Stock Exchange

An exchange on which shares of stock and common stock equivalents are bought and sold

EXPLANATION

A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to trade stocks, bonds and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include shares issued by companies, unit trusts,derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in thesecondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks.

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

HISTORY OF STOCK EXCHANGE

Securities markets took centuries to develop. The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company's founding in 1602, while others point to earlier developments. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back as ancient Rome.

In the Roman Republic, which existed for centuries before the Empire was founded, there weresocietas publicanorum, organizations of contractors or leaseholders who performed temple-building and other services for the government. One such service was the feeding of geese on the Capitoline Hill as a reward to the birds after their honking warned of a Gallic invasion in 390 B.C. Participants in such organizations had partes or shares, a concept mentioned various times by the statesman and orator Cicero. In one speech, Cicero mentions "shares that had a very high price at the time." Such evidence, in Malmendier's view, suggests the instruments were tradable, with fluctuating values based on an organization's success. The societas declined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state.

Tradable bonds as a commonly used type of security were a more recent innovation, spearheaded by the Italian city-states of the late medieval and early Renaissance periods.

In 1171, the authorities of the Republic of Venice, concerned about their war-depleted treasury, drew a forced loan from the citizenry. Such debt, known as prestiti, paid 5 percent interest per year and had an indefinite maturity date. Initially regarded with suspicion, it came to be seen as a valuable investment that could be bought and sold. The bond market had begun.

From 1262 to 1379, Venice never missed an interest payment, solidifying the credibility of the new instruments. Other Italian city-states such as Florence and Genoa became bond issuers as well, often as a means of paying for warfare. Bonds were traded widely in Italy and beyond, a business facilitated by bankers such as the Medicis.

War between Venice and Genoa resulted in suspension of prestiti interest payments in the early 1380s, and when the market was restored, it was at a lower interest rate. Venice's bonds traded at steep discounts for decades thereafter. Other blows to financial stability resulted from the Hundred Years War, which caused monarchs of France and England to default on debts to Italian banks, and the Black Death, which ravaged much of Europe. Still, the idea of debt as a tradable investment endured.

As with bonds, the concept of stock developed gradually. Some scholars place its origins as far back as ancient Rome. Partnership agreements dividing ownership into shares date back at least to the 13th century, again with Italian city-states in the vanguard. Such arrangements, however, typically extended only to a handful of people and were of limited duration, as with shipping partnerships that applied only to a single sea voyage.

The forefront of commercial innovation eventually shifted from Italy to northern Europe. TheHanseatic League, an alliance of mercantile towns such as Bruges and Antwerp, operated counting houses to expedite trade. The term "bourse," which would become synonymous with "stock market," arose in Bruges, either from a sign outside a trading center showing one or a few purses (bursa is Latin for bag) or because merchants gathered at the house of a man named Van der Burse; nobody's quite sure.

By the late 1500s, British merchants were experimenting with joint-stock companies intended to operate on an ongoing basis; one such was the Muscovy Company, which sought to wrest trade with Russia away from Hanseatic dominance. The next big step was in Amsterdam. In 1602, the Dutch East India Company was formed as a joint-stock company with shares that were readily tradable. The stock market had begun.

A bond issued by the Dutch East India Company, dating from 7 November 1623, for the amount of 2,400 florins.

The Dutch East India Company, formed to build up the spice trade, operated as a colonial ruler in what's now Indonesia and beyond, a purview that included conducting military operations against recalcitrant natives and competing colonial powers. Control of the company was held tightly by its directors, with ordinary shareholders not having much influence on management or even access to the company's accounting statements.

However, shareholders were rewarded well for their investment. The company paid an average dividend of over 16 percent per year from 1602 to 1650. Financial innovation in Amsterdam took many forms. In 1609, investors led by one Isaac Le Maire formed history's first bear syndicate, but their coordinated trading had only a modest impact in driving down share prices, which tended to be robust throughout the 17th century. By the 1620s, the company was expanding its securities issuance with the first use of corporate bonds.

The Dutch West India Company was formed in 1621, bringing a new issuer to the burgeoning securities market. Amsterdam's growth as a financial center survived the tulip mania of the 1630s, in which contracts for the delivery of flower bulbs soared wildly and then crashed. New techniques and instruments proliferated for securities as well as commodities, including early forms of options trading and margin trading.

Joseph de la Vega, also known as Joseph Penso de la Vega and by other variations of his name, was an Amsterdam trader from a Spanish Jewish family and a prolific writer as well as a successful businessman in 17th-century Amsterdam. His 1688 book Confusion of Confusions explained the workings of the city's stock market. It was the earliest book about stock trading, taking the form of a dialogue between a merchant, a shareholder and a philosopher, the book described a market that was sophisticated but also prone to excesses, and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment.

