The Karachi Stock Exchange

Karachi Stock Exchange

Abstract

This report will introduce the Karachi Stock Exchange (KSE) to readers with the assumption that they have no prior knowledge regarding the entity. The report begins with an introduction to stock exchanges in general and the KSE in particular. This is followed by an examination of the particulars of the operations of the entity. These include items such as membership criteria, and the trading and settlement system in place. The report concludes with an analysis of recent trends as well as changes to be implemented in the future.

Introduction

Stock exchanges are basically a type of organized market which facilitate the buying and selling of financial instruments known as securities. The most commonly traded instrument is shares of companies listed on the exchange although bonds, options and futures contracts are also traded. Stock exchanges serve a myriad of purposes. First and foremost the stock exchange plays an important role in the running of the capital market of the country. This means that stock exchanges contribute towards the efficient allocation of resources in the economy. As an indicator of the performance of an economy and of individual companies, stock exchanges aid resource allocation by diverting resources to companies that perform well. Similarly, poorly performing companies face the prospect of losing out when it comes to the allocation of resources. This works indirectly; poor performance in the secondary market will adversely impact performance in the primary market, especially in the case of seasoned IPOs. This brings us to another important and more obvious function of stock exchanges. In the primary market, companies can raise capital by issuing shares to the public. A share represents an ownership in the company and through an IPO (Initial Public Offering) a company effectively goes "public." IPOs are usually issued with the assistance of investment banks that specialize in the service. The secondary market is where the trading of shares takes place and this is the function which is most commonly associated with stock exchanges. The corporation is usually not involved in the trading of its stock in the secondary market. Although corporations do not benefit directly from secondary market operations, performance in this secondary market (as measured by share price) is closely monitored by managers as this influences, among other things, the cost of raising new funds. Share price also affects shareholders. A declining share price may force shareholders to vote in a new board of directors which results in a change of management. Additionally, managers' compensations are often tied with the performance of the share price of the company and poor performance also elevates the risk of a takeover. All these factors make the share price and hence the secondary markets important for both investors and managers.

Shares effectively represent ownership into a company, granting access to dividends and voting rights. A company can issue different types of shares such as ordinary shares, preference shares, shares without voting rights or any other shares as are permissible under the law. Studies have shown that over a twenty-year span, investment in shares has provided greater returns than most other forms of savings. Shares can provide you with a regular stream of income through dividends as well as the potential for investments to grow in value. If the prices of shares go up, they can be sold at a capital gain. Once the shares are bought they are registered with the owner's particulars in the company's share register.

Buying shares can offer advantages over saving in deposit accounts: investments may increase in value besides paying out dividends. Unfortunately, there is a significant element of risk involved. If the company performs badly, the share price may go down and the value of the investment will be reduced. Other factors, such as the performance of the stock market as a whole and the general economic climate, may also affect the price of shares. Investment in shares is therefore investment in 'risk capital'. A well-functioning Exchange provides efficiency, fairness, liquidity and transparency to the market and in doing so alleviates some of the risk involved.

The Exchange makes buying and selling easy. Mature Exchanges have sophisticated computer systems in place that allow a real-time track of share prices. Also, transactions can be conducted through a stock broker making it unnecessary to be physically present at the Exchange. This system implies that buying and selling of shares can take place instantly.

In a nutshell, stock exchanges are important as they bring the buyer and seller together. They ensure efficiency and liquidity. The Exchange makes buying and selling easy thereby encouraging investment and stimulating growth. Keeping in mind that stock exchanges contribute towards efficient resource allocation, a stock exchange is essential to the running of the economy and indeed to the maintenance of the economic system in place.

The Karachi Stock Exchange (KSE)

The Karachi Stock Exchange (KSE) is the biggest and most liquid of the three stock exchanges in Pakistan. The KSE was established on 18th September 1947. It became a Limited Company by Guarantee on 10th March 1949. There were initially nine members and only five companies were listed with a paid up capital of Rs. 37 million. The scale of operations has grown substantially over the years. As of June 30, 2006 there were 652 listed companies with a listed capital of Rs. 517,904.11 million (US$ 8,511.16 million) and a market capitalization of Rs. 2,942,739.59 million (US$ 48,360.55 million). The daily turnover on average is 270.50 million shares with average daily trade value being Rs. 32,869.61 million (US$ 540.17 million). Membership strength has grown to 200. The representation index for the market is the KSE 100 index, a capital weighted index introduced on November 1, 1991 which represents about 90% of the market capitalization of the Exchange. In 1995 the need was felt for