LAHORE STOCK EXCHANGE

Introduction:
Of all the modern service institutions, stock exchanges are perhaps the most crucial
agents and facilitators of entrepreneurial progress. After the industrial revolution, as the size of
business enterprises grew, it was no longer possible for proprietors or partnerships to raise
colossal amount of money required for undertaking large entrepreneurial ventures. Such huge
requirement of capital could only be met by the participation of a very large number of investors;
their numbers running into hundreds, thousands and even millions, depending on the size of
business venture.
In general, small time proprietors, or partners of a proprietary or partnership firm, are
likely to find it rather difficult to get out of their business should they for some reason wish to do
so. This is so because it is not always possible to find buyers for an entire business or a part of
business, just when one wishes to sell it. Similarly, it is not easy for someone with savings,
especially with a small amount of savings, to readily find an appropriate business opportunity, or
a part thereof, for investment. These problems will be even more magnified in large
proprietorships and partnerships. Nobody would like to invest in such partnerships in the first
place, since once invested, their savings would be very difficult to convert into cash. And most
people have lots of reasons, such as better investment opportunity, marriage, education, death,
health and so on for wanting to convert their savings into cash. Clearly then, big enterprises will
be able to raise capital from the public at large only if there were some mechanism by which the
investors could purchase or sell their share of business as ands they wished to do so. This implies
that ownership in business has to be “broken up” into a lager number of small units, such that
each unit may be independently & easily bought and sold without hampering the business
activity as such. Also, such breaking of business ownership would help mobilize small savings in
the economy into entrepreneurial ventures.
This end is achieved in a modern business through the mechanism of shares.

What Is The Stock Exchange?

