Why Investors Not Investing in The Stock Market

Why investors not investing in the Stock Markets
_______________________________________________________________________ _
INSTITUTE OF BUSINESS AND TECHNOLOGY Why Investors Not Investing in the Stock Market Prepared By Noman Jamil BM/25029 Course Code : MKT-606
MBA (Banking and Finance)
FACULTY OF MANAGEMENT AND SOCIAL SCIENCES FALL- 2010
Institute of Business and Technology
_______________________________________________________________________ _
TABLE OF CONTENTS
Page No. ACKNOWLEDGMENT01 ABSTRACT. 02 CHAPTER NO.1 INTRODUCTION
1.1 1.2 1.3 1.4 Introduction.. 04 Purpose of Study 05 Research Objective 06 Research Methodology . 06
CHAPTER NO. 2 LITERATURE REVIEW

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Pakistan and Gulf Economist 08 Investment opportunities in Pakistan .. 08 Where to invest your money ..09 Ten commandments .. 16 Stock screening basics....18 Einsteins rule of 72 .19 Stocks or Bonds .. 19 Ways for individual to invest in stocks ..... 20
CHAPTER NO.3 FINANCIAL SYSTEM

3.1 3.2 3.3 The Financial System 22 Functions of Financial System .. 23 Importance of Financial System .. 25
CHAPTER NO.4 STOCK MARKET & INVESTMENT

4.1 4.2 4.3 Stock Markets in Pakistan ......... 27 Sector wise Investment ..... 36 Present and Future Prospects ...... 41
CHAPTER NO.5 PROBLEMS OF PAKISTANS STOCK MARKET

5.1 5.2 5.3 Economical ... 44 Political. .. 45 Tax Issues .. 46
_______________________________________________________________________ _
CHAPTER NO. 6 REASEARCH ANALYSIS

6.1 Analysis and Interpretation of Data .. 48
CHAPTER NO. 5 CONCLUSION AND RECOMMENDATIONS

. 7.1 7.2 Conclusion 65 Recommendations ..... 66
BIBLIOGRAPHY .............. 67 ANNEXURE
_______________________________________________________________________ _
ACKNOWLEDGMENT
At the completion of my research project I would like to thank God Almighty for giving me the power, energy and guidance to do this research study. I would then like to thank my resource person, Mr. Dr. NOOR MEMON for giving me this opportunity to carry out this project. I would like to thank him for all his help and guidance. Last but not the least, I would like to thank my family and friends for being there for me whenever I needed then for bearing with me all the way through.
_______________________________________________________________________ _
INSTITUTE OF BUSINESS AND TECHNOLOGY

ABSTRACT SUBMITTED BY: Noman Jamil
DISCIPLINE:
MBA (Banking & Finance)
TITLE OF PROJECT REPORT:
Why investors not Investing in the Stock Markets
MONTH OF SUBMISSION:
November, 2010
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon ABSTRACT We are led to believe that the best place to invest our money is in the stock market. Low barriers to entry, low barriers to exist, plenty of information, high probability of success in the long run and a lot of success stories. We also hear some of the horror stories of people who day traded tech stocks in the early 2000s, gamblers who lost it all on penny stocks. Most of the people in Pakistan do not invest in stock markets cause of fear of loss and the economical condition of country. political uncertainty is another factor which s un negligible. The thinking involved before making a decision to invest in stocks includes how to actually do it and in what stocks to invest. First someone has to decide whether he is willing to take on some risk and place his money on a stock that he hopes will increase in value. Due diligence by investigation of the company along with a study of it's history are critical factors. No one should just take a chance and invest in a company simply because it has been in business a long time. Thought is also required regarding how much of a role his stock investments will play
Institute of Business and Technology 5
_______________________________________________________________________ _ within his entire investment portfolio. Also, if he is a first-time investor, he will have to register with a brokerage firm before buying stocks or making trades. Investing in the stock market has one overriding goal: to make money. A typical reason why people will choose to invest in stocks rather than other avenues can be because he likes a specific industry or company. . Excitement and thrill are factors as well, with anticipation of hitting it big by owning a piece of a company he likes and having the opportunity to flourish with it. Stocks provide but one avenue of investing. There are corporate and government bonds available, which are considered less risky than stocks but typically offer smaller returns, that are commonly found in portfolios. Investing in commodities such as gold or silver is yet another avenue, as is real estate, while some choose to invest in themselves through self-employment. Many investors have a diversified portfolio as a protection, so that if one form of investment takes a downward turn, there is still opportunity that the other instruments will be doing well and dampen the loss. Stocks are considered to be one of the most risky investments but also offer a chance to reap large rewards as the continuation of this opportunity remains prevalent.
_______________________________________________________________________ _
01. INTRODUCTION
1.1 Introduction: Stock exchange is of the powerful financial institutes. By 1995, over 60 developing countries had established although these varied considerable in size in terms of number of companies listed and market capitalization. Stock market not only helps investors their money but also provides their significant funds to different companies. Whenever a company needs funds for investment in its operation/business, it either raises debts/loans or invites equity/capital from the investors. When funds are raised through equity/capital, investors in acknowledgement of the portion of their investment are made the shareholder of the company and issued share certificates as a proof of their ownership in the company. Stock ownership has provided the greatest investment opportunity to the largest number of people over time. Now whenever a certain shareholder of the company wishes to sell all or part of her/his holdings, he or she can only do so through the stock market. Likewise, anyone willing to buy the shares of the company can do in the stock market. Other then stock market there are different financial institute, which provide fund to company like banks or corporate bonds. Similarly, investors are investing in different financial institute/schemes like bonds, saving certificates, banks.
_______________________________________________________________________ _ 1.2 Purpose of Research:
There is a lot of mystery in the minds of people, who are new to working with the stock market. There is the fear and concern of possibly losing hard earned money, coupled with the wonder and excitement of building large profits. Even though, people do invest in different market/schemes. They find the specific market/scheme according to their needs and put their earned money there. It is an observation that some of people, who are potential investors or who are investing in any form, are not trading in stock market. This research is specially focused on finding factors that are stopping any investor to invest in stock market. It is important to know that one can start buying stock with just few rupees a month. As one start with a small amount, a lot of experience is not required. Person knowledge and experience will increase as the amount of money you invest grows. Above all stock provide highest return on investment with greater risk. Frequent substantial political, economical and social changes make of an adventurous nature. Due to the adventurous nature of these securities, returns can sometimes be handsome, making them attractive to investors willing to tolerate risk. However, the downside danger can be substantial.
_______________________________________________________________________ _ 1.3 Researched Objectives: Following are the objectives of this research project. 1. To find out the awareness of stock market among the people. 2. To identify why any investor does not invest in stock market. 3. The factor which are affecting investors decision. 4. To determine what investors want out of his money that he/she invested.
1.4
Research Methodology:
In any survey, the methodology employed is crucially important, as the local people are reluctant to reveal any pertinent information to the surveyor. To overcome this problem a unique method of investigation was required. The required information had to be gathered in a way, which meets all the objective requirements with a high degree of accuracy. Measurement instrument that is used in research is questionnaire. A questionnaire is a list of planned, written question related to a particular topic, with space provided for indicating the response to each question, intended for submission to a person for reply. Questionnaire contains 24 relevant questions.
_______________________________________________________________________ _ 1.5 Methods in Data Collection:
The most important aspect of any trade survey is the accuracy of information. To meet the requirements of the method of data collection used involved formal questionnaire. The researchers posed themselves as young aspiring businessmen willing to know why investors are not investing in stock market. Only those people, who seem to have enough financial and education capability to invest, were given questionnaire. If questionnaire is given to the individual who later ineligible to invest, his filled questionnaire is discard from overall survey and results. Sixty questionnaires were distributed out of that only 72 responded. A Survey research where information was collected directly from respondent at the following geographically segmented location: 1. Clifton 2. Defence 3. KDA 4. Tariq road & P.E.C.H.S 5. North Nazimabad 6. Gulshan-e-Iqbal
10
_______________________________________________________________________ _
02. LITERATURE REVIEW

