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The stock exchange
provides a market place where shares can be
bought and sold.
- What is the Role of the Stock
Exchange?
- 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.
- Stock Exchanges in
Pakistan:
There are three stock
exchanges in Pakistan:
- Karachi Stock Exchange (Guarantee) Ltd.
- Lahore Stock Exchange (Guarantee) Ltd.
- Islamabad Stock Exchange (Guarantee) Ltd.
Of these, Karachi Stock Exchange is
the biggest exchange in the country.
- Trading and Settlement:
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.
- T+3 Settlement System:
- In the T+3 settlement system, purchase and
sale of securities is netted and the balance is
settled on the third day following the day of
trade.
- Benefits of T+3 Settlement
System:
- 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+3
counter. Trading on the provisionally listed
counter then comes to an end and all the
outstanding transactions are transferred to the
T+3 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.
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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 transfered 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. Top |
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- Know What Investment Products are
Available:
The following types of
securities are available on the stock market for
investment:
- Ordinary shares of listed companies
- Unit trust schemes
- Mutual funds certificates
- Corporate bonds i.e., Term Finance
Certificates (TFCs)
- 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
informationregarding 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:
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. You can report abuse to the
SEC, whose mission is to ensure the development
of a fair, efficient, and transparent securities
and futures market. Although its main function
is regulatory in nature, the SEC has the
ultimate responsibility to protect the investor
through market supervision and ensuring that its
laws and regulations are complied with.
Stock exchanges are the frontline
regulators; they must play a proactive role.
Send all your complaints in writing to the
respective stock exchange(s) with full details,
including the complainant’s name, address and
telephone number etc. In case you do not get a
response to your complaint, please contact the
“Complaint Cell” in the SEC. Top |
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- 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.
- 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. All the
registered brokers are listed at the web site of
SEC http://www.secp.gov.pk/
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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
- Commission charged by the broker;
There are two types of
orders:
- 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.
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- 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.
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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:
- 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.
- 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. Top |
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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. You can report abuse to the
SEC, whose mission is to ensure the development
of a fair, efficient, and transparent securities
and futures market. Although its main function
is regulatory in nature, the SEC has the
ultimate responsibility to protect the investor
through market supervision and ensuring that its
laws and regulations are complied
with.
Stock exchanges are the frontline
regulators; they must play a proactive role.
Send all your complaints in writing to the
respective stock exchange(s) with full details,
including the complainant’s name, address and
telephone number etc. In case you do not get a
response to your complaint, please contact the
“Complaint Cell” in the SEC.
SECURITIES AND EXCHANGE COMMISSION OF
PAKISTAN
NIC Building,
Jinnah
Avenue,
Blue Area,
Islamabad.
Fax: (92
51) 920 4915
Website:
www.secp.gov.pk Top |
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