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ISLAMIC INJUNCTIONS ABOUT BUSINESS

Chapter on Stock Exchange
1) INTRODUCTION
a. When a person purchases shares of a Company and becomes a
shareholder, he cannot get back the amount invested from the
company. If he wants to disinvest, he will have to find another
investor and sell his shares to that investor. In this way the new
investor will become the shareholder and the previous one will get his
money disinvested.
THIS HOWEVER WILL NOT AFFECT THE COMPANY AS THE
COMPANY WILL NOT PAY ANY AMOUNT TO ANYONE.

b. The sale & purchase of shares is basically a deal between two parties
but finding purchaser of shares of a particular company is not easy. To
facilitate this process, a market is established where sellers & buyers
may find each other. This market is known as Stock Exchange.
c. Stock Exchange not only facilitates the sale & purchase of shares
rather it regulates it as well. The business of sale & purchase of shares
that is carried out without the involvement of Stock Exchange is
known as over the counter transaction.
d. Stock Exchange is a private body, established with the permission &
patronage of the Government. The companies listed with the Stock
Exchange are called Listed Companies.
e. Sale & purchase of Shares of Listed Companies is possible in stock
exchange and over the counter transaction is also possible.
f. Company may be listed after its creation. It may be before or after the
starting of actual business. In some cases even before the flotation of
shares.
g. Listing before the flotation of shares is known as Provisional
Listing.
h. Companies that are not listed on Stock Exchange are termed as
Unlisted Companies.
i. Sale & purchase of Shares of Unlisted Companies is possible only
over the counter.
2) MEMBERSHIP

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a. ONLY MEMBERS CAN DO BUSINESS ON STOCK EXCHANGE

As the business of Shares is very technical therefore everyone is not
permitted to deal in Stock Exchange. Only Members are permitted to
do the business of Sale & Purchase of Shares on Stock Exchange.
General Shareholders must deal through a member.
b. COMMISSION AGENTS: Members of Stock Exchange do business
for themselves, as well as, on behalf of their clients. While doing
business on behalf of a client, they charge certain %age of
Commission; hence they are also known as Commission Agents.
There are three types of placing order of purchase through a
Commission Agent;
i. Market Order
Its the Order to purchase on Market Rate.
ii. Limited Order
This type of Order fixes an upper limit of Price. If share are
available within the range of that Price only then Agent should
purchase, for his client, the required number of shares.
iii. Stop Order
It is the order that agent should sell the shares held by client if
the price of share falls below a certain limit. But if;
1. it does not fall below that limit OR
2. remains stable
OR
3. it goes on increase,
Then
agent should not sell the shares of his Client.

3) DETERMINATION OF PRICES
a. Prices of shares keep changing due to many reasons. The reasons
may include:

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i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

Increase in value of Assets of Company

Decrease in value of Assets of Company
Prospects / expectations of profit
Apprehensions / threats of loss
Trends of Supply & Demand
International & domestic political situation
Weather conditions
Catastrophes
Speculations

Note:
As external factors (like those given on derail number. iv, v. vi, vii &
ix above) also affect the prices of shares therefore, share price is not
a true representative of value of assets of company.
b. Bull vs Bear
Trend of rising prices is termed as Bullish in Stock Exchange
Trend of falling prices is termed as Bearish in Stock Exchange

&

c. Types of Buyers of Shares

There are two types of buyers of shares:
i. One type of buyers is those who purchase shares with the
intention to keep it with them and receive the annual dividend
income.
d. Second type of buyers is those who purchase shares with the intention
to sell the same when price rises. Such people treat the shares as a
commodity of trade. The profit that they make is termed as Capital
Gain. These are known as Speculators as they speculate about the
price. Their speculation may turn true or may turn wrong.

4) PROCEDURE OF SALE & PURCHASE OF SHARES

a. There are three possibilities or three methods for the sale & purchase
of shares:
i. Spot Sales

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It is the simplest way. Pay the cash and make purchase. But due
to administrative reasons it takes one week (or few days) to take
possession of the shares.
ii. Sales on Margin
It is the type of sale where a certain % age of total price is paid
by the client (who is buyer) and the remaining amount is paid
by the commission agent / broker. This is regarded as credit by
the broker to his client. It may be interest free loan for a few
days (e.g. 3 days) and beyond that the broker may charge
interest from the client.
Brokers are mainly interested in their commission of sale &
purchase, and they want to keep the business running. For this
purpose they get ready to give advances as well
iii. Short Sales
It is the sale of such shares which are not in the ownership of
the seller. The seller thinks that after the completion of
transaction I will buy the shares from a third party in the market
and give to the buyer.
b. Spot Sales versus Forward Sales
There is a difference between Spot Sales & Forward Sales
i. Spot Sales
In spot sales the sale is done & transfer of rights is also done on
spot.
But due to administrative reasons it takes one week (or few
days) to take possession of the shares. More time is taken in
case of registered shares and less time in case of bearer shares.
In many instances if the buyer feels he can make a profit, he
sells the shares to someone without getting possession of
shares.

