Investing in Pakistan’s stock market is one of the most common means of investing all over the world. There is a whole science to it and for someone looking to start investing for the first time, it can be confusing. This article will help introduce you to the technical world of stock investments.
What are stocks and how can you earn from them?
Stocks or shares are units of ownership of a company. Companies issue shares for the money that they raise. People that buy shares become shareholders of a company. Companies that are established, pay their shareholders some portion of their net earnings. This payment is called a dividend if it is paid in cash. Sometimes a company pays its shareholders more stock if it doesn’t have the cash to distribute. The additional shares are called bonus shares.
Types of Shares
Shares can be preferred or common, which yields different returns for shareholders. They are traded in the stock market by specialized vendors called stockbrokers or stock traders. Many people invest in stocks by buying companies’ stocks and hoping that the company will pay good dividends. People that purchase stocks for an extended period are known as investors. This type of investment is called passive investment.
Most people investing in stocks are passive investors; however, some people buy and sell stocks regularly. These people are known as day traders or active traders.
Active traders trade in stocks over a short term or maybe a day or up to a month, just to capitalize on the share price fluctuation. A basic rule of thumb is to call investors who trade shares at least ten times a month active traders. These people try to benefit from rising share prices, buying a share as it rises and then selling it as it reaches the expected peak price. These people usually base their decision on information about the share, the company’s anticipated results, or some other information.
For the average person looking to invest in stocks, bear in mind that it is best to keep things simple. If you do not know the stock market, it is best if you dabble in a mix of low-cost, indexed funds to get the most out of your investment in the stock market.
How To Trade In The Stock Market?
To start on your investing journey, you must open a brokerage account. This account can be linked to your bank account for fund transfers. The most common way to trade shares in the stock market is by trading through stock exchanges. Stock markets are where buying and selling forces influence the trading price of a stock. Through a stockbroker, you can buy shares from existing investors who wish to sell them and vice versa.
Stock market transactions can be of two types, primary and secondary market transactions.
Primary Market
When a company first releases its stock, it is called an Initial Public Offering, usually called an IPO short. Since there are regulatory requirements that companies must follow, the IPO must be registered, and the company decides which banks it wants to issue the IPO through.
An IPO specifies a fixed number of shares for a specific price. You must subscribe to the shares through the bank’s IPO offering documents. At times, an IPO can be oversubscribed, which means that more people have subscribed for the IPO than there are shares to be issued. Similarly, an IPO can also be undersubscribed, which means fewer people are looking to buy the stock than there are shares.
In most cases, primary market issues are much lesser in number compared to secondary market trades.
Secondary Market
Stock is traded on stock exchanges in secondary sales. Trading in stocks has to meet specific government regulations. Most of these regulations are in place to protect investors from fraud. Over the long run, stocks usually give better returns on the money you invest in them than other investments.
Brokerage
An investor must trade stocks through brokers or brokerage houses registered with the stock exchange. This does not require the direct involvement of the company. Each stock exchange has several brokers and brokerage houses registered. Registered Brokers/brokerage houses are allowed to engage in the execution of trade on others’ behalf as per the laws, rules, and regulations. The following points are of key importance if you are opting for trade.
- For protection against fraud and misrepresentation, an investor should trade only through registered brokers/brokerage houses and agents.
- Make sure that the brokerage house, broker, or agent you pick is authentic. You can check their registration on the SECP’s uploaded list of registered Stock Exchanges brokers and agents. Remember that the registration of all the brokerage houses/brokers and agents are valid for one year. this registration is renewed annually.
- If you find an unregistered broker or agent, report them immediately to the SECP as it is in the general interest of other investors.
- The list of registered brokerage houses/brokers and agents can also be found on the respective websites of the Exchanges.
Trading Platform
When assessing a brokerage house or agent to invest in the Stock market, make sure to see how you like their trading platform. An online trading platform helps its users to assess the market through pricing charts and indicators that track stock prices and behaviors. A comprehensive trading platform that is easy to use and understand is essential to place orders on the stock exchange.
Research
The availability of research into industries, sectors, and market behavior can help make informed and sensible decisions about shares in your portfolio. Having market information is important to successful stock trading. Having informed market research and other information is useful.
Steps to open a brokerage account
You need the following to open a brokerage account:
- CNIC
- A Pakistani bank account.
- Salary slip; This helps in having swift credit history checks.
- You must research which brokerage will work for you and then visit them physically once.
- Once you finish all the paperwork and admit all the documents, you will have to wait for 1-2 weeks.
Benefits of Investing in Stocks
At times, the stock market over or underprices shares based on market and industry trends. Similarly, the stock market undervalues shares based on negative news and events. An example would be share prices falling after a poor World Cup performance. Unrelated and related events can influence prices for the short term but this is not relevant to the passive investing we discussed above.
Despite the challenges, investing in shares has some benefits to offer:
1. Capital Gain by Investing in Pakistan’s
A strong fluctuation in stock prices can give you a better gain from your investment than a simple long-term investment. As stock prices change every day, this makes stocks a sound long-term investment.
2. Dividends Investing in Pakistan’s
Established and well-performing companies in the shareholder market offer dividends and bonus shares to their shareholders at the end of each financial year. This allows for capital appreciation if you continue to reinvest the dividends you receive. The more shares you own, the more profit you will earn at the end of each financial year.
3. Liquidity Investing in Pakistan’s
Investing in shares is a liquid investment. Most shares can be easily bought and sold on any working day on the stock market
How to Investing in Pakistan’s Stocks
The underlying concept behind investing is simple, you know the price of something and the predictions or forecasts for the price. Ideally, when it’s available for a lower price in the market, you buy it. This is kind of like buying a product on sale. It’s the same product, but you buy it for less. This means that you save money while investing in something worthwhile
Bear in mind that it is better to see the financial analysis on the company’s financials, and keep an eye on its dividend payouts, revenue, cash flows, events related to the industry, its brand target market, and its competitive edge. This is where your broker’s research should be useful.
Why All Investors Should Be Careful of Stock Prices
As an investor, you should realize that the stock market is complex and unpredictable for even the most seasoned investors. If the market is rising, it is time for any investor to sell off their short-term holdings and gain based on the rising market.
Most newbies and even some seasoned investors get excited by rising trends and buy specific stocks rising daily. Investors’ buying interests usually drive such rises, and there is no guarantee of how long such rising trends, known as rallies, would continue.
When you go to a mall, you don’t walk into a store and buy just anything. You usually have a list or know what you want to buy and which shops to go into to browse. The same should hold for investing in the stock market.
Some basic rules to follow before you start investing in a new stock are:
- Always research the company you are planning to invest in. What is their business, and which products do they sell? Do the products have a steady demand? Is the competition strong? Does the company have the muscle and capacity to supply the product?
- How long has the company been in business? Does it have a good stock performance record?
- Does it have sound Corporate Governance policies?
The final word on Investing in Pakistan’s
A golden rule is to buy on the rumor and sell on the news. For instance, if market rumors claim that a company is due to get a big contract. Its share price would start rising and would cross its intrinsic and fundamental valuation.
People begin to buy based on the rising trend, and the price would increase further. However, if you had already purchased before the rumors and sold during the rise, then you stand to gain from your investment.
Buying based on rumors and news means that the stock price has already risen to accommodate. You need to bear in mind that the stock market is fluid; it cannot remain high or low for an indefinite period. You have to follow market prices and pick up stocks when they are at low points.
