In the name of Allah The most Merciful

And

Who Help me Guided me

And

I always solicit at every step, at every

moment.

1

DEDICATION

This effort is dedicated to

my sweet parents

And

Respectable teachers who

always remind

The

Source of my guidance and

encourage me.

2

ACKNOWLEDGEMENT

First of all I am thankful to Almighty Allah

Whose Grace Has no limit and without

Whose Blessing and Mercies I never am

able to complete this project. Secondly I

am a lot of thankful to my parents,

teachers, and friends whose really

contribution to great deal in the

successfully completion of my project. 3

I would like to thank my reader for

investing the time and effort. Finally I

want to welcome and invite your

suggestion, thought, ideas to improve my

knowledge

4

PROJECT OUTLINE

1. Mission

2. Vision

3. Corporate Profile

4. What is Stock Exchange?

5. Who needs a Stock Exchange?

6. Importance of Stock Exchange

7. How does stock exchange work?

8. What are stock shares?

a. New Issue

b. Offer for Sale

9. Why does the stock market Rise & Fall?

10. What is KSE-100 Index2

11. What is meant by Bulls & Bears?

12. History of Karachi Stock Exchange

13. Trading

14. Growth

15. What is the Central Depository?

16. Why do we need the Depository?

17. The main operations performed in the CDS are as follows:

18. Who will trade then?

a. Main Account

b. House Account:

c. Sub-account (Client Account):

d. Group Client Account:

e. Cash Account

19. How does it work?

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20. Corporate actions will be handled by the CDC in the following manner:

a. Notice of meetings

b. Dividends

c. Bonus Shares

d. Rights Issues

e. Share Sub-division & Consolidation

21. Listing of Securities

22. Meaning of Listing

23. Advantages of Listing

24. Operators at Stock Exchange

a. Members of stock exchange

(1) Jobbers

(2) Brokers

b. Non-members acting for members:

(1) Remiser

(2) Authorized clerk

25. Functions of stock exchange

26. Recommendation

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1. Vision. To be a leading financial institution, offering efficient, fair and

transparent securities market in the region and enjoying full confidence of the investors.

2. Mission.

a. To strive to provide quality and value-added services to the capital market

in an efficient, transparent and orderly manner, compatible with

international standards and best practices.

b. To provide state-of-the-art technology and automated trading operations,

driven by a team of professionals in accordance with good corporate

governance.

c. To protect and safeguard the interests of all its stakeholders, i.e. members,

listed companies, employees and the investors at large.

d. To reflect the country’s economic health and behavior and play its role for

the growth, development and prosperity of Pakistan.

3. Corporate Profile

a. Chairman. Mr. Muneer Kamal

b. Managing Director. Mr. Nadeem Naqvi

c. Director (1) Mr. Ashraf Bava (2) Mr. Shazad G. Dada (3) Mr. Abid Ali Habib (4) Mr. Mohammad Qasim Lakhani (5) Mr. Abdul Qadir Memon (6) Mr. Zafar Siddiq Moti (7) Mr. Asif Qadir (8) Mr. Mohammad Sohail

d. Company Secretary. Mr. Muhammad Rafique Umer

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4. What is Stock Exchange? Stock Exchange is a market where shares

and securities are bought and sold by the Member/Broker on behalf of their clients

and also on their accounts. Stock Exchange is a capital market. Deals on the

Stock Exchange take place on open offers and bids which reflect the prevailing

flow of supply and demand for the market. Stock Exchange enables the buyers

and sellers to enter into transaction without the necessity of individual hawking.

