Complete Investor Guide
Everyone today appreciates the need to save whether for a house, for children’s education, a wedding, or for use after retirement. All these goals can be realized through excellent financial planning. An intelligent plan entails investing your money in an appropriate combination of assets with potential to generate the income needed to achieve your goals. If you invest wisely, you can maximize the earning on your investments. There are many investment avenues available, but a wise investor does not invest on impulse, a hot tip or follow the herd. An investor should discriminate between information, casting away irrelevant and illogical pieces of information, and checking for opportunities and facts before making an intelligent choice of investments.
- What is Stock Exchange?
- Role of the Stock Exchange?
- Stock Exchanges in Pakistan
- Trading and Settlement
- T+2 Settlement System
- Benefits of T+2 Settlement System
- What are shares?
- Tips For Investing Wisely
- Investor Protection
- Important Things to Know About Equities
- How to Trade?
- Various Ways of Becoming a Shareholder
- Important Considerations for Investors
The stock exchange provides a market place where shares can be bought and sold.
- The stock exchange admits companies for trading at their securities
- It provides a market for raising capital by companies.
- It provides a market place for shares of listed public companies to be bought and sold, by bringing companies and investors together at one place. The exchange’s role is to monitor the market to ensure that it is working efficiently, fairly and transparently.
All stock exchanges (KSE, LSE,ISE) are merged into one stock exchange which is PSX (Pakistan Stock Exchange).
The stock exchanges have introduced a computerized trading system to provide a fair, transparent, efficient and cost effective market mechanism to facilitate the investors.
The trading system comprises of four distinct segments, which are,
- T+3 Settlement System;
- Provisionally Listed Counter;
- Spot Transactions; and
- Futures Contracts.
In the T+2 settlement system, purchase and sale of securities is netted and the balance is settled on the second day following the day of trade.
- It reduces the time between execution and settlement of trades, which in turn reduces the market risk.
- It reduces settlement risk, as the settlement cycle is shorter.
- Provisionally Listed Counter:The shares of companies, which make a minimum public offering of Rs.100 million, are traded on this segment from the date of publication of offering documents When the company completes the process of dispatch/credit of allotted shares to subscribers, through CDC it is officially listed and placed on the T+2 counter. Trading on the provisionally listed counter then comes to an end and all the outstanding transactions are transferred to the T+2 counter with effect from the date of official listing.
- Spot/T+1 Transactions: Spot transactions imply delivery upon payment. Normally in spot transactions the trade is settled within 24 hours.
- Futures Contract: A Futures contract involves purchase and sale of a financial or tangible asset at some future date, at a price fixed today.
Each share represents a small stake in the equity of a company. You can buy large or small lots to match the amount of money you want to invest. A company’s share price can rise or fall as a result of its own performance or market conditions. Once the shares are brought and transferred in your name your name will be entered in the company’s share register, which will entitle you to receive all the benefits of share ownership including the rights to receive dividends, to vote at the company’s general meetings to receive the company’s reports.
If you decide to sell your shares you will need to deliver share certificates to the broker in time for the transaction to be completed. With the introduction of the Central Depository System (CDS), an investor can have shares in paper form or can own shares in an electronic book- entry form at the Central Depository Company (CDC).
- Why Do Companies Issue Shares?
Companies issue shares to raise money from investors. This money is used for the development and growth of businesses of companies. A Company can issue different types of shares such as ordinary shares, preference shares, shares without voting rights or any other shares as are permissible under the law. These give shareholders a stake in the company’s equity as well as a share in its profits, in the form of dividends, and a voting right at general meetings of shareholders.
- Why Do Investors Buy Shares?
Studies have shown that over a twenty-year span, investment in shares has provided greater returns than most other forms of savings. Shares can provide you with a regular stream of income through dividends as well as the potential for your investments to grow in value. If the prices of shares go up, you can sell them for more than you paid. This is called capital gain.
- What are Dividends?
Dividends are returns paid to shareholders out of the profits of the company. Returns can be in the form of cash or additional shares of the company called bonus shares. Dividends are usually paid once or twice a year depending upon the company’s profit distribution policy.
- What is Capital Growth?
This is one of the ways in which shares differ from deposit accounts. The principal amount of money you put in a bank or any fixed income savings scheme always stays the same e.g. if you start with Rs.100,000 you will always have Rs.100,000 (other than any interest earned). changes in value according to the performance of the company. With good management, the value of your investment in shares of a company can grow over time so that your shares are worth more than you paid for them. This is capital growth.
