Assignment on

Stock Exchange“Subject”

Financial Institution and Markets

5th Semester

By

Fezan Akhtar MBAP-F13-19

Faisal Saeed MBAP-F13-07

Hina Shaheen MBAP-F13-10

Ammara Ch MBAP-F13-24

MASTERS IN BUSINESS ADMINISTRATION

Faculty of Management Sciences

THE SUPERIOR UNIVERSITY LAHORE Campus, Okara, Pakistan

1

Table of ContentsStock Market 3

History & Introduction 3

Function of stock Exchange 4

Characteristics of stock Exchange 6

History of American and Nasdaq Stock Exchange 7

Why we buy share 7

Why we sell share 7

Famous Stock Exchanges of the world 8

Stock Exchanges in Pakistan 10

Chines vs American Stock Exchange 12

Money Market vs Capital Market 14

How to Effect Interest rate on Stock Market 16

How the sets of security prices 17

2

Stock Exchange

History:

In the 11th century, in the city of Cairo (currently the capital of Egypt), Yuthas and Mughals were

involved in the buying-selling trade and this is the Rishi Moolah for all the stock exchanges of

the world. As per the record, the first stock exchange of the world was “Amsterdam Stock

Exchange” formed in the year of 1602 by the Dutch East India Company. Then this concept

spread to all the countries gradually and stock exchanges were formed throughout the world by

the Traders organization.

Introduction:

The word “Stock Exchange” is made from two words 'Stock' and Exchange. Stock means part or

fraction of the capital of a company, and Exchange means a transferring the ownership;

representing a market for purchasing and selling. Thus, we can describe the stock exchange as a

market or a place where different types of securities are bought and sold. Securities traded on a

stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment

products and bonds. As the stock exchange deals in all types of securities, it is known as

'securities market' or 'securities exchange' also. A stock exchange is a secondary market of

securities because the trading happens only for the securities that have already been issues to the

public and now being allowed to be traded on the floor of a stock exchange after getting listed

with the stock exchange. 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.

The Securities Contracts (Regulation), has defined stock exchange as an   “association,

organization or body of individuals, whether incorporated or not, established for the purpose of

assisting, regulating and controlling business of buying, selling and dealing in Securities.”

According to Pyle, “security exchanges are market places where securities that have been listed

thereon may be bought and sold for either investment or speculation”.

K.L. Garg, has described the stock exchange as   “an association of persons engaged in the

buying and selling of stocks, bonds and shares for the public on commission and guided by

certain rules and conditions.”

3

Functions of Stock Exchange:

1. Continuous and Regular Market:

The stock market is a continuous market; it facilitates sale and purchase of various types of securities.

2. Evaluation of Securities:

Stock exchange provides liquidity and marketability to the securities. The investors at any time can know the real value to their holdings.

3. Promotes Capital Formation:

Stock exchange promotes capital formation and accelerates the economic development by channelizing savings into productive channels.

4. Safety and Security in Dealings

In the stock exchange, all transactions take place as per rules and regulation. It provides security in every transaction.

4

5. Stimulates Industrial Investment:

Stock exchange helps to divert the funds to companies and provides resources to industrial units, by helping them to seek investment and funds.

6. Encourages Public Borrowings:

Stock exchange enables the government to sell their securities and encourages the public to spend their money on government securities along with private sector securities.

7. Facilitates Speculation:

In the stock exchange, healthy speculation is carried out, and the speculators get an opportunity to maximize profit.

8. Facilitates Bank Lending:

Stock exchange provides liquidity to securities. The banks can easily offer loans against securities.

9. Regulates Company Management:

The company whose shares are listed in the stock exchange have to follow the defined rules and regulations.

10. Serves as an Economic Barometer:

Stock exchange is highly sensitive and gets affected by economic and political events in the country. It shows the economic situations of the company and national economy. Hence it serves as an economic barometer.

11. Generates Employment:

The stock exchange provides various employment opportunities to the number of broker and sub brokers.

12. Acts as Clearing House of Commercial Information:

Stock exchange acts as a clearing house of commercial information through daily quotations, weekly and monthly reports. It also provides booklets and statements issued from time to time.

5

Characteristics of Stock Exchange

Characteristics or features of stock exchange are following under as described.

Market for securities: Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.

Deals in second hand securities: It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.

Regulates trade in securities: Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade.

Allows dealings only in listed securities: In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.

Transactions effected only through members: All the transactions in securities at the stock exchange are effected only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorized brokers only.

Association of persons: A stock exchange is an association of persons or body of individuals which may be registered or unregistered.