5. Who Needs a Stock Exchange? The Stock Exchange provides a way

in which people’s savings can be put to work. A business needing new machinery

or premises has two options. Either the company use the profits kept in the

business or it will borrow from the bank. But Banks are willing to provide short-

term finance. They are reluctant to provide money on a permanent basis for long-

term projects. So companies turn to the public, inviting people to lend them money

or take a share in the business, in exchange for a share in future profits. Stock

Exchange acts as a bridge between the companies & the investors. The investor

will not be prepared to entrust his savings to a company seeking cash for

expansion, unless he can be sure that he would be able to get it out again. If the

company has invested his money in launching a new product, it will not be able

simply to hand it back. So these problems can be easily handled through a Stock

Exchange. When the saver/investor needs his money back, he does not have to

go to the company with whom he originally placed it. Instead, he sells his shares

to some other saver/investor who is seeking to invest his money. Large companies

need a way to tap the saving of the public at large. This they do by issuing stocks

& shares in the business through the Stock Exchange. By doing so they can

mobilize the savings of individuals and institutions.

6. Importance of Stock Exchange. The Stock Exchange is one of the

most important instruments in mobilizing national resources & broad basing

industrial ownership to promote economic development of a country. The Stock

Exchange, the world over has assumed a very important & vital place in the

sphere of industrial finance because of its role in promoting investment climate &

8

capital formation. It also ensures the maximum opportunities for equity

participation for growth & expansion of small & medium sized industries in the

country. The Stock Exchange channel lays the capital lying idle with the potential

to industry and commerce. At the establishment of large-scale industries has been

possible due to this institution. As such, the Stock Exchange constitutes an

important segment of economy & helps to promote national prosperity & also

contributes to the laudable objective of diffusion of ownership. The Stock

Exchange provides necessary stimulant to institutions, working for promoting

virtue of thrift, in carrying out their aims & objectives which are mainly to attract the

savings of individuals, & to utilize such savings profitably for industrial

development. With these actions of the capital market the base of industrial

finance has greatly widened & a large number of small investors are induced to

their savings in equity investment. With rapid economic development, the equity

finance in private & public sectors has acquired vital importance because of more

funds required for industrial expansion. It is obvious that for such a purpose the

existence of the Stock Market becomes indispensable because through this

institution alone it would be possible to mobilize savings of general public for

investment & medium-sized industries either for setting up such industries or for

their expansion, thereby increasing employment opportunities. The Stock

Exchanges the world over is rightly considered as the barometers of the economy

of their countries. The prospective investors look to the Stock Exchange for

guidance for investment.

7. How Does Stock Exchange Work? Stock Exchange is a market where

shares & securities are bought & sold by the Members/Brokers on behalf of their

clients and also on their accounts. Dealings on Stock Exchange take place by

open offers and bid which reflect the prevailing flow of supply and demand for the

market. The Stock Exchange enables buyers and sellers to enter into transaction

without the necessity of individual hawking. The law of supply and demand

determines the prices on the Stock Exchange floor. It also helps investors to

9

choose good scripts, as before granting enlistments of a scrip, the Stock

Exchange satisfies itself that the company is substantial, its shares are legally

issued, its shares are widely owned and the company agrees to issue adequate,

timely public notices of its financial position and for closure of its book for the

purpose of dividend, right issue and bonus issue.

8. What are Stock Shares? A share of stock represents ownership in a

corporation. A corporation is owned by its shareholders (also known as

stockholders) often thousands of people and institutions each owing a fraction of

corporation. When you buy a share of corporation you become a part owner or

shareholder, you immediately own a part, no matter how small, of every building,

piece of office furniture, machinery – whatever that company owns. As a

shareholder, you stand to profit when the company profits. You are also legally

entitled to a say in major policy decisions, such as whether to issue additional

shares, sell the company to outside buyers, or change the board of directors. The

rule is that each share has the same voting power, so the more shares you own,

the greater your power. You can vote in person by attending a corporation’s

annual meeting or you can vote by using an absentee ballot, called proxy, which is

mailed before each meeting. The proxy allows a yes or No vote on a number of

proposals. Alternatively, stockholders may authorize their votes to be cast

consistently with the Board of Director’s recommendations. There are a number of

classes of shares and the most common are: -

a. New Issues. For a new company in order to build up its capital it

may issue lots of the capital to be raised.

b. Offer for Sale. In an existing company where the majority

shareholding is held by a holding company, the latter may sell its

shares to the public with or without a premium to broad base the

company.