Local Literature:
2.1 Pakistan and Gulf Economist: Equities offer an incredibly high yield at present. To support their argument say that Board meetings of most of the companies are scheduled in December and a large number of companies may declare very attractive dividend. They say that last nearly 375 companies declared dividend amounting rupees 32 billion and most of them announce similar result for the 2006, at least Investment in mutual funds may be the best for individuals. Since mutual funds have a diversified investment portfolio, selection of scrip is based on economic fundamentals and managed; probability of substantial losses is relative low. Analysts often suggest that investors must look towards equities market. Cover story: Where to invest your money, 22nd October, 2006, page16 2.2 Investment opportunities in Pakistan: A seminar organized by Harvest Group By Faraz Siddiqui Pakistan is among the developing economies of world with emerging markets, stock market is one of them. Emerging stock and forex markets in developing countries have become an important and highly accepted investment tools. Due to its significant Harvest Group has organized a seminar on Investment Opportunities in Pakistan. Presenting the introduction of Harvest Group, Mr.Ziaullah, Marketing Manager Harvest Group said, Harvest Group is an international entity with specialized services of Forex and securities trading. It was established in 1992 and in a very
11
_______________________________________________________________________ _ short of time it becomes a worldwide Forex and security brokerage house of international standard. In Pakistan HG operates two partnerships Harvest Top worth International (HTW) and Harvest Smartrend Securities (Pvt) Limited (HSS). Bhatti further said, HTW is the Forex Brokerage Arm of Harvest Group which is pioneer of Forex Brokerage in Pakistan with the largest setup. While HSS is a stock brokerage house which offers a wide range of services for the investments in the stock markets. He further said, HSS is the only stock brokerage house in Pakistan Stock market information through Reuters Systems. Enlightening the insights of exciting world of stocks, Humaira Jamil, Research Analyst at Harvest Group Lahore, said, Pakistan has sample investment opportunities being an emerging market. All the stocks markets in Pakistan are emerged markets. She further said, stock business is highly regulated industry which is managed first by stock exchange itself, then Central Depository System and finally Securities Exchange Commission of Pakistan. From March 2000 onwards, KSE has been facing huge losses but now market is slowly recovering and coming back on the track. She further said, in depth analysis of the market behaviour reflects that market has strength to sustain higher level with the years to come. 2.3 Where to Invest Your Money?
Attractive investment opportunities a must for boosting savings rate
By shbbir h. Kazmi
Oct 30- Nov 05, 2000 Pakistan needs large scale investment for acceleration the economic growth rate. The objective cannot be achieved without boosting investment in productive activities. T quantum of investment is largely dependent on the savings rate that is driven by the philosophy incentive for savings. The declining returns on National Savings Schemes (NSS) and mark-up being paid by financial institutions and high rate of inflation have become serious impediments for boosting savings rate.
12
_______________________________________________________________________ _ Historically, people used to keep their savings with commercial banks either as time deposits or in their savings accounts. Investments in NSS products, currencies, gold, real estate and commodities were other available options. However, with the recent declining trend in return on bank deposits and NSS products, people are in desperate search for other alternatives. The quest is also supported by the Supreme Court judgment regarding abolishing RIBA from the economy. Even much earlier, than the day this judgment was announced, a large number of people were in search if interest free financial products. There was a pressure on financial institutions to come up with RIBA free products. Though the initiative was taken as back as early eighties, the lack of commitment, uncertainty and dearth of expertise did not allow the financial institutions in the country to come up with financial products truly based on Islamic injunctions. Investment in NSS products, despite yielding lower return, is still considered most secure because of being backed by the government. The investors in these products mainly comprise of widows, old people and those who are interested in getting fixed and/or regular income. However, they feel a pinch now due to reduction in rate of return.
Bank Deposits:
Domestic and foreign commercial banks, put together, have an
elaborate network of branches throughout the country. Almost each bank has its own niche market and has its own strength and weakness. Deposits with banks are perceived secure. This perception has helped the banks in mobilizing low cost funds and earn high yield by investing the funds in T-Bills/government securities. In last couple of years the scenario has changed to a large extent. With the growing competition among the banks in resource mobilization, reduction in T-Bills yield, foreign currency deposits being expensive and low demand for credit, the return on PLS account and time deposits are on a constant decline and do not commensurate with the with the rate of inflation in the country. However, as a result of the recovery campaign of November 1999 large scale restructuring of loans and change in the rules regarding provisions
_______________________________________________________________________ _ against doubtful loans, commercial banks are expected to pay better return on deposits. To maintain deposits level almost every bank is trying to come up with innovative financial products to suit the needs of various groups. Now financial institutions offer various products which have the advantage of daily calculation of mark-up to advance profit payment. This clearly indicates that these institutions have realized the need of various income groups and have started offering products to suit the needs of each group. Thanks to growing competition foe resources mobilization that has also forced the banks to optimize operating costs to enable themselves to offer competitive return. While the return on deposits may be comparable, the inflow of deposits is dependent on a number of other factors. These include: branch network, quality of service and other fringe benefits. These factors often playa decisive role in selecting a bank or branch when one has to make a selection. After the freezing of foreign currency accounts in May 1998, the preference for dollar deposits has come down considerably. Even the banks discourage maintaining such accounts, at times, due to higher exchange risk cover. Some of banking sector analysts says that it was not the rate of return on deposits but the probability of gains due to persistent rupee depreciation that encouraged people to accumulate dollars. Yet another reason was preference of dollar deposits as the most acceptable collateral by banks. The recent dollar buying spell was also due to expectation of massive devaluation of rupee. The buying pressure led to exchange rate volatility which further intensified the lust for accumulation of dollars. However the volatility has reduced to a large extent and the difference between kerb and official rates is expected to come down further once the inflow from multilateral resumes.
Capital Market:
As the returns are going down, it has become imperative that
people should not look towards bank deposits/NSS only. Mutual funds, equities and debt instruments, currencies, real estate and gold should also be considered for investment to maintain a diversified investment portfolio to earn higher return.
_______________________________________________________________________ _ Each option offers opportunities and has pitfalls. While services of investment consultants may be available in the country, the ultimate responsibility of making prudent decision lies with the investor. According to ARIF HABIB, Chairman, Karachi Stock Exchange, with the increasing number of listed companies and large capital base corporations the daily trading volume has increased manifold over the years. It is mainly due to better market information, brokerage house opening more and more branch offices and printing exhaustive reports about the performance of listed companies. It is also because of improved infrastructure and market efficiency. ARIF said that despite a negative perception about equities market, performance of various sectors is worth mentioning. Net assets values of a large number of companies have improved over the years. Still, many scripts are selling at a discount and prices are very attractive. As the signs of economic revival have started appearing there are prospects for better dividend yield. Over the last couple of years number of companies declaring cash dividend is on an increase. To make the equities market more efficient and attractive the Securities and Exchange Commission of Pakistan (SECP) is trying hard to play its due role. This has improved corporate governance, encouraged greater disclosure and also helped in restoring confidence of investors. However, according to ARIF, a lot has to be done to improve market efficiency. Creation of Central Depository, KATS, display of real time information and monitoring of brokers behavior have further consolidated the confidence of investors which will lead to large investment in equities and debt instruments. Debt instruments, mainly Term Finance Certificates (TFGS), have been floated. They offer the advantage of fixed income. Individual investors are still reluctant to invest TFGS due to support from secondary market. Mostly institutional investors invest in these certificates. Globally the market is large in size as compared to equities market, but it is the other way round in Pakistan.
15
_______________________________________________________________________ _ One of the reasons for lack of issuers is compulsory rating by an independent credit rating agency. However some analysts strongly believe that disclosure is the main issue. In Pakistan many listed companies prefer to publish the bare minimum information in annual reports and would never like to make the maximum disclosure. Such companies prefer to borrow from banks rather than mobilizing resources from capital market. Another issue is credible track record for credit rating. While there is no obligation for paying dividend to shareholders, no issuer can avoid paying agreed return to TFC holders. According to DR. AMJAD, Head of Assets Management, National Investment Trust, the analysis of performance of bank deposits, gold, dollar, Defence Savings Certificates and stock market for the last 25 years indicates the highest growth in investment in stocks. However, he was skeptical that an individual who did not have thorough knowledge of stock market might loose his money. In his opinion interest in investment in stock is driven by the attitude towards risk, age of a person and time horizon. Still the key factor affecting the return on investment is the diversification of the portfolio. Dilating his point, he said that investment in openend mutual funds may be the best for individuals. The sale and repurchase price, based on net assets value, is calculated on daily basis. This provides an opportunity to investors to make capital gains besides earning regular dividend income. Since an open-end fund is diversified, selection of Scripps is strictly on the basis of economic fundamentals and it is also managed by professionals, the probability of substantial losses is minimized. Dr. Amjad has a point of caution for investors. In his opinion, the time horizon for investors in equities market should be about three years. This period allows an investor to earn a reasonable dividend as well as make capital gains. An analysis of local equities market may indicate some spikes during three to six months period. However, over a longer period the adverse impact of such surges is minimized. He also suggested that old persons, who need regular and guaranteed income, should not invest more than 30 percent to their total portfolio in equities market and should invest preferable in fixed income securities. At
_______________________________________________________________________ _ present there are two open-end mutual funds in Pakistan, i.e. National Investment Trust (NIT) and Unit Trust of Pakistan (UTP). As against this there are 39 closed-end listed mutual funds. Out of these the largest number pertains to the funds managed by the investment Corporation of Pakistan (ICP) and remaining are managed by the private sector. An analysis of mutual funds managed by ICP shows that at present all these funds are quoted/traded when with net asset value. Another observation is that quoted price per share, in case of a number of funds, is even below par value. This indicates a lack to interest of investors in closed-end mutual funds. According to HABIB-UR-REHMAN, Executive, ABAMCO, Investment in an open-end fund is most suitable for individuals. If one looks at the number of mutual funds operating globally it is amazing. For example, the first mutual fund, Unit Trust of India, was established in India in 1964. The size of total mutual funds in India at estimated over five trillion Indian rupees. Apparently, it looks that individuals know very little about the advantages of investing in mutual funds in Pakistan that was also confirmed by REHMAN. The largest investments in mutual funds in Pakistan, at present, pertain to institutional investors. Whereas in India mutual funds have grown in number and size mainly due to the Skeen interest of individual investors who have realized the advantage on investing in mutual funds. If one looks at the performance of mutual funds in Pakistan, it generally reflects the performance of listed companies. The reason being that these funds have invested mainly in equities. However, BSJS Balanced Funds stands distinguished. As the name reflects, BSJS has made investment in a diversified and balanced portfolio. It has made investment in equities, debt instruments and money market, etc. Since its established it has been paying regular dividend to its shareholders. As compared to this all hose funds that have total investment in equities have been experiencing performance full of surges.
Other Options:
A smaller segment of investors, which has large amount at its
disposal and also have strong holding power, have been investing in real estate,
_______________________________________________________________________ _ gold bars and commodities. To make an investment in these options one needs to have thorough knowledge of the trade. At present prices of real estate are down a cycling behavior. A factor responsible for this is said to be the on going process of documentation. In the recent past there used to be a huge difference between the markets price and the price used for registration purpose. Other reasons for lack of interest in real estate are: constant increase in the prices of construction materials, delays in handing over of the possession by the builders and poor low and order situation, particularly in Karachi. The last factor has adversely affected the prices of houses in almost all the localities. It is due to the preference for living in apartments. This shift towards apartments is on a constant increase. However, living in apartment has its own disadvantages/hazards. The apartments which ensure proper maintenance, security, uninterrupted supply of water and stand-by electricity system have been registering constant increase in market value of the property. Pakistan needs grooming of the bread of investment advisors. The service of equities analysts/brokers and real estate are available. However, the country now needs investment advisors who can help in developing a diversified portfolio to ensure regular return. While some RIBA free products are being offered foe investment by the financial institutions, there is still a need for improved products. These needs: greater commitment of the financial institutions, efforts to develop innovative product and to commence extensive promotional campaigns.
18
_______________________________________________________________________ _ 2.4 Ten Commandments: Before you invest in any stock. Continuously review and disinvest if any commandment gets violated. Ten Commandments 1. Sector allocation: You shall allocate sector weightages that are different from sensex lest you should not achieve the objective of limiting risk requires you not to go gung-ho on some sectors as their fortunes change without taking your permission. 2. Liquid and focused portfolio: You shall limit your portfolio to 10 and 10 stocks. All successful investors agree that an unwieldy portfolio is a sure recipe foe below average returns. As all Homo sapiens can err, you shall invest in stocks where exit is easy i.e. stocks with a minimum market capitalization (we set the limit at Rupees 10mn) and have good liquidity (average BSE turnover should exceed Rupees 10mn per day in the last 3 months). 3. Avoid tips: You shall not envy your friends getting rich if his/her sticks appear to be rising faster than yours. You should not forget that can fall even faster. You shall fall in the trap of getting excited by every tip even if it looks sexy by its performance in the last few days. None of your investment decisions should violate any of the 10 commandments. 4. Leader only: You shall only buy companies that are leading in their respective industries i.e. they should be in top 5 in the respective Indian industry. An exception can be made only if there is a big turnaround or restructuring story. 5. Management quality: You shall not buy companies run by managements that have a track record of incessant equity dilution, talking up unrelated projects, misleading investors by miscommunication or no proven track record. The only exception you can make if you have a reliable report that the management is changing.
_______________________________________________________________________ _ 6. Positive cash flow: You shall invest only in companies that are expected to have a positive cash flow in the next 3 to 5 years. In other words, the companies that will have operating cash flows higher than their requirements of cash for capital expenditure and investments on merit investments. 7. Valuation: You shall not be carried away by P/E multiples. That does not mean you shall ignore P/Es but requires you to evaluate future P/Es keeping in mind P/Es of the peer companies and relatives growth prospects. Also the investment candidates should expect to have a favorable change in their Evas (economic value added). That is EVA in the next 2-3 years is expected to be substantially better than the same in the recent past. 8. Industry position: You shall evaluate companies as regards to their competitive position on the Porter Model which considers parameters like bargaining power of buyers and suppliers, threat of substitution, competition and changes in industry structure. You shall find most companies with regulated earnings as out of your investments arena. 9. Global competitiveness: You shall invest in companies that are susceptible to unavailability with competition from imports and global competition. You shall presume that import duty structure will be aligned to global norms in making this evaluation. A corollary is that you shall prefer companies with cost advantage, high operating efficiency and superior quality products. 10. Shareholder friendly: You shall invest in companies that have track record of treating minority or non promoter like step children. Such companies include the once that hive off profitable for a poor consideration or diverts funds to other unknown group companies etc. Other things being equal prefer companies that are shareholder friendly in terms of dividend, bonus, transparency, disclosures in annual reports etc.
20
_______________________________________________________________________ _ Foreign Literature: 2.5 Stock Screening Basics: Stock screening is the process of finding companies that meet certain financial criteria. Using a screener is equity easy. First you answer a series of question: Do you like large-cap small- cap? Are you looking for stock prices at all-time highs, or companies with stocks that have fallen in price? What range for the P/E ratio is acceptable? The good screeners will allow you to search on just about any merit you wish. Screening focuses on the measurable factors affecting a stocks price, this is referred to as quantitative analysis. In other words, screening focuses o tangible variables such as market capitalization, revenue, volatility, profit margins as well as performance ratios such as the price/earning ratio or debt/equity ratio. For example, for obvious reasons you can use a screener to search for a company that makes the best products.
21
_______________________________________________________________________ _ .
2.6 Einsteins Rule of 72