The same year in which de la Vega published also saw an event that would help spread financial techniques and talent from Amsterdam toLondon. This was the "glorious revolution," in which Dutch-born William of Orange ascended to England's throne. William sought to modernize England's finances to pay for its wars, and thus the kingdom's first government bonds were issued in 1693 and the Bank of England was set up the following year. Soon thereafter, English joint-stock companies began going public.

London's first stockbrokers, however, were barred from the old commercial center known as the Royal Exchange, reportedly because of their rude manners. Instead, the new trade was conducted from coffee houses along Exchange Alley. By 1698, a broker named John Castaing, operating out of Jonathan's Coffee House, was posting regular lists of stock and commodity prices. Those lists mark the beginning of the London Stock Exchange.

The next few decades saw one of history's greatest financial bubbles. At the center of it were theSouth Sea Company, set up in 1711 to conduct English trade with South America, and theMississippi Company, focused on commerce with France's Louisiana colony and touted by transplanted Scottish financier John Law, who was acting in effect as France's central banker. Investors snapped up shares in both, and whatever else was available. In 1720, at the height of the mania, there was even an offering of "a company for carrying out an undertaking of great advantage, but nobody to know what it is."

By the end of that same year, share prices were collapsing, as it became clear that expectations of imminent wealth from the Americas were overblown. In London, Parliament passed the Bubble Act, which stated that only royally chartered companies could issue public shares. In Paris, Law was stripped of office and fled the country. Stock trading would be more limited and subdued in subsequent decades. Yet the market survived, and by the 1790s shares were being traded in the young United States.

CAPITAL MARKETS

Capital Market constitutes all financial institutions under banking system and the
securities market. This is the market place where financial investments (normally
of a long-term nature) can be acquired or disposed off. The term is used in the plural
to signify separate market segments for various types of financial investments. For
example, shares and bonds issued by business entities (companies) which are traded
at a Stock Exchange or Money Market, where acquiring or disposing of short-term
financial investments including inter-bank placement of very short-term deposits
and dealings in currencies is made.



MAJOR INSTRUMENTS TO INVEST IN THROUGH
STOCK EXCHANGE



When we invest money with a business entity, it can either be in
the capacity of becoming a partner in the business or we can lend
money to the business entity for a defined time period. When we
invest money in the business then we become the equity owners or
the shareholders, while if we lend money then we are the creditors
of that business. The must common types of securities are stocks
and bonds.
5.1 Stocks / Shares
When we participate in the ownership of the
business and have an equitable right in the
business to the extent of our share in it, we
become an "equity" or "share" holder. An equity investor is entitled to
distribution of profits and in the event the business is liquidated at some
stage, he is entitled to his share of the net assets left over. Stock or share,
as an equity instrument represents ownership insterest of the holders in their
corporate ventures.
5.2 Bonds
Bond as a debt instrument represents the promise of a issuer to pay a fixed
sum ofmoney at a specified maturity date and fixed return at regular intervals
until then.
At Stock Exchange, most of the trades are made in equity instruments, i.e.
stocks or shares issued by various companies.

What is dividend?

Dividend is the return paid to shareholders out of the profits of the company.
Dividends can be in the form of cash or additional shares
of the company called stock dividend or bonus shares.
Dividends are usually paid once or more than once in a
year depending upon the company’s pay-out policy. The
dividend paid at the end of the financial year is called
Final Dividend, whereas dividend(s) paid during the year on the basis of
periodical results of the company are called Interim Dividends.
7.5 What is capital growth?
This is one of the ways in which investment in shares differ from
placing money in deposit accounts. The principal amount of
money placed in a bank or any fixed income savings scheme
always stays the same except profit earned at a fixed rate is paid
to the investor. Changes in the value of shares of a company occur
according to the performance of the company. With good
management and corporate governance, the value of your
investment in shares of a company can grow multiple times over
the period. This is capital growth.
7.6 Risks and rewards:
Investing in shares generally gives better returns as compared with other
investment avenues. Your investment may increase in value besides paying
you dividends. You share the rewards when the company does well and the
price of the shares goes up. However, it is important to remember that share
prices are sensitive to market sentiment and are very volatile. Thus shares
are not a suitable investment unless you invest funds for a long term that
will be disinvested only when market conditions are favourable. The funds
that might be needed in an emergency may force a distress sale when the
market might happen to be down.