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* A premium is additional money requested by the company on each share on any issue, over and above its par value.

When an unquoted company applies for Stock Exchange listing, a firm that is a

member of the Stock Exchange must sponsor it. This sponsoring member firm has

the responsibility of ensuring that the company meets the requirements for listing,

and carries out the necessary procedures to ensure a successful issue for the

company’s shares – e.g. by advising on an issue price for the shares, or by trying

to attract institutional investors in buying some of the shares. A Company about to

issue new securities in order to raise finance might decide to have the issue

underwritten. Underwriters are financial institutions or individuals who agree, in

exchange for a fixed fee, to purchase at the issue price any securities, which are

not subscribed for by the public.

9. Why Does The Stock Market Rise & Fall?The market as whole does well

when many people invest; it suffers when investment activity is down. A number of

factors influence whether and why people buy stocks. Some of these factors are

economic, productivity level in the economy, interest rates and exchange rates.

Ample money supply stimulates investments of all kinds; tight money holds them

down. Changes in tax rates can also have an impact on stock buying patterns. In

addition, investors often consider the influence of social or political factors upon

economic stability. The unsettling economic effect of domestic unrest, pending

elections or international conflict can make investors cautious and slow down

stock market activity.

10. What is KSE-100 Index.The KSE-100 contains a representative sample of

common stocks that trade on the KARACHI Stock Exchange. The KSE stocks that

comprise the index have a total market value of Rs.114 Billion for over 500 stocks

on the Karachi Stock Exchange as on November 1st, 1991. In the simple form, the

KSE-100 index is a basket of price and the number of shares outstanding. The

value of the basket is regularly compared to a starting point or a base period i.e.

01-11-1991, to make the computations simple, the total market value of the base

11

period has been adjusted to 1000 points. Thus, the total market value of the base

period has been assigned a value of 1000 points.

The formula for calculating KSE-100 is:

Sum of shares outstanding * Price for period * 1000

Sum of shares outstanding * Price for base period

For example Suppose the price of 100 shares in the index increase to Rs.

57.900 Billion as compared to the base price of Rs. 57.281 billion, then index will

move to 1010.8 i.e. by 10.8 points as shown on the next page.

57.900*1000 = 1010.8

57.281

11. What is meant by Bulls & Bears? The market goes through cycles,

tending upwards for periods of time, and then reversing it, and vice versa. Arising

period is known a BULL MARKET. Bulls are being the market optimists who cause

prices to rise. A BEAR MARKET is a falling market, where the pessimists are

driving prices lower. The stock market is a constant attack sweeping their paws

downward while bulls toss their horns upward. A useful struggle between the

bulls and the bears, both groups tugging in opposite directions. Popular notions

abound regarding the origin of these labels. One common myth is that the terms

reflect the animal’s method of attack-bears but not the true origin.

12. History of Karachi Stock Exchange. Karachi Stock Exchange

is the biggest and most liquid exchange in Pakistan. It was declared the “Best

Performing Stock Market of the World for the year 2002”. As on May 30, 2008, 654

companies were listed with a market capitalization of Rs.3, 746.203 billion (US$

56.334 billion) having listed capital of Rs.705.873 billion (US$ 10.615 billion). The

KSE 100TM Index closed at 12130.51 on May 30, 200

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a. Trading. The exchange has pre-market sessions from 09:15am to

09:30am and normal trading sessions from 09:30am to 03:30pm. It is

the second oldest stock exchange in South Asia. The Karachi stock

exchange has undergone a considerable deal of downturn partly due

to global financial crisis and partly on account of domestic troubles. It

remained suspended in excess of 4 months and resumed normal

trading only on December 15, 2008. The KSE 100 Index and KSE 30

Index after hitting the low around mid January has now rebounced

and recovered 20-25% till March 12th 2009. 2

b. 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

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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.

c. 2008 Karachi Stock Exchange Crisis:

(1) April 20 : Karachi Stock Exchange achieved a major milestone

when KSE-100 Index crossed the psychological level of 15,000

for the first time in its history and peaked 15,737.32 on 20 April,

2008. Moreover, the increase of 7.4 per cent in 2008 made it

the best performer among major emerging markets.

