karachi stock exchange corporate finance project
TRANSCRIPT
In the name of Allah The most Merciful
And
Who Help me Guided me
And
I always solicit at every step, at every
moment.
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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 &
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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
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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
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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
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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
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as dividends, bonus, rights entitlements and voting rights, will remain with the
actual owner of those securities.
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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
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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
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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
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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.
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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
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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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