STOCK EXCHANGE

A stock exchange, securities exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks.

Types of Stock Exchanges:

There are three stock exchanges in Pakistan.
Karachi stock exchange; formed in 1947 Lahore stock exchange; formed in 1971 Islamabad stock exchange; formed in 1989

Out of all the three exchanges, the Karachi stock exchange is the premiere stock exchange. Exchange of the country, with over 700 listed companies. It was established soon after the creation of Pakistan.

KARACHI STOCK EXCHANGE

The Karachi Stock Exchange or KSE is a stock exchange located in Karachi, Sindh, Pakistan. Founded in 1947, it is Pakistan's largest and oldest stock exchange, with many Pakistani as well as overseas listings. Its current premises are situated on Stock Exchange Road, in the heart of Karachi's Business District.

History:
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

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

Functions of stock exchange

Although the stock exchange market has multiple functions, its main activities are two:
o

To promote the savings and for them to be canalized towards of carrying through investment projects that otherwise wouldnt be possible you need that the issuing institution of the securities to be admitted for quoting. The negotiations will be done on the primary market. To provide liquidity to the investors. The investor can recuperate the money invested when needed. For it, he has to go to the stock exchange market to sell the securities previously acquired. This function of the stock market is done on the secondary market.

Other functions of the stock exchange market as an organization are:

o

To guarantee the legal and economic security of the agreed contracts. To provide official information about the quantities that are negotiated and of the quoted prices. To fix the prices of the securities according to the fundamental law of the offer and the demand.

Specifying a bit more and centering on the two main agents that intervene in the market, investors and companies, we could do the following classification:

Functions done by the stock exchange market in favor of the investor:

o

It permits him the access to the profitable activities of the big companies. It offers liquidity to the security investments, through a place in which to sell or buy securities. It permits for the investor to have a political power in the companies in which he invests its savings due that the acquisition of ordinary shares gives him the right (among other things) to vote in the general shareholders meetings of the company in question. It offers the possibility of diversifying your portfolio by enlarging the field of strategy of investments due to alternative options, as could be the derived market, the money market, etc.

With respect to the function done by the stock exchange market in favor of the companies:
o

It supplies them with the obtaining of long-term funds that permits the company to make profitable activities or to do determine projects that otherwise wouldnt be possible to develop for lack of financing. Also, this funding signifies a less cost than if obtained at other channels. The securities quoted at the stock exchange market usually have more fiscal purpose advantages for the companies. It offers to the companys free publicity, which in other way would suppose considerable expenses. The institution is

objecting of attention of the media (television, radio, etc.) in case any important change in its owners (the share holders). There also exists a constant following (newspapers) of the quotations. Therefore we can see how the stock exchange market supposes a great advantage to the companies, but there are also some inconveniences to have in mind:

First of all, they need of a series of conditions to be apt to enter to the quotations, not all the companies that apply can do it. The issuing of shares may suppose a loss of power for the founders of the company. Anyway, this is very relative because it will depend on the grade of atomization on the participations of the new shareholders and of the percentage of shares that the founders keep over the total capital of the company. If for example a 49% of the share capital is in hands of the founders, these could loose the control of in case the other 51% would be in hands of one main shareholder. However, this rarely happens, due that the share capital that usually goes to the stock market tends to be distributed between a great number of shareholders that acquire modest participations in respect to that of the capital of the company the founders may still keep control with share capital is distributed between a great number of participants. Now then, the property of these shares implies the possession of certain rights over the company in which you participate.

These are: political rights, among which appears the possibility of participating in the general share holders meetings and in the administration of the company by means of the execution of your rights

to vote; and the economic right, which embraces the possibility of receiving dividends, preferential rights of subscription, the transmission of shares (selling) and the right to the liquidity value. This last implies that at the moment in which the company is liquidated, what remains is proportionally divided between the shareholders. The possession of all these rights is what reduces the power of the founders.

The shares may pass to be property of unknown people to the founders. At the moment in which they are object of quotations at the stock exchange market any supplier of capital may have them. If its a company that previously knew all its shareholders, considering this as an asset of value to the company. The stock market quotation may generate an important change that will not always be positive. The companies that are quoted at the stock market offer a better transparency, in a way that the general public may have access to any information related to their evolution and activities. This makes them have a greater control and to supervise every movement done.

Other Function of the stock exchange:

1. Raising capital for businesses
The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

2. 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.

3. 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.

4. 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.

5. Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat (2003), are among the most widely scrutinized by the media).

6. 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.

7. 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 the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

8. 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.