ROLE OF STOCK ‎EXCHANGES IN ‎ECONOMIC ‎DEVELOPMENT

ROLE OF STOCK EXCHANGES IN ECONOMIC DEVELOPMENT
ACCOUNTING AND FINANCE (5566)
ASSIGNMENT # 2
HUMA WASEEM
ROLL # BR564185
COL MBA / MPA
SPRING SEMESTER 2018
DEPARTMENT OF BUSINESS ADMINISTRATION
ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD
HUMA MALIK
2018

CONTENTS
1. INTRODUCTION 1
1.1 1
1.1.1 1
1.1.2 1
1.1.3 2
1.1.4 2
1.2 Types of Stocks and 2
1.2.1 2
1.2.2 3
1.2.3 3
1.3 Difference between the 3
2. BENEFITS & LIMITATIONS OF STOCK 4
2.1 4
2.2 5
3. 6
3.1 6
3.2 6
3.3 6
3.4 6
3.5 6
3.6 7
3.7 7
3.8 Liquidity in Stock 7
3.9 7
3.10 7
3.11 7
3.12 7
3.13 Safety of Capital and Fair Dealing 8
3.14 8
3.15 8
3.16 8
4. 8
4.1 8
4.2 Interest 8
4.3 8
4.4 Confidence and 8
4.5 9
4.6 9
4.7 9
5. ROLE OF 9
5.1 9

5.2 10
5.3 10
5.4 10
5.5 Redistribution of 10
5.6 10
5.7 10
5.8 11
5.9 11
6.
11
6.1 12
7. 12
ROLE OF PAKISTAN STOCK EXCHANGE ON ECONOMIC
DEVELOPMENT
8. 14
8.1 14
8.1.1 14
8.1.2 14
8.1.3 15
8.1.4 Merger Pakistan Stock Exchange (PSX) 15
9. ROLE OF STOCK EXCHANGE IN ECONOMIC 15
9.1 Stock Exchange & Economic Development An Overview of Last 15
9.2 Stock Exchange & Economic Development 18
9.3 Five Years Progress Report 2014- 20
9.4 21
10. 22
11. 23

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1. INTRODUCTION
. and oversee
the stock market. It is an important part of the economy of a country. The stock market
plays a pivotal role in the growth of the industry and commerce of the country that
eventually affects the economy of the country to a great extent. Government, industry
and even the central banks of the country keep a close watch on the happenings of the
stock market. The stock market is important from both point of views; the industry and
the investors. Some important terms are mentioned here before going to further
exploration.
1.1. DEFINITIONS
1.1.1. Stock:
A stock (also known as "shares" and "equity) is a type of security that signifies
ownership in a corporation and represents a claim on part of the corporation's assets
and earnings.
Dictionary of Accounting defines Stock as:
Noun - the available supply of raw materials; large stocks of oil or coal
- especially UK the quantity of goods for sale in a warehouse or
retail outlet. Also called inventory
- shares in a company
- investments in a company, represented by shares or fixed interest
securities
Verb - to hold goods for sale in a warehouse or store
(Collin, 2017)
Stocks represent ownership interest in a company. When one purchases the stock of a
called equities because the shareholders legally own the net assets of a company,
which is also known as equity.
Companies issue stock to raise investment capital that is needed to grow the business
or create new projects. If a company decides to raise capital through a public stock
offering, the stock shares can then be bought and sold by investors on the stock
exchange where the company is listed. (Lumby, 2017)
1.1.2. Stock Market:
- A place where shares are bought and sold, i.e. a stock exchange. (Collin, 2007)
- The value of all investments that are traded. A stock market is also another word
for a stock exchange. (Cambridge Dictionary, 2018)
- An organized marketplace in which common stocks are traded.

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1.1.3. Exchange:
An exchange is a marketplace in which securities, commodities, derivatives; and
other financial instruments are traded. The core function of an exchange is to ensure
fair and orderly trading and the efficient dissemination of price information for any
securities trading on that exchange. Exchanges give companies, governments and
other groups a platform from which to sell securities to the investing public.
(Exchange, n.d.)
Electronic Exchange
A securities exchange in which traders do not physically meet to buy and sell
securities. Instead, all trading takes place over a computer system, which may
be operated from almost anywhere. Electronic exchanges may or may not have
specified trading hours. Electronic exchanges differ from physical location
exchanges, which have a central location to meet. (The Free Dictionary, 2018)
Trading is increasingly conducted on electronic exchanges as markets become
more sophisticated; exchanges themselves can ensure fair trading without
requiring all members to be on a centralized trading floor. (Exchange, n.d.)
1.1.4. Stock Exchange:
- Market in which securities are bought and sold; its primary function is to raise
capital. (Kurian, 2013)
- A place where stocks and shares are bought and sold. (Collin, 2007)
- A place where shares in companies are bought and sold, or the organization of
people whose job is to do this buying or selling. (Cambridge Dictionary, 2018)
1.2. TYPES OF STOCKS AND STOCK CLASSIFICATIONS:
1.2.1. Based On Ownership Rights
The majority of publicly issued (and traded) stock is common stock, which is
Preferred stocks (sometime
bond-like features. Most preferred stocks pay a regular dividend that is very
similar to the regular coupon payments offered by bonds. The stock is called
er common
stockholders with regard to dividend payments and bankruptcy claims.
Common stock usually entitles the owner to vote at shareholders' meetings
and to receive dividends. Preferred stockholders generally do not have voting
rights, though they have a higher claim on assets and earnings than the
common stockholders.

