Professional Documents
Culture Documents
AN ASSIGNMENT
ON
OF
PAKISTAN
Contents
Non security
Security market
market
Stock
exchanges
1. Market:-
A public place where buyers and sellers make transactions, directly or via intermediaries.
Also sometimes means the stock market.
A market is a public place where provision and object are exposed for sale.
2. Types of Market:-
There are two types of Market as following :
Money Market
Capital Market
Money Market:-
In finance, the money market is the global financial market for short-term borrowing
and lending. It provides short-term liquidity funding for the global financial system. The money
market is where short-term obligations such as Treasury bills, commercial paper and bankers'
acceptances are bought and sold.
Capital Market:-
It is defined as a market in which money is provided for periods longer than a year as
the raising of short-term funds takes place on other markets (e.g., the money market). The capital
market includes the stock market (equity securities) and the bond market (debt).
3. Organization of markets:-
A market can be organized as
an auction,
a private electronic market,
a commodity wholesale market,
a shopping center,
a complex institution such as a stock market,
An informal discussion between two individuals.
Markets of varying types can spontaneously arise whenever a party has interest in a good or
service that some other party can provide. Hence there can be a market for cigarettes in
correctional facilities, another for chewing gum in a playground, and yet another for contracts for
the future delivery of a commodity. There can be black markets, where a good is exchanged
illegally and virtual markets, such as eBay, in which buyers and sellers do not physically interact
during negotiation. There can also be markets for goods under a command economy despite
pressure to repress them.
2. Stock exchange
Stock exchange
Introduction Role
Listing of securities
History
Securities
Owner ships
Types of operators
Future
Trading process
Types
1. Introduction:-
A stock exchange, (formerly a securities exchange) is a corporation or mutual
organization which provides "trading" facilities for stock brokers and traders, to trade
stocks and other securities. Stock exchange is a highly organized market where securities
are purchased and sold.
A stock exchange is an organization of which the members are stock brokers. A stock
exchange provides facilities for the trading of securities and other financial instruments.
Usually facilities are also provided for the issue and redemption of securities as well as
other capital events including the payment of income and dividends. The securities
usually traded on a stock exchange include the shares issued by companies, unit trusts
and other pooled investment products as well as corporate bonds and government bonds.
Some stories suggest that the origins of the term "bourse" come from the Latin bursa
meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three
purses), hung on the front of the house where merchants met. However, it is more likely
that in the late 13th century commodity traders in Bruges gathered inside the house of a
man called Van der Burse, and in 1309 they institutionalized this until now informal
meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and
neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351, the Venetian Government outlawed spreading rumors intended to
lower the price of government funds. There were people in Pisa, Verona, Genoa and
Florence who also began trading in government securities during the 14th century. This
was only possible because these were independent city states ruled by a council of
influential citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in business
ventures and get a share of their profits—or losses. In 1602, the Dutch East India
Company issued the first shares on the Amsterdam Stock Exchange. It was the first
company to issue stocks and bonds. In 1688, the trading of stocks began on a stock
exchange in London.
On May 17, 1792, twenty-four supply brokers signed the Buttonwood Agreement outside
68 Wall Street in New York underneath a buttonwood tree. On March 8, 1817, properties
got renamed to New York Stock & Exchange Board. In the 19th century, exchanges
(generally famous as futures exchanges) got substantiated to trade futures contracts and
then choices contracts. There are now a large number of stock exchanges in the world.
3. Securities:-
The securities traded on a stock exchange include:
Supply and demand in stock markets is driven by various factors which, as in all free
markets, affect the price of stocks.
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off exchange or
over the counter. This is the usual way that derivatives and bonds are traded. Increasingly,
stock exchanges are part of a global market for securities
Shares:-
The total authorized capital in the company is divided into small units and each is
individually called “Share”. You can buy large or small lots to match the amount of money
you want to invest. When the company does well, its shares can rise in value. If the
company hits a bad patch, its share can fall in value. The shares are considered as the main
source to raise company’s capital.
Share Holder:-
The people who provide finance to company by purchasing shares are called shareholders.
