Illustration of Wealth Creation in Pakistan - Dissertation Example

?Introduction This paper gives an illustration of wealth creation in Pakistan through Karachi Stock Exchange 100 index (KSE 100) nominal and real returns in comparison to S&P 500 returns, gold and real estate over 20 years stock index and 10 years of holding premium rate (HPR). Stock exchange market is a market system that enables stock brokers and investors to transact business across stocks, bonds and other securities. The market provides facilities for issue and recovery of securities and other financial instruments and capital trading that involves payment of income and dividends (Siegel, 2007). The securities that are traded at stock exchange market are shares, unit trusts, derivatives and bonds. Stock market index on the other hand means the statistical gauge that is used to measure and report changes around the stocks or shares market value. Stock market index track the movement of market differently depending on the averaging method used to come with the index, coverage of index whether broad or narrow and the weight applied which depends on whether it is based on market capitalization or market prices (Puntaier 2010). A nominal rate of return in the stock exchange market represents the investment returns before adjusting for inflation rate during that period. A real rate of return on the hand is the rate of return on the investment after taking into consideration the inflation rate factor during that period. Literature review Pakistan stock exchange market (KSE 100) is the stock market index that tracks the share prices of 100 top listed companies on the Karachi Stock Exchange. The index was first launched in November 1991 with a stand of 1000 points which has generally grown to new heights in the past. The companies with the highest market capitalization are selected in determining the companies that are to be made use of in working out of the index. To make sure that the index is a full representation of the market, each sector of the economy is represented in this computation by the highest capitalized company from that sector which covers over 80% of the total market capitalization. There are 35 sectors of Pakistan economy that are captured in the computation of KSE 100 index which includes, open-end mutual funds, close-end mutual funds, modarabas, leasing companies, investment banks/ investment companies/ security companies, commercial banks, insurance companies, textile weaving industry, textile spinning industry, textile composite sector, woolen sector, jute sector, sugar and allied industry, tobacco sector, power generation and distribution sector, oil and gas marketing companies sector, oil and gas exploration sector, cement sector, automobile assembly sector, refinery sector, automobile parts and accessories sector, cable and electrical goods sector, technology and communication sector, fertilizer sector, pharmaceuticals sector, chemical sector, paper and board sector, vanaspan and allied industries, transport sector, leather and tanneries sector, food and personal care products sector, glass and ceramics sector, synthetic and rayon sector and miscellaneous sector. The companies are selected from each of the 35 sectors except from the open-end mutual fund sector (McGuigan and Moyer 2012). The largest capitalized companies in each of the 34 sectors makes the first 34 companies on the list while the remaining 