3
1.2.2. Based On Company Style
Each company that issues stock has a unique plan for growth and dividend
distributions, which is reflected in the stock classifications below.
Income Stocks
Income stocks typically pay a regular quarterly dividend to shareholders. These
are usually high-quality; well-established companies with a history of strong
profits and steady dividend increases. Retirees often buy these stocks to secure a
steady income stream in the form of dividends. Many publicly traded energy
and utility companies are good examples of income stocks.
Value Stocks
Value stocks usually have one or more of the following characteristics:
- Low price-to-earnings ratio
- Low price-to-book ratio
- Low price-to-dividend ratio
These stocks are underpriced when compare to other similar companies in the
stock market. Sometimes this is a result of financial distress or management
problems. Other times, it may be due to investor sentiment and cyclical trends.
Growth Stocks
Growth stocks are stocks of companies with profits that are increasing quickly.
These companies often reinvest the profits and pay little to no dividends to
stock owners. In doing so, they hope that the growth in stock price is enough to
keep stockholders on board.
1.2.3. Based On Size
Market capitalization (market cap) refers to the size of a company. One can
calculate the market cap of any firm by multiplying the number of outstanding
shares by the current stock price.
For example, if a company had 100 million shares of common stock outstanding
and a current stock price of $50 per share, its market cap would be $5 billion (100
million x $50).
The size of a company is very important in stock pricing because there is a strong
correlation between size and risk. Small companies are generally far more risky
than large companies because they have fewer resources available, a less well-
defined position in the marketplace, and are more susceptible to economic
downturns.
(Lumby, 2017)

4
1.3. DIFFERENCE BETWEEN THE STOCK MARKET & STOCK
EXCHANGE
The stock market represents the companies that list equity shares for public investors to
buy and sell. Stock exchanges are the infrastructures that facilitate the trading of those
equity securities, or stocks. Without a stock exchange, companies would have no
formal mechanism on which to list shares, and without a stock market, exchanges
would have no reason to exist. Stock exchanges can be electronic or manual, and they
provide telling information about the size of the stock market. (Terzo, n.d.)
2. BENEFITS & LIMITATIONS OF STOCK EXCHANGE
A stock exchange is used to raise capital for companies seeking to grow and expand
their operations. The first sale of stock by a private company to the public is referred to
as an initial public offering (IPO). Companies listed on the stock exchange typically
have an enhanced profile. Having more visibility may attract new customers, talented
employees and suppliers who are eager to conduct business with a prominent industry
leader.
Initial Public Offering - IPO
An initial public offering is when a private company or corporation raises investment
capital by offering its stock to the public for the first time. Growing companies seeking
capital to expand are those that generally use initial public offerings, but large,
privately owned companies or corporations looking to become publicly traded can also
do them. In an initial public offering, the issuer, or company raising capital, brings in
an underwriting firm or investment bank, to help determine the best type of security to
issue, offering price, amount of shares and timeframe for the market offering. (Initial
Public Offering, n.d.)
2.1. BENEFITS OF STOCK EXCHANGE:
The advantages can be outlined from the point of view of (a) Companies, (b) Investors,
and (c) the Society as a whole.
(a) To the Companies
(i) The companies whose securities have been listed on a stock exchange enjoy
a better goodwill and credit-standing than other companies because they are
supposed to be financially sound.
(ii) The market for their securities is enlarged as the investors all over the world
become aware of such securities and have an opportunity to invest.
(iii)As a result of enhanced goodwill and higher demand, the value of their
securities increases and their bargaining power in collective ventures,
mergers, etc. is enhanced.
(iv)The companies have the convenience to decide upon the size, price and
timing of the issue.

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(b) To the Investors:
(i) The investors enjoy the ready availability of facility and convenience of
buying and selling the securities at will and at an opportune time.
(ii) Because of the assured safety in dealings at the stock exchange the investors
are free from any anxiety about the delivery and payment problems.
(iii)Availability of regular information on prices of securities traded at the stock
exchanges helps them in deciding on the timing of their purchase and sale.
(iv)It becomes easier for them to raise loans from banks against their holdings in
securities traded at the stock exchange because banks prefer them as
collateral on account of their liquidity and convenient valuation.
(c) To the Society
(i) The availability of lucrative avenues of investment and the liquidity thereof
induces people to save and invest in long-term securities. This leads to
increased capital formation in the country.
(ii) The facility for convenient purchase and sale of securities at the stock
exchange provides support to new issue market. This helps in promotion and
expansion of industrial activity, which in turn contributes, to increase in the
rate of industrial growth.
(iii)The Stock exchanges facilitate realisation of financial resources to more
profitable and growing industrial units where investors can easily increase
their investment substantially.
(iv)The volume of activity at the stock exchanges and the movement of share
prices reflect the changing economic health.
(v) Since government securities are also traded at the stock exchanges, the
government borrowing is highly facilitated. The bonds issued by
governments, electricity boards, municipal corporations and public sector
undertakings (PSUs) are found to be on offer quite frequently and are
generally successful.
2.2. LIMITATIONS OF STOCK EXCHANGE:
Like any other institutions, the stock exchanges too have their limitations. One of
the common evils associated with stock exchange operations is the excessive
speculation. Speculation implies buying or selling securities to take advantage of
price differential at different times. The speculators generally do not take or give
delivery and pay or receive full payment. They settle their transactions just by
paying the difference in prices. Normally, speculation is considered a healthy
practice and is necessary for successful operation of stock exchange activity. But,
when it becomes excessive, it leads to wide fluctuations in prices and various
malpractices by the vested interests. In the process, genuine investors suffer and are
driven out of the market.

