Preston University, Islamabad ENTERPRENEURSHIP PROJECT

(MBA Evening)

STOCK BROKERAGE BUSINESS

To facilitate stock investments for the better future of the investors

Prepared by:

Mr. Younas Khan (Registration No. 1432-208052) Mr. Naeem Khan (Registration No. 1432-407036) Mr. Waris Khan (Registration No. 1432-208028)

Presented to: Date of Submission:

Mr. Humayun Shuja April 29, 2009

BUSINESS PLAN FOR A MEDIUM SIZE NEW BUSINESS

1. Introductory Page:
Name of the Business: Address: Telephone Number: Sponsors/Directors: Khan Investment Services (Pvt.) Limited 101-E, Khyber Plaza, Fazlay Haq Road, Blue Area, Islamabad. 051-2275045 Mr. Younas Khan Mr. Saeed Khan Mr. Waris Khan The core business of the Company is to provide brokerage services to the stock market investors for the sale and purchase of shares of listed companies. Statement of Financing Needed: (PKR) S.No. Description 1. Incorporation Expenses 2. Cost of Membership of stock exchange 3. Office Furnishing 4. Office Equipment 5. Account-holding with CDC 6. Account-holding with NCCPL 7. Various Deposit Requirements 8. Office Car 9. Working Capital Total:

Nature of Business:

100,000 10,000,000 1,000,000 1,000,000 100,000 100,000 200,000 500,000 1,000,000 14,000,000

Report of Confidentiality: This report is confidential and is the property of the owners as mentioned above. It is intended only for use by the person addresses on the title page.

2. Executive Summary:
2.1 What is a stock Market?

Stock Market is a marketplace that provides opportunities for buying or selling of shares. This is a platform where the buyers and sellers of equity and debt securities of companies, semigovernment and governments meet together to trade in securities. A stock market brings together entrepreneurs who wish to raise money through the issue of new securities and individuals and organizations seeking to invest their savings or surplus funds. The stock market thus offers investors liquidity or the ability to convert the investments into cash at short notice thereby encouraging the flow of savings into productive ventures. The trading of securities is done through members (brokers) of the stock exchange who buy seats or memberships for conducting brokerage business in our exchange. The members provide a link between individual investors and the stock market by buying and selling shares on behalf of the investors. The Exchange continually monitors all the trading activities of its members to ensure that they are acting within its strict rules. This in turn provides investors with a market they feel confident to use. These members are also required to fulfill the eligibility criteria/registration process defined by the exchange and the SECP. 2.3 What is a Share and Why to invest in Shares?

Each share is a small stake in a company. One can buy large or small lots to match the amount of money he/she wants to invest. When the company does well, its shares can rise in value. If the company hits a bad patch, its share can fall in value. Evidence shows that over periods of 10 years, investing in shares has provided greater returns than most other forms of savings. Shares can not only provide you with regular income in the form of dividends, but also have the potential to grow in value thereby providing you with the capital gains. 2.4 Business Potential

Although propensity to save in Pakistan in quite less due to over all poor economic situation, yet the people who have money find a few avenues of investments. Conventionally, bank deposits and saving certificates are the main mode of savings wherein return on deposits is not satisfactory. There is huge potential in stock investments if properly marketed. There are only a few brokerage offices in the country and these offices are mainly located in big cities. Even in these big cities people have no knowledge about the stock investments hence making no investment in the stock market. Yet for the last few years, the print and electronic media has focused the stock investments and now people are taking interest in the stock exchange. Therefore the directors have decided to incorporate a company, get the membership of the Exchange and run a brokerage business.

2.5

Cost of Doing Business

The business will require an amount of about Rs.10 million for initial setup. The recurring monthly expenditures may mount to Rs.150,000/-. The company expects Rs.100,000 to 150,000 on account of commission income. 2.6 Time to Start

Being one window operation, the stock brokerage business can be easily started within a shorter period of time.

In view of the above, the starting of stock investment business is strongly recommend.