THE KARACHI STOCK EXCHANGE AND ITS TRADING SYSTEM

The Karachi Stock Exchange has introduced computerized trading
system to provide a fair, transparent, efficient and cost effective
market mechanism to facilitate the market participants, including
the investors. The systembeing operated at Karachi Stock Exchange
is cal led Karachi Automated Trading System (KATS).The trading system comprises of various distinct segments, which are:
8.1 T+3 Settlement System:
In the T+3 settlement system, purchase and sale of securities is netted and
the balance is settled on the third day following the day of trade.
Benefits of T+3 Settlement System:
• It reduces the time between execution and settlement of trades, which
in turn reduces the market risk.
• It reduces settlement risk, as the settlement cycle is shorter.
8.2 Provisionally Listed Counter:
The shares of companies, which are not already listed and which make a
minimum public offering of a specified amount, which is presently Rs.150
million, are traded on this counter from the date of publication of
prospectus/offering document.When the company completes the process of
dispatch/credit of allotted shares to subscribers through CDC, it is officially
listed and placed on the T+3 counter. Trading on the provisionally listed
counter then comes to an end and all the outstanding transactions are
transferred to the T+3 counter with effect from the date of official listing.
8.3 Spot/T+1 Transactions:
Spot transactions imply delivery upon payment. Normally in spot transactions
the trade is settled within 24 hours.
8.4 Futures Contract:
A Futures contract involves purchase and sale of
securities at some future date (normally within one
calendar month), at a price fixed today.The number
and names of companies to be traded on the Futures
counter are determined every six months based on
the eligibility criteria approved by the SECP in this regard and which are
notified to the market participants in advance.

8.5 Odd LotsMarket:
This market has been created to provide an automated platform through
KATS enabling the investors to trade securities in lots which are less than
the normal trading units (lots) of the securities approved for Ready Market.
The minimum volume of a buy/sell order may be one share.
8.6 COT Market:
Equity repurchase transactions, better known, as “Badla” are called Carryover
trades. These are an established form of transactions used in the stock
market for temporary financing of trades by speculators and jobbers. Through
this mechanism, the purchase transaction, after its execution, is funded
through borrowing till the next day of settlement. At KSE, COT session is
run in the afternoon, to provide an efficient forum to investors and financiers.
All carry over transactions are done for a period of 10 trading days, during
which financee may release COT on any day before completion of 10 days
period, whereas financier will be able to release COT only after completion
of that period.
Difference in COT& Margin Financing
In COT, the financing is arranged by the traders after execution of trade,
whereas in Margin Financing, there needs to be a certain credit limit duly
approved before executing the trade.
8.7 OTC Market (In Process):
In order to encourage enterprising promoters to set up new industries or
expand their existing enterprises by raising finance in a cost-effective way
through listingmechanismwith comparatively lesser requirements, anOver-
The-Counter (OTC) market is proposed to be operative soon.

IMPORTANT CONSIDERATIONS FOR MAKING INVESTMENT IN SECURITIES MARKET

Before you invest in shares, you must consider a number of factors.9.1 Know what investment products are available:
The following types of securities are available on the stock market for
investment:
• Ordinary/preference shares,Modaraba Certificates of listed companies
• Unit trust schemes
• Mutual funds (Open-end and Closed-end) certifi cates
• Corporate bonds/Debt Instruments i.e., Term Finance Certificates
(TFCs)
• Government securities i.e., Federal InvestmentBonds (FIBs), Pakistan
Investment Bonds (PIBs) and Special US Dollar Bonds.
Out of the above, most common product is the ordinary shares traded on the Stock Exchange.
9.2 Understand your risk profile:
If you can afford to take some risk and have the ability to
endure the market’s ups and downs, equity investments may
grant you good returns. A wise and prudent investor chooses
an investment product not only according to his
goals and the amount of capital available but also according to
his tolerance for risk. All investments carry a certain degree of
risk. You have to determine whether you are a “risk-prone” or
a “risk-averse” person. Depending upon the extent of risk you
intend to take, you should pursue an investment strategy
(aggressive, moderate or conservative) that fits your risk profile.
9.3 Do your homework before you invest:
Don’t put in your money until you have gathered and understood all relevant
information regarding the investment. Prepare yourself
for the vigorous homework of analyzing companies’
annual reports, accounts and other statements while
keeping abreast of what’s happening in the industry,
country and elsewhere that may affect your
investment. Consult your investment adviser/broker
to get latest market information about shares you
intend to buy or sell. Be skeptical of any thing picked up from rumors,particularly if you cannot explain the choice rationally. Please take your time
over your investment decisions. Do not be pressured by anyone telling you
that you are about to miss an exceptional opportunity to make money – It
is better to lose an opportunity than to lose your money.