66 companies are selected in a descending manner from the highest capitalized to the 66th capitalized company. If a company has being suspended in the last 6 months from trading and or on the defaulters’ counter, it is not included in the composition of the KSE 100 index. The reason behind the establishment of KSE 100 index is to act as a benchmark of comparing the stock price performance over a period of time. Thus, KSE 100 design helps investors to have a sense of how the performance of equity market is in Pakistan. This means that KSE 100 works like other indicators in tracking down the sectors of economy of Pakistan. The index is computed by taking the total market capitalization to the volume of stocks of the companies considered, i.e., {(sum of outstanding shares * current price)/ base period value}* 1000. Main body KSE 100 and S&P 500 for the last 10 years stock index Date KSE 100 Returns S&P 500 Returns S&P 500 HPR HPR on KSE 100 6/1/2012 0.50% 38.25% 0.35% 0.66% 5/2/2012 -1.54% -626.17% -6.27% -1.46% 4/2/2012 1.90% -74.97% -0.75% 1.66% 3/1/2012 6.85% 311.66% 3.13% 6.86% 2/1/2012 8.27% 405.58% 4.06% 8.45% 1/2/2012 4.72% 425.38% 4.36% 4.65% 12/1/2011 -1.75% 85.73% 0.85% -1.61% 11/1/2011 -3.02% -32.29% -0.51% -2.83% 10/3/2011 0.97% 1079.29% 10.77% 0.91% 9/5/2011 6.21% -719.37% -7.18% 6.25% 8/1/2011 -9.29% -570.17% -5.68% -9.19% 7/1/2011 -2.55% -214.74% -2.15% -2.45% 6/1/2011 3.03% -182.58% -1.83% 3.08% 5/2/2011 0.27% -146.57% -1.35% 0.54% 4/1/2011 2.10% 256.72% 2.85% 2.10% 3/1/2011 4.30% -21.15% -0.10% 4.61% 2/1/2011 -8.61% 295.39% 3.20% -8.66% 1/3/2011 3.73% 226.62% 2.26% 2.80% 12/1/2010 6.86% 598.69% 6.53% 7.01% 11/1/2010 5.70% -43.52% -0.23% 6.00% 10/1/2010 5.86% 347.79% 3.69% 5.84% 9/1/2010 2.19% 871.47% 8.76% 2.04% 8/2/2010 -5.86% -525.49% -4.74% -6.71% 7/1/2010 8.00% 683.74% 6.88% 8.20% 6/1/2010 4.45% -520.46% -5.39% 4.24% 5/3/2010 -10.50% -834.36% -8.20% -10.56% 4/1/2010 1.87% 132.00% 1.48% 2.45% 3/1/2010 5.38% 579.63% 5.88% 5.39% 2/1/2010 0.21% 284.95% 2.85% 0.45% 1/4/2010 2.15% -382.34% -3.70% 2.42% 12/1/2009 2.74% 147.51% 1.78% 1.96% 11/2/2009 0.26% 573.74% 5.74% 0.51% 10/1/2009 -2.36% -177.46% -1.98% -2.04% 9/1/2009 7.00% 368.41% 3.57% 7.77% 8/3/2009 11.96% 307.00% 3.36% 12.37% 7/1/2009 7.62% 723.92% 7.41% 7.80% 6/1/2009 -1.74% -42.67% 0.02% -1.57% 5/4/2009 0.74% 531.66% 5.31% 1.03% 4/1/2009 4.26% 998.25% 9.39% 4.98% 3/2/2009 19.72% 936.17% 8.54% 19.78% 2/2/2009 6.59% -1069.14% -10.99% 6.51% 1/2/2009 -6.53% -853.94% -8.57% -8.31% 12/1/2008 -36.16% 164.75% 0.78% -36.16% 11/3/2008 0.05% -747.73% -7.48% 0.05% 10/6/2008 0.03% -1678.62% -16.94% 0.03% 9/1/2008 -0.31% -943.21% -9.08% -0.31% 8/1/2008 -12.29% 105.64% 1.22% -12.99% 7/1/2008 -13.34% -72.92% -0.99% -13.88% 6/2/2008 1.66% -854.66% -8.60% 1.31% 5/2/2008 -20.12% 103.97% 1.07% -19.78% 4/1/2008 0.05% 446.17% 4.75% -0.02% 3/3/2008 1.08% -58.25% -0.60% 1.28% 2/1/2008 6.55% -347.96% -3.48% 6.54% 1/2/2008 2.82% -609.14% -6.12% -0.43% 12/3/2007 0.56% -76.17% -0.86% 0.56% 11/1/2007 -2.32% -418.23% -4.40% -2.25% 10/1/2007 5.61% 144.64% 1.48% 7.25% 9/3/2007 10.14% 358.15% 3.58% 9.33% 8/1/2007 -11.19% 129.26% 1.29% -11.10% 7/2/2007 -0.65% -328.25% -3.20% -0.24% 6/1/2007 5.81% -178.16% -1.78% 6.26% 5/2/2007 4.36% 325.49% 3.25% 4.78% 4/2/2007 9.64% 433.13% 4.33% 9.74% 3/1/2007 0.67% 99.94% 1.00% 0.82% 2/1/2007 -1.08% -216.15% -2.18% -0.82% 1/3/2007 12.08% 142.52% 1.41% 12.27% 12/1/2006 -5.17% 126.16% 1.26% -5.45% 11/1/2006 -5.55% 