The stock exchange provides a market place where shares can be bought and sold.
What is the Role of the Stock Exchange?
The stock exchange admits companies for trading at their securities.
It provides a market for raising capital by companies.
It provides a market place for shares of listed public companies to be bought and sold, by
bringing companies and investors together at one place.
The exchange's role is to monitor the market to ensure that it is working efficiently, fairly
and transparently.
Stock Exchanges in Pakistan:
There are three stock exchanges in Pakistan:
Karachi Stock Exchange (Guarantee) Ltd.
Lahore Stock Exchange (Guarantee) Ltd.
Islamabad Stock Exchange (Guarantee) Ltd.
 Of these, Karachi Stock Exchange is the biggest exchange in the country.
1. Trading and Settlement: The stock exchanges have introduced a computerized trading
system to provide a fair, transparent, efficient and cost effective market mechanism to
facilitate the investors.
The trading system comprises of four distinct segments, which are:
T+3 Settlement System.
Provisionally Listed Counter.
Spot Transactions.
Futures Contracts.
2. T+3 Settlement System:
In the T+3 settlement system, purchase and sale of securities is netted and the balance is
settled on the third day following the day of trade.
3. Benefits of T+3 Settlement System:
It reduces the time between execution and settlement of trades, which in turn reduces the
market risk.
It reduces settlement risk, as the settlement cycle is shorter.
4. Provisionally Listed Counter:
The shares of companies, which make a minimum public offering of Rs.100 million, are
traded on this segment from the date of publication of offering documents When the
company completes the process of dispatch/credit of allotted shares to subscribers,
through CDC it is officially listed and placed on the T+3 counter. Trading on the
provisionally listed counter then comes to an end and all the outstanding transactions are
transferred to the T+3 counter with effect from the date of official listing.
5. Spot/T+1 Transactions:
Spot transactions imply delivery upon payment. Normally in spot transactions the trade is
settled within 24 hours.
6. Futures Contract:
A Futures contract involves purchase and sale of a financial or tangible asset at some
future date, at a price fixed today.
What Are Shares?
Once the shares are brought and transferred in your name your name will be entered in
the company’s share register, which will entitle you to receive all the benefits of share ownership
including the rights to receive dividends, to vote at the company’s general meetings to receive
the company’s reports.
If you decide to sell your shares you will need to deliver share certificates to the broker in
time for the transaction to be completed.
With the introduction of the Central Depository System (CDS), an investor can have shares in
paper form or can own shares in an electronic book- entry form at the Central Depository
Company (CDC).
Why Do Companies Issue Shares?
Companies issue shares to raise money from investors. This money is used for the
development and growth of businesses of companies.
A Company can issue different types of shares such as ordinary shares, preference shares,
shares without voting rights or any other shares as are permissible under the law. These give
shareholders a stake in the company’s equity as well as a share in its profits, in the form of
dividends, and a voting right at general meetings of shareholders.
Why Do Investors Buy Shares?
Studies have shown that over a twenty-year span, investment in shares has provided
greater returns than most other forms of savings. Shares can provide you with a regular stream of
income through dividends as well as the potential for your investments to grow in value. If the
prices of shares go up, you can sell them for more than you paid. This is called capital gain.
What are Dividends?
Dividends are returns paid to shareholders out of the profits of the company. Returns can
be in the form of cash or additional shares of the company called bonus shares. Dividends are
usually paid once or twice a year depending upon the company’s profit distribution policy.
What is Capital Growth?
This is one of the ways in which shares differ from deposit accounts. The principal
amount of money you put in a bank or any fixed income savings scheme always stays the same
e.g. if you start with Rs.100,000 you will always have Rs.100,000 (other than any interest
earned).changes in value according to the performance of the company. With good management,
the value of your investment in shares of a company can grow over time so that your shares are
worth more than you paid for them. This is capital growth.
Risks And Rewards:
Buying shares can offer advantages over saving in deposit accounts: your investment may
increase in value besides paying you dividends. You share the rewards when the company does
well and the price of the shares goes up. But if the company performs badly, the share price may
go down and the value of your investment will be reduced. Other factors, such as the
performance of the stock market as a whole and the general economic climate, may also affect
the price of your shares. Investment in shares is therefore investment in ‘risk capital’. The
shareholders can be rewarded for taking this risk and the potential return on your money can be
higher than that on other investments. You can reduce your risks with careful planning.
How To Trade?
Your first step is to contact a stockbroker or an investment adviser.
Introducing Stockbrokers:
Stockbrokers are your link to the stock market. Their job is to help you get the best price
available when you want to buy or sell your shares. Be careful in selecting your broker.
The Mechanics of Share Dealing:
There are various ways of investing in the stock market: you can deal directly in shares;
invest through a unit trust or investment trust or let your investment be handled by an advisor.
Opening of Account:
Once you have decided the broker with whom you intend to deal, you should ensure that
an account is opened in your name by filling the account opening form. It is imperative that the
terms and conditions prescribed in the account opening form are read very carefully and well
understood. It will be in your interest if you give clear instructions as to who can operate the
account. It is preferred if the investor gives instructions that business can only be transacted in
the account on his instructions.
Buying/ Selling Directly:
When you have decided to buy/sell shares in a particular company, contact your
stockbroker. You can ask to buy/sell a fixed number of shares or shares up to a certain value. Get
the contract note confirming your order immediately and check for the following information.
 Name and number of securities.
 Date on which the order is executed.
  Nature of transaction (spot, ready or forward and also whether bought or sold).
 Price at which the transaction is executed.
 Commission charged by the broker.
There are two types of orders:
Limit Orders: In a limit order, the client specifies the price at which the order is to be
executed.
Market Order: Also known as at best order, the order is executed at the prevailing market
rate.
History of Lahore Stock Exchange:
The Lahore Stock Exchange (Guarantee) Limited came into existence in October 1970,
under the Securities and Exchange Ordinance of 1969 by the Government of Pakistan 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
number of listed companies has increased to 519 since its inception. With 37 sectors of the
economy and 519 listed companies with total capital of Rs. 555.67 billion having market
capitalization of around Rs. 2.51 trillion . The LSE has 152 members of which 81 are corporate,
and 54 are individual members. The LSE was the first stock exchange in Pakistan to use the
internet and currently 50% of its transactions are via the internet.
The Lahore Stock Exchange has opened branches in the industrial cities of Faisalabad
and Sialkot for trading. The Sialkot branch is referred to as the "Sialkot Trading Floor".

Important Developments over the Past Years

A number of significant initiatives have been taken to improve the regulatory regime and
the trading environment for the benefit of Institutional Investors as well as listed companies.
Although the list of such initiatives is exhaustive, below some of these incentives are touched
upon;

LSE was the first Exchange in the country to undertake automation of trading at the
exchanges in 1994. LSE has made large investments in technology & automation to keep pace
with globalization of securities trading. The Exchange is fully committed to providing a
transparent, efficient, fair and investor friendly environment for the benefit of Investors and
Issuers. The goal is to bring LSE up to international standards in operational, technical,
regulatory and quality management areas and to ensure that not only domestic but also foreign
investors are attracted.

LSE has made direct investment in Pakistan Credit Rating Agency (Pvt) Ltd. (PACRA),
Central Depository Company Ltd. (CDC), National Clearing Company of Pakistan Ltd.
(NCCPL), and National Commodity Exchange Ltd. (NCEL), all of which play a central role in
developing the infrastructure around the financial markets of Pakistan. In addition, LSE is an
active member of the Federation of Euro-Asian Stock Exchanges (FEAS) and the South Asian
Federation of Exchanges (SAFE), helping to expand its outreach, presence and profile beyond
the boundaries of Pakistan.