(2) May 23: Record high inflation in the month of May, 2008

resulted in the unexpected increase in the interest rates by

State Bank of Pakistan which eventually resulted in sharp fall in

Karachi Stock Exchange.

(3) July 16 : KSE-100 Index dropped one-third from an all-time

high hit in April, 2008 as rising pressure on shaky Pakistan's

coalition government to tackle Taliban militants exacerbates

concern about the country's economic woes

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(4) July 17 : Angry investors attacked the Karachi Stock Exchange

in protest at plunging Pakistani share prices.

(5) August 18: KSE 100 Index rose more than 4% after the

announcement of the resignation of President Perwez Musharaf

but Credit Suisse Group said that Pakistan's Post-Musharraf

rally in Stock Exchange will be short-lived because of a rising

fiscal deficit and runaway inflation.

(6) August 28 :Karachi Stock Exchange set a floor for stock prices

to halt a plunge that has wiped out $36.9 billion of market value

since April

(7) December 15: Trading resumes after the removal of floor on

stock prices that was set on August 28 to halt sharp falls.

13. What is the Central Depository? The Central Depository System is an

electronic book entry system to record and transfer securities. This system

changes ownership of securities without any physical movement of certificates or

necessity for execution of transfer deeds. The CDS is normally operated by a

Central Depository Company which records and transfers the beneficial ownership

of securities and works similar to a bank. Securities will be deposited into the CDS

and transactions will be effected electronically, thereby removing the current need

to count, verifies, store and transport countless certificates. The components of

the CDS include the hardware, software, networking environment, legal

framework, participants and the CDC management. Some international examples

of scrip less trading are New York, Hong Kong and the London stock exchanges.

These systems all vary from each other in one-way or another. In Hong Kong for

instance, the Central Clearing and Settlements System (CCASS) is employed for

settlements. The CCASS is a computerized securities and settlements. Without

automation and immobilization of certificates, the delivery and settlement of

15

securities would become unmanageable, not to mention highly risky. System that

has replaced the physical delivery system, Under the CCASS, certificates

representing securities traded on the stock exchange In the Kuala Lumpur Stock

exchange semi-scrip less system is being used. A specific number of shares have

been deposited with the central depository and the rest are traded physically.

14. Why do we need the Depository? There are a number of advantages

that the CDS brings with it but there are three main reasons for the CDS. The

Stock Markets in Pakistan, in the last few years have registered exceptional

growth, especially with the entry of foreign investors in the local market. Trading

volumes have increased manifold and are likely to increase further with the

passage of time and the physical handling of certificates will become more

cumbersome and time consuming Secondly, the current delivery, settlement and

transfer procedures have traditionally been plagued by lengthy delays, risks of

damage, loss, forgeries, duplication and considerable investment in time and

capital. Implementation of the CDS will not only minimize these problems, but also

assist in the development of the capital market. Thirdly, the implementation of

CDS in Pakistan will fulfill the recommendations made by the Group of Thirty, a

private international body whose charter is to raise awareness and understanding

of major international and financial issues. Its objective is to standardize the

settlement procedures and reduce associated inherent risks on a global basis. The

most important recommendation made by the Group of Thirty was to setup

securities depositories by major stock exchanges worldwide so as to facilitate

delivery and settlement of transactions. The Group of Thirty's recommendations

have been adopted by the International Federation of Stock Exchanges and are

supported throughout the international securities community. The CDC will act as

a trustee for investors and all securities within the CDC will be registered in its

name. CDC however will have no beneficial rights to these securities; it will hold

them as a nominee on the investors' behalf. Therefore all rights and benefits, such

16

as dividends, bonus, rights entitlements and voting rights, will remain with the

actual owner of those securities.