3. Industry Analysis:
i. Macro Environment:

Economy: The economy of the country has been facing a poor economy since long. Presently, in order to meet public expenditures, the country has to depend on so many direct and indirect taxes. Every business hence faces tax and other levies from time to time. General: Being a poor country, people have low propensity to save. Therefore the public participation in the stock business is unsatisfactory. The people can be easily targeted for the business. Technology: The businesses are in a position to use the latest technology. All the stock business in being done through the computerized trading system. Thus the system is quite efficient and transparent. Legal: Legal environment is satisfactory and companies are appreciated to be formed for any legal business objects. Registration with SECP as a broker is quite easy and it is not difficult to meet the criteria for the registration as broker.

ii.

Specific Industry Environment:

Education: Although the stock investment is done in almost all the developed countries of the world and public participation is quite satisfactory, yet in Pakistan less than 1% population knows and invests in the stock market. However, due to revolution of media, the public is taking interest in the stock market. Moreover, investor education programs started by the stock exchanges and their regulator have been quite successful to attract the public to stock investment. Present Situation: The market has faced a crisis-like situation and now the shares prices are quite attractive. The market may witness a positive growth and the investors could be in a better position to avail the investment returns. Since the brokerage business is limited to major cities only, there is a lot of potential for this business to grow. Taxation: The taxes imposed by the Government on the shares business are also reasonable and this investment is not over-taxed. An investment of Rs.100,000/- bears of tax of Rs.30/- that could be claimed as tax credit. A sale proceed of Rs.100,000/- also bears a tax of Rs.20/-.

iii.

Market Segmentation

Majority of the masses in Pakistan is not familiar with the stock investments. Keeping in view the requirement of average amount advised to be invested, the middle class may be attracted for the stock investment having monthly income of about 30000 rupees. The company has decided a make a separate section for female investors being a unique step to persuade the female investors to touch the stock market.

4. Description of Venture:
i. Mission Statement To facilitate stock investments for the better future of the investors Initially the Company shall make its set up in Federal capital. However, lateron the same may be expanded to other cities mainly remote areas. The core business of the company will be the provision of brokerage services to the public at large. The company will also facilitate the investors for initial public offering and underwriting the different offerings by the new companies to the public. The office equipment shall include computers, trading soft wares, multimedia, fax machines, modems and printers. The trained staff may be hired from the stock market with more incentives. All the three directors of the company have considerable experience of the stock investment and are fully equipped with the market knowledge.

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5. Production Plan
The planned business is service oriented. Therefore, it does not involve any production plan in strict sense.

6. Operational Plan
i. Having a service based business, the company shall facilitate the investors in buying/selling of their shares. The orders may be executed in person or through telephone calls. The operational head will look after the execution of trades, risk management and settlements. All the accounts of the investors will be updated on daily basis and the executed orders will be confirmed to the investors within 24 hours of execution as per the requirement of the law. All the three stock exchanges i.e. KSE, LSE and ISE have computerized trading systems. So all the orders are to be executed through the respective trading systems. The company may utilize the latest trading software from the vendors in order to expand its business by giving online trading facility once the operations start successfully. Being a member of the Islamabad Stock Exchange (ISE), the company would prefer to trade at ISE to strengthen its risk management system.

