MUHAMMAD ALI JINNAH UNIVERSITY KARACHI PAKISTAN

SECURITY ANALYSIS INVESTMENT OPPURTUNITIESIN KARACHI STOCK EXCHANGE

Submitted to: Mr. Umair Baig Submitted by: Samie Elahi
ID: FA10-MB-0048

Vision :
To be a leading financial institution, offering efficient, fair and transparent securities market in the region and enjoying full confidence of the investors.

Mission Statement :
To strive to provide quality and value-added services to the capital market in an efficient, transparent and orderly manner, compatible with international standards and best practices; To provide state-of-the-art technology and automated trading operations, driven by a team of professionals in accordance with good corporate governance; To protect and safeguard the interests of all its stakeholders, i.e. members, listed companies, employees and the investors at large; and to reflect the countrys economic health and behavior and play its role for the growth, development and prosperity of Pakistan.

History of the Karachi Stock Exchange :

The Karachi Stock Exchange, the oldest exchange in Pakistan, was established in 1947 and became a registered company limited a few years later. Since then it has experienced a remarkable progress with only 5 companies listed and 90 members on the Exchange in the 1950s and 663 listed companies and 200 members in 2006. In 2002, the Karachi Stock Exchange was recognized internationally by the magazine 'Business Week' as one of the best performing stock markets in the world. The Karachi Stock Exchange has started trading through the computerized trading system KATS (Karachi Automated Trading System) since 1997. As the demand for Trading Workstations installation has been significant during the consecutive years, today over 1000 KATS workstations are already installed. In 2005, trading in the Internet was also initiated. Since 1990, corporate entities can become members on the Karachi Stock Exchange. However, they have to meet stringent requirements of the Board of Directors and own a minimum capital of Rs. 20 million (approximately UK ? 181,000). At the beginning of 2006, 120 corporate members were registered in the Exchange. The Karachi Stock Exchange introduced KSE 50 Index at the end of the 20th century. However, because of the growth in the stock market, the Index did not represent the

stock market performance anymore. Thus, in 1991 a capital weighted KSE 100 Index launched. At the moment, the Exchange successfully trades two world-famous indices KSE 100 Index and KSE All Share Index, which was introduced in 1995.

About the Karachi Stock Exchange :

Karachi Stock Exchange (KSE) is the biggest and most liquid exchange in Pakistan with the average daily turnover of 525.15 million shares and market capitalization of US $ 54.28 billion. The international magazine 'Business Week' announced the KSE as the best performing world stock market in 2002. Since then the KSE continuously maintains the reputation as one of the best performing markets in the world. Since 1991, foreign investors have an equal opportunity together with local investors to operate in the secondary capital market on the Karachi Stock Exchange. The establishment of the new policy for foreign investors and initiated privatization in Pakistan has accelerated the development of the KSE, which had even 663 companies listed in 2006. In addition, companies have a choice to be listed on one of the two markets - the ready market and the over-the-counter (OTC) market, which has lesser listing requirements. While the ready market requires listing companies to have minimum paid up capital of Rs 200 million (about UK ? 1.8 m), the companies with minimum of Rs 100 million can be listed on the OTC market. The Karachi Stock Exchange trades the KSE-100 Index. It is a highly-diversified index of 100 largest capitalization companies' stocks from all sectors of Pakistan economy. A constantly revised index is a good indicator of the overall Exchange performance over a period of time. In 2005, 88% of the KSE total market capitalization was represented by the KSE-100 Index. The membership in the Karachi Stock Exchange is limited. Only 200 individual and corporate entities can register as members in the KSE. In 2005, 162 members traded actively on the Exchange. In addition, foreign corporate entities may also become the members of the KSE with the condition that the nominee member of the company is a citizen of Pakistan.

LIST OF SECTORS :
1 2 3 4 5 6 7 8
9

10 11 12 13 14 15 16

Open-end Mutual Funds 19 Oil & Gas Marketing Companies Close-end Mutual Funds 20 Oil & Gas Exploration Companies Modarabas 21 Engineering Leasing Companies 22 Automobile Assembler Investment Banks/Inv. Cos./Securities Cos. 23 Automobile Parts & Accessories Commercial Banks 24 Cables & Electric Goods Insurance 25 Transport Textile Spinning 26 Technology & Communication Textile Weaving 27 Fertilizer 10 Textile Composite 28 Pharmaceuticals Woollen 29 Chemical Synthetic & Rayon 30 Paper & Board Jute 31 Vanaspati & Allied Industries Sugar & Allied Industries 32 Leather & Tanneries Cement 33 Food & Personal Care Products Tobacco 34 Glass & Ceramics Refinery 35 Miscellaneous18 Power Generation & Distribution

SCOPE OF THE STUDY :

The Scope of the study is to determine the factors which effect on investment in Karachi Stock Exchange and there effect on investors to invest in Karachi Stock Exchange Securities. Also Determine the threats and countermeasures from which investor can manage risk and invest in best securities.