- Risks And Rewards:
Buying shares can offer advantages over saving in deposit accounts: your investment may increase in value besides paying you dividends. You share the rewards when the company does well and the price of the shares goes up. But if the company performs badly, the share price may go down and the value of your investment will be reduced. Other factors, such as the performance of the stock market as a whole and the general economic climate, may also affect the price of your shares. Investment in shares is therefore investment in ‘risk capital’. The shareholders can be rewarded for taking this risk and the potential return on your money can be higher than that on other investments. You can reduce your risks with careful planning.
- Know What Investment Products are Available:
The following types of securities are available on the stock market for investment ,
a: Ordinary shares of listed companies
b: Unit trust schemes
c: Mutual funds certificates
d: Corporate bonds i.e., Term Finance Certificates (TFCs)
e: Government securities i.e., Federal Investment Bonds(FIBs), Pakistan Investment Bond (PIBs) and Special US Dollar Bonds.
- Know Your Investment Profile:
A wise investor chooses an investment product not only according to his goals and the amount of capital available but also according to his tolerance for risk. All investments carry a certain degree of risk. You have to determine whether you are a “risk-taker” or a “risk-averse” person. Depending on the extent of risk you intend to take, you should pursue an investment strategy (aggressive, moderate or conservative) that fits your risk profile.
- Do Your Homework Before You Invest:
Don’t put in your money until you have understood all relevant information regarding the investment. Prepare yourself for the vigorous homework of analyzing company’s annual reports, accounts and other statements while keeping abreast of what’s happening in the industry, country and elsewhere that may affect your investment. Consult your investment adviser/broker to get latest market information about shares you intend to buy or sell. Be skeptical of any thing picked up from rumors, particularly if you cannot rationally explain their choice.
- Think Long-term:
Bear in mind that even in the best of securities/shares, there can be short-term aberrations. It is important to have the power to hold your investments for longer periods. Studies have shown that investments properly timed and based on strong fundamentals have been very profitable for investors in the longer term.
- Avoid Putting All Your Eggs In One Basket:
The best way to minimize risk is to diversify your investments across various investment products. If equities are your sole investments, it makes sense to diversify between different companies and sectors. In this way, loss made on some investments can be absorbed by gains made in others, keeping the overall return on investments positive. You can also diversify your investment by investing in open-end funds managed under various unit trust schemes. While investing in mutual funds check the rating of the instruments. Similarly while investing in any security please check the rating if any available.
- Beware of Scams Beware of promises of quick profits or sky-high returns. Remember: higher the gain on investments, higher is the risk involved. This is the fundamental risk-reward trade-off.
You should always ensure that the stockbroker you choose is licensed by the Securities and Exchange Commission of Pakistan (SEC) to trade. Prefer stock brokerage firms with good track record. As a shrewd investor, you should know your rights and responsibilities and should beware of the rules that govern your investments as well as the legal recourse available, in case things go wrong.
- If you can afford to take some risk and have the ability to endure the market’s ups and downs, equity investments may grant you good returns.
- Do not invest any money with the stockbroker as a deposit at fixed rate of return. Such a deposit has no legal standing and the investor is exposed to risk of losing his money.
- You must know the rates of fees and commissions charged by the broker/stock exchange as these affect your costs, and hence your returns.
- The aim of investing in stocks and shares is to buy at low and sell at high. Knowing when is however, the problem. Many investors attempt to time the market: they try to figure out when the market is going up and buy before it does and then anticipate when it is going to crash and sell before that. Usually you try to buy when the upswing has begun and sell as the downswing starts. However, such accuracy is extremely difficult to achieve.
- The stock market is driven by two emotions: greed and fear. People are caught up in the boom fever and pay beyond the worth of shares this is the greed that drives bull markets. In bear markets, people get carried away with the ruling pessimism and are eager to sell their investments believing in the worst rumors this is the fear that dominates bear markets. f:-Be careful in selecting your broker. Ensure that he/she is licensed by the SEC to trade and the stock broking firm has a good track record. Give clear instructions to avoid ambiguity, check trade confirmations received and keep a proper record of all your transactions.
Your first step is to contact a stockbroker or an investment adviser.
- Introducing Stockbrokers
Stockbrokers are your link to the stock market. Their job is to help you get the best price available when you want to buy or sell your shares. Be careful in selecting your broker.
- The Mechanics of Share Dealing:
There are various ways of investing in the stock market: you can deal directly in shares; invest through a unit trust or investment trust or let your investment be handled by an advisor.