6
Another shortcoming of stock exchange operations is that security prices may
fluctuate due to unpredictable political, social and economic factors as well as on
account of rumours spread by interested parties. This makes it difficult to assess the
movement of prices in future and build appropriate strategies for investment in
securities. However, these days good amount of vigilance is exercised by stock
exchange authorities and SECP to control activities at the stock exchange and
ensure their healthy functioning. (Kumar, 2016)
3. FUNCTIONS OF STOCK EXCHANGE
The secondary market is in the form of stock exchange. It plays an important role in the
economic development of the country. It is channelizing the savings of the people and
making them available for investment purpose. The following are some of
the important functions of a stock exchange.
3.1. Continuous Market for Securities
The Investors are able to invest in good securities and in case of any risk; it enables
people to switch over from one security to another. Stock markets provide ready and
continuous opportunities for securities.
3.2. Evaluation of Securities
It the stock exchange, the prices of securities clearly indicate the performance of the
companies. It integrates the demand and supply of securities in an effective manner. It
also clearly indicates the stability of companies. Thus, investors are in a better position
to take stock of the position and invest according to their requirements.
3.3. Mobilizes Savings
The savings of the public are mobilized through mutual funds, investments trusts and
by various other securities. Even those who cannot afford to invest in huge amount of
securities are provided opportunities by mutual funds and investment trusts.
3.4. Healthy Speculation
The stock exchange encourages healthy speculation and provides opportunities to
shrewd businessmen to speculate and reap rich profits from fluctuations in security
prices. The price of security is based on supply and demand position. It creates a
healthy trend in the market. Any artificial scarcity is prevented due to the rules and
regulations of the market.
3.5. Mobility of Funds
The stock exchange enables both the investors and the companies, to sell or buy
securities and thereby enable the availability of funds. By this, the money market also
is strengthened as even short-term funds are available. The banks also provide funds
for dealing in the stock exchanges.

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3.6. Stock Exchange Protect Investors
As only genuine companies are listed and the activities of the stock exchange are
controlled, the funds of the investors are very much protected.
3.7. Stock Exchange helps Capital Formation
Stock exchange plays an active role in the capital formation in the country. Companies
are able to raise funds either by issuing more shares through rights shares or bonus
shares. When a company wants to go in for diversification, they can issue the shares
and raise more funds. Thus, they are able to generate more capital and this promotes
economic growth in the country. Stock exchange also creates the habit of saving,
investing and risk bearing amongst the investing public.
3.8. Liquidity in Stock Exchange
Institutions like banks can invest their idle funds in the stock exchange and earn profit
even within a short period. When necessity arises, these securities can be immediately
sold for raising funds. Thus, it is the stock exchange which provides opportunities for
converting securities into cash within a short notice.
3.9. Economic Barometer
The most important function of a stock exchange is that it acts as an economic indicator
of conditions prevailing in the country. A politically and economically strong
government will have an upward trend in the stock market. An unstable government
with heavy borrowings from other countries will have a downward trend in the stock
market. Every government will adopt policies in such a manner that the stock exchange
remains dynamic.
3.10. Control on Companies
One of the major functions of stock exchange is to have control on companies. The
companies listing their securities in the stock exchange has to submit their annual
report and audited balance sheet to the stock exchange. Thus, only genuine companies
can function and have the shares transacted. If not, such companies will be black listed
and they will find it difficult to raise their capital.
3.11. Attracts Foreign Capital
Due to its dynamism and higher return on capital, the stock exchange is capable of
attracting more foreign funds. Due to this, the exchange rate of the currency will
improve when there is more trade undertaken by the government.
3.12. Monetary and Fiscal Policies
The monetary policy and the fiscal policy of the government have to be favorable to
businessmen and producers. If they are not so, then through the stock exchange the
government may indicate and accordingly suitable steps can be taken.

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3.13. Safety of Capital and Fair Dealing
The stock exchange transactions are made publicly under well defined rules and
regulations and bye-laws. This factor ensures a great measure of safety and fair
dealings to the average investors.
3.14. Proper Canalization of Capital
Stock exchange directs the flow of savings into the most productive and profitable
channels.
3.15. Regulation of Company Management
The companies, which want to get their securities listed in the stock exchange, should
have to follow certain rules and fulfill certain conditions. Stock exchanges safeguards
the interest of the investing public and also regulates company management.
3.16. Barometer of Business Progress
Stock exchanges function as a barometer of the business conditions in the country.
Booms and depressions are reflected by the index of prices of various securities
maintained by the stock exchange. By analyzing the ups and downs of the market
quotations, the causes for the changes in the business climate can be ascertained.
(Money Matters, 2018)
4. FACTORS AFFECTING THE STOCK MARKET
4.1. Economic Growth
Higher economic growth or better prospects for growth will help firms be more
profitable because there will be more demand for goods and services. This will help
boost company dividends and therefore share prices.
4.2. Interest Rates
Lower interest rates can make shares more attractive for two reasons. Lower interest
rates help boost economic growth making firms more profitable. Also, lower interest
rates make shares relatively more attractive than saving money in a bank or holding
bonds. If bond yields fall, it may encourage investors to switch into shares which
give a relatively better dividend.
4.3. Stability
Stock markets dislike shocks that could threaten economic stability and future
growth. Therefore, they will tend to fall on news of terrorist attacks or spikes in the
price of oil. They will also dislike political instability which may make it difficult to
pursue strong economic policies.
4.4. Confidence and Expectations
A key factor is the mood of investors. If they receive economic news that gives
optimism then they are more likely to buy shares. If they receive bad news they will