By Dr. J. Michael Hall
(Doctors in Finance, Investment & Estate Planning), Mesa
(Phoenix, Scottsdale, Tempe Area) Arizona. Einsteins RULE of 72 gives us an easy figure how long it takes to double our money! Simply divide the rate of growth your money is earning into 72. Example: If you have $ 10,000 in a savings account at a bank, earning you 2.5%, Divide 2.5% into 72=58.8 years money (This shows why Einstein said, If people really understood the Rule of 72 they would never put their money in Banks!) If you have $ 10,000 invested in an investment that return 18% Divided 18% into 72=4 years to double your money! Knowing this, why would you put money in a bank! Its probably the place to put it. They seldom pay over 3-4%, even in C.D.s. There are MUCH better places to put your money, as youll soon see. 2.7 Stocks or bonds? 1.
Are bonds subject to the same market fluctuation as sticks?
Stocks are subject
to two kinds of market fluctuations: one, fluctuation in earnings, and two, fluctuation in interest rates, i.e. fluctuation in the value of money. Bond, on the other hand (at least, T-bonds), are subject only to fluctuations in interest rates. However, there are empirical relationships between the level of business activity and interest rates, which vary other the business cycle. Hence, T-bonds will also be indirectly affected by fluctuation in corporate earnings, through their effect on interest rates.
22
_______________________________________________________________________ _ 2. If you are investing for just a few years, do you invest in stocks or bonds? If you are investing for a few years, bonds provide much safety. In addition, it is possible to choose bonds of the appropriate maturity, so that interest rate is minimized. If you want to minimize down-side risk, then you should invest much more in bonds than in stocks. 3.
I am in my thirties; do I invest in stocks or bonds? Why?
The average return on
bonds, particularly T-bonds is very low, compared to that on US equities. Long-term T-bonds have yielded an average of 5.35% from 1926 to 1993, while the average return on the Standard and Poors Composite Index over the same period was 12.31%. Inflation over the same period was 3.23% on an average. This means that long-term bonds barely provided a 2% over inflation, while equities provided about 9% over inflation. Although the year to year variation in returns is much higher for bonds than for stocks, the variation returns over 20-years periods is actually smaller for stocks than bonds. Hence, anybody investing for the long-run should probably invest a sizeable portion of their wealth in stocks, provided that the portfolio is well diversified. 2.8 Ways for Individuals to Invest in Stocks:
The best way for individuals to invest in stocks:
Mutual funds are probably the best
bet for most people because funds offer Diversification Low-cost, professional management Low-cost transactions
One stock you shouldnt invest in:
Dont put too much money in your employers
stock 401(k) and Employee Stock Ownership Plan (ESOP) might give you a good deal on employers stock
23
_______________________________________________________________________ _ Consider placing some money in employers stock, but dont invest more than 10 percent of your equity holdings in your companys stock if your company hits hard times, you can get hit with double whammy. The stock price falls, you lose your job If your company offers you stock options as an incentive with little or no cost to you, take them But invest the rest of your portfolio in other assets so that it your company went bankrupt, youd still be OK
The best way to minimize your risk:
Invest in a broadly diversified portfolio Diversify
across asset classes: Stocks Bonds Real estate Diversify within asset classes Large company stock Small company stocks Foreign stocks Dollars cost average Bond laddering Example of how diversifications reduce your risk without reducing your return Studies show that typical returns for individual stock ranges between -40 to +60 percent per year So dont be impresses if a broker tells you about a stock that she picked went up 50 percent It happens all the time Returns for the market as a whole range between -7 to +27 percent per year By investing in a broad-based mutual fund, you enjoy the same average gain, over time, as if you invested in a few individual stocks, but with less volatility
24
_______________________________________________________________________ _
03. FINANCIAL SYSTEM