9.4 Think long-term:
Investment in shares does not result in instant yields. Do not invest any
money which you may need immediately, since the price of shares can go up
and down, It is advisable to keep some money in a deposit account to meet
your financial obligations in the near future. In this way, you
will not be forced to sell shares at a low price in case of an urgent
cash requirement. Bear in mind that even in the best of
securities/shares, there can be short-term aberrations. It is
important to have the capacity to hold your investments for
longer periods. Studies have shown that investments properly
timed and based on strong fundamentals have been proved very profitable
for investors in the longer term.
9.5 Avoid putting all your eggs in one basket:
The best way to minimize risk is to diversify your investments across various
investment products. If equities are your sole investments, it makes sense to
diversify between different sectors and companies. In
this way, loss incurred on some investments can be
absorbed or compensated by gains made in others,
keeping the overall return on investment positive.
You can also diversify your investment by investing in open-end mutual
funds managed under various unit trust schemes. While investing in mutual
funds check the credit rating of the fund and instrument. Similarly, while
investing in any security, check the credit rating of the concerned company,
if available.
9.6 Taxes & Commision:
Youmust know the rates of taxes and commissions charged
by the Central Board of Revenue (CBR)/broker as these
affect your costs, and hence your returns. There is no scale
of commission rates prescribed. As such the investors may
negotiate the rate of commission based on the services
desired and the volume and nature of their trades.The Finance Act, 2004 has imposed following two taxes on securities
transactions, which Brokers may charge to and collect from their clients
for onward depositing in government treasury:
1 - Capital Value Tax (CVT) @ 0.01% on purchase value of shares.
2 - Withholding tax @ 0.005% on sale value of shares.

9.7 Judgment of timings:
The aim of investing in stocks and shares is to buy at low
and sell at high. Knowing when, however, is the challenge.
Many investors attempt to time the market. They try to
figure out when the market is going up and buy before it
does and then anticipate when it is going to crash and sell
before that. Usually you try to buy when the upswing has
begun and sell as the downswing starts. However, such
accuracy is extremely difficult to determine.
9.8 Avoid greed and fear:
The stock market is driven by two emotions: greed and fear. People are
usually caught up in the boom fever and pay beyond the worth of
shares. This is the greed that drives bullmarkets. Never allow greed
to become your need. In bear markets, people get carried away with
the ruling pessimism and are eager to sell their investments believing
in the worst rumors. This is the fear that dominates bear markets.
9.9 Handling of trades:
Give clear instructions to avoid ambiguity, check trade
confirmations received and keep a proper record of all your
transactions.
9.10 Beware of scams:
Beware of promises of quick profits or sky-high returns.
Remember: higher the gain on investments, higher is the risk
involved. This is the fundamental risk-reward trade-off.9.11 Keeping eye on Stocks’ performance:
In general terms, when you witness if the stock price and
volume of a stock suddenly jumps, there may be typically
three reasons for this:
i. Company’s fundamentals have changed, say a financial or structural
reform has been undertaken which has turned around the company’s
financial standing.
ii. The sector to which the company belongs, could be experiencing a
seasonal or circumstantial boom.
iii. Unfair trading practices by market participants which
may be in the form of cornering, insider trading, front
running, blank selling, etc. These practices may cause
sudden change in price chart, even of an inactive and
illiquid stock. These practices are discouraged and
curbed by the regulators through effective market
surveillance and investigations.
Moreover, there are several types of investors: some are long term investors
who simply tuck away their investments for years while others trade frequently
and keep a close eye on how their shares are performing. You can check your
shares’ performance in variousways.Adaily indicator of share price movements
is available in newspapers and also on website of the relevant stock exchange.
Youmay access this information directly or through your stock broker/advisor.
Informative articles about many companies are regularly published
in newspapers and investment magazines. Your stockbroker may
also provide valuable information. Some publish newsletters for
their clients, reflecting their views on the performance of selected
companies. Annual reports of companies also contain useful
information. Some companies have shareholder relations
departments, which can help with factual information.

HOW TO TRADE?

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10.1 Decision to trade – independently or on certain advice:
Investors can choose tomake their own share dealing decisions or take advicefrom a professional. Buying and selling shares and tracking their performance
can be time consuming but it is rewarding for those who have the time to
manage their own investments.Many stocks fly on high and many leap on
very transient rumors. Evaluating merits and flows is always
the soundest approach. The quarterly and annual financial
statements published by the listed companies give you a
snapshot of a company’s financial standing. Since as a retail
investor you are most likely looking for companies to invest
in with a long termview, the stability factor is an important
consideration. Some investors deal with stockbrokers directly
while others prefer to use the services of professionalmanagers
who have discretionary powers to manage the investment portfolio.
10.2 Selection of stock broker:
Selecting a broker will be one of themost critical decision
you take in your investment experience. Stockbrokers
are your link to the stock market. Their job is to help
you get the best price available when you want to buy
or
sell your shares. Be careful in selecting your broker. To start with, ensure that
the broker you choose is registered with the SECP to trade and that the stock
brokerage firm has a good track record. Visit them and meet them in person
before you decide. If anyone of his existing clients are known to you, call up
a few of them and ask about his quality of service. After all, you are going
to entrust him withmoney you don’t want to lose. All the registered brokers
are listed at the KSE and SECP websites.
10.3 Opening of Trading Account with Broker:
Once you have decided the broker with whom you
intend to deal, you should ensure that an account is
opened in your name by filling the account opening
form on the standardized format approved by SECP
as per Annexure “A”. Make sure that you are assigned a unique account
identity and that all your transactions bear this identity. It is imperative that
the terms and conditions prescribed in the account opening form are read
very carefully and well understood. It will be in your interest if you give clear
instructions as to who can operate the account. It is preferred if the investor
gives specific instructions that business can only be transacted in the account
on his instructions.