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7. Marketing Plan
i. The core business of the Company is to provide services of buying /selling of shares of different listed companies at the stock exchange to the public at large. Since the main source of income of the company will be the brokerage services, therefore the revenues of the business will mainly depend on the volume of trades done by the investors. For this purpose, marketing is of vital importance. The personal relationships of the directors and the services of marketing manager will be utilized for inducing potential investors. This could be through execution of sale/purchase orders in the presence of the investors and or through telephone/fax and /or through direct online facility that will be extended in due course of time. There is extensive potential in stock investments as a few people are equipped with the knowledge of the stock market. The brokerage business could be easily marketed to the masses. At initial stage certain graduates will be employed to market the business to different companies/institutions and this will be an innovative step at least in shares investment marketing. Generally commission rates are fixed by the stock exchanges. However, in practice, there are competitive and normally range from10 to 15 paisa per share. The investors making handsome investments will be given special discounts in commission charges. Although presently the settlement system is based on T+3 i.e. settlement of trades on third day of execution of the trades, however, our Company intends to introduce a new product that would be T+0 meaning thereby spot settlements of clients trades. The clients will be able to have their shares/amount of the same day of execution of orders. The company expects an initial turnover of 100,000 shares per day in the first year thus resulting in average monthly revenue of Rs.130,000/- and the efforts will be made to increase the volume at least 25% annually.

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8. Organizational Plan
i. The status of the enterprise will be a private company limited by shares. The business of the company will be managed by the Board of Directors comprising all the four directors. One of the directors will act as a full time director as managing Director. The company will have initially a small set up comprising 7 persons designated as marketing manager, trader, operational manager and support staff. Since the stock business is specialized business, the persons will be hired from the stock market itself having appropriate experience of the business. The rewards to the employees will be based on their performance. The organizational organogram will be as under:

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Managing Director

Manager (Operations)

Manager (Marketing)

Assistant Manager (Trading)

Assistant Manager (Accounts)

Assistant Manager (Clearing)

Assistnat Manager (marketing)

9. Assessment of Risk
i. Here is the SWOT analysis of the business: Strengths Weaknesses 1. The stock business is properly 1. The stock market is mainly regulated by the stock exchange and controlled by a few big players. SECP. 2. Level of participation from the 2. Government taken measures from general public is unsatisfactory. time to time to make better the 3. Most of the investors have functioning of the market. speculative mind. 3. Most of the government owned 4. Most of the investors invest without entities are privatized through stock proper investment plan. market. 5. The regulator of the market also 4. Brokerage business is not much lacks consistency in its policies for costly. the market. 5. Legal requirements of the business 6. Most of the directors of the are also easily compliable. company have no necessary experience of the stock market. Opportunities Threats 1. A large number of the people are 1. Political situation in the country is now aware of stock investments. deteriorating day by day resulting 2. The over all number of investing in economic slowdown. public is increasing day by day. 2. Any flaw in risk management can 3. Number of brokerage houses is cause heavy losses to the company quite limited and new offices could on account of debits of the clients. be easily opened for the service. 3. SECP decision of allowing setting 4. Due to advancement in technology, up of electronic exchange to a access can be given to large number certain party is still pending with of investors even living in remote the Commission. Any unfavourable areas. decision can badly affect the worth 5. Tax rebates are still allowed against of membership and over all stock investments. clientale.

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The main risk associated with the stock brokerage business is that the exposures of the clients are properly managed. The company has decided to enforce a strict risk management scheme whereby no client will be allowed to take an exposure more than double of his deposits with the company. As the brokers are also entitled to trade on their own behalf by maintaining a separate proprietary account, the company will also make stock investments on delivery basis upto a certain extent as decided by the directors.

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10. Financial Plan

Following will be the financial requirements for setting up the business: Statement of Financing Needed: (PKR) S.No. Description 1. Incorporation Expenses 2. Cost of Membership of stock exchange 3. Office Furnishing 4. Office Equipment 5. Account-holding with CDC 6. Account-holding with NCCPL 7. Various Deposit Requirements 8. Office Car 9. Working Capital Total:

100,000 10,000,000 1,000,000 1,000,000 100,000 100,000 200,000 500,000 1,000,000 14,000,000

Following the budgeted statements of the business: i. ii. iii. iv. v. Pro forma income statement (first three years) Pro forma cash flow projections (first one year) Pro forma balance sheet (first three years) Break-even analysis Sources and applications of funds.

The budgeted income statement, cash flow and balance sheet of the Company are given on onward pages.