Types of shares:-
1. Preference Shares:
These are shares whose holders have preferential rights in respect of the payment of
dividend and repayment of capital in the event of winding up. The rate of dividend on these
shares is fixed. There are further two types of preference shares.
Cumulative preference shares: If the profit if company is not enough to pay dividend on
any kind of shares at the end of financial year than the right of dividend on these shares
accumulates until all arrears of unpaid dividend have been paid.
Non-Cumulative preference shares: These are the shares on which if dividend is not paid
out of current years profit in any year then it is never paid.
2. Ordinary Shares:
These shares are the shares on which dividend is not paid at fixed rate. Ordinary
shareholders receive the dividend proportionally out of profit earned by the company after
the payment of fixed dividend on preference shares.
3. Deferred Shares:
The share issued to promoters of the company is called deferred or founders shares. The
dividend on these shares is paid after the payment of dividend on all other types of shares.
1. Brokers:
A broker is a member of the stock exchange. He buys and sells the securities on the behalf
of the outsiders who are not the members. He charges brokerage for his services. He does
not specialize in any particular security. He buys sells all types of securities according to the
orders placed by his clients.
2. Jobbers:
The jobber is a member of stock exchange but he buys and sells securities on his own
behalf. He is a dealer in securities. He usually specializes in one type of security. His
income comes from the profit or price difference in the purchase and sale of securities. A
jobber normally deals for himself but he is not prohibited from buying and selling securities
on the behalf of others.
3. Bulls:
A bull is a speculator who expects a rise in prices. Therefore, he buys securities with a view
to sell them in future at a higher price thereby make profit. When the conditions in the stock
exchange are dominated by bulls, it is called a “bullish market”. When the prices fall and
bulls have to sell at loss, it is called “bull liquidation”.
4. Bears:
A bear is a speculator expects fall in prices. Therefore, he sells securities for future delivery.
He sells securities, which he does not possess. He sells with the hope to buy the securities at
lower price before the date of delivery. The efforts of bears to bring down the prices
artificially are known as “bear raids”. When bears dominate the market, it is called a
“bearish market”. When prices are rise and bears have to make purchases to meet their
commitments, it is called “bear covering”.
In order to purchase or sell securities on a stock exchange, the following steps have to
be taken:
1. Selection of Broker:
A broker is a member of stock exchange and securities can only be purchased and sold
through him. After selecting the broker the investor has to convince the broker to buy or sell
securities on his behalf. For this purpose, the investor may have to make an advance or give
references of a bank or some other persons.
The stock broker simply acts as agent and contacts the particular jobber in the stock
exchange on behalf of the client. He does not disclose to the jobber whether he is a buyer or
seller of shares. He therefore, asks him to quote two prices:
For Example, Mr. Ali wants to sell one thousand shares of a Company. He contacts a broker
dealing on the stock exchange. The broker asks a jobber to give quotations. He does not
disclose the jobber whether he wants buy or sell the shares of a company. The jobber gives
two prices, one at which he is willing to sell and the other at which he is ready to buy. For
instance, the two quoted prices are Rs.21.90 and Rs.22.00 in a thousand. This means broker
is willing to purchase at Rs.21.90 and sell at Rs.22.00 per share. If the broker is not
satisfied, he can go to another jobber or ask the first one to make it closer (i.e. to reduce the
margin between buying and selling). If the broker is satisfied with the new quotation, he
then contacts with his client informs him the bid of the share. If the client agrees to the bid
price, then bargain is struck
The stock broker prepares a contact note, one copy of which is given to the client; second
one to the jobber and the third remains with the broker. The contact note generally contains
the following information:
4. Settlement:
In case of ready delivery contract, the buyer pays the money and the seller delivers
the securities one same day.
In the case of forward delivery contracts settlements are done in a week or once in a
month.
On the settlement day, the difference in the purchase and the sell price may be paid without
any delivery of securities. The parties may also postpone the deal to the next settlement date
through mutual consent. This is known as “carryover” or “budla”.
6.Role of Stock Exchange in economy
Stock exchanges have multiple roles in the economy, this may include the following:
The Stock Exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public. It induces people to save and invest in
securities. There is regular publicity of its operations, which encourages savings and
investments. People know that when they need money, they can easily sell there securities
on stock exchange. Therefore, they are more willing to invest there savings in securities.
