization.

The free-float market capitalization for each company is calculated by multiplying its total
outstanding free-float shares with the closing market price on the day of composition / re-
composition.

Ѻ -



The scrip included in the top companies should also be characterized by adequate liquidity i.e.
transaction cost and one of the practical, realistic and accurate measures of market liquidity is

¬
. It is defined as the cost of executing a transaction in a given stock for a specific
predefined order size of fixed rupee amount (currently set to Rs. 500,000). The transaction cost
referred here is not the fixed cost typically incurred in terms of transaction charges or cost arising
through CDC, rather it is the cost attributable to the market liquidity, which comes from buyers
and sellers in the market. Average of the best bid price and the best offer price of a scrip at any
time, called ideal price, is considered as the best price to trade in that particular scrip at that time.
However, every buyer/seller suffers a cost in excess of this ideal price while actually executing a
transaction (buy or sell). This price movement from the ideal price is known as the transaction
cost and when measured as the percentage of ideal price is called Impact Cost.

Under impact cost analysis high liquidity is represented by low impact cost. A stock with high
market capitalization cannot be assumed to be liquid just because of its sheer size. Some large
market capitalization stocks are in reality very illiquid. Similarly, high trading volumes, in
themselves, are not enough to confirm consistent liquidity of a stock.
Impact cost analysis looks at the order book of each stock throughout the whole trading day and
based on the bids and offers calculates impact costs in terms of percentages for each instance of
the order book.
The Impact Cost of each security is calculated as described hereunder:

’ First the impact cost is calculated separately for the buy and the sell side in each order
book for past six months.
’ The buy side impact cost (or the sell side impact cost) is the simple average of the buy
side impact cost (or the sell side impact cost) computed in the last six months.

’ Impact Cost reckoned for the purpose of all computation is the mean of such buy side
impact cost and sell side impact cost.

Ñ 

The scrip should include in Top 30 companies on the basis of final ranking. The final rank is
arrived by assigning 50% weightage on the basis of free-float market capitalization and 50%
weightage to the liquidity based on Impact Cost of the securities. The security having highest
free-float market capitalization and lowest Impact cost is assigned full marks and the marks for
rest of the securities are calculated proportionately.

ÑÑ   
* ¬*

¬
    

The companies selected for inclusion in the KSE-30 Index are determined on the basis of "Free-
Float Market Capitalization" methodology. As per this methodology, the level of Index at any
point of time reflects the free-float market value of 30 component stocks relative to a base
period. The market capitalization of a company is determined by multiplying the price of its
stock by the number of free-float shares determined for the purpose.