[STOCK EXCHANGE] March 5, 2010 Why do we earn money? To have a better living and to have our needs fulfilled.

Every individual saves a part of his income for future needs. Some wise people rather keeping idle cash do investments. There is a saying Dont put your all eggs in one basket. There are many investment avenues available, but a wise investor does not invest on impulse, a hot tip or follow the herd. An investor should discriminate between information, casting away irrelevant and illogical pieces of information, and checking for opportunities and facts before making an intelligent choice of investments. One of the biggest investment avenues is Stock Exchange Market.

What is stock exchange market?

It is defined as: A centralized market for buying and selling of stocks where the price is determined through supply - demand mechanisms. In simple words, it is a place (secondary market) where shares of a company can be bought and sold. This is the most common way of buying and selling shares. The Stock Exchange can be also seen as a control to regulate the Marketplace where listed public companies and traders buy and sell shares. It is different from general market, as it only deals in shares

MOST POPULAR STOCK EXCHANGES

A few exchanges include American Stock Exchange, London Stock Exchange, the NASDAQ, and New York Stock Exchange (NYSE). These are among the most popular exchanges. There are also rules that are enforced by them and include regulations on the brokers and firms that work with them.

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ROLE & FUNCTION OF STOCK EXCHANGE:

The stock market plays an important role in the economy by mobilizing domestic resources and channeling them to productive investment. This implies that it must have a significant relationship with the economy. The relationship can be seen, in general, in two ways: The first relationship views the stock market as the leading indicator of the economic activity in the country, whereas

Second focuses on the possible impact the stock market may have on aggregate demand, particularly through aggregate consumption and investment. In other words, whether changes in stock market cause fluctuations in macroeconomic variables, like Consumption Expenditures, Investment Spending, Gross Domestic Product (GDP), Index of Industrial Production (IIP) etc are caused by these variables is an interesting issue to be examined.

STOCK EXCHANGES IN PAKISTAN

There are three Stock Exchanges in Pakistan, namely 1. Karachi Stock Exchange (KSE); formed in 1947, 2. Lahore Stock Exchange (LSE); formed in 1971, 3. Islamabad Stock Exchange (ISE); formed in 1989. Out of all the three Exchanges, the Karachi Stock Exchange is the premiere Stock Exchange of the country, with over 700 listed companies. It was established soon after the creation of Pakistan.Plan are underway for setting up a stock exchange at Faislabad. Moreover a plan of combining all the domestic stock exchanges into one Pakistan Stock Exchange are also under consideration.

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Lahore stock exchange (LSE)

We visited Lahore Stock Exchange (LSE) for our assignment. What information we got is briefly described below:

FEATURES:

Organized market Regular market (Opens at 9:45am and closes at 2:15pm from Monday to Thursday. Friday, it remains open from 9:25am to 12:00 noon & from 2:30pm to 4:00pm) Clearing house Free competition Second hand securities Listed securities Price quotation

Working:
LSE is working on computerized system, now-a-days. A software named Ultra Trade is used which not only resolved the complexities of trading shares by introducing online trading system but also abolished the previously working floor trading system. Now working is more systematic, organized and timely via free float market capitalization.

Free float market capitalization: It is defined as: The stocks of a company being traded in market are called free float market capitalization. Companies are divided on the basis of it, i.e.: KSE 30, KSE100

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CDS: Central Depository System

CDS is an important component of online trading system. With the introduction of the Central Depository System (CDS), an investor can have shares in paper form or can own shares in an electronic book- entry form at the Central Depository Company (CDC).

Central Depository Company of Pakistan Limited:

Central Depository Company of Pakistan Limited (CDC) was incorporated in 1993 to manage and operate the Central Depository System (CDS). CDS is an electronic book entry system to record and transfer securities. Electronic book entry means that the securities do not physically change hands and the transfer from one client account to another takes place electronically. An IBM led consortium along with the management of the company implemented CDS in Pakistan. The aim of CDC is to operate as a central securities depository on behalf of the financial services industry so as to contribute to the country's ability to support an effective capital market system which will attract institutional and retail level investors from Pakistan and abroad.

Components of Ultra Trade:

Symbol: name or abbreviation of the company Volume: number of shares to be bought Buy: Price at which a share is bought Sell: Price at which a share is sold

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[STOCK EXCHANGE] March 5, 2010 Volume: Volume of shares being traded Last: Last deal price Change: difference between previous day closing price and todays opening price. If there is a positive change i.e. increase in price, it will be shown by a green colored up arrow .and if there is a negative change ie decrease in price,It will be shown by a red .

coloured down arrow.

High : maximum bid price during the day. Low : Minimum bid price during the day. Turn-over: total number of shares traded during the day Average: Average price of shares traded during the day.

TRADING IN STOCK MARKETS

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with any one of the many registered professionals at a stock exchange, called the stock brokers who execute the order for a commision. The stock market functioning is very similar to auction market, where a buyer bids a specific price for a specific stock and a potential seller asks a specific price for that stock. When the bid and ask price matches, a sale takes place. If there are multiple bidders or askers at a given price, the sale will take place on first come first served basis. The highest biding price and highest sale price flashes on the screen of Ultra Trade. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

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THE MECHANICS OF SHARE DEALING:

One can operate in stock exchange very easily, all we have to do is: Hire a broker. Open an account. Submit the initial deposit. Submit the initial security. NOTE: Before opening an account, all the terms and conditions should be read very carefully.