Thus a stock exchange serves as an instrument for raising capital.
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 stronger
economic growth and higher productivity levels and firms.
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. The dot-com
bubbles in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical
examples of corporate mismanagement. Companies like Pets.com (2000), Enron
corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002),
MCI WorldCom (2002), Parmlat (2003), American International Group (2008), Lehman
Brothers (2008), and Satyam Computer Services (2009) were among the most widely
scrutinized by the media.
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 shares they
can afford. Therefore the Stock Exchange provides the opportunity for small investors to
own shares of the same companies as large investors.
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.
9. Regulation of companies:
Stock exchange provides employment opportunities to the jobbers and other members who
perform there activities in the stock exchange. So it is an important source of employment
not only for investors but also for the members and there employees.
After the scrutiny of application, if the stock exchange authorities are satisfied, they call
upon the company to execute the ‘listing agreement’. The listing agreement contains the
following conditions and obligations:
1) The company must be fair to all the applicants for shares. In the case of over
subscription, no undue preference will be shown to any particular class of applicants.
2) To notify stock exchange about the date of the board meeting at which decision of
dividend is taken.
3) To forward the copies of its annual accounts duly audited to the stock exchange.
4) To notify the stock exchange, about any material change or nature or feature of the
company’s business.
5) To notify the stock exchange any change in the capital of the company.
7) To comply with all the requirements of the listing agreement and not to commit any
breach of any condition.
8) To notify the stock exchange of any occasion this will result in redemption or
cancellation of any listed security.
The ECNs contend that an array of special interests profit at the expense of investors in
even the most mundane exchange-directed trades. Machine-based systems, they argue, are
much more efficient, because they speed up the execution mechanism and eliminate the
need to deal with an intermediary.
Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all
exchanges) has been slow to respond to technological innovation, thus allowing growing
pure speculation to continue. Conversion to all-electronic trading could erode/eliminate the
trading profits of floor specialists and the NYSE's "upstairs traders", who, like in September
and October 2008, earned billions of dollars selling shares they did not have, and days later
buying the same amount of shares, but maybe 15 % cheaper, so these shares could be
handed to their buyers, thereby making the market fall deeply.
William Lupine, founder of the Instinet trading system and the Optima system, has been
quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast
once you reach the tipping point. We're now at the tipping point."
One example of improved efficiency of ECNs is the prevention of front running, by which
manual Wall Street traders use knowledge of a customer's incoming order to place their
own orders so as to benefit from the perceived change to market direction that the
introduction of a large order will cause. By executing large trades at lightning speed without
manual intervention, ECNs make impossible this illegal practice, for which several NYSE
floor brokers were investigated and severely fined in recent years Under the specialist
system, when the market sees a large trade in a name, other buyers are immediately able to
look to see how big the trader is in the name, and make inferences about why s/he is selling
or buying. All traders who are quick enough are able to use that information to anticipate
price movements.
ECNs have changed ordinary stock transaction processing (like brokerage services before
them) into a commodity-type business. ECNs could regulate the fairness of initial public
offerings (IPO’s), oversee Hambrecht's Open IPO process, or measure the effectiveness of
securities research and use transaction fees to subsidize small- and mid-cap research efforts.
However, believe the answer will be some combination of the best of technology and
"upstairs trading" — in other words, a hybrid model.
Trading 25,000 shares of General Electric stock (recent quote: $7.54; recent volume:
216,266,000) would be a relatively simple e-commerce transaction; trading 100 shares of
Berkshire Hathaway Class A stock (recent quote: $72,625.00; recent volume: 877) may
never be. The choice of system should be clear (but always that of the trader), based on the
characteristics of the security to be traded.
Even with ECNs forming an important part of a national market system, opportunities
presumably remain to profit from the spread between the bid and offer price. That is
especially true for investment managers that direct huge trading volume, and own a stake in
an ECN or specialist firm. For example, in its individual stock-brokerage accounts,
"Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37%
of its undesignated market orders through the Boston Stock Exchange, where an affiliate
controls a specialist post."