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sell. This is why in the depth of a recession; stock markets can start to rise. Investors
are always trying to predict the future. Therefore if they feel the worst is over the
stock market can rally even when economic fundamentals remain poor.
4.5. Bandwagon Effect
At times the stock market seems to over-react to certain events. It remains a little
mystery why the stock market fell so much there was no economic problem. In
follow the mood. When prices fall, people may feel the need to follow suit and get
out of the market.
4.6. Related Markets
Often investors have choices. For example, rather than investing in stock market,
they could buy government bonds or commodities. If investors feel government
bonds are overpriced and likely to fall, then the stock market can benefit as people
move into shares.
4.7. Price to Earnings Ratios
Some investors and economists, guide to the long-term performance of shares is
their price to earnings ratios. If share prices rise significantly above historical
averages, then this is a sign that shares are becoming overvalued and are due a
correction at some point in the future.
(Pettinger, 2017)
5. ROLE OF STOCK EXCHANGE IN ECONOMY
The trading of stock in public companies is an important part of the economy. Stocks
are a type of security that represents ownership interest in a company. Stock trading
allows businesses to raise capital to pay off debt, launch new products and expand
operations. Stock prices influence consumer and business confidence, which in turn
affect the overall economy. The relationship also works the other way, in that economic
conditions often impact stock markets. (Basu, 2018).
5.1. Stock Market Trends
The prices of individual stocks are dynamic, giving the entire stock market a dynamic
and even volatile character. Stock prices tend to trend, and these trends have a
psychological impact on individuals and businesses. Rising stock markets, or bull
markets, can create a sense of confidence about the direction of the economy. As prices
continue to rise, more investors come into the market, which builds on the momentum.
Falling stock markets, or bear markets, usually have the opposite effect. People feel
pessimistic about the economy. Media reports about market trends can create a sense of
panic. People start moving funds away from stocks into low-risk assets, which can
depress stock prices even further.

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5.2. Stock Trends and Consumer Spending
Bull markets can create a wealth effect. People feel more confident as their investment
portfolios rise in value. They spend more on big-ticket items, such as homes and cars.
Conversely, falling stock prices create a reverse wealth effect. Falling portfolio values
can create uncertainty about the future of the economy. People hold back on their
spending, especially on nonessential items. This slows down economic growth because
consumer spending is a key component of the gross domestic product.
5.3. Effect on Business Investment
Stock prices can affect business investments. Businesses are likely to make capital
investments when they feel that these investments will lead to rising market values,
such as during rising or bull markets. Management has more operational flexibility if
sustained stock price increases lead to increased consumer spending. Merger and
acquisition activity tends to increase during bull markets because companies can use
stock as currency. Initial public offerings increase as new companies take advantage of
market optimism to raise capital. Bear markets have the opposite effect. Businesses
become less confident about investing in new infrastructure projects or expansion
plans. Merger activity slows down, as does the number of new company listings. This
reduction in business investment activity slows down the economy.
(Basu, 2018)
5.4. Mobilizing Savings 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 commerce and industry.
5.5. Redistribution of Wealth
By giving a wide spectrum of people a chance to buy shares and therefore become part-
owners of profitable enterprises, the stock market helps to reduce large income
inequalities because many people get a chance to share in the profits of business that
were set up by other people.
5.6. Improving 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
shareholder. It is evident that generally, public companies tend to have better
management records than private companies.
5.7. Creates Investment Opportunities for Small Investors
As opposed to other business that require huge capital outlay, investing in shares is
open to both the large and small investors because a person buys the number of shares
they can afford. Therefore the Stock Exchange provides an extra source of income to
small savers.

11
5.8. Government Raises Capital for Development Projects
The Government and even local authorities like municipalities may decide to borrow
money in order to finance huge infrastructural projects such as sewerage and water
treatment works or housing estates by selling another category of shares known as
Bonds. These bonds can be raised through the Stock Exchange whereby members of
the public buy them. When the Government or Municipal Council gets this alternative
source of funds, it no longer has the need to overtax the people in order to finance
development.
5.9. 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. Therefore their movement of share prices can be an indicator of
the general trend in the economy.
(Business Writing Services, 2011)
6. IMPORTANCE OF STOCK
ECONOMY
Stock market growth and the growth of economy are very much related with each
other. The liquidity in stock market helps the development of the economy. Stock
market provides general idea about the strength of the economy. Countries that have
better performing stock markets generally have better performing economies too. The
everyday activities in stock market impact the economy of a country. Stock market
works as a barometer that explains . (Ake & Jin,
2010)
Corporations add to the economy of a country. If, in any case, the corporations need to
raise capital they go to stock market and issue new shares to have more investment and
capital. In this way stock markets keep the corporations alive by providing them the
fresh capital which makes the corporations capable of keep adding to the economy of
the country.
Studies have found that overall growth of the economy depends on the performance
and efficiency of stock markets. Stock markets mobilize the savings of individuals to
the corporations and corporations then add to the GDP of the economy. So, indirectly
stock markets inject the savings of individuals to the growth of the economy. Rising
stock prices create a sense of improvement in the economy and build the confidence of
the investors. (Petros, 2012)