10.4 The mechanics of share dealing:
There are various ways of participating in the stock market:
• You can invest directly by purchasing shares through a broker. You
may buy shares in one company or youmay spread your risk by investing
in a number of different companies to give you a ‘portfolio’ or collection
of shares.
• You can invest indirectly and through collective
investment schemes such as open-ended unit
trusts and closed-ended mutual funds.This would
further reduce your risk.
When you have decided to buy/sell shares of a particular company, contact
your stockbroker. You can ask to buy/sell a certain
number of shares at or upto a certain value. Get the
contract note confirming your order immediately and
check for the following information.
a) Name and number of securities;
b) Date on which the order is executed;
c) Nature of transaction (spot, ready or forward and also whether bought
or sold);
d) Price at which the transaction is executed; and
e) Commission charged by the broker;
There are two types of orders:
(i) Limit Order: In a limit order, the client specifies the acceptable price at
which the order is to be executed.
(ii) Market Order: Also known as at best order. It is executed at the prevailing
market rate.

10.5 Important Concepts to understand while Trading in Stocks.
a) KSE-100 Index:
The stock price index provides a sensitive barometer of general confidence
in the economy. The KSE-100 Index is a benchmark used for ascertaining
market direction. The KSE-100 Index comprises the top company from each
of the listed sectors on the KSE, in terms of market capitalization. The rest
of the companies are then picked on the basis of their respective market
capitalization ranking, without any consideration for the sector. The KSE-
100 index contains a sample of 100 representative common stocks with the
base value of 1,000 points.
b) Circuit Breaker:
Acircuit breaker refers to a measure used by stock exchanges to avert panic
selling or over-exuberant buying. After the stock’s price has risen or fallen
by a certain percentage, the exchange might activate restrictions or trading
halts. The KSE management has imposed a circuit breaker of 7.5% or Rs.
1.50 whichever is higher for the purpose of upward price fluctuations in the
stock price from the closing price of the previous day and a circuit breaker
of 5% or Re. 1/-, whichever is higher in case of downward price fluctuation
in the stock price from the closing price of the previous day.
c) Earning Per Share (EPS):
This is a ratio calculated by dividing a company’s net profit after tax by its
number of shares outstanding. This denotes the company’s earning capability
for each share issued.
d) Book Value or Break-up value:
This is a ratio which indicates the asset coverage that each equity share
represents in the company. It thus represents the net worth of assets that
each share commands. Book Value per share is arrived at by dividing total
equity by the number of shares outstanding. Shareholders’ equity includes
paid up capital, reserves and retained earnings, less losses, if any.e) Price Earning (P/E) Ratio:
This ratio is calculated by dividing current market price of the share by its
Earning per share (EPS).This ratio is used as a tool for valuation and indicates
whether price of a share is realistic in line with its earning. If the share is
over-priced then the ratio will be high, if it is under-priced the ratio will be low.

