In order to understand investment strategies of stock market, players ought to be segregated into four categories: institutions, High Net worth Individuals and small investors, mutual funds and foreign investors.

Institutions include banks, corporate clients, insurance companies.

Up until 1991, the Karachi Stock Exchange was a sleepy place. With fewer than Rs50 billion rupees in market capitalisation, trading was conducted through the open out-cry system, where brokers and their agents moved around a ring in the trading hall and shouted the buy and sell orders at the top of their voice.

The 200-strong stock broker fraternity was the master of all it surveyed. Investors followed its lead in conducting trade. But brokers were also an average lot making small sums of money through trading on phone from their dingy, one-room, offices.

But the Karachi stock market was soon to turn into a place of high finance. As the government of Benazir Bhutto opened up the market for foreign investors in 1991, big international brokerage houses started to affiliate with bewildered local brokers who saw a flood of foreign inflow and rapidly rising share prices.

Brokers and investors who held shares, turned overnight from rags to riches as foreigners were lured into buying shares all across the board, irrespective of their fundamentals.

Although most brokers were able to stash away millions of rupees, foreigners who bought worthless stocks soon realised that they were trapped. They were buying only on word of mouth.

At the time there was not a single broker with a credible research section that could offer research reports on corporation’s performance and fundamentals. It was then that the foreigners started to seek an exit.

But between the entry and the exit of the initial batch of foreign investors, the Karachi stock market became a lively place. Price of brokers’ membership cards soared to Rs4 million from only Rs0.4m in a couple of months; an increasing number of small investors marched into the market to dabble in stocks.

Most small investors with scarce basic knowledge in investing followed the herd, which would do as the big brokers’ did. The thinking went: if they buy, the share must be good; if they sell, it was better to offload.

Brokers made loads of money by buying from their own house and surreptitiously selling at higher prices through other brokers, both sharing the spoils. It was then that the market was dubbed a ‘casino’ which most despised as a closed club of the few.

The capital market reforms that took hold from the start of the current century were vociferously opposed by vested interests. But slowly and gradually, reforms started to be implemented. From undisclosed trading to the code of corporate governance, the market regulators had to painstakingly push their way.

As the market has developed, institutional investors such as banks, corporations and insurance companies usually have their own research houses and team of investment strategists, who deliberate and decide on buying or selling stocks.

Mutual Funds, currently the biggest players in the market, hire highly qualified investment advisors to run their funds and produce comparatively higher returns than their peers. They conduct their own in-depth studies on listed companies.

Foreigners do discuss investment strategy with their brokerages, but demand detailed reports on companies with past performances, current figures and ratios of price-to-earrings and yields and industry comparisons.

Most big brokerage houses maintain research departments with several highly qualified economists and financial analysts. Often the sectors on the Pakistan Stock Exchange (PSX), such as cement, oil and gas exploration, textiles, Independent Power Plants, banks, insurance etc are distributed among four to six analysts who are required to follow both the industry and the companies on daily basis.

But market regulators — the Securities and Exchange Commission of Pakistan (SECP) and the PSX keep an eye on research reports and a misstatement attracts fines and, at least in one instance, a term in jail.

While high net-worth individuals also rely on company reports besides conducting their own independent studies, the small investors who still number in a few thousands, rely on brokers, ‘tips’ and market gossip. They often get their fingers burnt.

The ‘code of corporate governance’ now lays strict rules regarding ‘material disclosures’, which means all information that could influence stock prices have to be provided first and foremost to the PSX, which announces them within minutes of receipt on Public Address System (PAS) so as to curb any ‘insider trading’.

Although the company profiles and analysis published by a newspaper could make great reading, it can no longer impact stock prices in market trading for the reason that whatever appears in the press is invariably already public knowledge disseminated by corporations through the PSX.

Published in Dawn, The Business and Finance Weekly, October 9th, 2017