Khan Investment Services (Pvt.) Limited Pro Forma Income Statement First Year by Months (Amount in PkR'ooo') July Aug Sep Oct Nov Dec Jan Feb March April May Jun 130 135 145 140 150 160 170 185 195 200 225 240 100 20 10 25 10 3 5 3 5 181 100 20 10 20 12 4 5 2 5 178 100 20 10 15 12 4 5 3 3 172 100 20 9 10 9 3 5 2 2 160 100 20 8 10 8 3 4 2 2 157 100 20 8 9 7 3 3 2 1 153 100 100 20 20 8 9 8 8 7 3 3 1 1 151 9 4 3 2 1 156 157 100 20 9 7 8 5 3 3 2 157 100 20 9 7 7 5 3 3 3 100 20 10 7 0 4 3 0 100 20 10

Sales Less Expenses: Staff Salaries Office Rent Utilities Advertisement Telephone Exps POL Newspapers Printing & Stat Misc. Total Exps. PBT Tax

0 4 3 3

144

140

(51) (43) (27) (20) (7) 7 19 29 0 0 0 0 0 0 5 7

38 43 81 100 8 9 18 25

Net Profit/ Loss

(51)

(43)

(27) (20)

(7)

14

22

30

34

63

75

Khan Investment Services (Pvt.) Limited Pro Forma Income Statement Three Years Summary (PKR ooo) Year1 2075 1200 240 110 126 89 45 45 26 25 Year2 3500 1400 240 130 130 95 75 50 30 30 Year3 4500 1500 240 140 50 100 100 60 35 35

Sales Less Expenses: Staff Salaries Office Rent Utilities Advertisement Telephone Exps POL Newspapers Printing & Stat Misc.

Total Exps.

1906

2,180

2,260

PBT Tax

169 72

1,320 350

2,240 1000

Net Profit/ Loss

97

970

1,240

Khan Investment Services (Pvt.) Limited Pro Forma Cash Flow First Year in Aggregate (ooo) Description Receipts Disbursement Staff Salaries Office Rent Utilities Advertisement Telephone Exps POL Newspapers Printing & Stat Misc. Tax Total Disbursement: Cash Flow: Beginning Bal Ending Balance: Amount 2075 1200 240 110 126 89 45 45 26 25 72 1,978 97 1,000 1,097

Khan Investment Services (Pvt.) Limited Pro Forma Balance Sheet End of the First Year Assets Membership Card Office Furniture Office Equipment Security Deposits Office Car Cash in Hand (PKR) 10,000,000 1,000,000 1,000,000 500,000 500,000 1,097,000

Total Assets:

14,097,000

Liabilities & Owners Equity Paid-up Capital 1400000 shares of Rs.10 each Retained Earnings Total Liabilities & Capital:

14,000,000

97,000 14,097,000

Khan Investment Services (Pvt.) Limited Break-even Analysis

Break Even = FC / (SP VC) where FC is Fixed Cost, SP is selling Price and VC is Variable Cost
In view of the nature of expenses, all the expenses are treated as fixed costs. SO we have a fixed cost of Rs.1,900,000. In order to arrive at a break-even point, the Company must earn atleast a revenue of Rs.1,900,000. As the Company will be charging an average commission of Re.0.10 paisa per share, therefore it would have a monthly turnover of 1,700,000 shares resulting into an annual turnover of 20,400,000 shares.

Khan Investment Services (Pvt.) Limited Statement of Sources and Application of Funds Sources: Sponsors Capital Issuance of 1400000 shares @10 each. Operating Surplus Total Funds: Application: 1. 2. 3. 4. 5. 6. 7. 8. 14,000,000 97,000 14,097,000

Incorporation Expenses Cost of Membership of stock exchange Office Furnishing Office Equipment Account-holding with CDC Account-holding with NCCPL Various Deposit Requirements Office Car

100,000 10,000,000 1,000,000 1,000,000 100,000 100,000 200,000 500,000 13,000,000 1,097,000

Total Funds Utilized: Funds in hand: