Introduction to market

Market:-
A market is any one of a variety of systems, institutions, procedures, social
relations and infrastructures whereby parties engage in exchange. While parties may
exchange goods and services by barter, most markets rely on buyers offer their goods or
services (including labor) in exchange for money (legal tender such as fiat money) from
buyers.

Types of Market:-
There are two types of Market as following:
Money Market
Capital Market

Money Market:-

In finance, the money market is the global financial market for short-term borrowing and
lending. It provides short-term liquidity funding for the global financial system. The
money market is where short-term obligations such as Treasury bills, commercial paper
and bankers' acceptances are bought and sold.

Capital Market:-

It is defined as a market in which money is provided for periods longer than a year as the
raising of short-term funds takes place on other markets (e.g., the money market). The
capital market includes the stock market (equity securities) and the bond market (debt)

Stock exchange
A stock exchange is an organization of which the members are stock brokers. A stock
exchange provides facilities for the trading of securities and other financial instruments.
Usually facilities are also provided for the issue and redemption of securities as well as
other capital events including the payment of income and dividends. The securities
usually traded on a stock exchange include the shares issued by companies, unit trusts
and other pooled investment products as well as corporate bonds and government bonds.

Trading process
Types
History of Stock Exchanges
In 11th century France the courtiers de change was concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. As these men
also traded in debts, they could be called the first brokers.
Some stories suggest that the origins of the term "bourse" come from the Latin bursa
meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three
purses), hung on the front of the house where merchants met. However, it is more likely
that in the late 13th century commodity traders in Bruges gathered inside the house of a
man called Van der Burse, and in 1309 they institutionalized this until now informal
meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and
neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351, the Venetian Government outlawed spreading rumors intended to
lower the price of government funds. There were people in Pisa, Verona, Genoa and
Florence who also began trading in government securities during the 14th century. This
was only possible because these were independent city states ruled by a council of
influential citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in business
ventures and get a share of their profits—or losses. In 1602, the Dutch East India
Company issued the first shares on the Amsterdam Stock Exchange. It was the first
company to issue stocks and bonds. In 1688, the trading of stocks began on a stock
exchange in London.
On May 17, 1792, twenty-four supply brokers signed the Buttonwood Agreement outside
68 Wall Street in New York underneath a buttonwood tree. On March 8, 1817, properties
got renamed to New York Stock & Exchange Board. In the 19th century, exchanges
(generally famous as futures exchanges) got substantiated to trade futures contracts and
then choices contracts. There are now a large number of stock exchanges in the world.

Stock exchange of Pakistan

• Karachi stock exchange
• Lahore stock exchange
• Islamabad stock exchange

Karachi Stock Exchange

The Karachi Stock Exchange or KSE is the first 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. Later on two more stock
exchanges were formed in Lahore (1971) and Islamabad (1992) to facilitate the
investment in securities. The investors get opportunities of international investment due
to contract of Pakistan’s stock exchanges with other countries. The stock exchange not
only informs the investors about international business trends but also plays important
role in strengthening the economy of the country.

History:-

The KSE is the first 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.

Trading:-

The exchange has

Pre-market sessions from 09:15am to 09:30am.
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 re
bounced and recovered 20-25% till March 12th 2009.

Securities:-
The securities traded on a stock exchange include:
Shares issued by companies.

Debentures.
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 electronics 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.
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off exchange or
over the counter. This is the usual way that derivatives and bonds are traded.
Increasingly, stock exchanges are part of a global market for securities

Shares:-
The total authorized capital in the company is divided into small units and each is
individually called “Share”. You can buy large or small lots to match the amount of
money you want to invest. When the company does well, its shares can rise in value. If
the company hits a bad patch, its share can fall in value. The shares are considered as the
main source to raise company’s capital.

Share Holder:-
The people who provide finance to company by purchasing shares are called
shareholders.

Types of shares:-
Preference Shares:
These are shares whose holders have preferential rights in respect of the payment of
dividend and repayment of capital in the event of winding up. The rate of dividend on
these shares is fixed. There are further two types of preference shares.
Cumulative preference shares:
If the profit if company is not enough to pay dividend on any kind of shares at the end of
financial year than the right of dividend on these shares accumulates until all arrears of
unpaid dividend have been paid.
Non-Cumulative preference shares:
These are the shares on which if dividend is not paid out of current years profit in any
year then it is never paid.

Ordinary Shares:
These shares are the shares on which dividend is not paid at fixed rate. Ordinary
shareholders receive the dividend proportionally out of profit earned by the company
after the payment of fixed dividend on preference shares.
Deferred Shares:
The share issued to promoters of the company is called deferred or founders shares. The
dividend on these shares is paid after the payment of dividend on all other types of
shares.