3.1 The Financial System Such systems are very important in the economy for they play a critical role in igniting industrialization by facilitating the mobilization of capital for immense works. Well-functioning financial institutions spur technological innovation by identifying and funding those entrepreneurs with the best chances of successfully implementing innovative products and production processes. It has been said that where enterprise leads finance follows. According to this view, economic development creates demands for particular types of financial arrangements, and the financial system responds automatically to these demands. There is a belief that the development of financial markets and institutions is a critical and inextricable part of the growth process. There is evidence that the level of financial development is a good predictor of future rates of economic growth, capital accumulation, and technological change. Financial market development or the lack thereofcrucially affects the speed and pattern of economic development.
25
_______________________________________________________________________ _ 3.2 The Functions of the Financial System The costs of acquiring information and making transactions create incentives for the emergence of financial markets and institutions. Put differently, statecontingent claim framework with no information or transaction costs, there is no need for a financial system that expends resources researching projects, scrutinizing managers, or designing arrangements to ease risk management and facilitate transactions. Different types and combinations of information and transaction costs motivate distinct financial contracts, markets, and institutions. In arising to ameliorate transaction and information costs, financial systems serve one primary function: they facilitate the allocation of resources, across space and time, in an uncertain environment. The primary functions of a financial system can be divided into five basic functions: risk, allocate resources, monitor managers and exert corporate control, mobilize savings, and facilitate the trading, hedging, diversifying, and pooling of
Facilitate the exchange of goods and services.
26
_______________________________________________________________________ _
Fig 3.1 - Theoretical Approach to Finance and Growth

Market Frictions - Information costs - Transaction costs
Financial markets and Intermediaries
Financial Functions - Mobilize savings - Allocate Resources - Extent corporate control - Facilitate risk mgmt - Ease trading of goods, services ,contracts
Channels to growth - Capital accumulation - Tech. innovation
Growth
27
_______________________________________________________________________ _ 3.3 Importance of Financial Markets Credit Surplus Units (CSUs) may invest indirectly by identifying Credit Deficit Units (CDUs) that have identified profitable investments, but no resources to exploit them. The CDUs agree to borrow savings of CSUs by issuing financial claims. A financial claim is a contract or agreement between two parties, in which the borrowing party agrees to transmit income to the saver in order to obtain savings immediately. Financial markets facilitate the savings and investment process by making it more efficient. Markets provide mechanisms to reduce the time and effort for CSUs to search CDUs. They provide much needed information on prices and volume of transactions. In that respect, financial markets provide information about the income that can be expected on different financial claims and their current prices.
Fig 3.2 - Flows of Funds through Financial System
Indirect Finance Financial Intermediarie s

F U N D S
Funds
Funds
Lender-Savers House Holds Business Firms Governments Foreigners
Funds
Financial Markets
Funds
Borrowers-Spenders House Holds Business Firms Governments Foreigners
Direct Finance
28
_______________________________________________________________________ _ The importance of financial markets is also apparent when considering the development of a non-market economy. This economy has no mechanism for determining the value of goods and services. These values are determined by central government bureaucracies. The result of foregoing markets that provide information on the supply-and-demand interaction for goods and services is the mis-pricing of most goods and services. This leads to waste. Many goods are produced even thought here is no market for t hem. Other goods are produced using very costly materials, when less expensive substitutes could be used. This also leads to the well-known shortages. The price is low, but goods are not available. Creating a market economy in goods and financial claims is a solution to many of these problems. Thus to summarize it can be said that the financial markets are important for a few of the following reasons: To provide information on past and present prices and trading volume To reduce search costs by bringing buyers and sellers together To provide for standardization of contracts To reduce (transfer) credit risks for buyers and sellers to reduce information asymmetry.
29
_______________________________________________________________________ _
04. STOCK MARKET & INVESTMENT

4.1 Pakistans Stock Markets Stock market in Pakistan has witnessed extraordinary volatility during the year. The Karachi Stock Exchange (KSE) witnessed an accelerated rise during the year until March 15, 2005. The KSE-100 index rose from 5210 in July 2004 to peak at 10,303 on March 15, 2005 an increase of 5093 points or 98 percent. That rose in index continue till the mid of year 2007 and index cross the limit of 16000. but in last of 2007 it gradually declined and 2008 it reached to less than 5000 points. Government took some supportive measures as a result it again start to rise and today market is trading on more than 11,000 points. The accelerated rise was witnessed since January 2005 and until March 15, 2005 when index rose by 65 percent in a short period of 2.5 months. Most of these increases were contributed by OGDC, PTCL, PSO, POL and NBP, of which three are on privatization list (OGDC, PTCL and PSO) and their share prices jumped upward mainly on report of good buying interest from foreign strategic buyers. There has been a buying interest in NBP on account of good profitability. The stock market turned bearish since March 16, 2005 as the KSE 100 index dropped to as low as 6939 on April 12, 2005 from its peak of 10303 showing a decline of 3364 points or 32.7 percent. Such a sharp rise in index and a subsequent steep decline represented abnormal and unhealthy movements in the equity market. While the five scripts listed above caused unprecedented boom, the same scripts largely became the cause for the sharp down turn. There are divergent views of the market players and outsiders on what caused abnormal behavior of the equity market.
30
_______________________________________________________________________ _ Some of the reasons responsible for the abnormal behavior of the equity markets include the following: 1. Delay in the privatization of government owned companies 2. Withdrawal of funds by financiers 3. Excessive buy positions by several brokers in the future market who were not able to get an exit opportunity due to the continuous decline in the market 4. Sellers in the March future contract were carrying hedged position from ready market 5. Seller decided not to square up their positions in the March futures contract 6. Downward circuit breakers blocked the opportunity of exit from the market.
Islamabad Stock Exchange: 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 has set the highest standards of operational efficiency and is committed to support a climate of confidence and optimism that encourages and promotes trading activity. It also provides for reasonable conducive environment to channalize the small investments of the residents of less developed areas. The ISE offers an easy access to both domestic as well as foreign investors and actively encourages the listing of eligible and profitable companies, both large and small to make it an exciting and diverse Exchange. The Exchange is playing a pivotal role for economic growth of the area thereby contributing towards the overall economic prosperity and welfare of the country.
_______________________________________________________________________ _ At present there are 104 members out of which 39 are corporate bodies including commercial and investment banks, DFIs and brokerage houses. The other 65 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 10 million shares. The automated system which was indigenously developed, replaced the outcry system in 1997. 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 scripts are settled through Central Depository Company of Pakistan Limited. 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. In this context efforts are being made to bring ISE in line with the International system and methodology. The turnover of shares on the Islamabad Stock Exchange (ISE) was 2.8 billion shares during July-March 2004-05 as compared to 1.5 billion during the same period last year. The ISE Network index has increased from 11894 points in June 2004 to 12894 points in March 2005, recording a growth of 8.4 percent. Eight new companies were listed and Rs 18.8 billion was mobilized on the ISE during the first nine months of the current fiscal year. The ISE started functioning in August 1992 and within 14 years; it has developed into a vibrant, efficient and
_______________________________________________________________________ _ stable market. Today, the ISE is one of the premier stock exchanges of the country known for the highest standard of transparency in its operations, excellent risk management, dynamic market technology and lowest overall costs of listing.
Profile of Islamabad Stock Exchange
Lahore Stock Exchange: Lahore Stock Exchange (Guarantee) Limited came into existence in October 1970, under the Securities and Exchange Ordinance, 1969, of the Government of Pakistan, in response to the needs of the Provincial metropolis of the Punjab. Only 83 members had its memberships and it was housed in a rented building in the crowded area of Bank Square in exotic city of Lahore. The number of members has increased from 83 to 150 over a period of 25 years. Inadequacy of space, crowded area and severe limitations of communications cramped its growth. Only a few of all the members were active, and they too had to work through Karachi Stock Exchange, or be limited to do business in Bonus, Vouchers and Bonds. It took the management all of two decades of uncertainties, apprehensions and planning to construct a suitable building for itself and venture out to its present location at 19-Khayaban-e-Aiwan-e-Iqbal, Lahore. Lahore Stock Exchange has taken shape of a significant institution of Pakistan. It owes a debt of gratitude to its past presidents and members of the Board who had contributed their time and energy to realize the dreams of the LSE members. The turnover of shares on the
_______________________________________________________________________ _ Lahore Stock Exchange (LSE) during July-March 2004-05 was 14.0 billion compared to 34.5 billion shares in the same period last year. Total paid up capital with the LSE increased from Rs 361.5 billion in June 2004 to Rs 387.6 billion in March 2005. The LSE index, which was 2828 points in June 2004, increased to 4011 points in March 2005. The market capitalization of the LSE has increased from Rs 1460 billion in June 2004 to Rs 2088 billion in March 2005. Seven new companies were listed with the LSE during July-March 2004-05, as compared to nine in the same period last year. The amount of funds mobilized at the LSE by way of subscription was Rs 37.2 billion in the first nine months of the outgoing fiscal year.
Profile of Lahore Stock Exchange
34
_______________________________________________________________________ _ Karachi Stock Exchange: Karachi Stock Exchange is the biggest and most liquid exchange and has been declared as the Best Performing Stock Market of the World for the year 2002. As on June 30, 2010; 645 companies were listed with the market capitalization of Rs. 2,068.19 billion (US $ 34.70) having listed capital of Rs. 438.49 billion (US $ 7.36 billion). KSE has been well into the 4th year of being one of the Best Performing Markets of the world as declared by the international magazine Business Week. Similarly the US newspaper, USA Today, termed Karachi Stock Exchange as one of the best performing bourses in the world.
35
_______________________________________________________________________ _ Five Year Performance of KSE:

