An organized and managed stock market stimulate investment opportunities by recognizing and financing productive projects that lead to economic activity, mobilize domestic savings, allocate capital proficiency, help to diversify risks, and facilitate the exchange of goods and services. Undoubtedly, stock markets are expected to increase economic growth by increasing the liquidity of financial assets, make international and domestic risk diversification possible, promote wiser investment decisions, and influence corporate governance, i.e., solving institutional problems by increasing shareholders interest/value. In addition to above, stock markets are the best indicator to forecast future economic activity and describe actual casual affect between future economic growth and stock prices. On the contrary, the relationship between stock market development and real economic growth can be explained as any change in the stock market will eventually change the cost of rental capital. If the firm's cost of borrowing will become high as compared to investment, it slows down the growth of the economy.
Pakistani business sector and the Government like any other country are anxious to attract overseas investment into different sectors of the economy. The cheap labor rates at Pakistan also make it an attractive option for foreign investors for future business opportunities. However literature available in exact portfolios is very limited. Stock-exchanges in Pakistan provide a reasonable view of key business activities in various industrial and non industrial sectors. The appropriate government regulatory bodies and entrepreneurs are always making supreme efforts to enhance the value of their shares through respective policy regulations and business practices. A massive volume of information is continuously being collected by the stock-exchanges and various other financial institutions. As a business consultant, this data could be mined to offer expert consultancy services to prospective local and multinational companies for selecting optimum mix of portfolios for investments. This activity though being performed at individual levels needs to be further expanded to state level such that similar services could be provided to any individual or organization willing to invest or start a business in Pakistan.
Pakistan is certainly not the only country in the entire world to be badly hit by the current stock exchange crisis; many leading international stock exchanges have also witnessed a historic recession. However, the environment in Pakistan is more uncertain because of both foreign and domestic political and economic reasons. The major dilemma of the stock trading in Pakistan is that 30 % of its portfolio comes from overseas investors, while the rest from local economic institutions.
it is certainly true that the direct flight of foreign portfolio has contributed largely to the sharp decline of the stock trading in Pakistan, but numerous other factors have also been involved like; (1) short selling. (2) Economic crisis (3) Exchange rates (4) Unstable conditions (5) Terrorism (6) Assassination of Benazir Bhutto (7) Approaching IMF (8) Inflation rate (9) Falling currency value (10) Increasing import bills and expense of doing business.
Now the argument arises that how to cop up with all these different factors to draw foreign investments? Although there are several factors which are often not under our direct control though there are too many factors on which we certainly can work out to bring them in our favor rather than on the opposing side of the fence. Like if we talk about the short selling problem than Lawmakers should have to look at the effects short sellers had on compact companies and experience to investigate the demand for regulation after allegations of extensive manipulation by short sellers of over-the-counter stocks. Similarly as for as exchange rate is concerned the effective exchange rate should be used which is a multilateral exchange rate which is a weighted average of exchange rates of home and overseas currencies, with the weight for each overseas country equal to its share in trade. Which measures the average price of home goods relative to the average cost of goods of trading partners, using the share of trade with each country as the weight for the particular country? Also, inflation can be effectively controlled and there are a variety of different methods that can be used in attempts to control inflation e.g. monetary policy, fixed exchange rates, gold standard and wage and price controls.


Salman Zafar is a Student of Mng. Sciences in Iqra University.