Function of SE
An organization
In favor of investor
In favor of companies
The functions of stock exchange are as following
1. Main activities:
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.
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.
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:
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.
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.
The securities quoted at the stock exchange market usually have more fiscal
purpose advantages for the companies.
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).
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.
This last implies that at the moment in which the company is liquidated, what remains is
proportionally divided between the shareholders.
5. 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.
3. Major stock exchange
World major SE
Regions
Twenty Major Stock Exchanges In The World: Market Capitalization & Year-to-date Total
Turnover at the end of August 2009
Market Value Total Share
Region Stock Exchange (millions Turnover
USD) (millions USD)
Asia-
Australian Securities Exchange 1,066,513.2 560,912.8
Pacific
Asia-
Bombay Stock Exchange 1,082,572.0 171,176.2
Pacific
Asia-
Hong Kong Stock Exchange 1,945,517.7 970,227.6
Pacific
Asia-
Korea Exchange 727,125.3 1,050,473.8
Pacific
Asia-
National Stock Exchange of India 1,019,109.0 506,652.3
Pacific
Asia-
Shanghai Stock Exchange 2,142,756.8 3,315,768.5
Pacific
Asia-
Shenzhen Stock Exchange 596,320.2 1,701,256.8
Pacific
Karachi stock
exchange (KSE)
Lahore stock
exchange (LSE)
Islamabad stock
exchange (ISE)
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.
Trading System
The Karachi Stock Exchange has introduced a state-of-the-art computerized trading
system known as Karachi Automated Trading System (KATS) to provide a fair,
transparent, efficient and cost effective market for the investors.
Currently, the exchange conducts one trading session from Monday to Thursday and
two sessions on Friday. The Trading is divided into four distinct segments, each of which
has its own clearing and settlement procedure. These are: T+3, Provisionally Listed
Companies, spot (T+1) Transactions and Future Contracts.
History:-
The Islamabad Stock Exchange (ISE) was incorporated as a guarantee limited Company on 25th
October, 1989 in Islamabad Capital territory of Pakistan with the main object of setting up of a
trading and settlement infrastructure, information system, skilled resources, accessibility and a
fair and orderly market place that ranks with the best in the world. The purpose for establishment
of the stock exchange in Islamabad was to cater to the needs of less developed areas of the
northern part of Pakistan.
The ISE Towers comprise twin 22 storey towers with unique and inspiring amenities, offer
futuristically and aesthetically designed offices with panoramic views, is being constructed over a
piece of land measuring 5600 square yards in the heart of Islamabad at Jinnah Avenue (Blue
Area) which is the hub of all business and commercial activities in Islamabad. The building is
facing 400 feet wide Jinnah Avenue on one side and has another entrance from 100 feet wide
Nazimuddin Road, besides breathtaking scenic view of the Margalla Hills and the city from the
building.
At present there are 119 members out of which 93 are corporate bodies including commercial and
investment banks, DFIs and brokerage houses. The other 26 Members are individual persons who
are well educated, enterprising and progressive minded. The affairs of the Exchange are governed
by the Board of Directors. The Board of Directors consists of ten directors, of which five are
elected member directors and four are non-member directors nominated by the SECP while the
managing director by virtue of his office is the tenth director of the Board. In order to protect the
interest of the investing public, an Investors Protection fund has been established by the
Exchange.
Since the inception of automated trading system (ISECTS), the trade volume has been
multiplying day by day and the average daily turnover has now crossed the figure of 1 million
shares. Now all the listed securities are traded through the ISECTS. The system of physical
handling of shares and securities has been phased out and majority of the scrip’s are settled
through Central Depository Company of Pakistan Limited.
At the moment there are 241 companies/securities listed on the Exchange with an aggregate
capital of Rs. 389.512 billion. The market capitalization stood at Rs. 2,275.00 billion as on 04-04-
2007 . The pace of listing has remained slow as the economy of the Country is under consistent
pressure due to internal as well as external factors.
In comparison with major financial markets around the World, the functioning of capital market
in Pakistan is still very much in its infancy and lacks advanced technology.
References:-