Segments of Trading System:

The stock exchanges have introduced a computerized trading system to provide a fair, transparent, efficient and cost effective market mechanism to facilitate the investors. The trading system comprises of four distinct segments, which are: T+3 Settlement System Provisionally Listed Counter Spot Transactions Futures Contracts

T+3 SETTLEMENT SYSTEM:

In the T+3 settlement system, purchase and sale of securities is netted and the balance is settled on the third day following the day of trade. BENEFITS OF T+3 SETTLEMENT SYSTEM: It reduces the time between execution and settlement of trades, which in turn reduces the market risk.

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[STOCK EXCHANGE] March 5, 2010 It reduces settlement risk, as the settlement cycle is shorter.

PROVISIONALLY LISTED COUNTER:

The shares of companies, which make a minimum public offering of Rs.100 million, are traded on this segment from the date of publication of offering documents When the company completes the process of dispatch/credit of allotted shares to subscribers, through CDC it is officially listed and placed on the T+3 counter. Trading on the provisionally listed counter then comes to an end and all the outstanding transactions are transferred to the T+3 counter with effect from the date of official listing.

SPOT/T+1 TRANSACTIONS:
Spot transactions imply delivery upon payment. Normally in spot transactions the trade is settled within 24 hours.

FUTURES CONTRACT:
A Futures contract involves purchase and sale of a financial or tangible asset at some future date, at a price fixed today.

Investment strategies:
When a stock is attractive to trade? Which stock is doing well? What are the reasons of low market value of a particular stock? ALL such questions are answered by applying various investment strategies: 1. Fundamental analysis 2. Technical analysis 3. Index method 4. Insider trading method generally used

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Fundamental analysis:
We see: Past performance History Financial statement General economic factors Strength in industry

Usage:
This is basically used to determine long-term potential of a company. If these factors are good, then even if there are short-term setbacks, over the long run, the stock should do well.

Technical Analysis:
We see factors like: Volume of trading Cyclical behavior Trends Moving averages etc

Usage:
This is basically to decide when to buy? It could be helpful in determining how far the price might fall and could provide help in indicating a good time to buy. Some investors use both approaches. They use fundamentals to determine the long-term potential of a company and technical analysis to decide when to buy. For example, you may believe that a certain company has great potential over the long-term and will be worth much more in years to

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[STOCK EXCHANGE] March 5, 2010 come. However, it could be that the current market for this companys product is temporarily weak and that as a result, the stock price could fall. Technical analysis could be helpful in determining how far the price might fall and could provide help in indicating a good time to buy.

Stock Index method:

It is defined as: It is a tool for analyzing the performance of stock prices. It is an important method to see: How did market do today? It shows the degree of activity of the market. There are 3 types, as explained by a stock broker at LSE: 1. Simple index number 2. Value weighted index number 3. Un-weighted index number

Simple Index Method:

In which prices of the shares of the selected companies are added up and divided by the number of companies to find an average for each day and the difference between the averages of two consecutive days is calculated as a percentage. Example:

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Explanation:

In the above example the difference between the two days prices is Rs.1.6.This is the change in stock exchange price.

Value Weighted Method: In this method the change in index of a particular company can be calculated using the formula: Todays price___ x Total outstanding shares of company Yesterdays price

Example:

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[STOCK EXCHANGE] March 5, 2010 Calculations: Suppose that 10 shares of each company are sold, so: 310/300*10=10.33 rupees 55/50*10=11 rupees 90/100*10=9 rupees

Total=10.33+11+9 =30.33 rupees Average=10.11 rupees

Explanation: In the above example, the value weighted index is 10.11 rupees. This method is used now-adays.

Un-Weighted Index:
Change in index is found by the formula: Difference in stock price of 2 consecutive days x 100 Base index price In this way the percentage change for each company is found and added up and divided by the no. of companies. Example:

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Calculation: Average (10+5/2) = 7.5 % Explanation: In the above example, the un- weighted index is 7.5%

Insider Trading Method:

Sometimes companys private and confidential information which is not made available to the market is leaked out to outer world by any insider of the company. Such information might affect the investment decision of the investor, which eventually effect the share price Such trading is known as insider trading method.

Remedies for Stabilizing the Market Condition: Upper Lock:

Lock the standard that no sale/purchase more than 5% of the previous day share trading price. This usually happens in bull market conditions.

Lower Lock:
Lock the standard that no sale/purchase less than 5% of the previous day share trading price. This usually happens in bear market conditions.

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Conclusion:
Now a days market is neither bear nor bull. There is uncertainty in the minds of buyers due to political instability in the country. There is a capital flight due to prevailing unstable law and order situations. Increasing inflation and currency devaluation are badly affecting stock exchange. Textile sector, which is the backbone of our economy is going down day by day as due to electricity shortage they are unable to perform their commitments. Government should take some measures against all these problems so that Pakistan could progress by leaps and bounds

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