In million except companies, index and bonds data 5 YEARS PROGRESS 2006-2010 Upto 30-122006 Total No. of Listed Companies Total Listed Capital - Rs. Total Market Capitalisation - Rs. KSE-100TM Index KSE-30
TM
Upto 29-122007 654
Upto 31-122008 653
Upto 31-122009 651
Upto 03-12-2010 645 914,608.13
652
519,270.17 671,255.82 750,477.55 814,478.74
2,771,113.9 4,329,909.7 1,858,698.9 2,705,879.8 3,112,350.0 4 9 0 3 6 10040.50 12521.54 6770.06 9 14,789.76 3 3,400.00 260.69 31,610.71 82.68 13,587.63 14075.83 16717.10 9956.76 14 57,239.92 3 6,500.00 268.23 25,262.97 61.69 9,077.61 5865.01 5485.33 4400.76 10 15,312.12 7 26,500.00 146.55 14,228.35 30.76 5,229.97 9386.92 9849.92 6665.55 4 8,755.73 1 3,000.00 179.88 7,450.75 1.03 89.66 11406.66 10993.62 7935.97 6 33,438.45 4 5,650.18 132.43 4,340.64 4.56 385.75
Index
KSE All Share Index New Companies Listed during the year Listed Capital of New Companies Rs. New Debt Instruments Listed during the year Listed Capital of New Debt Instruments - Rs. Average Daily Turnover - Shares in million Average value of daily turnover Rs. Average Daily Turnover (FutureTM) YTD Average Value of Daily Turnover YTD
Foreign Investment in Securities Market Inflow - Rs Outflow - Rs Net Inflow/(Outflow) - Rs -
Today KSE has emerged as the key institution of the capital formation in Pakistan with: Listed companies 659, securities listed on the exchange 700: ordinary share 659, Preference shares 15 and debt securities (TFC's) 26.
36
_______________________________________________________________________ _ Listed capital Rs.438,489.99 million (US$ 7,357.21 million). Market capitalization Rs.2,068,187.15 million (US$ 34,701.13 million) Membership strength at 200. Corporate Members are 112 out of which 9 are public listed companies Active Members are 155. Fully automated trading system with T+3 settlement cycle. Deliveries through central depository company National Clearing and Settlement System in place.
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 88 percent of market capitalization of the Exchange. The market performance during the period June 1998 to April 2005 is given under.
Performance of KSE
37
_______________________________________________________________________ _
The KSE is primarily influenced by some big blue chip companies including; OGDC, PTCL, Pakistan State Oil etc. During the first three quarters of the current fiscal year, the combined turnover of shares of ten big companies (OGDC, PTCL, A Pakistan PTA Ltd., Sui Southern Gas, FF Bin Qasim, D.G. Khan cement, Fauji Fertilizer Bin Qasim, Fauji Cement and National Bank, Pakistan State Oil and TRG Pakistan Ltd.) was 12.59 billion, which constituted 17.6 percent of the total turnover of the KSE. These ten companies earned a profit after taxation of Rs 65.22 billion in the current fiscal year up to March 2005. Out of Rs 65.22 billion after taxation profit, the share of PTCL and OGDC was Rs 51.58 billion representing 79.1 percent of the ten big companies. In the first nine months of 2004-05, PTCLs after taxation profit was (Rs 29.2 billion). The price-earning ratio of the ten big companies ranged from 50.5 in the case of TRG Pakistan Ltd. to 21.4 in respect of OGDC. This indicates that the business environment in the current fiscal year has improved appreciably.
38
_______________________________________________________________________ _
Profile of Karachi Stock Exchange
4.2 Sector Wise Investment : During the first nine months of the outgoing fiscal year, the KSE 100-share index and aggregate market capitalization of 12 different sectors have increased by 47.2 percent and 55.8 percent respectively, as against their increase of 50.1 percent and 78.3 percent in the same period last year. Total turnover of shares on the KSE was 71.7 billion in the first nine months of 2004-05 as compared to 65.2 billion in the same period last year. Funds mobilized by the KSE during this period amounted to Rs 34.1 billion as compared to Rs 61.7 billion in the same period last year. All but two of the 12 major trading groups on the KSE (cotton and other textiles, pharmaceuticals & chemicals, auto & allied, cables and electric goods, paper and board, cement, fuel and energy, transport and communication, banks and other financial institutions, and miscellaneous) witnessed growth in their share indices, ranging from 0.5 percent (banks and other financial institution) to 63.7 percent (fuel and energy). Two sectors namely engineering and sugar & allied encountered slight declines in their share indices. During the calendar year 2009, total profit before taxation of the 12 trading groups amounted to Rs 229.5 billion as compared to their before taxation profit of Rs 136.8 billion in 2003. The
39
_______________________________________________________________________ _ performance of leading trading groups and companies for the first nine months of the outgoing fiscal year is discussed below
Sectoral Performance of KSE:
SECTOR CODE 0530 1350 1730 1750 2350 2720 2730 2750 2770 2790 3350 3530 3570 36 3720 3740 3760 3780 4530 4570 5550 5750 6530 7530 7570 8350 8530 8570 8630 8770 8980
SECTOR NAME Oil and Gas Chemicals Forestry and Paper Industrial metals and Mining Construction and Materials General Industrials Electronic and Electrical Equipment Industrial Engineering Industrial Transportation Support Services Automobile and Parts Beverages Food Producers BONDS Household Goods Leisure Goods Personal Goods Tobacco Health Care Equipment and Services Pharma and Bio Tech Media Travel and Leisure Fixed Line Telecommunication Electricity Gas Water and Multiutilities Banks Non Life Insurance Life Insurance Real Estate Investment and Services Financial Services Equity Investment Instruments
TURNOVER 8,140,964 19,714,611 48,834 252,550 3,333,756 392,567 5,619 153,674 5,859 731,409 162,848 4,902 273,799 0 239,176 50 13,614,543 375,213 49 43,336 1,552 145,825 1,325,195 3,762,911 899,713 11,872,946 1,075,756 159,110 994,913 15,859,817 2,387,467
40
_______________________________________________________________________ _ 9530 Software and Computer Services 169,637 9570 Technology Hardware and Equipment 501
Cotton and Other Textiles:
In this group there are three sub-groups: (a) textile
spinning, (b) textile weaving & composite, and (c) other textiles. There were 217 companies listed with the KSE under this group in December 2009. The share index of cotton and other textiles recorded a growth of 19.3 percent during the first nine months of the current fiscal year as compared to a growth of 34.3 percent in the same period last year. Its market capitalization increased by 34.3 percent or by Rs 30.5 billion during July-March 2004-05 as compared to a rise of 27.8 percent (Rs 18.2 billion) in the same period last year.
Chemicals & Pharmaceuticals:
A total of 38 companies were listed with the KSE
under this group at the end of December 2009. During the first nine months of the current fiscal year, its share index has declined by 1.6 percent as compared to an increase of 49.7 percent in the comparable period of last year. Its market capitalization stood at Rs 195.8 billion on 31st March 2010, showing an increase of 23.3 percent over June 2009.
Auto and Allied:
A total of 25 companies were listed with the KSE under this group
at the end of December 2009. Its share index increased by 28.7 percent, while its market capitalization increased by 22.2 percent during the first nine months of the current fiscal year.
Sugar and Allied:
Under this group, a total of 37 companies were listed with the
KSE with a market capitalization of Rs 14.8 billion. During the first three quarters of the current fiscal year, the share index of sugar and allied posted a growth of 41.2 percent as compared to a rise of 17.5 percent in the comparable period last year.
41
_______________________________________________________________________ _ Cement: At the end of 2009, there were 21 cement companies listed with the KSE. The cement industry was one of the best performing sectors in the stock market. Its market capitalization increased to Rs 75.5 billion on March 31, 2010 from Rs 65.1 billion in June 2009, recording a growth of Rs 16.0 percent.
Fuel & Energy:
A total of 26 companies were listed with the KSE. It is the most
dominant group in the stock market. Its share index grew by 63.7 percent during the first nine months of the current fiscal year, which was the highest among the 12 trading sectors. Its market capitalization increased by a huge Rs 423.3 billion to Rs 909.0 billion in March 2010 from Rs 485.8 billion in June 2004. Its market capitalization constituted 43.0 percent of the aggregate market capitalization in March 2010. In the corresponding date of the last year market capitalization of this group was 37.2 percent. A swelling fuel and energy sector continued to be one of the major market players in the current year along with transport and communication, banking and finance, and cement. The energy sector has been identified as an engine of growth along with 3 other sectors, (agriculture, small and medium enterprises and information technology) by the government. Companies like OGDC, PSO, SNGC, SSGC, Hub Power, and Pakistan Oil Fields etc. led the current years upsurge in the s tock market. These companies were the main drivers of the stock market.
Transport & Communication:
At the end of 2004, there were 14 companies of this
group listed with the KSE. Its share index and market capitalization increased by 54.9 percent and 60.0 percent respectively during July-March 2009-10 as compared to their rises of 36.3 percent and 49.3 percent respectively in the same period last year. Its market capitalization at Rs 309.7 billion constituted 14.6 percent of the aggregate market capitalization (AMC) in March 2010 making it a major player on the KSE. The combined market capitalization of fuel and energy, and transport & communication was Rs 1218.7 billion on March 31, 2010, which constituted 57.6 percent of the AMC (Rs 2114.8 billion) as compared to their share of 51.0 percent on the corresponding date of last year.
_______________________________________________________________________ _
Banks & Other Financial Institutions:
In December 2009, a total of 159 companies
were listed with the KSE. There are 4 sub groups in this group: banks & investment companies, modarabas, leasing companies, and insurance. During the current fiscal year, the share index of this group has marginally increased by 0.5 percent. Its market capitalization however increased by 59.8 percent or from Rs 187.1 billion in June 2009 to Rs 299.0 billion in March 2010.
Miscellaneous:
The miscellaneous group includes five sub-groups: jute, food &
allied, glass & ceramics, vanaspati & allied, and others. In December 2003, a total of 92 companies were listed with the KSE, which came down to 89 companies at the end December 2004. Its share index and market capitalization posted growth of 9.6 percent and 10.5 percent respectively in the first nine months of the current fiscal year, as compared to their growth of 31.6 percent and 38.5 percent respectively, in the same period last year.
4.3
Present and Future Prospects
Foreign investors are pushing funds back into Pakistan stocks, setting the market up for its second-best year for inflows in a decade, drawn by cheap valuations and some economic and security improvements. Such investments may be paying off as well because the main Karachi stock index .KSE is one of the few markets in Asia showing a rise since the beginning of the year. While the benchmark MSCI Asia ex-Japan index is down 11 percent this year, the KSE is up 3 percent.
_______________________________________________________________________ _ "Pakistan remains one of the cheaper markets in Asia and emerging markets with an improving domestic situation and a stabilising economy," said Mark Mobius, executive chairman at Templeton Asset Management Ltd. Net foreign portfolio investment into the stock market reached more than $530 million (362 million pounds) in the first 11 months of 2009/10, compared with a year-earlier outflow of $408 million. If that holds to the end of the July-June fiscal year, it would mark the biggest net foreign investment in more than 10 years, apart from 2007. The government has pulled back from the brink of a debt default thanks to International Monetary Fund emergency funding and is seeing some success in military operations against Taliban militants behind bomb attacks across the country. A government led by the party of assassinated former prime minister Benazir Bhutto has proven more resilient than critics predicted and recently introduced constitutional reforms to bolster parliamentary rule, and stability. The powerful military, which has ruled for more than half of Pakistan's history, is seen as largely satisfied with the civilian government and loathe to step back in to politics while it hands are full battling militancy. The economy is also pulling out of the global downturn and this year the government expects growth above 4 percent compared with record low growth last year of 1.2 percent. The Karachi stock market .KSE has more than doubled from lows hit last year during the worst of the global crisis, although many stock markets have seen similar gains. To be sure, Pakistan remains one of Asia's riskiest investment destinations, Reuters surveys show.
_______________________________________________________________________ _ That's why most foreign money goes into energy stocks or fertiliser company Engro Chemicals (EGCH.KA). Apart from having cheaper valuations compared with many regional peers, they offer the liquidity foreign investors need should they decide to sell. Al Qaeda-linked Taliban militants remain a serious threat despite the military's successes, and chronic power cuts and rising prices are eroding the government's support. There remains criticism of a lack of policy stability. In addition, the inflow figures have been flattered by the lifting of a KSE trading floor, which had stopped investors selling below 9,144 points between August and December 2008.
Brokerage Invest and Finance Securities Ltd says the lowest one-year forward price-to-earnings ratio in Asia of just 6.25 is also drawing funds. That's less than half China's level, it says. "Of course investors are interested in seeing fewer terrorist attacks, but many investors have become inured to such situations knowing that they are isolated incidents," Mobius said in late May. Foreign direct investors seem less confident. Actual FDI has almost halved to $1.77 billion in the first 10 months of 2009/10 compared with $3.20 billion a year earlier. Such FDI would be the lowest level since year ending June 30, 2004 when it was $949 million. Asad Iqbal, chief investment officer at Faysal Asset Management Ltd, said that apart from obvious security concerns, FDI is a victim of ever-changing government policies. He cited export tax on yarn. The government raised it to 15 percent last month only to reverse the decision in the budget Saturday.
45
_______________________________________________________________________ _ For the country to be able to generate healthy long-term investment, clear policies along with assurances of security are needed.
05. PROBLEMS OF PAKISTANS STOCK MARKET

