Functions of Stock Exchange/Secondary Market

Pakistan Stock Exchange

Pakistan Stock Exchange Limited (PSX) (formerly: Karachi Stock Exchange

(Guarantee) Limited (KSE) was established on September 18, 1947. It was incorporated
on March 10, 1949. Only five companies were initially listed with a total paid-up capital
of 37 million rupees. The first index introduced in KSE was based on fifty companies
and was called KSE 50 index. Trading used to be carried out on open out-cry system.
Computerized trading system called Karachi Automated Trading System (KATS) was
introduced in 2002 with a capacity of 1.0 million trades per day and the ability to provide
connectivity to an unlimited number of users.[1]In October 1970, under the Securities
and Exchange Ordinance of 1969 by the Government of Pakistan, a second stock
exchange was established in Lahore in response to the needs of the provincial
metropolis of the province of Punjab. It initially had 83 members and was housed in a
rented building in the crowded Bank Square area of Lahore. The LSE was the first stock
exchange in Pakistan to use the internet

 Formed: January 11, 2016; 18 months ago

 Owner : Government of Pakistan
 Currency : Pakistani Rupee
 No. of listings : 560 - as on (May 29, 2017)
 Market cap : US$ 98 billion - (29 may, 2017)
 Indices : KSE 100 Index & KSE-30 Index & KMI 30 Index

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Some of the Important Functions of Stock Exchange/Secondary Market are listed

below:

1. Economic Barometer:

A stock exchange is a reliable barometer to measure the economic condition of a

country.

Every major change in country and economy is reflected in the prices of shares. The

rise or fall in the share prices indicates the boom or recession cycle of the economy.

Stock exchange is also known as a pulse of economy or economic mirror which reflects
the economic conditions of a country.

2. Pricing of Securities:

The stock market helps to value the securities on the basis of demand and supply

factors. The securities of profitable and growth oriented companies are valued higher as

there is more demand for such securities. The valuation of securities is useful for

investors, government and creditors. The investors can know the value of their

investment, the creditors can value the creditworthiness and government can impose
taxes on value of securities.

3. Safety of Transactions:

In stock market only the listed securities are traded and stock exchange authorities

include the companies names in the trade list only after verifying the soundness of

company. The companies which are listed they also have to operate within the strict
rules and regulations. This ensures safety of dealing through stock exchange.

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4. Contributes to Economic Growth:

In stock exchange securities of various companies are bought and sold. This process of

disinvestment and reinvestment helps to invest in most productive investment proposal

and this leads to capital formation and economic growth.

5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new

issues, better trading practices and by educating public about investment.

6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange permits
healthy speculation of securities.

7. Liquidity:

The main function of stock market is to provide ready market for sale and purchase of

securities. The presence of stock exchange market gives assurance to investors that

their investment can be converted into cash whenever they want. The investors can

invest in long term investment projects without any hesitation, as because of stock
exchange they can convert long term investment into short term and medium term.

8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are actively

traded so such companies can easily raise fresh capital from stock market. The general

public hesitates to invest in securities of loss making companies. So stock exchange

facilitates allocation of investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various securities.

These attractive opportunities encourage people to save more and invest in securities of
corporate sector rather than investing in unproductive assets such as gold, silver, etc.

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Stock Exchange: Concept, Features and Its Role in Market | Securities Market

Concept of Stock Exchange:

After the new issue or the original issue of securities is complete; securities become

secondhand and are traded (i.e. bought and sold) at the floor of the stock exchange-
through brokers and other intermediaries.

The literal meaning of stock exchange is an exchange of stock (or shares and other
securities) between buyers and sellers.

Under the Securities Contract (Regulation) Act, 1956, the term stock exchange is

defined “as an association, organisation or body of individuals- whether

incorporated or not-established for the purpose of assisting, regulating and

controlling the business in buying, selling and dealing in securities.”

Stock exchange could be very simply defined as follows:

A stock exchange is an organized market, where second-hand securities that have

been listed thereon, may be bought and sold, in a safe, quick and convenient manner.

Features of Stock Exchange:

Salient features of stock exchange are the following:

(i) Stock exchange is a market for second hand securities

(ii) It is basically a market for second-hand listed securities of companies viz., shares,
debentures/ bonds and government securities.

(iii) Stock exchange allows dealing only in listed securities. In fact, stock exchange

maintains an official list of securities that could be purchased and sold at its floor.

Unlisted securities i.e., securities which do not figure in the official list of the stock
exchange; could not be dealt in the stock exchange.

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(iv) Stock exchange is in organized market for dealing in securities. Activities of a stock

exchange are governed by a recognized code of conduct, apart from statutory

regulations.

(v) All transactions in securities at the stock market are effected through authorized
members only.

Role of the Stock Exchange (or Functions of the Stock Exchange):

Role of the stock exchange could be highlighted with reference to the following

functions performed by it, in the economy of a nation:

(i) Ready Market:

Stock exchange is a convenient meeting place for buyers and sellers of second-hand

securities. Investors who have a preference for liquidity (i.e. cash) can sell their

securities; and those who wish to invest in securities can buy the same. Since stock
exchange ensures liquidity of investment; people are induced to buy securities.

(ii) Safe Market:

Stock exchange is, perhaps, the safest market for having transactions in securities. A

stock exchange functions according to a recognised code of conduct and is subject to

strict statutory regulations. Since the establishment of SEBI (Securities and Exchange

Board of India) in the year 1988, dealings in securities at stock exchanges have become
further safer.

In the absence of stock exchange, investing public might be deceived or cheated by

shrewd unscrupulous brokers.

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(iii) Evaluation of Securities:

Stock exchange determines prices of various securities (in terms of their real worth)

through the interplay of demand and supply forces. Prices at which transactions in
securities take place are recorded and published, in the form of market quotations.

Point of comment:

Securities for which published quotations are readily available; become reliable
securities for obtaining loans etc. against these.

(iv) Agency of Capital Formation:

Stock exchange is an agency of capital formation. It draws the savings of the man in the

street into productive investment channels. Since stock exchange provides a safe and

convenient market for liquidity and investment purposes; people are induced to save
and invest in securities.

Through stock exchange, savings of people which otherwise would have gone into
destructive channels, are routed into productive channels.

(v) Qualitative Industrial and Commercial Development:

Stock exchange aids in the process of ensuring qualitative industrial and commercial
development of the economy. This is so, because, through stock exchange people keep

shifting their investment from inefficient companies (which do not pay good dividends) to

efficient companies (which promise high returns on investment). This shifting process of
investment is specially important for a country where savings are scarce.

(vi) Acting as a Barometer of the Company:

(Barometer is something that shows the changes that are happening in an economic,

social or political situation). Stock exchange is sensitive to economic, political and social
conditions of the economy; as such conditions affect the prices of securities.

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In fact, price trends at stock exchange reflect the economic climate of the

country. “Stock exchanges are not merely the chief theatres of business

transactions; they are also barometers which indicate the general conditions of

the atmosphere of business in a country.”- Alfred Marshall

(vii) Control Over Company Managements:

Stock exchange very directly exercises control over the managements of companies,

whose securities are listed with it. In fact, those companies whose securities are listed
with a stock exchange have to abide by the rules and regulations of the stock exchange.

(viii) Storehouse of Business Information:

Companies, whose securities are listed with the stock exchange, are required to furnish

financial statements, annual reports and other reports to the stock exchange. Many

stock exchanges publish directories which provide data on the corporate sector. Such

information is highly helpful to the government in economic planning. It is equally useful

to managements of many business enterprises.