12
6.1. Impact of Economic Factors on Stock Markets
economic factors that affect the stock markets as well. Some of these factors are below.
Inflation is one of the most important economic factors affecting the stock
markets. As the individuals invest their savings in the stock market, when
there is an increase in the inflation rate the price of products increases and
thus there is a reduction in savings for the individuals. Decline in saving
leads to decline in the stock market by the individuals.
Interest rate is another economic factor that impacts the performance of
stock market of a country. Higher interest rates are certainly beneficial for
investors but in this way the cost of borrowing becomes very high for
corporations so they avoid more investment from the investors. Thus, there
is a low supply of shares than the demand which affect the stock market
negatively. (Arestis, Demetriades & Luintel, 2001)
7. BIGGEST STOCK EXCHANGES IN THE WORLD
Rank Stock Exchange, Country
Market Capitalization
Value of Shares in 2015
(USD)
1 New York Stock Exchange, United States $19.223 Trillion
2 NASDAQ, United States $6.831 Trillion
3 London Stock Exchange Group, United
Kingdom and Italy
$6.187 Trillion
4 Japan Exchange Group, Japan $4.485 Trillion
5 Shanghai Stock Exchange, China $3.986 Trillion
6 Hong Kong Stock Exchange, Hong Kong
(SAR China)
$3.325 Trillion
7 Euronext, United Kingdom, Belgium,
Portugal, France, and the Netherlands
$3.321 Trillion
8 Shenzhen Stock Exchange, China $2.285 Trillion
9 TMX Group, Canada $1.939 Trillion
10 Deutsche Borse AG, Germany $1.762 Trillion
(World Atlas, 2017)

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STUDY OF
ROLE OF
PAKISTAN STOCK EXCHANGE ON
ECONOMIC DEVELOPMENT

14
8. PAKISTAN STOCK EXCHANGE
The Pakistan Stock Exchange (PSX) is the stock exchange of Pakistan with trading
floors in Karachi, Islamabad and Lahore. PSX was reclassified as a MSCI Emerging
Market in May 2017, while, the FTSE classifies PSX as a Secondary Emerging Market.
PSX was established on 11 January 2016 after the merger of individual stock
exchanges of Karachi, Lahore and Islamabad. PSX's origin's where laid with the
establishment of the Karachi Stock Exchange in 1947, the Lahore Stock Exchange in
1970 and the Islamabad Stock Exchange in 1992. As of February 23, 2018, there are
559 companies listed in PSX and the total market capitalisation is $84 billion.
The investors on the exchanges include 1,886 foreign institutional investors and 883
domestic institutional investors along with about 0.22 million retail investors. There are
also about 400 brokerage houses which are members of the PSX as well as 21 asset
management companies. PSX is among the world's best performing stock market's,
between 2009 and 2015 it delivered a 26% a year. In December 2016, PSX sold 40%
strategic shares to a Chinese consortium for $85 million.
8.1. History
The Pakistan Stock Exchange (PSX) came into inception in January 2016 when
the Government of Pakistan decided to merge the three large exchange markets of the
country into one combined market.
8.1.1. Karachi Stock Exchange
Founded on 18 September 1947, Karachi Stock
Exchange Limited (KSE) was registered in Pakistan. The
Karachi Stock Exchange Limited (KSE), was a stock
exchange located at the Stock Exchange Building (SEB) on
Stock Exchange Road, in the heart of Karachi's Business District, I. I. Chundrigar
Road, Karachi, Sindh Province of Pakistan. It was Pakistan's largest and one of the
oldest stock exchange in South Asia. Karachi Stock Exchange was also listed
among 10 best stock markets in the world in 2015. According to Bloomberg, the
Pakistani benchmark stock market index is the third-best performer in the world
since 2009. In June 2015, Khaleej Times reported that since 2009, the Pakistani
equities delivered 26 percent a year for US dollar investors, making Karachi the
best-performing stock exchange in the world. As of 10 July 2015, total market
capitalization reached Rs. 7.33 trillion (US$72 billion approximately).
8.1.2. Lahore Stock Exchange
Lahore Stock Exchange is located in Lahore, Pakistan. It was
formally inducted into the national Pakistan Stock Exchange on 11
January 2016. The Lahore Stock Exchange (Guarantee) Limited
came into existence in October 1970, under the Securities and

