Share Prices

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND

Share Prices are the most critical indicator which is available to the investors and the market for their assessment to invest or not in a particular stock. The stock market has become an essential marketplace, playing a crucial role in economic prosperity that fostering capital formation and sustaining economic growth. Stock markets are more than a place to trade stock and securities; they operate as a facilitator between investors and borrowers of capital by means of pooling of funds, sharing business risk, and transferring their wealth. Stock markets are essential for economic growth as they maintain and insure the flow of resources to the most valuable investment opportunities. Share prices change in stock markets on a daily basis. These Changes in the share price may associate with the changes in the underlying fundamental factors of the company, external factors and market behavior which collectively bring the change in the stock price in developed and the emerging markets. The objective of this study is to determine to what extent changes in the fundamental factors affect the change in the stock price in the Karachi Stock Exchange.

1.2 FUNDAMENTAL ANALYST

Fundamental factors influencing stock prices might include performance of the company earnings, price to sales ratio, market value of equity, growth of the company, a change in board of directors, appointment of new management, and the creation of new assets, dividends, etc. External factors might include government rules, regulations, policies, gross domestic product, inflation, and other economic conditions, market conditions, investor behavior, , money supply, competition, uncontrolled natural or environmental circumstances directly affecting the production of the company, etc. Moreover, the behavior of market participants and market sentiments could be an important influencing factor of stock price volatility. Fundamental analysis is a stock valuation approach that uses financial and economic analysis to forecast the share price volatility.. Many investors use fundamental analysis alone or in combination with other methods to assess stocks price volatility for investment purposes. As for the most analysis, the goal is to derive a forecast the stock price and share price volatility.

1.3 TECHNICAL ANALYST

A technical analyst does not look for profit and loss accounts, balance sheets, company policies, or anything fundamental about the company and the industry. The technical analyst considers that the securities prices moves in trend and will help you to forecast the direction of the stock market or shares of the company with the assistance ofshare price patterns and stock charts.

1.4 RELEVANT LITERATURE

“The US Investor is known to price the securities much more on the basis of analysis made widely available by the financial analyst community and the mass media”. [Irfan and Muhammad (2002)] “It is widely agreed that a set of fundamental variables as suggested by individual theories is no doubt relevant as possible factor affecting share price changes in the short run and the long run” [Ariff and Khan (2000)]

1.5 OBJECTIVE OF THE RESEARCH

The purpose of this study is to explore the change in stock price from one year to another is due primarily to fundamentals factors in Karachi stock exchange in oil and gas exploration sector using the following variables: dividend payout ratio, price earning ratio, growth rate, dividend yield and market to book value ratio. We refer these predictor variables collectively as fundamentals factors.

1.6 SIGNIFICANCE OF THE STUDY

This study will help the potential investor, portfolio managers, financial institutions and companies to make the decision to invest in the particular stock on the basis of the fundamental analysis that explains the variation in the share prices. Portfolios managers, investors and institutions may find results in this research helpful for determining the future behavior and performance of share prices, for identifying investment approaches, pursuing available investment opportunities, and reducing the probability of high value losses in the stock market based on the fundamental analysis of the company in the oil and gas sector of Karachi stock exchange.

1.7 OVERVIEW OF KARACHI STOCK EXCHANGE

The Karachi Stock Exchange is the first stock exchange of Pakistan and one of the oldest stock exchanges in emerging markets. Karachi Stock Exchange was established in 18 September 1947 just two months after Pakistan became an independent state. Karachi stock exchange is a significant growing capital market of the region and is the leading and most liquid exchange in Pakistan over the decade and was declared the “Best Performing Stock Market of the World for the year 2002. The study is important to test and investigate that the changes in fundamental variables affect the changes in share price in KSE as the fundamental variables affect significantly the changes in share price in the US and the Japanese market.

1.8 RESEARCH HYPOTHESIS

Based on the arguments above the following hypothesis has been developed that the change in share price from one year to another is due to change in fundamental factors that effect the change in share price.

1.9 SCOPE AND LIMITATION OF THE STUDY

The scope of this study is confine to the oil and gas sector of Karachi stock exchange. The oil and gas sector has a considerable influence on the Pakistan's economy- the oil and gas sector has attracted by far the highest level of foreign direct investments in the country, and increases considerable income tax for the government. Pakistan is known as the most gas dependent economies of the world. Pakistan has well developed and integrated infrastructure of distributing, transporting and utilizing natural gas over 55 years.

1.10 SUMMARY

Fundamental analysisstudies reasons of the change in the share price over the certain period of time. With the help of fundamental analysisinfluence of various fundamental factors such as dividend payout ratio, earning per share, growth, leverage, firm size and the macroeconomic factor can be estimated on the share price volatility that will help the investors, institutions and others to make the decisions on the basis of the variation explained by the fundamentals in the stocks prices.

Chapter 2 presents the literature review.

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