17

15. The main operations performed in the CDS

a. Deposit of existing and new securities into the depository

b. Withdrawal of securities in the form of certificates from the depository

to cater for investors who prefer to have physical possession of

certificates.

c. Free transfer or book entry transfer of securities without any

associated cash movement.

d. Pledge/release/call like placing a lien on securities in favors of a

lender, which can only be released/called by the lender.

e. Stock borrowing or lending through the mechanism of transfer with or

without associated money movement through the depository system.

f. Corporate action like bonus issues, rights entitlements, sub-division,

consolidation and any other action that changes the number of

securities held in a participant's account or involve the determination

of entitlement to beneficial owners.

g. Delivery versus payment, book entry transfer of ownership of a

security in exchange for payment to settle a transaction. Cash only

movement, movement of cash from one account to another without

any associated securities movement.

18. Who will trade then? As soon as a company is put on the CDS all

physical trade will no longer be possible. Now it will be the participants who will

trade for their clients. These participants will be limited to securities institutions

such as stockbrokers, financial institutions and some qualified private investors.

Retail investors will participate through these institutions. The participants of CDC

18

will be able to settle their transactions within the CDS through five types of

accounts, namely:

a. Main Account. Each participant in the system will be allocated a

main account by virtue of being a participant in the CDS. This account

will mainly be used as a transit account for movement of securities.

b. House Account. Used for securities owned beneficially by

participants. Holding a house account is optional and a participant

may create any number of such accounts.

c. Sub-account (Client Account). This account is used for keeping

securities belonging individually to each of the clients of a participant.

A participant may open any number of sub accounts he requires and

maintain these sub-accounts on behalf of his clients.

d. Group Client Account. This account is used for keeping securities,

which are beneficially owned by the participant's clients. It will be

used for clients who are not willing to utilize the facility of opening

separate sub-accounts. Each group account will contain the securities

owned by a group of clients. The participant will hold the detailed

break-up of the securities held by each client of such a group and no

such record will be maintained within the CDS.

e. Cash Account . Each participant in the system who opts to avail

the Delivery vs. Payment (DVP) facility will be required to deposit, in

advance, a rolling settlement fund to be used for the settlement of his

DVP obligations. The balance of the participant's rolling settlement

fund will be stored in this account.

19. How does it work? This is perhaps the most common question and

pops up in every mind. The first step of course will be to deposit the certificates in

19

the CDC if a transaction is to be made. The CDC will declare securities eligible for

deposit in the CDS. A participant will initiate a deposit transaction either on his

own behalf or on behalf of his client. The certificates after due verification by the

issuer will be canceled and the nominee holding of CDC will be increased in the

relevant register of the issuer. At the same time, the beneficial owners' account will

be credited in the CDS.

However there are investors who might want to keep their certificates. There is no

compulsion that all certificates be deposited with the CDC. So the CDC to cater for

investors who prefer to keep certificates will provide this option. Withdrawn

certificates however will not be eligible to be used to settle a market trade. In order

to be traded in the market they will have to be redepositing into the CDS.

Participants may also apply to issuers or their appointed registrar/ transfer agent in

order to withdraw securities by sending them the prescribed withdrawal form. Sub-

account holders, will affect withdrawals through their participants. Once the issuer

has approved the withdrawal form, he will issue a certificate/s in the name of it's

beneficial owner and reduce CDC's nominee holding accordingly.

Securities can also be pledged through the CDC. A participant, acting either on his

own behalf or on behalf of his client, can place securities under pledge with an

eligible pledged from whom a loan is to be taken. Placing securities under pledge

will result in securities being flagged as no longer available for transfer /delivery

until such time as they are released from pledge or transferred on the instructions

of the eligible pledges to the account of a participant. Any benefits will however,

still accrue to the pledges.