5.1 Economical Issues The economy of Pakistan is the 25th largest economy in the world in terms of purchasing power, and the 45th largest in absolute dollar terms. Pakistan has a semi-industrialized economy, which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7.9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan has reached as high as 25.0%.
_______________________________________________________________________ _ Due to inflation and economic crisis worldwide, Pakistan's economy reached a state of Balance of Payment crisis. "The International Monetary Fund bailed out Pakistan in November 2008 to avert a balance of payments crisis and in July last year increased the loan to $11.3 billion from an initial $7.6 billion." By October 2007, Pakistan raised back its Foreign Reserves to a handsome $16.4 billion. Exceptional policies kept Pakistan's trade deficit controlled at $13 billion, exports boomed to $18 billion, revenue generation increased to become $13 billion and attracted foreign investment of $8.4 billion. Since the beginning of 2008, Pakistan's economic outlook has taken stagnation. Security concerns stemming from the nation's role in the War on Terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3.5bn for the current fiscal year. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan's economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months. For the first time in years, it may have to seek external funding as Balance of Payments support. Consequently, S&P lowered Pakistans foreign currency debt rating to CCC-plus from B, just several notches above a level that would indicate default. Pakistans local currency debt rating was lowered to B-minus from BB-minus. Credit agency Moodys Investors Service cut its outlook on Pakistans debt to negative from stable due to political uncertainty, though it maintained the countrys rating at B2.The cost of protection against a default in Pakistans sovereign debt trades at 1,800 basis points, according to its five year credit default swap, a level that indicates investors believe the country is already in or will soon be in default. This weak and uncertain condition of economy stop investors to invest in Pakistan specially in Stock markets.
47
_______________________________________________________________________ _ 5.2 Political Issues Political stability play a vital role for strength of economy as well as stock markets. The government is in no immediate danger of being brought down. The ruling coalition, led by President Asif Ali Zardaris party, has a comfortable majority in parliament and the military, which unlike the government is seen to have responded effectively to the disaster, is not going to stage a coup. But anger with a government already unpopular is likely to intensify. The economic impact of the floods will be severe and food shortages and rising prices could spark protests. The opposition, led by former prime minister Nawaz Sharif, has been critical of the government but has not called street protests. Analysts say the opposition is content to let the government struggle but opposition leaders could come under pressure from their rank and file to take advantage of growing discontent to go on the offensive. A well-organised opposition taking the lead of popular protests over prices and food shortages could be explosive. In a worstcase scenario, the military might feel compelled to step in if protests got out of hand. But analysts say the opposition is loathe to create the conditions which would precipitate military intervention, which would block its bid to gain power through a general election, due by 2013.The government should launch a proper economical policy to encourage the small and medium investors and to protect them and their investment.
5.3 Tax Issues Officials from Pakistans tax collection agency, the FBR (Federal Bureau of Revenue) held emergecny meetings with top managers of the countrys main stock market - the say many investors are opposed fundamentally to plans for documenting their earnings. Paying the tax of up to 10 per cent is secondary. The annoying issue is having to document the incomes too. People now have to file returns, a Karachi fund manager told the Financial Times.
48
_______________________________________________________________________ _ But it is an odd reaction from a community which has long pointed fingers at wealthy landowners for remaining exempt from paying an income tax. Farm incomes in Pakistan for long have been exempt from paying Karachi stock exchange (KSE), to help stem a slide in share prices. It is an unusual move for the tax authorities to become involved in affairs of the stock market. But there is a good reason. In the past two days alone, the KSE lost about 2 per cent of its net value as nervous investors rushed to sell their shares in reaction to this weeks withdrawal of a tax exemption on stock market profits. Knowledgeable insiders an income tax, prompting criticism from urbanites. And yet, Pakistans very future depends on its ability to make its wealthy elite pay their dues. As the country battles Taliban and Al-Qaeda militants across its frontier lands along the Afghan border, its internal economy has eroded badly. Basic services such as education and health remain sorely neglected and increasingly out of reach for the poor. Pakistans tax to GDP ratio at about 9 per cent is the lowest among its south Asian peers. Equally appalling is the figure that just over 1 per cent of the population pays an income tax. Its clear that the ability of this nuclear-armed south Asian country to progress depends on clamping down on those who evade taxes. If the tax authorities decide on Saturday to back off from taxing stock market gains, it wont just mean the unraveling of a long overdue effort at reform. It will become even harder to tax other parts of the economy including the rich rural landowners.
49
_______________________________________________________________________ _
06. REASEARCH ANALYSIS
6.1
Questionnaire Analysis: 1. Do you invest in any of financial instrument/scheme other then stock? Number of Percentage 33.3% 63.0% 3.7% 0.0% Male 6 11 0 0 Female 3 6 1 0
Yes No Dont Know Didnt Reply Total
Respondent 9 17 1 0 27
2.
Are you planning to invest within few years?
Number Yes No Dont Know Didnt Reply Total
of Percentage 37.0% 25.9% 7.4% 29.6%
Male 7 5 1 4
Female 3 2 1 4
3. Which type of investment (Stocks, bond, saving certificate etc) you would prefer the most? Number of Percentage Male Female
50
_______________________________________________________________________ _ Respondent Stocks 6 22.2% 4 2 Bonds 4 14.8% 2 2 Saving 6 22.2% 3 3 Certificate Others Total 11 27 40.7% 8 3
12 10 8 6 4 2 0
ic at e O th er s to ck s on ds er t if
Series1
4. Attitude towards investment risk, select one . Number Conservative Cautious Balanced Adventurous of Percentage 7.4% 25.9% 37% 3.7% Male 1 6 4 0 Female 1 1 6 1
51
Respondent 2 7 10 1
av in
_______________________________________________________________________ _ Speculative 4 14.8% 3 1 Didnt reply 3 11.1% 3 0 Total 27
Attitude towards investment Risk