DELIVERY AND SETTLEMENT

Once the transaction of purchase or sale of security is executed, the
same gets completion on delivery and settlement thereof. If a company
has not yet been entered in the Central Depository System(CDS), the
delivery of its shares is performed manually in physical form, otherwise
the same is done electronically throughCDS as operated by a separate
company namely Central Depository Company of Pakistan Limited
(CDC).
11.1 Central Depository System (CDS)
The system of electronic book-entry of securities i.e. CDS has been set up
to eliminate physicalmaintenance and transfer of securities.
This system is in line with the international practice and
has replaced the manual system of physical handling and
settlement of shares at stock exchanges.Within the CDS,
transfer of shares from one account to another account
takes place electronically.
TheCDS is managed by theCentral Depository Company of Pakistan Limited
(CDC), which has been sponsored by the stock exchanges and leading local
and foreign financial institutions. Established under the Central Depositories
Act, 1997, CDC has emerged from an elementary settlement agency to a
full fledged depository. It has revolutionalized the financialmarket by making
trading and settlement of securities transparent, reliable, efficient and secure
in eliminating risks.
Following are the core advantages of the CDS:
• Electronic book entry system
• Records and transfers securities electronically.
• No physical change of hands of securities.• Strict confidentiality
• No risk of damaged, lost, forged and duplicate securities.
• Simple procedure involved in pledging of securities.
• No delays in delivery, settlement and transfer of securities due to speed.
• Instantaneous credit of entitlements (Bonus, PaidRights, etc.) to investors.
• Significantly reduced the cost of investors.
An investor can use any of the three types of CDC accounts, which are
described as below with their features:-
i. Sub-Account:
A broker may open, maintain and operate any number of sub-accounts
he requires on behalf of his clients. A specific sub-account is used for
keeping securities belonging individually to that particular client of the
broker.
ii. Group Client Account:
This account is used for keeping securities which are beneficially owned
by the broker’s clients who are not willing to utilize
the facility of opening separate sub-account. The
broker groups all such clients in their group account.
The detailed break-up of the securities held by each
client of a group account is maintained by the broker in his back office.
iii. Investor Account:
By opening an investor account with CDC, the client comes with direct
contact of CDC. Such account can only be operated by the relevant
account holder. The service provides efficient, effective and secure
services to its clients.
Out of the above, the most secured and convenient type is the investor
account which is highly recommended to the investors.

11.2 National Clearing and Settlement System (NCSS)
Clearing and Settlement is one of themost important aspects in the operation
of the securities business. It is the process of reporting, matching, correcting
securities transactions and the ultimate delivery or receipt of net balances.
The Karachi Stock Exchange
23
NCSS is an electronic system developed to replace the individual Clearing
Houses of Pakistan’s three stock exchanges by a single entity. This system
is operated by National Clearing Company of Pakistan Limited (NCCPL),
which has been registered as a separate legal entity. The operations ofNCSS
are rapidly gaining momentum and so far a majority of the securities have
been inducted into the system for settlement purpose.
NCSS provides stability to the market by capping the systematic risk to a
good extent. It has also improved efficiency of the settlement process by
introducing a consolidated and geographical neutral clearing and settlement
system. NCSS, with its technologically advanced features such as automated
Pay and Collect functionality, introduced extraordinary transparency and
efficiency in the clearing process.

INVESTORS’ PROTECTION:

Investors’ confidence in the fairness of capitalmarkets is fundamental to the success
ofmarkets in capital foundation. To attract investment, investors need to be assured
that they would not be cheated off their money by the company in which they invest
or by intermediaries such as brokers, fund managers or other
participants such as investment advisors and analysts. Stock Exchanges,
as frontline regulator and SECP, as apex regulator of the capital
markets use a variety of means to get the investors protected from
market abuse. Investors are offered protection by including good
corporate governance
practices in corporate law, having an effective systemofhandling investors’ complaints,
creating awareness among investors of prudent way of dealing in securities and
demonstrating the capacity to detect and punish market abuse through market
surveillance.
12.1 Resolution of investors’ complaints.
You should always ensure that the stockbroker you choose is
licensed to trade by the Securities & Exchange Commission
of Pakistan. Prefer stock brokerage firms with a good track
record. As a shrewd investor, you should know your rights and
obligations and should be aware of the rules that govern yourthings go wrong. You can report abuse to the KSE or SECP, who are the
regulators to ensure the development of a fair, efficient, and transparent
securities market. Alongwithmonitoring and regulating the capitalmarket,
both the KSE and the SECP have the ultimate responsibility to protect the
investors through market supervision and ensuring that their laws and
regulations are complied with.

12.2 The Investors’ Education & Complaints Cell at KSE
Stock exchanges, being the frontline regulators, play a
proactive role. Securing the interest of small investors
and minority shareholders is of prime importance to the
Karachi Stock Exchange. In order to keep a vigilant eye
on investors’ issues and to provide a platform to the
general public for voicing their concerns, an Investors’
Education & Complaints Cell within Legal Division
of KSE has been set up. This Cell is responsible for ensuring that
grievances/complaints of the general public concerning investment and
trading of securities are heard and redressed, in a quick and efficient manner.
The Investors’ Education & Complaints Cell also conducts programs for
investors’ education and provides assistance for answering general questions
regarding the securities laws, rules and regulations and any counseling that
may be required in this regard.
12.3 Your complaint
Your complaint is important to the KSE as it may provide
useful information and insight into malpractices in the
market. It can also serve as an early warning signal to
preempt potential defaults. You are, therefore, encouraged
to lodge your complaint with the KSE as a frontline
regulator. Frivolous complaints, however, are not entertained.
The KSE receives complaints of a varied nature. Of these the most common
are those that are lodged against the brokers of the stock exchange. These
relate to:• unauthorized trading,
• unauthorized transfer of shares,
• non-supply of statements of account, and
• order execution problems.
Grievances can be lodged with the KSE in the form of a formal complaint
against a member or an agent of a broker of the stock exchange. The KSE
will endeavour to redress your complaint in a timely and judicious manner.