- Opening of Account:
Once you have decided the broker with whom you intend to deal, you should ensure that an account is opened in your name by filling the account opening form. It is imperative that the terms and conditions prescribed in the account opening form are read very carefully and well understood. It will be in your interest if you give clear instructions as to who can operate the account. It is preferred if the investor gives instructions that business can only be transacted in the account on his instructions.
- Buying/ Selling Directly:
When you have decided to buy/sell shares in a particular company, contact your stockbroker. You can ask to buy/sell a fixed number of shares or shares up to a certain value. Get the contract note confirming your order immediately and check for the following information.
- Name and number of securities;
- Date on which the order is executed;
- Nature of transaction (spot, ready or forward and also whether bought or sold);
- Price at which the transaction is executed; and e:- Commission charged by the broker;
There are two types of order.
Limit Orders: In a limit order, the client specifies the price at which the order is to be executed.
Market Order: Also known as at best order, the order is executed at the prevailing market rate.
- Initial Public Offering (IPO):
When companies offer shares to the general public for the first time it is known as a flotation or an Initial Public Offering (IPO). These shares can be bought directly from the company without paying stockbroker’s commission. You might see an advertisement in a newspaper from a company issuing shares or your stockbroker might tell you about a company making an IPO. Simply fill in the share subscription form and deposit the form along with subscription cheque in a branch of the designated bank’s).
- Right Issues:
Right shares are issued when companies need to raise additional capital to finance their new expansion projects or to meet working capital needs, etc. In case of rights issues, the existing investors have the right to subscribe to these new shares in proportion to their respective shareholdings.
- Trading Market:
The most common way of buying/selling in stock market is through trading in the secondary market. Through a stockbroker you can buy shares from existing investors who wish to sell them and vice versa.
Before you invest in shares, you must consider a number of factors,
- How Much Money Can You Afford to Invest?
Investment in shares does not result in instant yields. Do not invest any money which you may need immediately, since the price of shares can go up and down, It is advisable to keep some money in a deposit account to meet your financial obligations in the near future. In this way, you will not be forced to sell shares even at low price, if cash is needed urgently.
- How Do You Want to Invest?
There are various ways of participating in the stock market:
a:-You can invest directly by purchasing shares through a broker. You may buy shares in one company or you may spread your risk by investing in a number of different companies to give you a ‘portfolio’ or collection of shares.
b:-You can invest indirectly and through collective investment schemes such as open-ended unit trusts and closed-ended mutual funds. This would reduce your risk further.
- Do You Need Advice or Do You Want to Make Your Own Decisions?
Investors can choose to make their own share dealing decisions or take advice from a professional. Buying and selling shares and tracking their performance can be time consuming but it is rewarding for those who have the time to manage their own investments. Some investors deal with stockbrokers directly while others prefer to use the services of professional managers who have discretionary powers to manage the investment portfolio.
Electronic book-entry transfer of securities i.e. CDS has been set up to eliminate physical transfer of securities. This new book-entry system is in line with the international practice and has replaced the manual system of physical handling and settlement of shares at stock exchanges. With in the CDS, transfer of shares from one client account to another takes place electronically.
The CDS is managed by the Central Depository Company of Pakistan Limited, which has been sponsored by the stock exchanges and leading local and financial institutions. Presently, 97 percent of settlements are routed through CDS. Investor Account Services have been introduced in order to facilitate individual investors to maintain their account directly with the CDC. With the implementation of CDS and automated trading system, trading and settlement of securities have become transparent and efficient.
Stock brokerage costs vary according to the extent of services you avail. You should select the service that meets your needs and requirements. Before you start dealing in shares, determine how much you to pay stockbrokers for their services. You need to shop around for the right service at the right price. Charges will differ depending on whether you wish to invest directly or indirectly. Ask if there are any ongoing costs of stockbrokers, other than the dealing commission each time you buy or sell.
- WHAT HAPPENS ONCE YOU ARE A SHAREHOLDER? There are several types of shareholders: some are long term investors who simply tuck away their investments for years while others trade frequently and keep a close eye on how their shares are performing. You can check your shares’ performance in various ways. A daily indicator of share price movements is available in many newspapers and also on website of the relevant stock exchange. You may access this information directly or through your stock broker/advisor. Informative articles about many companies are regularly published in newspapers and investment magazines. Your stockbroker may also provide valuable information. Some publish newsletters for their clients, reflecting their views on the performance of selected companies. Annual reports of companies also contain useful information. Some companies have shareholder relations departments, which can help with factual information.