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In this case if Company declares dividend during these days, it

will be given by the company to the person whose name
appears in its record. But it is an accepted norm that such a
person will transfer this dividend to the buyer.
ii. Forward Sales
In this case the sale is carried out but transfer of rights is
delayed till some future date. On that date either actual shares
are handed over to the buyer or difference of prices is settled.
Example:
Sale of shares was done on 1st January @ Rs. 10/= per share and
31st March was fixed for delivery of shares. On 31st March the
price of share is Rs. 12 per share. Now the seller who had
agreed to give shares @Rs. 10/= per share, may give Rs. 2 per
share to the buyer and settles the deal.
c. Spot Sales versus Forward Sales of Kind and other goods
i. Sale & purchase of crops and other goods
In some cases the sale & purchase of crops and other goods are
also carried out in the same way as explained above for shares.
ii. Forward Sales vs Future Sales in case of crops & goods
It is basically the same. Only difference is in usage of two terms
now a day is , that:
1. If delivery and receipt of actual goods is the objective,
then it will be called Forward Sale.
2. If delivery and receipt of actual goods is not the
intention, rather only settlement is the intention, then it
will be called Future Sales.
iii. In some countries the Business of Futures is done in Stock
Exchange and in some countries there are separate markets for
this purpose.

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d. Speculation
Speculation is actually making estimation about future. Some people
speculate that the prices of shares of a certain company may rise in
future. On the basis of their guess work, they may make a deal with a
party to sell / buy the same share on a future date on such a rate which
may result for them in profit in the light of their guess work/
estimation / speculation.
Their main objective is not the Sale / Purchase; rather it is to make
profit through settlement of differences.
i. Future Sale & forward Sale: As explained above if delivery and
receipt of actual goods is the objective, then it will be called
Forward Sale and f deliver and receipt of actual goods is not the
intention, rather only settlement is the intention, then it will be
called Future Sales. Future Sales is done to safeguard against
the possible loss.
ii. Hedging: Future sale is also known as hedging. It is done to
safeguard against possible loss of future, therefore it is said
hedging.

5) SALE & PURCHASE OF OPTIONS

a. The right to sale or Purchase some specific item at some specific price
is termed as options
The person who gives the option may charge a fee for giving option.
The one who gives option is bound to fulfill his commitment but the
other part y is not bound for it.
Options may be given in the business of currency, crops , shares or
any other item.
Example:
A person purchased 1000/= dollars @ Rs. 100/= per $. Now he thinks
that if I sell it now, I may miss the opportunity of making profit, in

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case dollars price rises. At the same time he is worried that he may
suffer a loss if the price of dollar falls in the market.
The person who gives options, he may commit with this person that
for the next three months (or any other time period) I am ready to
purchase your dollars @ Rs. 100/= per $.
The person who gives Option will charge a fee on it. The other
party will get satisfaction. If the party could sell the dollars at profit at
any rate of its choice, the option giver have no objection. It will just
receive the fee.
If the dollar holding party could not sell dollars at profit, the option
giver is bound to purchase it from him.
b. In many countries, now Options are treated commodity in its own
right which can be traded itself.

6) FINANCIAL MARKET
Financial Market or Capital Market is a big market and Stock Exchange is a
part of that big market.
In addition to Shares (being sold in Stock Exchange) Financial Market deals
in financial papers issued by Banks & Financial Institutions and also in the
financial papers issued by the Government itself, known as Govt. Securities.
Although there is no separate physical existence of Financial Market and
these activities are also carried out in Stock Exchange, but theoretically and
conceptually it has a separate existence.
.
7) Why the Government Issues Securities

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When the Govt. needs money or otherwise feels it necessary it issues the
securities to borrow money from public. For example:
a. Prize Bonds
b. Defense Saving Certificates
c. Khas Deposit Certificates
d. Foreign Exchange Bearer Certificates (FEBC)
e. Etc
All the above are securities issued by Govt. In general all these show that
Govt. owes this much money to the bearer of this certificate. To facilitate the
public, the sale & purchase of these securities in secondary market is
allowed. (Secondary market means any market for sale & purchase of
such papers to anyone other than the original issuing authority)
8) A brief explanation of different Govt. Securities.
a. Prize Bonds
No interest is given to every individual who holds it. Rather after
certain intervals prizes of big amounts are given to some people who
are selected through a lottery
b. Defense Saving Certificates:
Certain Rate of Interest is announced and every bearer of this
certificate receives that from the Govt.
To create attraction, certain relaxations in taxes are also given at
different t occasions.
c. Khas Deposit Certificates
Certain Rate of Interest is announced and every bearer of this
certificate receives that from the Govt
d. Foreign Exchange Bearer Certificates (FEBC)
Before the delinking of Pak Rupee from US $ (that took place in
1980s) the rate of Pak Rupee was fixed in terms of US $ by the Govt.
Further everyone was not permitted to hold the foreign currency.

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As a result of this situation there was big difference between official

exchange rate and black market exchange rate.
People wanted to retain foreign currency whereas Govt. did not like it.
To solve this issue through incentives, the then Govt. issued FEBC.
The person who would give dollars to the Govt. would get this FEBC.
It showed that Govt is indebted to this person for such an amount of
Rupees. Govt. would also pay him interest @ 12% per annum.
This FEBC holder can receive the foreign currency from govt. when
he would need it for foreign travel of trade.