165.99% 1.65% -6.25% 10/2/2006 7.55% 315.31% 3.15% 7.75% 9/1/2006 4.75% 245.82% 2.46% 4.46% 8/1/2006 -4.06% 197.81% 2.13% -4.14% 7/3/2006 5.41% 51.97% 0.51% 5.09% 6/1/2006 0.95% 1.18% 0.01% 1.93% 5/2/2006 -13.57% -309.17% -3.09% -13.59% 4/3/2006 -1.68% 59.33% 1.22% -1.25% 3/1/2006 -0.34% 110.96% 1.11% 0.26% 2/1/2006 8.66% 4.53% 0.05% 8.86% 1/2/2006 9.96% 254.67% 2.55% 10.12% 12/1/2005 5.27% -9.52% -0.10% 5.87% 11/2/2005 8.15% 351.86% 3.52% 9.45% 10/3/2005 -0.26% -177.41% -1.77% 0.26% 9/1/2005 5.42% 69.49% 0.69% 5.50% 8/1/2005 8.02% -112.22% -1.12% 8.61% 7/1/2005 -4.14% 359.68% 3.60% -3.64% 6/1/2005 8.04% -1.43% -0.01% 8.64% 5/2/2005 -3.80% 299.52% 3.00% -3.48% 4/1/2005 -6.60% -201.09% -2.01% -8.57% 3/1/2005 -6.42% -191.18% -1.91% -5.93% 2/1/2005 22.11% 189.03% 1.89% 22.42% 1/3/2005 8.26% -252.90% -2.53% 8.51% 12/1/2004 11.54% 324.93% 3.25% 11.69% 11/1/2004 4.23% 385.95% 3.86% 4.42% 10/1/2004 2.44% 140.14% 1.40% 2.20% 9/1/2004 -2.42% 93.64% 0.94% -2.40% 8/2/2004 1.56% 22.87% 0.23% 1.06% 7/1/2004 0.05% -342.91% -3.43% 0.20% 6/1/2004 -3.48% 179.89% 1.80% -3.98% 5/4/2004 0.89% 120.83% 1.21% 1.24% 4/1/2004 6.29% -167.91% -1.68% 6.34% 3/1/2004 6.16% -163.59% -1.64% 5.50% 2/6/2004 -0.03% 122.09% 1.22% -0.02% 1/2/2004 7.88% 172.76% 1.73% 8.27% 12/1/2003 9.89% 507.65% 5.08% 9.91% 11/3/2003 7.41% 71.29% 0.71% 7.60% 10/1/2003 -6.16% 549.61% 5.50% -6.12% 9/1/2003 -9.76% -119.44% -1.19% -9.73% 8/1/2003 13.36% 178.73% 1.79% 13.43% 7/1/2003 15.59% 162.24% 1.62% 15.60% 6/2/2003 9.76% 113.22% 1.13% 9.79% 5/2/2003 6.88% 508.99% 5.09% 6.77% 4/1/2003 7.23% 810.44% 8.10% 6.87% 3/3/2003 12.81% 83.58% 0.84% 13.20% 2/3/2003 -4.99% -170.04% -1.70% -5.73% 1/2/2003 -4.27% -274.15% -2.74% -5.79% 12/2/2002 18.37% -603.33% -6.03% 18.18% 11/1/2002 0.23% 570.70% 5.71% 0.32% 10/1/2002 12.78% 864.49% 8.64% 12.87% 9/2/2002 2.22% -1100.24% -11.00% 2.24% 8/1/2002 10.44% 48.81% 0.49% 10.46% 7/1/2002 0.81% -790.04% -7.90% 0.99% 6/3/2002 6.50% -724.55% average nominal rate of return 26.62% 26.62% average inflation rate 12% 2% Real rate of return 13.06% 23.57% KSE 100 and S&P 500 Graph comparison Interpretation of the graph The graph above implies that investment returns under the industries covered in S&P 500 index in the last 10 years were very volatile while under KSE 100 had a moderate movement. This means that investments under S&P 500 index observed high returns during better economic cycles and very low returns during bad economic times (Marcus, Kane and Bodie 2011). On the other hand, industries under KSE 100 were making moderate returns at all times of economic nature. Conclusion From the observation of the two stock exchange index movement, for an investor to realize maximum wealth maximization he will be better invest under S&P 500 companies. This is because; the index shows that the sectors under this index are able to make the highest possible returns during peak times than under KSE 100 companies (Jain and Khan 2007). Reference Jain, L and Khan, M 2007. Financial management. New York. Oxford press. Marcus, A , Kane, A and Bodie, Z 2011. Investment and portfolio management. New York. McGraw Hill publishers. McGuigan, J and Moyer, C 2012. Contemporary financial management. Washintong. Wiley publishers. Puntaier, E 2010. Capital structure and profitability: S&P 500enterprises. California. Telso publishers. Siegel, J. 2007. Stocks for The Long Run: The Definitive Guide to Financial Market. London. Oxford press. Read More