12.4 Lodging your complaint
Although you have recourse to approach the KSE for lodging your complaint,
it is strongly advised that your concern/problem should first
be taken up directly with themember concerned. It is prudent
to act promptly. If the Member fails to redress your grievance
then you may lodge a proper complaint supported by
documentary evidences to the Karachi Stock Exchange
addressing to the Managing Director. The time limit required to resolve a
dispute varies with the nature and complexity of each case and the availability
of documentary evidences.
12.5 How your complaint is dealt with
On receiving your complaint against a member of KSE,
it is forwarded to the Investors’ Education & Complaints
Cell at Legal Division of KSE for review and evaluation.
The matter is then taken up with the concerned member
who i s / ar e r e qu es t e d t o s end hi s / t he i r
comments/observations to the KSE, a copy of which will
also be sent to you. The matter is likely to be resolved at this stage. In case
reservations remain despite the exchange of correspondence,KSEmay initiate
an investigation in order to ascertain the true facts of the matter. This could
involve inviting both parties to a face-to-face meeting for resolving the
matter. Occasionally, a dispute concludes without any decision. This occurs
mostly in the event of lack of evidence. The KSE in such cases may decline
to attend the dispute or may dismiss a case and refer the parties to avail their
remedies through court of law.

12.6 Disputes to be referred for arbitration:
As per General Rules & Regulations of the Exchange, all
claims, complaints, differences and disputes arising of dealings
and transactions in respect of securities made subject to Rules
& Regulations of the Exchange and not amicably settled with
the concerned member may be referred for arbitration process.
12.6.1 Appointment of Arbitrator(s):
As per above-referred Regulations, all claims/disputes upto Rs. 0.5
million are referred for arbitration to the Managing Director of the
Exchange, who either himself enters upon the reference or appoints
a nominee for this purpose. The claims/disputes valuing more than
Rs. 0.5 million are referred to the Arbitration Committee of the
Exchange. In such cases, a panel of 3 arbitrators is constituted to
conduct arbitration proceedings, out of which 2 are appointed by
drawing lots from the Arbitration Committee, with one being a
member of the Exchange and other a non-member director. The
third arbitrator will be the Managing Director of the Exchange or
his appointed nominee. However, in the case of non-availability of
any member of the Committee to act as arbitrator, it may instead
appoint any person having expertise in legal or securities market
matters, preferably a former non-member director of the Exchange
to be an arbitrator of the said panel.
12.6.2 Application for Arbitration:
In every case where a claim, difference or dispute arises, the concerned
investor may submit to the Exchange an application for arbitration
along with following documents:
(i) Investors’ Claim Form as per Annexure “B” duly filled and
signed along with all supporting documents and annexures as
mentioned in the form.(ii) An undertaking as per Annexure “C” to abide by all theRules
& Regulations of the Exchange in force for the arbitration.
(iii) Fee as specified in the Regulations.

12.6.3 Arbitration Hearings:
The arbitrator(s) fix a date, time and place for
each hearing, notice of which is given to the
parties in 7 days advance.
12.6.4 Appearance:
The parties to the reference may attend the hearing in person or
through any person duly authorized by them in writing who must be
acquainted with the matter in dispute.
12.6.5 Award:
An award made by an arbitrator, or in case of panel
of three arbitrators by majority of them, shall be
final and binding upon the parties.
12.6.6 Appeal against the Award:
(a) A party to a dispute who is dis-satisfied with any award of the
Managing Director/his appointed nominee may appeal to the
Arbitration Committee against such award within 7 days of the
receipt of such award. The award of the ArbitrationCommittee
in an appeal shall be final and deemed binding on the parties to
the dispute.
(b) A party dis-satisfied with the award of the panel of arbitrators
may appeal against such award to the Board within 7days of the
receipt of such award. However, for the purpose of hearing the
appeal, the Board may constitute a Committee of the directors
every year comprising three of its members, two being nonmember
directors and one member director.

Any investor appealing to the Arbitration Committee / Board shall provide
the following:
(i) The grounds of objections to the award of the arbitrator(s)
(ii) Payment of required fee.

TIPS TO AVOID COMPLAINTS AGAINST STOCK BROKERS

Though KSE and SECP have provided the appropriate forums to
aggrieved investors to have their grievances against the brokers
of the Exchange resolved as stated above, it has been observed
that the investors do not exercise due care and diligence while
making investment decisions or for that matter in their dealings
with the stock brokers. These lax practices generally leap to
disputes and investors find themselves at a great disadvantage.
To help you safeguard your interest and avoid complaints against the stockbroker,
here are some easy tips.