Types of operators in stock exchange:

The operators who buy and sell securities on stock exchange are of several types. Some
of them are described below:

Brokers:

A broker is a member of the stock exchange. He buys and sells the securities on the
behalf of the outsiders who are not the members. He charges brokerage for his services.
He does not specialize in any particular security. He buys sells all types of securities
according to the orders placed by his clients.

Jobbers:

The jobber is a member of stock exchange but he buys and sells securities on his own
behalf. He is a dealer in securities. He usually specializes in one type of security. His
income comes from the profit or price difference in the purchase and sale of securities. A
jobber normally deals for himself but he is not prohibited from buying and selling
securities on the behalf of others.

Bulls:

A bull is a speculator who expects a rise in prices. Therefore, he buys securities with a
view to sell them in future at a higher price thereby make profit. When the conditions in
the stock exchange are dominated by bulls, it is called a “bullish market”. When the
prices fall and bulls have to sell at loss, it is called “bull liquidation”.

Bears:

A bear is a speculator expects fall in prices. Therefore, he sells securities for future
delivery. He sells securities, which he does not possess. He sells with the hope to buy the
securities at lower price before the date of delivery. The efforts of bears to bring down
the prices artificially are known as “bear raids”. When bears dominate the market, it is
called a “bearish market”. When prices are rise and bears have to make purchases to meet
their commitments, it is called “bear covering”.

Trading procedure on Stock Exchange

In order to purchase or sell securities on a stock exchange, the following steps have
to be taken:
Selection of Broker:

A broker is a member of stock exchange and securities can only be purchased and sold
through him. After selecting the broker the investor has to convince the broker to buy or
sell securities on his behalf. For this purpose, the investor may have to make an advance
or give references of a bank or some other persons.

Placing the order:

There are three parties involved in the dealing of shares:

1. The Stock Broker
2. The Client
3. The Jobber

The stock broker simply acts as agent and contacts the particular jobber in the stock
exchange on behalf of the client. He does not disclose to the jobber whether he is a buyer
or seller of shares. He therefore, asks him to quote two prices:
The upper prices at which he is ready to sell the shares.
The lower prices at which he is ready to buy the shares.

For Example, Mr. Ali wants to sell one thousand shares of a Company. He contacts a
broker dealing on the stock exchange. The broker asks a jobber to give quotations. He
does not disclose the jobber whether he wants buy or sell the shares of a company. The
jobber gives two prices, one at which he is willing to sell and the other at which he is
ready to buy. For instance, the two quoted prices are Rs.21.90 and Rs.22.00 in a
thousand. This means broker is willing to purchase at Rs.21.90 and sell at Rs.22.00 per
share. If the broker is not satisfied, he can go to another jobber or ask the first one to
make it closer (i.e. to reduce the margin between buying and selling). If the broker is
satisfied with the new quotation, he then contacts with his client informs him the bid of
the share. If the client agrees to the bid price, then bargain is struck

Preparing the contract note:

The stock broker prepares a contact note, one copy of which is given to the client; second
one to the jobber and the third remains with the broker. The contact note generally
contains the following information:
• Name and the address of the stockbroker.
• The name and address of the jobber.
• The type and price of the share.
• The commission of the broker.
• The date of transaction

Settlement:

In case of ready delivery contract, the buyer pays the money and the seller delivers the
securities one same day.
In the case of forward delivery contracts settlements are done in a week or once in a
month.
On the settlement day, the difference in the purchase and the sell price may be paid
without any delivery of securities. The parties may also postpone the deal to the next
settlement date through mutual consent. This is known as “carryover” or “budla”.
.

Listing of Securities on Stock Exchange

All securities are not dealt on stock exchange. Only those securities are sold or purchased
which are included in trading list of the stock exchange. In order to get a security listed
on stock exchange for trading purposes, the company issuing such a security must make
an application along with following prescribed documents.

Copies of memorandum, articles, prospects, directors’ report, balance sheet and

agreement with underwriters.
Specimen copies of shares, debentures, certificates, letter of allotment and
acceptance, etc.
Particulars regarding capital structures.
A statement showing the distribution of shares.
Particulars of dividends and each bonus declared since its incorporation.
Particulars of shares and debentures for each, permission are required.
A brief history of the company’s activities since its incorporation.
After the scrutiny of application, if the stock exchange authorities are satisfied, they
call upon the company to execute the ‘listing agreement’. The listing agreement
contains the following conditions and obligations:
The company must be fair to all the applicants for shares. In the case of over
subscription, no undue preference will be shown to any particular class of
applicants.
To notify stock exchange about the date of the board meeting at which decision of
dividend is taken.
To forward the copies of its annual accounts duly audited to the stock exchange.
To notify the stock exchange, about any material change or nature or feature of the
company’s business.
To notify the stock exchange any change in the capital of the company.
To notify the issue of any new shares including bonus shares.
To comply with all the requirements of the listing agreement and not to commit any
breach of any condition.
To notify the stock exchange of any occasion this will result in redemption or
cancellation of any listed security.
To avoid, the establishment of a false market for the listed securities.
To supply the stock exchange any other information necessary to enable the
shareholders to know about the company’s position.
KSE Stock indices:-

Stock indices:-
A stock index is a method of measuring a section of the stock market. There are two big
indices used in Karachi Stock Exchange.