Participants on behalf of their clients can maintain sub accounts. The client,

however, will not be able to operate the account himself. The relevant participant

will handle all his transactions for him through this sub-account. The participant

will open, maintain and operate this sub account in the name of the sub-account

20

holder, so as to record his title to the securities in his account. A sub account

holder will receive confirmation of his account balance from the relevant

participant. Moreover, he can also request the CDC to directly confirm his balance.

The Central Depositories legislation has specific provisions for protecting the sub-

account holder. For example, a participant is not legally allowed to undertake any

transfers, pledges or withdrawals from sub-accounts without specific instructions

from the sub-account holder. Violation of this clause by a participant is punishable

by a significant fine and imprisonment.

20. Corporate actions will be handled by the CDC in the following manner:

a. Notice of meetings. The law requires that the issuer give notice

of a general meeting to its shareholders at least 21 days before the

meeting. The depository will produce a list of beneficial owners

containing the relevant details. This will enable the issuer or its

appointed registrar, to issue notices of meetings to the right people.

b. Dividends. The CDC will prepare a list of beneficial owners who are

to receive entitlements from the issuer. This report will be prepared on

the last day before the start of the book closure period announced by

the concerned company. These lists will be sent to the concerned

issuer or his appointed R/ TA, and dividends will be dispatched

accordingly.

c. Bonus Shares. In case of bonus shares, upon receipt of

information from the issuer, the depository will increase the positions

held by each participant by the amount of bonus share issued.

d. Rights Issues. Will be dealt with in a manner similar to bonus

shares. Beneficial owners will be credited automatically with their

entitlements. This will ensure that trading in 'unpaid rights' can start

immediately.21

e. Share Sub-division Consolidation. In the case of share sub-division

& consolidation, the CDC wilt calculates the new share balances,

which the shareholders in the Depository System will be entitled to,

based on their existing share holdings. On the date when the sub-

division or consolidation is approved by the issuer, a program will be

run which will replace the old balances with the new share balances

calculated above.

21. Listing of Securities. All corporate securities like shares, stocks, bonds,

debenture etc. are not allowed to be deal with in the stock exchange. Every stock

exchange maintains a list containing the names of selected companies whose

securities can be traded in that stock exchange. This list is called ‘official trade list’

Unlisted securities cannot be dealt in the stock exchange. The company, which

wants its securities to be traded in a recognised stock exchange, should apply to

the stock exchange and get its name included in the ‘official trade list’.

22. Meaning of listing the inclusion of the name of a company in the

official trade list of a stock exchange is called ‘listing’. Earlier, listing optional.

Listing is now made compulsory for all public companies, however, subject to

certain exemptions.

23. Classification of listed securities. Listed securities may be

classified into two categories:

a. Cleared Securities. Cleared securities are the securities in which

forward trading can be done. So they are also known as “securities on

forward list”.

b. Non-cleared Securities. Are traded in spot transactions. They

are called ‘securities in cash list’.

24. Advantages of Listing. Listing gives the company a higher status. It

enables a company to enjoy the confidence of the investing public. By widening

the market for the securities it helps the company to raise the future finance easily.

22

It provides price continuity for securities. It facilitates the correct evaluation of

securities in terms of their real worth.

25. Operators at Stock Exchange

a. Members of stock exchange

(1) Jobbers. Jobbers are security merchants dealing in shares,

debentures as independent operators. They buy and sell

securities on their own behalf and try to earn through price

changes. Jobbers cannot deal on behalf of public and are

barred from taking commission. In India, they are called

Taravaniwalas.

(2) Brokers. Brokers are commission agents, who act as

intermediaries between buyers and sellers of securities. They

do not purchase or sell securities on their behalf. They bring

together the buyers and sellers and help them in making a deal.