13.1 Be wise in selecting a broker
• Before selecting a broker, visit the offices of a few
to observe their business practices. Try to gauge the
reputation of the brokers by talking about it with
the people you meet.
• While opening your account with branch offices of the brokers,
first confirm that the branch office and the managing agent
of the office are registered with the stock exchange and the
Securities and Exchange Commission of Pakistan (SECP).
All offices outside the stock exchange, if not duly authorized,
cannot execute the trades according to the provision of the
law and as such the trades are not enforceable under the
law and the investor can suffer a loss.
• Get clear information on commission rates and services
provided and compare them with that of other brokers.
Commission rates vary with the quality of service and
smaller clients may be subject to higher commission
than larger clients, so don't over negotiate.
• Before starting your dealings with any person, make sure that he is a
permanent employee or a registered agent of the broker.
• It will be beneficial for you to personally meet the broker
or the senior management.
13.2 Always open accounts in your own name
• There are two types of accounts you would need to open for investing
in stocks. A trading account with broker for buying and selling securities
and a depository account for keeping securities. You can open the
depository account either with the broker which is called a subaccount
or directly with the Central Depository Company whichis called an investor account. Think of CDC as bank of securities that
it keeps in digital form.
• Do not trade until you have opened a trading account
with your broker through a standardized account
opening form. Thoroughly read and understand the
terms and conditions of the form. Strike out any inapplicable
clause, sign the form and the deleted clauses
and get it signed by the broker as well. Keep a copy.
• It is better if you open an investor account rather than a sub-account.
In an investor account, you stay in control of your securities because
they can only move once you give a transaction order. In a sub-account,
the broker is in control.While a subaccount reduces some hassle,
it is possible for the broker to move your securities without
authorisation. An investor account costs about Rs. 1500/- per
annum while a sub-account is free but don't compromise on
control for Rs. 1500/-.

13.3 Stay well documented at all times
• Obtain your client identification number that the broker would assign
you for his records.
• Instruct him in writing to enter always this number
in the trading system of the exchange while executing
your trades. This would help in setting an audit trail
of trades made on your account.
• Always obtain signed trade confirmations from your broker at the end
of the trading day. Insist on additional written confirmations if you are
given verbal trade confirmations on recorded lines.
• Make sure that all receipts/confirmations/ deliveries
are issued/made in the name of the stock broker on
proper stationery bearing the name of the stock broker.

• Obtain periodic statements from your broker to keep a check on your
trade positions and account balances. Also get a periodic sub-account
statement from the Central Depository Company to verify your securities
and their movement.
• Make all payments preferably through cross cheques
in the name of the broker only and obtain receipts
of all payments duly signed by the authorized
persons. Keep a record of the cheques given to and
received from your broker.
• All payments are received in the shape of cheque/pay order/demand draft
issued by the stock broker only and not by his agent or any other person.

13.4 Be thorough in trading practices
• Make your payments and deliveries promptly, just as you
would expect your broker to.
• Maintain your safety deposits or marginswith your brokers
at all times. The stock broker is within his legal rights
to square an open position if the investor circumvents his obligation.
• If you don't, your broker would have the right to sell your securities at
your peril and cost.
• Try to place your trade orders with one particular person.
It would reduce chances of misunderstanding.
• Ensure that every time you buy shares, they are transferred in your
account on the settlement day. Delay in transfers might mean that your
broker is using these securi ties for some other purpose.
• Incase of any discrepancy inyour statements, contact
the broker immediately. Don't make simplisticassumptions or leave things to chance. For correspondence
that you think you might need in case of a
complaint, use registered mail or obtain a receipt
from your broker.

13.5 Take responsibility for investment decisions
• Know your financial capacity and needs. Make investments accordingly
and be prepared to take responsibility for them. Stock prices have a habit
of rising or falling very sharply. The rule the world over is the same
"Buyers beware." Your broker is not responsible if you lose money on the
stocks that you buy.
• You can consider taking financial advice but in our
markets there is a dearth of qualified and experienced
professionals who can advise individual investors. Those
you might contact would only tell you what stock they think is looking good regardless of its suitability for you.
• Stay away from discretionary trading account. You are most likely to
have some serious problems with your broker if you leave up to him to
take decisions that you should be taking yourself.
• Do not deposit any money at a fixed return with your
broker to be invested in providing carry over or Badla
financing to others. Such deposits do not have a legal
cover and youmay be exposed to risk of losing your money.
• Do not provide anyone a blanket authority to operate your account in
any manner. • Never give consent to the stock broker to pledge shares with the bank
for borrowing purpose. No stock broker is authorized to pledge shares
belonging to his client for borrowings from a bank. In case the investor
does not take delivery of his shares, he can expose himself to such a risk.