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The small stock exchanges – A viable business opportunity

The Karachi Stock Exchange (KSE) was founded on 18th September 1947 as country’s first stock exchange. Initially only five companies were registered in the exchange. The Lahore Stock Exchange (LSE) came into existence in October 1970 while the Islamabad Stock Exchange (ISE) was registered as a guarantee limited company on 25th October 1989. On 11th January 2016, all three stock exchanges were merged as Pakistan Stock Exchange (PSX). The Pakistan Stock Exchange provides a reliable, orderly, liquid and efficient digitized marketplace where investors can buy and sell registered companies’ common stocks and other securities. For over 60 years, the Exchange has facilitated capital formation, serving a wide spectrum of participants, including individual and institutional investors, the trading community and registered companies. There are almost 575 companies registered in the Pakistan Stock Exchange. The market capitalization is more than US$90 billion.

The public can trade in the stock exchange through the brokerage houses by opening an account. There are more than 200 brokerage houses registered on the stock exchange. Normally an account opens with a minimum investment of fifty thousand to one hundred thousand.

Almost all the major companies working in the country are registered in the Pakistan Stock Exchange. The registration process to register in the stock exchange is very lengthy, stringent and expensive. Only companies with big capital can register themselves in the stock exchange and it is not viable for Small companies with investment of 20-30 million to register at this exchange.

In Pakistan, there is no safe investment opportunity for the small investor. The concept of establishing small stock markets at regional level is to manage and better utilize the investment of small investors. These markets can be good for those who don’t have the full capital to start a business and does not want to use the money on interest from the commercial banks. They can register their companies and float their share in the stock market and get the investment from there.

It is a fact that the returns of small and medium businesses are usually higher as compared to that of big investment businesses. The development of smaller regional stock exchanges can be good for the small and medium level investors to invest their money in these small and medium businesses. As discussed above the small and medium level businesses cannot afford to register in big stock exchange due to monetary constraints.

By the setup of the small level stock markets, the small investors who have monthly saving of two to five thousand can also invest his saving safely. There is no feasible scheme available for those people who have little monthly savings. This will motivate people to save more as they have the much better opportunity to invest, that will reduce the expense and eventually inflation will decrease.

In addition to decrease in inflation; these markets will have the following advantages:

Alternate to Conventional Banking (Riba Free): It will be good for those who do not want to borrow money from the banks on interest to do their business. They can register their company in the local stock market, sale share to the investors and get the capital to run the business. It’s a type of safe partnership in the business with much less risk that is also guaranteed by the government.

Reduction in Interest Rates: The development of the small stock exchange will create a better opportunity for the investor to invest at a better rate of return. Similarly business will get money at cheaper rate as compared to the conventional banks with much less restrictions. Both the business and investor will start reducing their dependence on the banks. This will force the banking institutions to reduce their interest rates by reducing the spreads to hold their customers. In order to retain the customers, the banks will also treat them with much respect.

Job Opportunities: The availability of capital at a small level without the interference of banks will create the new business opportunities and many new businesses will establish. The expansion of existing and establishment of new businesses will generate more job opportunities. The joblessness is one of the biggest problems of the present time. Any move that can create job opportunities is always good for the economy of the country.

Increase in Tax Base: The registration of more companies in small stock markets will push companies to show their actual profits and documents to attract investors. The declaration of actual profits will also increase the tax collection and increase the tax payer’s base.

Small Audit Firms: The small businesses want to register in small stock exchanges cannot afford the fee of big audit firms. So they will hire small audit firms for their audits, which will increase the exposure and business of small firms. This will also generate the job opportunities for the young and emerging accountants.

Small Law Companies: Similar to the audit firms, the business of small law companies will also increase and create a greater exposure of business contracts and corporate law for the young lawyers.

More Transparent Business: As the registration with a stock exchange will put the obligation of fair reporting, conducting regular audits and publishing the annual reports. The businesses will be more transparent for the investors and there will be fewer chances of business default and frauds.

This is an idea of how to generate new business opportunities, fair way of doing business, creating job opportunities and the human capital development. If we want to control the inflation & interest rates in Pakistan, the need of the time is to provide people with safe and transparent investment opportunities. We hope the government will think on these lines to benefit the public of Pakistan.

Muhammad Farhan is an engineer by profession and has been working in the Power sector since 2007. twitter.com/farhan6309902

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