15
Exchange Ordinance of 1969 by the Government of Pakistan in response to the
needs of the provincial metropolis of the province of Punjab. It initially had 83
members and was housed in a rented building in the crowded Bank Square area
of Lahore.
8.1.3. Islamabad Stock Exchange
Islamabad Stock Exchange or ISE was the youngest of the three stock
exchanges of Pakistan and is located in the capital of Pakistan.
Islamabad stock exchange (ISE) was incorporated as a guarantee-
limited company on 25 October 1989 in Islamabad. ISE tower is a 22-
storey building, which makes it the second highest building of
Islamabad after the Telecom Tower. Area covered by the building is 562,629 sq ft
(52,269.9 m2
), it consists of three levels of basements and ground plus 18 floors
above.
8.1.4. Merger Pakistan Stock Exchange (PSX)
PSX was launched on 11 January 2016. Prior to the formal launch,
the Karachi Stock Exchange held a two-day pre-production mock
trading session for all certificate holders of the three bourses. The
integration is expected to help reduce market fragmentation and
create a strong case for attracting strategic partnerships necessary
for providing technological expertise and assistance. The integration of the three
exchanges has completed the second phase of the Stock Exchanges
Demutualization and Integration Act 2012, passed by a joint session of parliament.
(Pakistan Stock Exchange, 2018)
9. ROLE OF STOCK EXCHANGE IN ECONOMIC
DEVELOPMENT OF PAKISTAN
The role of the stock market is to raise long-term funds for corporations (primary
market) while providing a platform for the trading of securities (secondary market).
Stock exchanges encourage investment through pooling of resources, enabling
corporations to obtain funds to expand their businesses.
9.1. STOCK EXCHANGE & ECONOMIC DEVELOPMENT AN
OVERVIEW OF LAST DECADE
In Pakistan where the saving rate has remained sticky at under 15%, the importance of
the stock exchange in aggregating savings and then channelizing them to meet the
expanding investment requirements of the country cannot be over emphasised.
Therefore, as an alternative to debt financing, the stock exchange as a whole facilitates
productivity levels and economic growth, particularly in the present tough economic
conditions, where asset pricing is under pressure and bankers have gone too cautious in
lending.

16
It is felt that there is a general ignorance regarding the essential role that Pakistan's
stock exchanges are playing in achieving equitable, broad-based and sustainable
economic development of the country. From a broader perspective the role of a stock
exchange is vitally important In Pakistan where the saving rate has remained sticky at
under 15%, the importance of the stock exchange in aggregating savings and then
channelizing them to meet the burgeoning investment requirements of the country
cannot be over emphasised. Therefore, as an alternative to debt financing, the stock
exchange as a whole facilitates productivity levels and hence economic growth,
particularly for countries moving toward greater integration with the global economy.
A functioning stock market makes it easier for firms to find sources of capital in both
domestic and international capital markets. Case in point is the growing number of
GDRs (Global Depositary Receipts) that allow foreigners to participate in local
offerings without taking currency risk. In the last decade, several blue chip Pakistani
companies such as Oil & Gas Development Company (OGDC), MCB Bank Ltd.
(MCB), Pakistan Telecommunication Company (PTC), Hub Power Company (HUBC)
and Lucky Cement (LUCK) have benefited from GDRs. Besides companies, this has
been beneficial for the entire economy in many different ways.
In the case of Pakistan, with per-capita incomes sticky at the US $1,000 mark, the stock
exchange helps to create investment opportunities for small investors. They can own
shares of the companies just like large investors, and enjoy similar rates of return. In
this context, stock exchanges help in redistribution of wealth through stock price
increases and dividends with investors getting the chance to share in the wealth of
profitable businesses. A healthy trend in this regard is Online Trading which leads to
greater awareness for retail participation and also enhances the benefits for a larger
number of people. Simply put, any investor can access the stock market via the internet
and without even calling up a broker become part owner of a business conglomerate
and enjoy the proportionate benefits.
The stock exchange also serves as an economic barometer and can give important
signals to economic policy makers regarding how their decisions related to interest
rates, taxes and currency volatility impacts different sectors of the economy.
Historically, the KSE has been a leading indicator to changes in the real side of the
economy and an effective predictor of growth.
Indeed, the meltdown in CY08 did not come as a major surprise given the then-
prevalent macroeconomic difficulties and the recent resurgence in the KSE certainly
parallels rapid improvement in the economy. The stock exchange thereby helps both
policy makers to adjust their actions and for regulators to effectively monitor.
The stock exchange can also help the government as well as private sector to raise
money through privatizations and GDR offerings. Government divestments in have
indeed added color to the local stock exchanges and given them much needed float,
depth and breadth.