12 10 8 6 4 2
e al an ce A d dv e nt ur ou S s pe cu la t iv D e id n tr ep ly
Series1
0
rv a ns e
tiv
C a
ut io
5. How much return would you expect of your investment? Number Lowest Low Average High Highest Didnt reply Total of Percentage 0.0% 3.7% 29.6% 44.4% 18.5% 3.7% Male 0 1 6 8 2 0 Female 0 0 2 4 3 1
C o
Respondent 0 1 8 12 5 1 27
us
52
_______________________________________________________________________ _
Expected Rate of Return
14 12 10 8 6 4 2 0 Lowest Low Average High Highest Didnt reply Series1
6. Do you know where the Karachi Stock Exchange building is situated?
Number Yes No May be Didnt reply Total
of Percentage 77.8% 14.8% 3.7% 3.7%
Male 15 1 0 1
Female 6 3 1 0
53
_______________________________________________________________________ _ 7. Do you know how Karachi Stock Exchange works?
Number Yes No Partially Didnt reply Total
of Percentage 29.6% 40.7% 29.6% 0.0%
Male 6 6 5 0
Female 2 5 3 0
12 10 8 6 4 2 0 Yes No P artially Didnt reply
8. Do any of your family members or friend trades in Stocks? Number Yes No Didnt reply Total of Percentage 44.4% 51.9% 3.7% Male 7 9 1 Female 5 5 0
54
Respondent 12 14 1 27
_______________________________________________________________________ _
55
_______________________________________________________________________ _ 9. Does Newspaper listing ( Stock related coverage given in newspaper ) help you in understanding Stock Function? Number Yes No Slightly Didnt reply Total of Percentage 22.2% 37.0% 33.3% 7.4% Male 3 6 6 2 Female 3 4 3 0
Is Newspaper listing helpful?