Recognition from Central Government: Stock exchange is an organized market. It requires recognition from the Central Government.

Working as per rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange. No deviation from the rules and guidelines is allowed in any case.

Specific location: Stock exchange is a particular market place where authorized brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours’ market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.

6

History of the American and NASDAQ Stock Exchanges:

The American Stock Exchange got its start in the 1800's and was known as the "Curb Exchange"

until 1921 because it met as a market at the curbstone on Broad Street near Exchange Place. Its

founding date is generally considered as 1921 because this is the year when it moved into new

quarters on Trinity. However, it wasn't until 1953 that it officially became the American Stock

Exchange. In November 1998, the "National Association of Security Dealers Automated

Quotations", announced that the American Stock Exchange would merge with the "National

Association of Securities Dealers creating "The Nasdaq-Amex Market Group." However, the

American Stock Exchange remained as an active exchange.

Founded by the National Association of Securities Dealers Automated Quotations, the NASDAQ began trading on February 8, 1971, as the world's first electronic stock market, trading for over 2,500 securities.

In 2000, NASDAQ membership voted to restructure and spin of NASDAQ into a shareholder-owned, for-profit company. In 2007, the NASDAQ merged with the New York Stock Exchange's regulation committee to form the Financial Industry Regulatory Authority (FINRA).

In May 2007, NASDAQ Announced a transaction to create global exchange and technology company with Swedish exchange operator, OMX. Later that year, on November 7, 2007, NASDAQ OMX announced that it had signed an agreement to acquire the Philadelphia Stock Exchange, the oldest stock exchange in America, founded in 1790. Today NASDAQ is the largest electronic stock market with over 3,000 companies listed.

Why we buy shares?We buy shares to make investment in the companies, whose profit is higher and whose dividend ratio is greater which is paid to its shareholders. The company's worth is increases due to issuing of more shares, and if he paid higher rate of dividend and profit to its members.

Why we sell shares?

We sell shares the reason is that the stock may have simply become over-valued, the stock may have achieved the price target we set when we bought it, and sometimes the political and economic conditions effects on companies’ financial conditions so, that the company is not able to meet its desired targets.

7

Top Famous and largest Stock Exchange of the worldThe ranking of stock exchanges could be based on various factors such as number of companies

listed in the market, market capitalization and turn over at the end of year. Here is used market

capitalization factor and listed the top stock exchanges in the world.

New York Stock Exchange:

This is located in the most famous Wall street, New York and it was established in the year of 1792. Now mostly electronic transaction happens and this happens to be the world’s largest stock exchange. Large, medium and small cap companies are listed in the New York stock exchange. It was merged with American Stock Exchange in the year of 2008. The current market capitalization of NYSE is more than 14,000 Billion dollars and the market functions between 9.30 am to 4.00 pm.

NASDAQ Stock Exchange:

This stock exchange was constituted in the year of 1971. This is the second largest stock exchange in North America. NASDAQ stands for National Association of Securities Dealers Automated Quotations. They also maintain the same stock exchange in eight different European countries. This is headquartered at New York. The current market capitalization of NASDAQ is more than 4500 Billion dollars and the market functions between 9.30 am and 4.00pm.

Tokyo Stock Exchange:

TSE is the third largest stock exchange all over the world and first largest stock exchange among the Asian countries. It was created in the year of 1878. Now more than 2,000 companies are listed in Tokyo Stock Exchange. Now the market capitalization of this stock exchange stands at 3,300 Billion dollars and the market functions between 9.00 am and 3.00 pm.

London Stock Exchange:

This is the oldest stock exchange in the world which was established in the year of 1801. This is the real international market in which nearly 3,000 companies from 70 different countries are listed. Among the European countries, this stock exchange has the highest market capital value. It is located near Paternoster square. Stock exchange went through numerous changes and recently in the year of 2011, it was announced publicly that London Stock Exchange had merged with TMX group. Currently the market capitalization of London Stock Exchange is 3396 Billion dollars and trading occurs between 8.00 am to 4.30 pm.

8

Hong Kong Stock Exchange:During the year of 2011, this stock exchange stood at 6 th position in terms of market capitalization. Now it has marched to number 5 position. There is no stringent controls on outside investors unlike Shanghai Stock Exchange. There are nearly 1,470 companies listed in this exchange. This is the largest stock exchange in China. Initially It was named Association of Brokers, Hong Kong in 1891 but later it was renamed as Hong Kong stock exchange in 1914. The market capitalization of Hong Kong Stock Exchange is 2,831 Billion dollars and functions between 9.15 am and 4.00 pm.