PROBLEM :
The Problem addressed is research paper is Why to invest in Karachi Stock Exchange. To solve this problem the researcher take various factors which relate to the investment in Karachi Stock Exchange and provide possible solution for this problem.

PRODUCTS OF K.S.E :

Factors Affecting Investors Interest in the KSE :

The factors which highly affect in investment in Karachi Stock Exchange are gathered by the researcher to know the impact of these in boosting investment are as follows :

Why Invest in Pakistan ?

Geo-strategic Location :
Pakistan is located in the heart of Asia and Pakistans main city of business Karachi is the gateway to push business of Pakistan. The benefit of port facilitate in importing and exporting. This strategic location attracts investors thinking to invest and make good return.

Trained Workforce :
A large part of the workforce in Karachi is educated, hardworking and intelligent if we see overall in Pakistan. Pakistan possesses a large number of trained and experienced

engineers, bankers, lawyers, doctors and other professionals. This trained workforce attracts foreign investor to invest in Pakistan and get benefit through trained work force.

Economic Conditions :
Economic Conditions are not well these days because after the change in politics the economy has gone down which make bad affect on investors thinking but after a period the investors understood that there should be not so much deficiency create from economic condition change in Pakistan, the market is growing as KSE cross 16,000 index points this month.

INVESTMENT POLICIES :
Previously the investment policies followed by the brokers and investors in Karachi stock exchange in not so much strict in order to manage the risk which may cause investor or firm not attract for invest in any security but know after SECP and KSE is playing better role to gain interest of investors by making better policies such as

Financial Markets :
The capital markets are being modernized, and infrastructure has developed in the Karachi Stock Exchange. The Securities and Exchange Commission of Pakistan has improved the regulatory environment of the stock exchanges, corporate bond market and the leasing sector. More then the Federal Board of Revenue has facilitated structural reform in tax and tariffs and the State Bank of Pakistan has facilitated the banking sector into high returns on investment.

Profitability :
Private sector investment is driven by profit motive. An important factor for profit is lower cost of production. The cost of production for livestock products is generally low in the country. For cotton producing cost, Pakistan is ranked among the countries with lowest cost of production in the world. The cost of labour is also very low as compared to all the developed and many developing countries.

Export markets :
Due to geographic location of Karachi the export market of Karachi is very good as compared to Lahore Faisalabad and other cities in Pakistan the Karachi Stock Exchange has opportunity to attract investors because through export the exporters generate dollars and with high safety margin most of them invest in from their savings.

Why invest in the Karachi Stock Exchange?

Labeled as the best performing stock market in 2002, the Karachi Stock Exchange (KSE) is today, considered a viable investment alternative in Pakistan. For numerous reasons including strong economic fundamentals, stability of the Rupee/Dollar parity and an expansionary monetary policy amongst others, the KSE has for the past two years produced higher returns to investors seeking to gain maximum value for their investments. By presenting an objective view of the history of the KSE, its recovery since 1998, the present market scenario, and its future prospects this report seeks to provide evidence of the economic viability of investing in the KSE. A brief assessment of the investment alternatives within Pakistan are further provided to substantiate the feasibility of investing in the stock market.

FINDINGS Karachi Automated System (KATS) Transaction

After the Launch of KATS in Karachi Stock Exchange now investors can easily make them selves up to date by using internet even at there home. Now there is no transparency in the data and physical share are converted into the electronic shares. Previously last rate was treated as the final rate of security but now rates change of every security in seconds which make investors decision better then future.

Degree of Growth of the Market :

As of December-2007 the KSE-100 stood at approximately 16933.51 points from June, 98 to Dec, 07. To examine the proportion of growth of the market, it is necessary to examine the historical trends of the market in terms of listed capital, market capitalization and movement of the KSE-100 index. The table highlights the increase in the number of listed companies, An interesting element defined by the table is the difference or gap between listed capital and market capitalization over the years. The increasing difference or gap between listed capital and market capitalization is an indicator of the level of investor interests and profitability available in the stock market today.

Alternative Investment Avenues

In addition to the Karachi Stock Market additional avenues of investment exist in Pakistan. The stock market however has provided greater returns on investments and that grew within in a short period of time. With high liquidity of investments the following are the alternative investment opportunities available in Pakistan:

National Saving Schemes

National Saving Schemes dates back to independence when the Government of Pakistan (GOP) made use of Defense Savings Certificates and Special Savings Certificates amongst others to meet its financing needs. Real Estate While real estate has always been considered a profitable avenue, it requires significant capital investments. Real estate funds are also not liquid and even though returns within this sector are high, investments in real estate need to be held for many years before these returns could be realized. This form of investment therefore appeals to long term investors as opposed to short-term investors found commonly in the stock market.

