RETAIL INVESTMENT IN EXCHANGE NEEDS TO BE PROMOTED

TARIQ AHMED SAEEDI (tariqsaeedi@htomail.com)
Nov 26 - Dec 02, 2007

Amid a buoyant performance recently being witnessed in the stock market small shareholders often find their investment at stake due to the intermittent market volatility. They believe high speculation prevailed in trading hit them hard while big punters comfortably swerve off any negative impact. This is why perhaps an analyst says individual investment in the equity market is all time low as compare to the regional market. The volatility is shattering stockholders' confidence level. In Karachi Stock Exchange reportedly active individual share holders enumerate as low as 30,000. This bemusing figure means that very small number of retail investors indulge regularly into buying and selling of stocks. The remnants relegate investment power to open-ended and close-ended funds, which were floated to provide mechanism to small uninformed investors to enter in the equity market.

Market is dominated by investors with heavy sums of money in their pockets. The ups and downs in the index of exchange are result of tactical transition of this money. The investment required to embark a lucrative trading in the capital market has initial of millions in order to save the skin from a major loss. Small investor has to outlay a big amount to start individual [retail] shareholding. Otherwise, the risk of heart-aching loss extends. In disproportional rate, as investment increases risk reduces. Therefore, many small investors thought that in such a volatile market condition only institutions or sponsors could survive.

Risk Diversification: Mutual funds pool the funds of a large number of investors and invest in buying of securities enabling low income investors to cut short prospective risks. Unlike individual investments the fund because of its collectivism mitigates chances of unnecessary capital loss to stockholders. Conversely, individual while buying and trading shares at his own discretion is more susceptible to financial loss. Both ways of investment have equal merits and demerits. Mutual funds lower risks to small investors and tenderly deprive them of buying decision prowess, while in individual investment shareholders take autonomous trading decision. Inactive participation of shareholders in trading keeps information gap a wide. They are unaware of first hand vision and experience. Notably, one of the reasons why foreign investors are interested in Pakistan's equity market is that it has negative or very low correlation with major world markets. International investors are seeking diversification opportunities for their portfolios and therefore prefer stocks which are either weakly or negatively correlated with the major share of their portfolios. This yields substantial potential in risk reduction. International Finance Corporation ranked Pakistan's equity market second among the five leading capital markets of the world because of its return to investors.

Insider Trading: Insider trading refers to a flow of information to insiders such as directors, staff, auditors, or anyone which is not accessible to the general public. This material tips could be used to get advantage of knowing share price fluctuation in advance. Short selling is a possible option in which short seller is allowed to borrow and later sell shares in anticipation of buying them back at low price. Not always, but in majority of the cases speculation is correct for those who have exclusive and special access to scrip's insides. Insider trading prohibitions are designed to curb misuse of material confidential information not available to the general public. Example of such misuse includes buying or selling securities to make profits or avoid losses based on material non public information or by providing others the information so that they are able to buy and sell securities before such information is generally available to all shareholders. Two years back, a biggest scam was ascertained in KSE. The fraud was related to insider trading. The resultant loss to small investors made them bankrupts. Despite the gravity of crime and redundant several claims of unravelling mystery by the government, nothing so far has been made public. It is said that insider trading is still in practice.

Dual Jobs of Broker: This is almost expected because of the dual role that many market participants play. Brokers perform not only the function of maintaining their clients' portfolios but also of their own. Similarly, they are seated as directors in listed companies sometimes creating serious conflict of interest problems. In various instances, brokers hold the interest of their company or their own portfolio superior to that of individual client. When broker maintains his own investment portfolio and also advices clients about investment strategies there is a possibility that he would offload the stock, price of which he thinks will fall, from his own portfolio onto the portfolio of his client. Unless these strange dual jobs eliminate there would always be threats for individual investors, making their calculated evaluations nullified.

Regulations: Section 222 of Companies Ordinance 1984 states that every director, chief executive, chief accountant, or any person directly or indirectly related to the company and an owner of 10 percent or more in the company is required to submit a return to concerned authority. In addition, Section 224 specifies that any gain made by any of the above mentioned persons through the transactions of the shares of the company (during a period of six months) is required to deposit the gain with the company. However, there is no apparent restriction on insiders from trading through proxies.

It is certain that equity market plays a major role in macro as well micro economic development of the nation. It is due to the capital market that industrial base of the nation expands further. It floats capital in the mainstream economy through realization of funds by listed companies. This on one hand creates job opportunities and makes economy viable and self-sustainable. Rather, capital market itself is the source of earning money for significant numbers of people. Investors have expectations to earn capital gains and highest dividend pay-outs on common and preferred lots. But, loss owing to unexpected jolt to index causes annoyance and shatter confidence of investors especially of those possessing odd lots. Individual investors have enormous capital potential in the form of savings which could well be inducted into the bourse. Retail investors should be motivated to invest in the equity market. Government should devise frameworks to rectify root causes of speculations so that fair and transparent capital market sets up.