ROLE OF STOCK EXCHANGES IN CAPITAL MARKET OF PAKISTAN
May 28 - June 3, 2012
Stock exchanges are playing a crucial role in the consolidation of a Pakistan's economy in general and in the development of industrial sector in particular. It is one of the most dynamic and organized component of capital market. In a developing country like Pakistan, the stock exchanges play a cardinal role in promoting the level of capital formation through effective mobilization of savings and ensuring investment safety.
Financial globalization has also advanced in the last decade with increased cross-border capital flows, tighter links among financial markets, and greater commercial presence of foreign financial firms in Pakistan. An important element of the globalization trend has been the increase in the KSE activities.
In last decade or so, it has been observed that there has been a paradigm shift in Pakistan's capital market. The applications of technology in the payment and settlement systems have made the local capital market comparable with the international capital markets. Now, the market features a developed regulatory mechanism and a modern market infrastructure with growing market capitalization, market liquidity, and mobilization of resources. However, the market has also witnessed one of its worst times.
Presently, KSE 100-share index is at 13,925 points and KSE 30-share index is at 12,090. The market turnover has touched to 165.289 million shares and overall market capitalization reached at Rs3.5 trillion. The crisis of confidence at the global capital markets dominated hearts and minds of investors at KSE as well. It is said that the recent drop in the index was due to fall in global commodities and Greece debt crises and possible exit from euro zone besides the affect of rumors of increase in taxation and deduction in subsidies for the fertilizer sector in the upcoming budget propelled investors to offload their holdings. Moreover, security concerns in Karachi, rising political noise and uncertainty over Pak-US relations on progress over NATO supplies is also playing a catalyst role in the bearish sentiment at KSE.
The capital market is playing an essential role in the growth of commerce and industry which in return affects the economy of the country to a large extent. This is the rationale that the industrial bodies, government advisors, and even the state bank keep a close eye on the activities of the stock market.
There are numerous individuals and companies, which are investing their savings in the Karachi stock exchange. It is functioning as an organized market for individuals as well as for institutional investors. SECP is quite vigilant and continuously reforming rules and regulations, hence the traders regulate the trading transactions with proper rules and regulations, which in turn, ensure investor's protection. This protection is helping to consolidate the confidence of the investors and small savers. We have witnessed this few years back and also in most recent days that KSE is attracting small savings especially of large number of investors in the capital market.
Blue chip companies in Pakistan are raising funds by issuing bonus and right issues. In most of the cases, the funds mobilized through capital market are provided to the industries engaged in the production of various goods and services useful for the society. Resultantly, it is leading to capital formation and development of national assets.
KSE has performed very well in past. It is again providing a wider avenue for the investment to the people and organizations with investible surplus. Companies from diverse industries like fertilizers, chemicals, oil and gas, banks, cement etc. are offering various kinds of equity and debt securities to the investors. Now various stockbrokers have started providing online trading facility to their clients. Online trading facility has brought the stock exchange at the doorsteps of the investors through computer network.
Necessary information available from different sources guides the investors in the effective management of their investment portfolios. Leading stockbrokers of KSE circulate daily briefings to their clients, which mostly covers the summary of current affairs and business news that can affect the market, updates of companies, and other statistical data.
Stock exchange has enabled the federal government to mobilize the funds for public utilities and public undertakings, which take up the developmental activities like oil and gas, telecommunication, etc. KSE has provided liquidity, marketability, price continuity, and constant evaluation of government securities.
Pakistan's stock market has all the ingredients of making a financial story with unexpected heights and falls, record-breaking numbers, and unfettered greed. Stock exchange is taken as a barometer of the economy of a country. Each economy is economically symbolized (indicators) by its most significant stock exchange. At both national and international level, performance of KSE represents the progress and conditions of Pakistan's economy.
International portfolio investments enter a particular country by means of financial markets. The primary function KSE performs is to collect financial savings and allow their use in meeting the needs of the economy whereas it is also creating liquidity.
Foreign institutional investors (FIIs) have been playing a significant role in the Pakistan's capital market. Pakistan, being a financially strained country, has taken many measures to make the investment environment encouraging for foreign institutional investment.
Better domestic environments increase the attractiveness of assets to investors. Political turbulence affects economic performance and economic players do not like uncertainty; it makes it difficult for them to reach informed judgments about the future.
The increasing importance of financial markets has reinforced the need to bring additional features in the stock market. The development of stock markets is highly important in sustaining a better economic growth. However, size of the market, as measured by market capitalization, has a stronger influence on economic growth than the liquidity of stock market.
Moreover, FDI as well as the development of human capital also has a strong positive relationship with the economic growth of Pakistan. Although the stock markets of Pakistan are growing and developing during the last few years, this growth in the stock markets should be accompanied with the industrial and manufacturing growth of the country. There exists a strong need for implementing the efficient monitory regulations that could contribute to the transparency and effectiveness of stock markets.