Term Financing Certificates (TFC)

Term Financing Certificates (TFC) were first publicly issued in 1995 with TFCs of 29 corporations presently circulating in the market. The TFC market is relatively new and as such is still an undeveloped market. Industry analysts however predict that over the next few years an increase in the number and size of public offerings would bring about development of this market. Investments in TFCs fall into the medium to long-term investment category and therefore are illiquid investments, offering rates of return between 3%-4%. With an inflation rate of 4%, the practicality of these investments is questionable.

Prize Bonds
Prize bonds like National Saving Schemes for years have been a popular form of investment in Pakistan. Though Prize Bonds do not have any rates of interest associated with them, an enormous level of funds are still invested in these bonds in the hope that investors would win bumper prizes against these bonds. These bonds are still a popular form of investment, however they appeal to the low to medium income class group of Pakistan and their relative attractiveness to other forms of investment has been on the decline.

Trading & Settlement System :

The Karachi Stock Exchange has introduced an state-of-the-art computerised trading system known as Karachi Automated Trading System (KATS) to provide a fair, transparent, efficient and cost effective market for the investors. Currently, the exchange conducts one trading session from Monday to Thursday and two sessions on Friday. The Trading is divided into four distinct segments, each of which has its own clearing and settlement procedure. These are: T+2. Provisionally Listed Companies, Spot (T+1) Transactions and Future Contracts.

T + 2 Counter:

Transaction in this segment are settled through the Clearing House that nets out the purchases and sales and the financial obligations thereon of each member/firm for the notified clearing period and issues instructions for deliveries of netted outstanding business. Payment from and to members are routed through the Clearing House. For the securities declared to be eligible securities by the Central Depository Company the Clearing House procedure remains the same as outlined above except that the KSE does not permit their physical settlement. In order to handle the clearing of all the three stock exchanges of the country under one roof, the National Clearing and Settlement System (NCSS) has been introduced. NCSS is managed by Central Depository Company of Pakistan Limited.

Futures Trading Listed Companies:

in

Provisionally

The shares of companies which make a minimum public offering of Rs. 150 million are traded on this segment from the date of publication of offering documents. The period of contracts of each scrip is notified by the Exchange. The outstanding contracts carried out under the provisionally listed companies are settled on the settlement date and members are not allowed to transfer their positions to the Ready Clearing Board or any other Board. On formal listing, the trading in the shares of the company are shifted to the Ready Board Counter under T+2 Settlement System from the date of formal listing.

Spot / T+1 Transactions:

For about 5 days before the closure of shares transfer book notified by the company, transactions are settled on T+1 basis. For non-CDC securities the delivery and payment is settled through the Clearing House of the Exchange, however, delivery is tendered directly between the buying and selling members as per the instruction of the Clearing House.

Future Contracts:
Under the Regulations Governing Future Contracts, trading in Future Contracts started in July 2001. Companies traded under Future Contract and the Contract is fixed for a period of one month.

A Menu of Investment Opportunities along the New Business Frontiers :

Value-added agro-industry :
Fruits & vegetables Livestock & dairy Fisheries Horticulture

Supporting industries :
Textiles Garments Automotive Electrical & electronics

Infrastructure and related services :

Hydro-electric power generation Roads (highways, motorways) Railways Ports & Port Handling activities Gas & Oil pipelines Urban Mass transit Storage facilities for agricultural produce Cool chains (for agro-business)

Banking & Finance :

Allied Bank Ltd. Muslim Commercial Bank Habib Bank Ltd. United Bank Ltd. NIT/ICP National Bank of Pakistan

Resources-based industries :
Oil & gas Petrochemicals Chemicals Other minerals

Light Industries :
Surgical instruments Bicycles Electrical appliances (fans) Bus body-building Gems and jewelry Leather and leather products

Tourism development :
Hotels and related facilities Marine complexes and beach resorts Mountain resorts in the northern areas Privatization A US$ 3 billion opportunity Banking, finance, insurance Oil and gas Power Telecommunications Aviation Industries

Oil and Gas :

Interests in 18 oil/gas fields Pakistan Oilfields Ltd. Oil & Gas Dev. Corp. Pakistan Petroleum Ltd. Attock Refinery Ltd.

Pakistan State Oil SNGPL/SSGC

PERFORMANCE OF INVESTMENT :

Conclusion
In the consideration of following factors the conclusion is that the products, system and all other things are good which attract investors to invest in KSE. However it is fact that economic condition of Pakistan is not good these days but it is expected by the specialist that KSE index will grow in the future and also will go on boom in next few years by increasing market capitalization of listed companies and will give good return

in future. Benefit should be gain when foreign and domestic investors come to the market and invest their savings for best results in face of return.