4. What is a Stock Market?
Hasan is a businessman and a fan of antique cars. He has 4 antique cars in his basement. He knows that his collection is quite rare and valuable. However, he wants to sell his Maisto 1970 Ford Mustang and buy an Audi SUV. In order to do so, he is participating in a local car roadshow where purchasers and sellers come together. Ali, who is a huge fan of antique vehicles, spots Hasan’s car and expresses interest in buying it. Hasan quotes a price of Rs. 20 Million. However, Ali wants to pay only Rs.15 Million. Finally, they both settle on Rs.18 Million.
A stock market is also like a car roadshow. Instead of selling products like cars, stock market assists owners of corporations to sell their shares for cash. The price of those shares will depend upon supply and demand. If there are more buyers than sellers, the price of shares will go up. If there are more sellers than buyers, the price of shares will go down. In the previous example, there was only one buyer i.e. Ali (hence, low demand for his antique car) and that’s why Hasan reduced the price of his Ford Mustang from 20 Million to 18 Million.
4.1. The Pakistan Stock Exchange
There is only one stock exchange in Pakistan i.e. the Pakistan Stock Exchange (PSX) situated in Karachi. If you want to buy or sell a property, you go to an Estate agent. Similarly, you can’t trade physical shares by directly going to the Pakistan Stock Exchange. Instead, you have to contact a stock agent – also called a broker. Up until now, investors had to go through a tedious process of finding the right broker for themselves and then filling out multiple forms in order to open an account and begin trading stocks. However, with the FinPocket mobile application, you can open a brokerage account, fill out all the required forms digitally and instantly begin trading from the comfort of your own house. Here is how it works:
- Suppose you are interested in buying 100 shares of a fertilizer-manufacturing company because you believe that the demand for fertilizers is going to go up in Pakistan.
- You download the FinPocket mobile application and Sign Up. After that, you will be directed toward filling a few forms required by the regulatory authorities in Pakistan.
- The verification process will begin and the information you provided will be corroborated to ensure transparency and security. Our Customer Service Representative will contact you after the verification process.
- You account will be active and you can buy 100 shares of the desired firm at the offered price on that day.
- Monitor the performance of your shares through the FinPocket mobile application.
4.2. The Stock Market and Pakistan’s Economy
Stock market can contribute toward Pakistan’s economy in following ways:
- Pakistan Stock Market assists in raising funds for capital expansion for local businesses by selling their shares to investors.
- It also helps in optimal resource allocation of funds in the economy. When investors save money and invest in stock market, they are delaying consumption and spending. Rather than storing money in the locker or putting it in bank deposits, they invest it for helping businesses grow.
- Like every stock exchange in the world, PSX is heavily regulated by the Securities and Exchange Commission of Pakistan or SECP. In order to satisfy the demands of shareholders and meet the stringent rules of the regulatory bodies, companies tend to improve their management practices.
- Consider a case where the Government of Pakistan is interested in raising funds for development of an efficient sewerage system in the country. Stock exchange allows the Government to issue securities (bonds) and get capital from the public to fund such large-scale projects.
- Stock market can be a ‘leading indicator’ of the economy. This means that the performance of stock market may indicate the situation of the economy in the future. For example, if the prices of most of the listed stocks in the market are going up, it may indicate an economic recovery or an economic boom. However, consistently declining stock prices may indicate an economic downturn in the coming months. Here is another way to look at this relation: If stock market is rising, investors will get dividends or capital gains and be wealthy. Increase in wealth will lead to higher spending and consequently, expansion of the economy. On the other hand, if the stock market is falling, investor’s will be less wealthy and spending will decline. This will lead to a slowdown in economic activity of the country.