17
Since the initiation of economic & financial reforms in the early 90's the GoP has raised
a total amount of PkR475bn through the successful privatization of government
enterprises especially those in the Financial and Oil & Gas sectors. This not only
helped the Government raise much needed funds for priority spending on infrastructure
development but also improved the financial performance and service quality of these
companies by promoting greater level of competition. (Business Recorder, 2010, April
9).
Major Privatizations Deals
In last deacde, the backdrop where the fiscal authorities are facing increasing stress due
to anemic growth in tax generation and higher defence related expenditures, the stock
exchange provide an avenue for the government to fund long-term projects through
revival of the privatization program.
This helped against the serious crowding out of private sector credit while allowing the
Central Bank to continue on the path of monetary easing. At the same time, the stock
markets are contributing directly to the government kitty through the tax collected on
Capital Value Tax (CVT) and withholding tax on share transactions. With the
Government planning to introduce Capital Gain Tax (CGT) on local equities, the
contribution of the stock market in solidifying fiscal consolidation will increase.
However, this depended largely on how interaction with tax authorities particularly of
individuals is facilitated. Technology and the level of advancement (e.g. UIN) already
attained help to achieve the objective without unnecessary interaction with tax
authorities and hiring of income tax practitioners at year end.
The stock exchange also allows domestic companies to tap foreign savings through
foreign flows. This is especially important in the case of Pakistan where there is sizable
saving - investment gap of around 5% of GDP. Hence to maintain an optimal level of
capital accumulation necessary to support 4%+ level of real GDP growth, continued
inflow of Foreign Portfolio gains significant importance.
In the last decade, Pakistan has received cumulative FPI of US $7.2bn which has not
only helped to sustain economic growth momentum but also eased pressure on the
balance of payments & the PkR exchange rate by partially financing the enlarging trade
gap.
In FY10, economic consolidation especially currency stability & lowering of Credit
Default Swap spread on the country's external commercial has resulted in Karachi
Stock Exchange to attract FPI of US $435mn FYTD. Returning confidence in the
outlook of domestic equities by both domestic and foreign institutional investors, can
potentially lay the ground work required to attract long term foreign direct investment
into the country.

18
A key component in this regard has been the role of CDC (transparent electronic
transfer) and technology innovations that have reposed investor (both local & foreign)
faith in the stock market. Higher FPI flows, despite serious security conditions, led the
market capitalisation of the KSE to increase to its current value US $35.2bn as
compared to US $27bn in the previous year.
At the same time, improved risk perception of Pakistan has helped raise the average
daily turnover at the KSE to 169mn shares from 119mn shares at the end of CY09.
Lastly, by diversifying ownership, companies generally tend to improve on their
management and efficiency in order to satisfy the demands of these shareholders and
the more stringent International Financial Reporting Standards (IFRS) and GAAP in
case of GDRs.
This form of corporate governance weans out the weak corporations through
acquisitions/ takeovers etc. In conclusion, the local stock markets are playing a positive
role in the Pakistan Economy where its contribution stands to magnify in the coming
times particularly with the planned introduction of more products (particularly
Derivatives) and the proposed Demutualization of stock exchanges.
This should further augment an increase in investor base leading to a larger pool of
funds available for capital formation in the country. Already, technological
advancements such as CDC (electronic settlement), UIN, online trading are facilitating
this progress. (Business Recorder, 2010, April 9).
9.2. STOCK EXCHANGE & ECONOMIC DEVELOPMENT RECENT
YEARS
The benchmark Pakistan Stock Exchange has swerved sharply north from its multi-
much expected. This column had been cautioning a slide to 39,000 (or even possibly
36000). But the bouncing back of stocks December 20th
onward did come as a surprise.
The market should have reacted to uncertainty, for uncertainty is pernicious for the

19
the risks of which had kept foreign
investors at bay for months amongst a host of other risks. That and fresh liquidity
injection in emerging markets in general after the new year provided a breather to local
players.
Recall that foreigners have been selling throughout last year, with local mutual funds
realized it had misread both politics and the so-called inclusion in MSCI-EM index.
Between late May 2017 and late December, foreigners sold profusely and so did local
mutual funds, whereas local banks and insurance firms took advantage of low prices.
selling save for the selling leading up to the formation of the JIT in late April 2017.
Now strangely, the only local major buyers are individuals. Considering that most
moneyed investors from banking and insurance industry are selling since late
December, are local individuals and the foreign investors being taken in for a ride.

20
The market is at one of those turns on the highway that are too tempting to not race
ahead and yet they could be treacherous. If investors act too fast, they might slip and
fall into a valley. If they are too slow, someone else might take a lead. In this business,
the loss of opportunity hurts as much as the actual loss. On the economic front,
concerns over external account have been allayed for now. The balance-of-payment
seems to be a concern for at least 6-9 months, which is the kind of horizon punters
usually look at. (Business Recorder, 2018, February 8)
9.3. FIVE YEARS PROGRESS REPORT 2014-2018
Upto
31-12-2014
Upto
31-12-2015
Upto
31-12-2016
Upto
31-12-2017
Upto
29-10-2018
Total No. of Listed Companies 557 554 558 559 558
Total Listed Capital - Rs. in Million 1,168,484.88 1,269,703.53 1,291,040.41 1,276,800.57 1,314,856.05
Total Market Capitalisation - Rs. in
Million
7,380,531.74 6,928,497.81 9,628,514.37 8,570,926.33 8,306,363.21
KSE- 32,131.28 32,811.89 47,806.97 40,471.48 41,453.76
KSE- 20,771.55 19,309.82 25,851.71 20,215.48 20,067.99
KMI-30 Index 50,735.12 55,647.21 81,794.73 68,611.63 71,510.81
KSE All Share Index 23,397.91 22,868.03 32,842.44 29,774.24 30,178.91
PSX-KMI All Shares Index 0.00 15,448.28 22,676.88 20,356.77 20,531.05
New Companies Listed during the year 6 8 4 7 3
Listed Capital of New Companies - Rs in
Million
26,973.47 29,941.59 5,490.04 12,548.92 5,432.39
New Debt Instruments Listed during the
year
6 2 1 1 3
Listed Capital of New Debt Instruments -
Rs. in Million
15,000.00 25,000.00 10,000.00 10,500.00 11,620.00
Average Daily Turnover - Regular Market
(Shares in Mn) (YTD)
218.67 258.79 293.03 249.19 196.16
Average Value of Daily Turnover -
Regular Market (Rs in Mn) (YTD)
9,401.68 11,465.25 11,637.79 12,099.95 7,844.76
Average Daily Turnover - Future Market
(Shares in Mn) (YTD)
24.34 36.46 49.48 59.77 67.17
Average Value of Daily Turnover - Future
Market (Rs. In Mn) (YTD)
2,205.34 3,142.91 3,056.70 4,307.03 3,009.25
YTD = Year to date
a. The KSE 100 Index was introduced in November, 1991.
b. The KSE 30 Index was introduced in September, 2006.
c. The KMI 30 Index was introduced in September, 2008.
d. The KSE All Share Index was introduced in September, 1995.
e. The PSX-KMI All Shares Index was introduced on November 18, 2015.
f. Listed companies reflected in the relevant year have been stated after 15 companies
delisted in 2013, 8 in 2014, 9 in 2015, 4 in 2016 and 3 in 2017 and merger of 1
company in 2013, 1 in 2014, 2 in 2015, 1 in 2016 and 3 in 2017.
(Pakistan Stock Exchange Ltd., 2018)