Brokers charge a commission from both the parties for their

service. Brokers are experts in estimating trends of price and

can effectively advice their clients in getting a fruitful gain.

Brokers get orders from investing public and execute the orders

through Jobbers and they are entitled to a prescribed sale of

brokerage.

b. Non-members acting for members.Some non-members with limited

rights are allowed to enter the house and to act on behalf of

members. There are two types of such agents.

(1) Remiser. He acts as an agent of a member of a stock

exchange. He obtains business for his principal i.e., the

member and gets a commission for that service. -189- -190-

(2) Authorized clerk. The authorized clerks are mere employees

of the members, appointed by the member of stock exchange.

The authorized clerks transact business on behalf of their

23

employers on the floor of the stock exchange. They are paid a

salary, plus a commission

26. Function of the stock exchange:

a. Raising capital for businesses. The Stock Exchange provides

companies with the facility to raise capital for expansion through

selling shares to the investing public.

b. Mobilizing saving for investment. When people draw their savings

and invest in shares, it leads to a more rational allocation of resources

because funds, which could have been consumed, or kept in idle

deposits with banks, are mobilized and redirected to promote

business activity with benefits for several economic sectors such as

agriculture, commerce and industry, resulting in a stronger economic

growth and higher productivity levels and firms.

c. Facilitating company growth.Companies view acquisitions as an

opportunity to expand product lines, increase distribution channels,

hedge against volatility, increase its market share, or acquire other

necessary business assets. A takeover bid or a merger agreement

through the stock market is one of the simplest and most common

ways for a company to grow by acquisition or fusion.

d. Redistribution of wealth. Stocks exchanges do not exist to

redistribute wealth. However, both casual and professional stock

investors, through dividends and stock price increases that may result

in capital gains, will share in the wealth of profitable businesses.

e. 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 24

imposed by public stock exchanges and the government.

Consequently, it is alleged that public companies (companies that are

owned by shareholders who are members of the general public and

trade shares on public exchanges) tend to have better management

records than privately-held companies (those companies where

shares are not publicly traded, often owned by the company founders

and/or their families and heirs, or otherwise by a small group of

investors). However, some well-documented cases are known where

it is alleged that there has been considerable slippage in corporate

governance on the part of some public companies (Pets.com (2000),

Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Web

van (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat

(2003), are among the most widely scrutinized by the media).

f. Creating investment opportunity of small investor . As opposed

to other businesses that require huge capital outlay, investing in

shares is open to both the large and small stock investors because a

person buys the number of shares they can afford. Therefore the

Stock Exchange provides the opportunity for small investors to own

shares of the same companies as large investors.

g. Govt. capital- rising for development project . Governments at

various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or

housing estates by selling another category of securities known as

bonds. These bonds can be raised through the Stock Exchange

whereby members of the public buy them, thus loaning money to the

government. The issuance of such bonds can obviate the need to

directly tax the citizens in order to finance development, although by

securing such bonds with the full faith and credit of the government

instead of with collateral, the result is that the government must tax

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the citizens or otherwise raise additional funds to make any regular

coupon payments and refund the principal when the bonds mature.

h. Barometer of the economy. At the stock exchange, share

prices rise and fall depending, largely, on market forces. Share prices

tend to rise or remain stable when companies and the economy in

general show signs of stability and growth. An economic recession,

depression, or financial crisis could eventually lead to a stock market

crash. Therefore the movement of share prices and in general of the

stock indexes can be an indicator of the general trend in the

economy.

27. Recommendation. In comparison to earlier years, currently the stock

market is considered a viable investment avenue for individual and institutional

investors. This report has presented a history of the market, its trends, its recovery

since September 2001 and future expectations of growth. Having analyzed

alternative forms of investments available in Pakistan, the KSE today provides

higher returns to investors. Despite certain barriers to growth, there exist strong

fundamentals, which according to analysts would bring the index level to 16,000

points thus making the stock market a profitable investment opportunity

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