Shanghai Stock Exchange:This is the third largest stock exchange in the Asian continent and second largest in the People Republic of China. Formed in the year of 1990 and these organizations are not entirely open to the foreign investors and there are strict regulations issued by China Securities Regulatory Commission. The index of Shanghai Stock Exchange has reached a maximum of 6,000 points during the year of 2007 and now it is floating nearer to the 2,500 mark. The market capitalization of SSE is 2,547 Billion dollars and the market functions between 9.30 am and 3.00 pm.

Toronto Stock Exchange:Toronto Stock Exchange is maintained by TMX group of Canada. It is located at Toronto, Canada. This is one of the largest stock exchanges in the world. This is the third largest stock exchange in North America. Various companies in Europe, Canada and United States are listed in this stock exchange. They are the leader in the mining and oil sector. The first stock exchange of Canada was formed in the year of 1852 by the Association of the Brokers of that country and later on they grew into the seventh largest stock exchange in the world. Presently 2,058 Billion dollars serves as the market capitalization of this stock exchange and the operational timings are between 9.30 am and 4.00 pm.

Deutsche Borse Stock Exchange: This is the stock exchange of Germany located at Frankfurt. This is one of the few stock exchanges which involves in charity organizations. It has nearly 765 companies listed in the market. This was formed in the year of 1994. Various branches of this exchange are located at Luxemburg, Switzerland, Czech Republic and Spain. Currently the market capitalization of "DBSE" 1,486 Billion Dollars and the market functions between 8.00 am and 10.00 pm.

Australian Securities Exchange:The first stock market of Australia was formed in the year of 1861 at Melbourne. Then it underwent numerous changes throughout the 19th century. Finally, Australian Securities Exchange was created in the year of 2006 by the merger of Australian Stock Exchange and Sydney Future Exchange. The current market capitalization of Australian Securities Exchange is 1,386 Billion dollars and the market timings are 9.50 am and 4.12 pm.

9

Bombay Stock Exchange:

This is one of the oldest stock exchanges in the world. It was formed in the year of 1850. Till

1874, the trading took place under the banyan tree on Mahatma Gandhi road, Mumbai. Then it

was shifted to the Dalal Street (Broker’s street). This stock exchange has the largest number of

companies listed all over the world. More than 4900 companies are listed in the Bombay Stock

Exchange. Currently the market capitalization of BSE is 1,263 Billion dollars and the market

operates between 9.15 am and 3.30 pm.

Stock Exchanges in Pakistan

Karachi Stock ExchangeINTRODUCTION TO THE KSE MARKETThe Karachi Stock Exchange (KSE) was established on 18th September, 1947. It was later

converted and registered as a Company Limited by Guarantee on 10th March, 1949. Initially, 90

members were enrolled, however, only half a dozens of them were active as brokers. Similarly,

only 5 companies were listed with a paid up capital of Rs. 37 million. Now KSE has emerged as

the key institution of the capital market of Pakistan with:

Listed companies 724, securities listed on the exchange 752: ordinary share 724,

Preference shares 5 and debt securities (TFC's) 23

Listed capital US$ 4,646 million

Market capitalization US$ 7,746 million

Average daily turnover 142 million shares with average daily trade value US$ 78

million

Membership strength at 200

Corporate Members are 92 out of which 9 are public listed companies

Active Members are 133

Deliveries through central depository company

National Clearing and Settlement System in place

Lahore Stock Exchange:

10

Lahore Stock Exchange (Guarantee) Limited came into existence in October 1970, under the Securities and Exchange Ordinance, 1969, of the Government of Pakistan in response to the needs of the Provincial metropolis of the Punjab. Only 83 members had its memberships and it was housed in a rented building in the crowded area of Bank Square in exotic city of Lahore. The number of members has increased from 83 to 150 over a period of 25 years.

The past seven years have seen Lahore Stock Exchange come to its own. Business has been steadily on the increase. A modern Management Information System, (MIS) has been firmly in place. Clearing House activities are fully computerized, computer ordering has been implemented.

LSE has set up a credit rating company named "Pakistan Credit Rating Agency (Pvt) Limited", (PACRA), in a joint venture with International Finance Corporation (IFC), and IBCA Limited of London.

Islamabad Stock Exchange:

The Islamabad Stock Exchange (ISE) was incorporated as a guarantee limited Company on 25th October, 1989 in Islamabad Capital territory of Pakistan with the main object of setting up of a trading and settlement infrastructure, information system, skilled resources, accessibility and a fair and orderly market place that ranks with the best in the world. The purpose for establishment of the stock exchange in Islamabad was to cater to the needs of less developed areas of the northern part of Pakistan.