21
9.4. CURRENT TRENDS IN PSX
After the Saudi investment and support to Pakistan economy, has started to control and
to support the stock prices, inwards finance flow, and inflation in October 2018. Stock
market index is now over 40,000 points which is seemingly good approach to support
the Pakistan economy. However, the market fluctuation is uncertain for coming month
due to other factor of economy that has impact on the stock prices as well. Foreign
investment in the Pakistan will enable stable financial flow in the country and stock
market trading will give boost to market internally and externally. (Ahmed, 2018
October 25).
Analysts believe that Saudi Arabia's $6 billion bailout package for the country is the
main reason behind restoration of investors' confidence. The market opened on a
positive note and climbed more than 1,000 points within the first 10 minutes of trading.
The benchmark moved up 1,556 points to reach 39,271 points at the close. Trade
volume and value also increased significantly. Trading activity was led by power
generation and distribution sector. The chemical and banking sectors followed
respectively. Senior analyst Ahsan Mehnati said that the Saudi package worth $6
billion triggered the bullish trend. He said that till a day before, the market was being
driven by negative sentiments based on the concerns regarding the imbalance of
external payments. (Dawn, 2018, October 24).
The benchmark KSE-100 index of Pakistan Stock Exchange (PSX) climbed up by 897
points on Monday owing to iprove sentiments on economic front on Monday, October
29, 2018. The index closed at 41,453 points as against 40,556 points showing an
increase of 872 points. Sectors contributing to increase includes Banks (+312 points),
Cements (+142 points), O&GMCs (+98 points), Power (+72 points) and E&P (+36
points).
ume of 460 million shares at the
brouse rank second after May 24, 2017. Market maintained its ascent on the first
trading day, all couresty of improved sentiment from successful Saudi Arabia visit.
(PKRevenue, 2018, October 29).

22
10. CONCLUSION
The stock market has traditionally been viewed as an indicator or "predictor" of the
economy. Many believe that large decreases in stock prices are reflective of a future
recession, whereas large increases in stock prices suggest future economic growth.
The stock exchanges in developed countries, as well as those exchanges in developing
countries, serve as barometers of where the national economy is likely headed.
Moreover, the largest stock exchanges play an important part in the world economy.
The stock exchange is a source of funding for national and international projects that
are needed for the economic development of many developing countries. In developing
countries, the stock exchanges are also in the development stages but the stock
exchanges in the developed countries are mature and are the major supporters of the
country's economy. Financial market growth equals higher standards of living as well
as create more jobs for the country's population. Mature financial markets aid in
funding international projects that benefit many countries as a whole. This funding
alleviates poverty and illiteracy as well.
To conclude, equities as an asset class remain largely untapped in Pakistan and once the
aforementioned developments take place, it is felt that the general public would
gradually diversify itself away from fixed income investments (Banks, NSS) towards
equity investments. As such, it is perceived that the role of the stock exchanges in
Pakistan's economy should only augment going forward.

23
11. REFERENCES
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package. Business Recorder. Retrieved from
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after-historic-saudi-package/
Ake, B. and Jin, D. (2010). The role of stock market development in economic growth:
evidence from some Euronext countries. International Journal of Financial
Research,1(1): 14-20.
Arestis, P., Demetriades, P. O. and Luintel, K. B. (2001). Financial development and
economic growth: the role of stock markets. Journal of Money, Credit and
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Basu, C. (2018). What is a stock and how do stocks affect the economy? In ZACKS.
Retrieved from https://finance.zacks.com/stock-stocks-affect-economy-
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Business Recorder. (2010, April 9). The Role of Stock Exchange in the Economic
Development of Pakistan. Retrieved from
https://fp.brecorder.com/2010/04/201004091042531/
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stocks/
Business Writing Services. (2011). The role of stock exchange in economic
development. Retrieved from
https://www.businesswritingservices.org/business-finance/433-the-role-of-
stock-exchange-in-economic-development
Cambridge Dictionary. (2018). Retrieved from https://dictionary.cambridge.org/
Collin, S.M.H. (2007). Dictionary of Accounting, 4th
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the-stock-market/
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