KSE 100 Index

Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index, acting as a
benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period of
time. In determining representative companies to compute the index on, companies with
the highest market capitalization are selected. However, to ensure full market
representation, the company with the highest market capitalization from each sector is
also included.

History:-
The index was launched in late 1991 with a base of 1,000 points. By 2001, it had grown
to 1,770 points. By 2005, it had skyrocketed to 9,989 points. It then reached a peak of
12,285 in February 2007. KSE-100 index touched the highest ever benchmark of 14,814
points on December 26, 2007, a day before the assassination of former Prime Minister
Benazir Bhutto, when the index nosedived. The index recovered quickly in 2008,
reaching new highs near 15,500 in April. However, by November 22, 2008 during the
global financial crisis of 2008, it had fallen to 9,187.

Top 30 KSE 100 Index companies:-

The following is a list of 30 companies with the highest market capitalization volume and
their respective weight ages in the index and account for over 80% of the KSE index as
of February 20, 2008

Weight age Market Capitalization

Number Company Name
(%) (PKR)
1 OGDCL 14.14 550,948,930,000
2 MCB 7.17 279,583,150,000
3 National Bank Of Pakistan 5.43 211,726,900,000
4 Pakistan Petroleum 5.06 197,201,080,000
5 Standard Chartered Bank 4.41 171,704,800,000
6 PTCL 4.28 166,810,800,000
7 United Bank Limited 4.13 161,025,160,000
Jahangir Siddiqui
8 2.66 103,600,000,000
&Company
9 Pakistan State Oil 2.08 81,034,440,000
10 Allied Bank Limited 2.01 78,371,670,000
11 Nestle Pakistan 1.93 75,280,250,000
12 Pakistan Oilfields 1.71 66,824,220,000
13 Fuji Fertilizer Company 1.68 65,607,390,000
14 ABN AMRO 1.63 63,666,370,000.
15 Engro Chemical 1.45 56,492,990,000
16 Arif Habib Securities 1.40 54,660,000,000
17 NIB Bank 1.27 49,320,250,000
18 Kot Addu Power Company 1.19 46,565,400,000
19 EFU General Insurance 1.16 45,300,000,000
20 Bank Of Punjab 1.13 43,869,030,000
21 Fuji Fertilizer Bin Qasim 1.06 41,474,480,000
22 Bank Alfalfa 1.03 39,975,000,000
23 Adam jee Insurance 1.01 39,258,300,000
24 Pakistan Tobacco Company 0.99 38,707,280,000
25 Sui Northern Gas Pipeline 0.98 38,300,100,000
26 Hub Power Company 0.98 38,128,240,000
27 Dawood Hercules Chemicals 0.91 35,549,620,000
28 Habib Metropolitan Bank 0.91 35,354,280,000
29 EFU Life Assurance 0.89 34,750,000,000
30 Lucky Cement 0.86 33,593,480,000

KSE-30 Index:
The Karachi Stock Exchange has launched the KSE-30 Index with base value of 10,000
points, formally implemented from Friday, September 1, 2006. The main feature of this
index that makes it different from other indices are:
KSE-30 index is based only on the free-float of shares, rather than on the basis of paid-up
capital.

The other index in Karachi Stock Exchange represents total return of the market. That is,
when a company announces a dividend, the other indices at KSE are not reduced/adjusted
for that amount of dividend (whether cash or bonus).Whereas, KSE-30 Index is adjusted
for dividends and right shares.
At the end of 13 July, 2007, KSE-30 Index has reached its highest ever level of
17,162.45.

Market Indices:-
KSE began with a 50 shares index. As the market grew a representative index was
needed. On November 1, 1991 the KSE-100 was introduced and remains to this date the
most generally accepted measure of the Exchange. The KSE-100 is a capital weighted
index and consists of 100 companies representing about 90 percent of market
capitalization of the Exchange. 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 29,1995 the KSE all share index was constructed and introduced on September
18, 1995.
ALINA IFTIKHAR AHMAD

MAB 4TH
SECTION-B
MANAGEMENT SCINCE DEPERTMENT

SUBMITTED TO :
MADAM RABIA

DATE :
23/MAY/2010