At present there are 103 Members out of which 29 are corporate bodies including commercial and investment banks, DFIs and brokerage houses. The other 74 Members are individual persons.

Since the inception of automated trading system which is called ISECTS the trade volume is multiplying day by day and the average daily turnover has now crossed the figure of 7.5 million shares. The automated system which was indigenously developed replaced the outcry system in 1997. Now all the listed securities are traded through the ISECTS. The system of physical handling of shares and securities is being phased out and majority of the scrips are settled through Central Depository Company of Pakistan Limited.

At the moment there are 285 companies/securities listed on the Exchange with an aggregate capital of Rs. 155,352.618 million. The market capitalization was Rs. 209,360.670 million (US $ 4,551.132 million) as on 10-09-9

Difference between American and Chinese stock markets

11

History:

China’s stock market is relatively young compared to the U.S. markets. While the Shanghai Stock Exchange dates back to the 1860s, it only reopened in 1990 after being closed in 1949 when the Communists took power. The Shenzhen Stock Exchange also opened that same year making China’s stock markets a mere 25 years old. While the Hong Kong Stock Exchange was founded in 1891, it first began listing the largest Chinese state-owned enterprises in the Mid.1990s.

By comparison, the U.S. stock market is 223 years old, with the New York Stock Exchange Originating upon the signing of the Buttonwood agreement on Wall Street in 1792. Since that time, a number of other stock exchanges have risen up in the U.S. The Security and Exchange Commission lists nearly 25 registered national securities exchanges, the second most important exchange after the NYSE being the Nasdaq, established in 1971.

Chinese stock markets are a much smaller part of the Chinese economy than the US stock markets are of the US stock market.  The market capitalization is much smaller.

The value of the Chinese stock market is largely determined by government policy.  Most of the companies on the Chinese stock markets are state owned enterprises, and the government can largely control the value of stocks by buying and selling shares. The US federal government does not invest in stocks, and state and local governments don't own enough to determine the market level.

US stock regulation is mostly process based whereas Chinese stock regulation is mostly merit passed. The stock regulators in the US are umpires that enforce the forces but they don't intervene directly to determine who gets listed and who doesn't.  The Chinese government intervenes pretty intensively in the Chinese stock market and does examine companies to see who gets listed and who doesn't.

U.S.A

NYSE

Market Capitalization (USD): $17.931 trillionNumber of Listed Companies: 2,453EOB Value of Share Trading (USD): $1.693 trillion

NASDAQ

12

Market Capitalization (USD): $6.982 trillionNumber of Listed Companies: 2,850EOB Value of Share Trading (USD): $1.211 trillion

China

Shanghai Stock Exchange

Market Capitalization (USD): $4.125 trillionNumber of Listed Companies: 1,071EOB Value of Share Trading (USD): $1.691 trillion

Hong Kong Stock Exchange

Market Capitalization (USD): $3.060 trillionNumber of Listed Companies: 1,810EOB Value of Share Trading (USD): $0.160 trillion

Money Market:

13

The short term debts and securities sold on the money markets which are known as money market

instruments have maturities ranging from one day to one year and are extremely liquid. Treasury

bills, federal agency notes, certificates of deposit, commercial paper, bankers' acceptances, and

repurchase agreements are examples of instruments. The suppliers of funds for money market

instruments are institutions and individuals with a preference for the highest liquidity and the lowest

risk.

Money Market is unsystematic market and so the trading is done off exchange, i.e. Over The Counter

between two parties by using phones, email, fax, online, etc. It plays an important role in the

circulation of short term funds in the economy. It helps the industries to fulfill their working

capital requirement.

Capital Market:

A type of financial market where the government or company securities are created and traded for

the purpose of raising long term finance to meet the capital requirement is known as Capital Market.

The securities which are traded includes stocks, bonds, debentures, euro issues, etc. whose maturity

period is not limited up to one year or sometimes the securities are irredeemable (no maturity). The

market plays a revolutionary role in circulating the capital in the economy between the suppliers

of money and the users. The Capital Market works under full control of Securities and Exchange

Board to protect the interest of the investors.

The Capital Market includes both dealer market and auction market. It is broadly divided into two

major categories: Primary Market and Secondary Market.

Primary Market: A market where fresh securities are offered to the public for subscription

is known as Primary Market.

Secondary Market: A market where already issued securities are traded among investors is

known as Secondary Market.

14

15

Basis for Comparison

Money Market Capital Market

Definition Is a component of the financial markets where short-term borrowing takes place.