1 2 1 0 8 6 4 2 0 Ys e N o S h lig tly Dn id t re ly p S rie e s1
10. Do you think there is enough material ( books/Magazines) available to assist you in getting information about stock market ?
56
_______________________________________________________________________ _ Number of Percentage Male Female Yes No Dont Know Didnt Reply Total Respondent 9 9 9 0 27 33.3% 33.3% 33.3% 0.0% 5 6 6 0 4 3 3 0
11. Is the provided information through newspaper, magazines, books reliable and accurate? Number Yes No Dont Know Didnt Reply Total of Percentage 51.9% 11.1% 29.6% 7.4% Male 8 3 4 2 Female 6 0 4 0
1 6 1 4 1 2 1 0 8 6 4 2 0 Ys e N o Dn o t Ko nw D n id t Rp e ly S rie e s1
57
_______________________________________________________________________ _ 12.Are you aware of brokerage system ( commission/ fee etc ) ? Number Yes No Partially Didnt reply Total of Percentage 44.4% 37.0% 18.5% 0.0% Male 8 7 2 0 Female 4 3 3 0
58
_______________________________________________________________________ _ 13. Are you aware of Stocks speculation? Number Yes No Partially Didnt reply Total of Percentage 44.4% 48.1% 7.4% 0.0% Male 8 8 1 0 Female 4 5 1 0
14. Are you aware of Dividend system? Number Yes No Didnt reply Total of Percentage 74.1% 25.9% 0.0% Male 12 5 0 Female 8 2 0
15. Are you aware of Bull/Bear Markets? Number Yes No Didnt reply Total of Percentage 59.3% 40.7% 0.0% Male 10 7 0 Female 6 4 0
59
_______________________________________________________________________ _
A w a re n e s s L e v e l
80.0 0% 70.0 0% 60.0 0% 50.0 0% 40.0 0% 30.0 0% 20.0 0% 10.0 0% 0.00% Y es No P artially D idnt reply bro k erag e s y s tem S toc k S pec ulation D ividend s y s tem B ear/B ull s y s tem
60
_______________________________________________________________________ _ 16. Have you seen any of advertisement about stocks?
Number Yes No Didnt reply Total
of Percentage 33.3% 63.0% 3.7%
Male 7 9 1
Female 2 8 0
17. How much money do you think is required to start basic investment in stock exchange? Number of Percentage 7.4% 25.9% 29.6% 22.2% 14.8% 0.0% Male 1 5 4 4 3 0 Female 1 2 4 2 1 0
Respondent Below 10,000 2 10,001-15,000 7 15,001-20,000 8 20,000-25,000 6 Above 25000 4 Didnt reply 0 Total 27
61
_______________________________________________________________________ _
M o n e y R e q u ire to s ta rt tra d e in S to c k M a rk e t
9 8 7 6 5 4 3 2 1 0 B e lo w 1 0 ,0 0 0 1 0 ,0 0 1 - 1 5 , 0 0 1 - 2 0 ,0 0 0 1 5 , 0 0 0 2 0 ,0 0 0 2 5 ,0 0 0 A b o ve D id n t re p ly 2 50 0 0
62
_______________________________________________________________________ _ 18. What are the factors, which stop you from investing in stocks?
Number Lack of Knowledge about stocks Very Risky 14 Not allowed 10 in Islam Stock 7
of Percentage 44.4%
Male 7
Female 5
Respondent 12
51.9% 37.0% 25.9% 63.0% 48.1% 25.9% 33.3%
10 6 4 10 10 5 7
4 4 3 7 3 2 2
speculation Economy of 17 Country Law & Order 13 condition Fraud from 7 broker side Fraud from 9 company side Environment of Stock exchange Other Factors Didnt reply 5 0 7
25.9%
18.5% 0.0%
2 0
3 0
63
_______________________________________________________________________ _
70.00% 60.00% 50.00% 44.40% 40.00% 30.00% 20.00% 10.00% 0.00% Environment of Stock Fraud from broker side Economy of Country Fraud from company Very Risky Other Factors Lack of Stock speculation Not allowed in Islam Knowledge about Didnt reply exchange Law & Order 51.90% 37.00% 25.90% 63.00% 48.10% 33.30% 25.90% 25.90% 18.50% 0.00% Series1
19. Do educational institutes provide adequate knowledge about stock markets? Number Yes No Dont Know Didnt Reply Total of Percentage 18.5% 29.6% 48.1% 3.7% Male 3 5 8 1 Female 2 3 5 0
64
_______________________________________________________________________ _
Personal Information:
20. Age Number Less than 18 18-25 years 26-35 years More than 35 Didnt Reply Total of Percentage 0.0% 74.1% 14.8% 11.1% 0.0% Male 0 13 2 2 0 Female 0 7 2 1 0
Respondent 0 20 4 3 0 27
21. Gender Number Male Female Total of Percentage 63.0% 37.0%
Respondent 17 10 27
22. What is your annual income ?
Number of Respondent
Percentage
Male
Female
65
_______________________________________________________________________ _ Below 10,000 4 14.8% 3 1 10,001-15,000 4 14.8% 2 2 15,001-20,000 4 14.8% 3 1 20,000-25,000 3 11.1% 2 1 Above 25000 12 44.4% 7 5 Didnt reply 0 0.0% 0 0 Total 27
23. Education Number of Respondent Below Higher 0 Secondary Highere secondary / Alevel Bachelors Masters Other Didnt reply Total 12 7 0 0 27 44.4% 25.9% 0.0% 0.0% 7 4 0 0 5 3 0 0 8 Percentage 0.0% 29.6% Male 0 6 Female 0 2
07. CONCLUSION AND RECOMMENDATIONS

7.1 Conclusion:
Most of the people are aware of stock market and they consider it as one of the popular investment medium but they are not very much familiar with the procedures, segments and functions of stock market. This lack of specific
66
_______________________________________________________________________ _ information about stock functionality exaggerates the present fear of stock market. People trust more on magazines and financial books then newspapers in making investment decision. Mostly investors keep balance or cautious risk strategy, and want high return on their investment. Stock has the potential to provide higher return on any investment comparative to other security but it also carries higher risk. Awareness level of stock market is low regardless of daily listing in newspaper. People have not seen any major advertisement of stocks. Economy of the country is the major factor that prevents investors from investing in stock market, other then that volatile nature of stock market and law order situation plays its part in hindering investors to invest in stock market. Knowledge about Stocks is the fourth important factor that stops investor.
7.2
Recommendations:
Following are some recommendations that may be helpful for attracting investors: 1. Economy of the country is the major factor for any investment. Smooth economy will definitely generate more investment in stock market.
67
_______________________________________________________________________ _ 2. Newspaper listing is not much helpful to people. It should be reformatted to make it understandable to general people. 3. People trust on books and magazines. They can play important role in educating people about stock market. Magazines and financial book should easily available to general mass and they should contain up-todate information, which help investor in evaluating opportunity. 4. There is no particular advertisement of stocks. There should be proper advertisements which encourage new people to invest in stock market.
68
_______________________________________________________________________ _
BIBLIOGRAPHY
Books: Brigham, C. Ehrhardt (2003). Financial Management, theory and Practice, 11th edition. Frederic S. Mishkin (2008).The Economics of Money, Banking, & Financial Markets, Seventh Edition, Addison-Wesley, Boston, MA, latest edition. Web sites: http://www.brecorder.com/news/statistics/indicators/ http://www.eagletraders.com/books/afm/afm2.htm http://www.finance.mapsofworld.com/ http://www.investorguide.com/igu-article-286-basic-economic-conceptsintroduction-to-inflation-and-its-impact.html http://www.opfblog.com/2037/inflation-in-pakistan-%E2%80%94-who-toblame/ http://www.statpak.gov.pk/depts/fbs/statistics/price_statistics/methodology _pri ce_statistics.html http://www.sbp.org.pk/reports/annual/ http://www.statpak.gov.pk/depts/fbs/statistics/price_statistics/methodology _pri ce_statistics.html http://www.stockmarkettiming.com/psp.html http://www.econ.iastate.edu/classes/econ308/tesfatsion/finintro.htm http://useconomy.about.com/od/themarkets/a/capital_markets.htm http://www.learningtree.com/investor/index.htm http://www.nasdr.com
_______________________________________________________________________ _
www.jang.cm.pk/thenews.html www.brecorder.com www.nation.com.pk www.dawn.com.pk www.dailytimes.com.pk www.kse.com.pk www.ise.com.pk www.lse.com.pk www.investopedia.com www.frbsf.org/ecomics/ www.accountancy.pk www.finance.gov.pk www.jstor.org www.wikipedia.com www.surveysystems.com www.en.mini.hu/stockmarket/stock.html
70
_______________________________________________________________________ _
QUESTIONNAIRE
1. Do you invest in any of financial instrument/Scheme other then Stocks? Yes No Dont know If you do invest in any security then GOTO Question#4 2. Are you planning to invest within few years? Yes No Dont know 3. If you do invest in then which type of investment (Stock, bonds, saving Certificates etc) you would prefer the most? Specify 4. Attitude towards Investment Risk, select one Conservative Cautious Balanced Adventurous Speculative 5. How much return would you expect of your investment? Lowest Low Average High Highest 6. Do you know where the Karachi stock exchanges building is? Yes No May be 7. Do any of your family members or friend trades in stocks? Yes No 8. Do you know how the Karachi Stock Exchange works? Yes
_______________________________________________________________________ _ No Partially 9. Does Newspaper Listing (Stock related given in newspapers) help you understanding functions? Yes No Slightly 10. Do you think there are enough material (Books/Magazines) available to assists you in getting information about stock market? Yes No Dont know 11. Is the provided information through newspaper, magazines, and books reliable and accurate? Yes No Dont know 12. Are you aware of brokerage system (commission/fee etc)? Yes No Partially 13. Are you aware of stocks speculation? Yes No Partially 14. Are you aware of Dividend system? Yes No 15. Are you aware of Bear/Bull Markets? Yes No 16. Have you seen any advertisement about stocks? Yes No 17. How much money do thing is required to start basic investment in Stock Exchange? Below 5000
_______________________________________________________________________ _ 5000-10000 10001-20000 20000-30000 ABOVE 25000 18. What are the factors, which stops you from investing in stocks? Check as many, Lack of Knowledge about Stocks Very Risky Not allowed in Islam (Satta) Stock Speculation Economy of Country Country law and order situation Fraud from Brokerage Side Fraud from Company side Environment of Stock Exchange Other. Specify 19. Do educational institute provides adequate teaching about stock markets? Yes No Dont know Personal Information 20. Age Less then 18 18-25 YEARS 26-35 YEARS MORE THAN 35 21. Gender Male Female 22. What is your annual income?| Below 10000 10000-15000 15000-20000 20000-25000 ABOVE 25000 23. Education Below Higher Secondary Higher Secondary/ A Level Bachelors
_______________________________________________________________________ _ Masters Other Specify
74

Why Investors Not Investing in The Stock Market

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Why Investors Not Investing in The Stock Market

Uploaded by

Copyright:

Available Formats

Why investors not investing in the Stock Markets

MBA (Banking and Finance)

FACULTY OF MANAGEMENT AND SOCIAL SCIENCES FALL- 2010

Institute of Business and Technology