LSE was the first Exchange in Pakistan to offer Internet based trading to its members in
the year 2001. It enables the brokers to reach out to the untapped retail markets. Currently, more
than 50% of the total trading volume at the LSE originates from Internet trading terminals. The
aim of this measure is to transform the LSE from a regional to a national player over a period of
time.

LSE has increased its geographical outreach by establishing its branches in other cities of
the Province. Two such branch offices have become operational in Faisalabad and Sialkot.
Similar Offices in other cities are also being contemplated. LSE’s trading system has already
been modified to connect branch offices in real-time fashion. There is a growing need for remote
trading terminals reflecting the confidence of traders in the use of stable Internet Trading
Systems.

LSE has improved the quality of operations and upgraded them to modern international
standards. This has included upgrading LSE’s IT infrastructure, updating regulations and
procedures to incorporate existing and expected technological changes, as well as reorganizing
and restructuring the workforce. As a result, LSE’s capabilities as both a front-line regulatory
body and a service organization have been significantly enhanced.

LSE has successfully launched Unique Identification Number (UIN) System with an
objective to bring more efficiency and transparency to the stock business and to improve the
surveillance and monitoring capacity of the Exchange.

LSE has implemented a regular timetable for the Broker System Audit, in order to build
investors’ confidence. Also, LSE has taken effective risk and exposure management measures
including the implementation of a fully automated in-house developed Trade Risk Filter (TRF)
to efficiently monitor members’ pre-trading exposures on a real time basis. This has been a
quantum leap for LSE in improving its risk management systems.

A visible trend at the LSE has been the increasing number of corporate members. It is
heartening to note that part of this increase has been due to the entry of investment
banks/financial institutions (or their subsidiaries) as members of the Exchange. An overview of
this trend over the past years is as follows:

LSE's Membership Structure

Year Private Corporate Members Banks or their Individual Tota

Limited Public Limited Subsdiaries Members l
Companies Companies
             
2000 26 3 6 3 118 118
2001 26 6 5 3 118 118
2002 26 5 6 3 118 118
2003 26 6 4 3 118 118
2004 44 4 5 3 118 118
2005 26 7 5 3 118 118
2006 22 6 7 3 118 118
 2007 24 5 4 3 118 118
             
As of May 31st, 2007

The above trend has led to record trading volumes as well as an improved product
offering. The measures at LSE have attempted to create an atmosphere, which is more conducive
and transparent for investment. The investing public has received the reforms very positively.

LSE Training Institute specifically dedicated to the Capital Markets, is the first of its kind
in Pakistan and was established in 2006. Formal courses have been introduced to provide trained
human resources for the capital markets. It has also launched a series of Education Programs
with a view to educate the brokers, agents and general public about the securities market and its
laws. In an effort to promote the education sector, particularly in relation to financial markets,
LSE is providing scholarships to deserving students of Lahore University of Management
Sciences (LUMS). LSE encourages universities and colleges to come and visit LSE.

In another trend-setting example, Lahore Stock Exchange and Islamabad Stock Exchange
have joined hands to establish a Unified Trading Platform which will help to bring increased
liquidity in the market, improve price discovery, maximize transparency, increase turnover,
broaden investor base, curtail risks and distortions in trade, provide cost effective service to the
investing public and enhance the image of both the Exchanges.

As part of second generation capital market reforms being pursued by the Securities &
Exchange Commission of Pakistan, demutualization is being seriously considered by the
members of the exchanges and hopefully that during the year 2007 a decision will be taken in the
best interest of the capital markets of the country. Demutualization is in line with international
standards, which will ensure that the exchange truly and fairly represents the interests of all
stakeholders.

LSE Index
LSE-25: The Lahore Stock Exchange Twenty Five company index also calculates the
performance of stocks assuming that all rights issues and bonus shares issues only increase the
listed capital. In the case of bonuses or rights the prices of the shares are not adjusted as they are
in the case of the LSETRI. However, the LSE25 assumes that dividends paid out by a component
company are not reinvested. In summary, in the LSE25, no price adjustments are made when any
component company issues cash dividends.

The Lahore Stock Exchange Total Return Index calculates the performance of stocks
assuming that all payouts are reinvested in the index on the ex-date. The LSETRI assumes that if
a component company issues bonus shares or announces a rights issue it will increase the listed
capital. Additionally, the LSETRI also assumes that all pay-outs by a component company are
100% reinvested in the index. Therefore, the LSETRI is adjusted against such payouts
announced by any of index constituents on its ex-date allowing the index value to remain
comparable over time.
 Some of the most notable Stock Brokers in Lahore Stock Exchange include: Mubashar
Latif (President), Azan Mubashar (Executive Vice-President), Abubakar Muabshar (C.E.O),