Is a component of financial markets where long-term borrowing takes place.

Time Period

The money market make an agreement for borrowing and lending of short term funds which shows time period is one year or less than one year.

The capital market compact in borrowing and lending of long term funding which means the time period is more than one year.

Credit Instruments

Certificate of deposit, Repurchase agreements, Commercial paper, Federal funds, Municipal notes, Treasury bills, Money funds, Foreign Exchange Swaps, short-lived mortgage, Eurodollar deposit, and asset-backed securities.

Stocks, Shares, Debentures, bonds, Securities of the Government.

Nature of Credit

Instruments

Homogenous. A lot of variety causes problems for investors.

Heterogeneous. A lot of varieties are required.

Purpose of Loan

Short-term credit required for small investments.

Long-term credit required to establish business, expand business or purchase fixed assets.

Basic Role Liquidity adjustment Putting capital to work

Institutions Central banks, Commercial banks, Acceptance houses, Nonbank financial institutions, Bill brokers, etc.

Stock exchanges, Commercial banks and Nonbank institutions, such as Insurance Companies, Mortgage Banks, Building Societies, etc.

Risk In money market, risk factor is very small because time period is less than one year is given so defaulter have less time to default that's way the risk is minimized.

In capital market, the risk is more as compare to in money market. the reason behind this is the time period. the maturity of more than one year provides more time for default. but in capital market risk is differs both in nature and degree.

Market Regulation

Commercial banks are closely regulated to prevent occurrence of a liquidity crisis.

Institutions are regulated to keep them from defrauding customers.

Relation with

Central Bank

Closely related to the central banks of the country.

Indirectly related with central banks and feels fluctuations depending on the policies of central banks.

Return on Investment

There is return on investment is less. On the other hand comparatively high.

Merit Increases liquidity of funds in the economy.

Mobilization of Savings in the economy.

The Effect of Interest Rates on Stock MarketThe stock market reflects the overall health of the economy. One measure of that health is rising or falling interest rates. The Federal Reserve raises or lowers interest rates to fight inflation or make it easier for companies to borrow money. Most commercial lending institutions follow the Federal Reserve's lead. All of this up-and-down adjustment affects the stock market. Investors have to learn to calculate the impact of rate changes on stock prices.

Cost of Borrowing:

Stock prices depend on company profitability. When companies have to pay more to borrow money, the additional interest expense eats into company profits. If investors perceive that companies can't make up for the lost profits, stock prices may drop. Higher interest rates signal investors to monitor company profits to see if the stock price is too high because it is based on old assumptions about interest rates. On the other hand, declining interest rates signal cheaper borrowing for companies. This can influence a rise in stock prices if investors perceive that companies will spend less of their profits on interest.

Capital Expenditures

High interest rates can cause businesses to stop purchasing large assets. Companies would find a need to borrow in order to make those purchases. Some companies won't want to take on new interest expense that comes with buying large equipment and buildings. Because businesses purchase assets to produce income, a reduction in asset acquisition can keep income from growing. Investors who perceive a lack of company growth may decide to sell company stocks, thus driving stock prices down. When interest rates move lower, companies may decide to purchase new assets. The resulting increase in income can drive stock prices higher if investors anticipate growth from the purchase of assets.

Cash Flow:

Some investors value stocks based on a company's current cash flow and anticipated cash flows. Rising interest rates can reduce a company's cash flow in the future because more cash will go to pay interest charges. This possible reduced cash flow can drive a company's stock down in price. If several companies anticipate reduced cash flow, the stock market overall could see a reduction in stock prices. Investors might expect all companies to suffer lower cash flows due to high interest rates. On the other hand, falling interest rates can leave more cash left over for businesses. Investors who see a company's growing cash stockpile may be willing to pay a higher price for its shares.

Exceptions:

16

Rising interest rates do not automatically result in dropping stock prices, and falling interest rates do not necessarily mean more cash and profits for companies, and therefore higher stock prices. If investors perceive that the Federal Reserve raises interest rates to keep inflation down, that can be good for businesses. Stocks might rise in that circumstance. Similarly, if investors think the Federal Reserve is lowering rates because of a declining economy, stocks may seem less attractive and market prices could go down.

How the market sets security Prices:

Generally speaking, prices are set in competitive markets as the price set by the buyer willing to pay the most for an item.

The buyer willing to pay the most for an asset is usually the buyer who can make the best use of the asset.

Superior information can play an important role.

Consider the following three valuations for a stock with certain dividends but different perceived risk:

Bud, who perceives the lowest risk, is willing to pay the most and will determine the “market” price.

17