History of stock exchange

• 1571: London Stock Exchange which is the oldest stock exchange of the world was
inaugurated and it was only used for selling interest-based government securities.
• 1602: The shares of Dutch East India Company were offered for sale to the general public
for the first time in history in order to diversify the risk of investment.
• 1792: Few brokers gathered under the trees in New-York, started the shares business. It
was the beginning of New-York stock exchange.
* 1825: The New-York stock exchange was officially established at Wall-Street New-York. It is
the biggest stock exchange of the world so far.
• 1971: NASDAQ (National Association for Securities
Dealers Automated Quotations). It was the association of the dealers who were used to
transact through computers on limited basis. Later on with the introduction of internet and
world wide web in 1980's increased the scope of electronic trading system through online
transactions. Today NASDAQ itself is a registered stock exchange. It is the second largest
stock exchange of the world after NYSE.
1873: The Mumbai Stock Exchange was established at Dalal Street. It is the biggest stock
exchange of India. Its index is known as Mumbai Stock Exchange Sensitive Index.
• 1894: The second stock exchange of India was established in Ahmadabad, the capital city
of Gujrat province.
* 1908: The third stock exchange of India was established in Kolkata.
• 1920: The fourth stock exchange of India was established in the city of Madras.
*1954 :after the KSE had operated for several years, the Dhaka Stock Exchange was set up in
the capital city of East Pakistan (now Bangladesh).
In the late 1950s, there were attempts to re-establish a stock exchange in the city of Lahore;
however, these efforts lapsed (Mirza, 1993). It was not until 1969 that the current Lahore
Stock Exchange (LSE) was established; it became operational in May 1971.
In 1992, the Islamabad Stock Exchange (ISE) was set up in the new capital of Pakistan. At
present, therefore, there are three stock exchanges operating in Pakistan.

Settlement of Transaction on Exchanges

 Transactions on all the three stock exchanges are managed by the National Clearing
Company of Pakistan Limited (NCCPL).
 The NCCPL was established on July 3, 2001 for settlement of security transactions
arising from dealings on the stock exchanges. The NCCPL established the National
Clearing and Settlement System (NCSS) to carry out the settlement of securities for all
three markets.
 The most common settlement period is T+2. Under this arrangement the buying, selling,
payment, receipt and transfer of securities for each member is settled by the NCSS
within two working days
 As a result of the large volume of trading on the three stock exchanges, the handling of
physical share certificates became burdensome. As a result, the Central Depository
Company of Pakistan (CDC) was set up in September, 1997.
 Its main function is to register security transfers using an electronic book-entry system.
Investors, at their discretion, have access to the security certificate if they wish.
 Currently, about 97.0% of trading is settled through the CDC.
 The goal of the CDC and the NCCPL is the establishment of an efficient electronic capital
market in Pakistan.
LSE:
 The LSE is the second largest stock exchange of Pakistan.
 There are 152 members of the LSE of whom 81 are corporate and remaining are
individual persons.
 The LSE has two branches - one in the city of Faisalabad and the other in Sialkot.
 The LSE is the most dynamic stock exchange in Pakistan; for example, it was the first to
shift from a trading pit system to an automated trading system in
 1994: it also pioneered internet-based trading for its members in 2001.
 The benchmark of the LSE is the LSE-25 index.

ISE:
 It is the smallest of the three exchanges.
 It currently has 120 members including 94 corporate and 26 individual members.
 It was felt that the establishment of the ISE would facilitate growth in the less-
developed Northern part of Pakistan.
 On 1st January 2004 the ISE established its own benchmark index, the ISE-10. Before
this, KSE-100 index was used a benchmark for trading.

Karachi Stock Exchange (KSE)

 The KSE is the oldest and the largest stock exchange in Pakistan; it is also the second
oldest stock exchange in the whole of South Asia.
 Membership became fixed at 200 in 1966 and this limit still remains; a prospective
member therefore has to buy a seat on the KSE from one of the existing members.
 Total members are 200; out of which, 183 corporate members and
remaining are individual.

Market Indices
 Various indexes have been introduced to gauge the share price performance of the
main Pakistan stock exchanges.
 The KSE-50 share index was used as the main index of KSE until November 1, 1991
when the KSE-100 was introduced to capture changes in over 80.0% of total market
capitalization.
 This index is currently used as the benchmark for measuring the performance of share
prices by the KSF.
 The KSE-100 index is comprised of 100 companies:
34 companies are selected on the basis of having the largest market capitalization in each of
the 34 Karachi Stock Exchange sectors.
 while the remaining 66 companies are included on the basis of their market
capitalization irrespective of the industry and are taken up by the largest market
capitalization companies in descending order.
 While the KSE-100 is the main index.
Market Index Calculation
The index is calculated by the following formula
Index = Free Float Market Capitalization-Current X 1000
Free Float Market Capitalization-Benchmark date
Profitability ratios.
The profitability of a company can be measured by the profitability ratios. These ratios are
calculated by relating the profits either to sales, or to investment, or to the equity shares.
Thus we have three groups of profitability ratios. These are listed below.
A. Profitability related to sales
(a) gross profit ratio = gross profit / sales
(b) operating profit ratio = EBIT / sales
(c) net profit ratio = earnings after tax (EAT) / sales
(d) administrative expenses ratio = administrative expenses / sales
(e) selling expenses ratio = selling expenses / sales
(f) operating expenses ratio = administrative expenses + selling expenses / sales
(g) operating ratio = cost of goods sold + operating expenses / sales

B. Profitability related to investment

(a) return on assets = earnings after tax / total assets
(b) return on capital employed = EBIT / total capital employed
(c) return on equity = EAT / shareholders' equity

C. Profitability related to equity shares

(a) earnings per share (EPS) = net profit available to equity shareholders
number of equity shares
(b) earnings yield = EBS / market price per share
(c) dividend yield = DPS (dividend per share) / market price per share
(d) dividend payout ratio = DPS / EPS
(e) price earnings ratio = market price per share / EPS

D. Overall profitability (or Earning power)

Return on investment (ROI) = EAT x Sales or EAT
Sales total assets total Assets

The overall profitability is measured by the return on investment, which is the product of net
profit ratio and investment turnover. It is a central measure of the earning power or
operating efficiency of a company.

Assessment of Risk
Company analysis involves not only an estimation of future returns but aiso an assessment
of the variability in returns called risk. The variability in returns arises primarily because of
variability in sales. The sensitivity of profits to changes in the level of sales is measured by a
ratio called degree of total leverage (DTL). This ratio is used as a measure of risk. It is
calculated as follows:
contribution
DTL = contribution
profit before tax (PBT)

It may be noted that contribution means sales minus the variable costs.
DTL may be subdivided into two components:
(i) the degree of operating leverage (DOL) arising from the cost structure of the company,
(ii) the degree of financial leverage (DFL) arising from the capital structure of the company.