Microinsurance is an incredibly beneficial and innovative financial tool that provides a crucial safety net for individuals with limited financial resources. It is specifically tailored to meet the needs of low-income individuals who are frequently overlooked by traditional insurance providers. This form of insurance plays a vital role in ensuring that everyone, regardless of their economic status, has access to essential financial protection.

According to the World Bank, over two billion people lack formal social security. Such people are the most exposed to risks and economic stress. Micro-insurance helps to protect low-income groups against specific perils in exchange for regular monetary payments (premiums) equivalent to the likelihood and cost of the risk involved.

Understanding Microinsurance

Microinsurance, a financial product tailored to the insurance needs of low-income individuals and families, stands out for its unique features. Unlike traditional insurance policies, which can be complex and costly, microinsurance policies are designed to be affordable, accessible, and straightforward. 

These policies typically cover a range of risks, including health, life, property, and agricultural insurance, offering a safety net for those most vulnerable to economic shocks.

 Key Features of Microinsurance

1. Affordability: Microinsurance policies are specifically designed with affordable premiums that are set at a level accessible to low-income individuals. This approach ensures that financial constraints do not hinder people from obtaining insurance coverage.

2. Accessibility: Microinsurance products are often distributed through easy-to-access channels such as mobile phones, community organizations, and microfinance institutions, making them accessible to people in remote or underserved areas.

3. Simplified Coverage: Policies are designed to be easy to understand, with straightforward terms and conditions. This makes such policies easier to trust and encourages uptake among potential policyholders.

4. Community-Based Approaches: Local knowledge and networks are integral to effectively distributing and managing microinsurance schemes, which are primarily community-based. 

These schemes leverage the understanding of local conditions to tailor policies that meet the community’s specific needs. Additionally, the networks within the community are utilized to ensure efficient administration and distribution of insurance coverage.

Benefits of Microinsurance

Microinsurance benefits individuals, families, and communities, contributing to broader financial stability and inclusion.

Financial Protection

Microinsurance offers invaluable financial protection to low-income families. In the unfortunate event of unexpected illness, death, natural disaster, or other adverse events, microinsurance provides coverage for associated costs, ensuring that these families are shielded from falling deeper into poverty due to unforeseen expenses.

Economic Stability

Microinsurance helps stabilize the economy by reducing financial risks. When individuals and families are protected from financial shocks, they are more likely to invest in education, health, and income-generating activities. This can lead to better economic outcomes and an improved quality of life.

Empowerment and Confidence

Microinsurance coverage does more than provide financial protection. It also gives people a sense of security and confidence. This support enables them to take calculated risks and pursue opportunities they might otherwise avoid because they fear financial loss.

Promoting Financial Inclusion

Microinsurance is important for helping low-income individuals join the formal financial system. It provides insurance to people who are usually not able to get it. This helps them access other financial services like savings and credit, which can help them improve their economic opportunities.

 Challenges and Solutions in Microinsurance

Despite its potential benefits, microinsurance faces several challenges that must be addressed to maximize its impact.

 Awareness and Education

Many low-income people don’t know much about insurance or the benefits it provides. To get more people to buy microinsurance, we need to educate them. Campaigns that fit with the culture and language of the people being focused on.

Distribution and Reach

Reaching remote and underserved populations can be a difficult process because of infrastructural and logistical difficulties. Innovative ways of delivering services, like using mobile technology and working with local organizations, can help solve this problem. 

For example, mobile-based insurance platforms allow people to buy and manage insurance using their phones, making it accessible even in places with limited physical infrastructure.

 Affordability and Sustainability

Microinsurance needs to be affordable while ensuring financial stability. To do this, insurers should manage risks effectively, use technology to lower administrative costs, and consider options like subsidies or partnerships with governments and non-governmental organizations to help economically vulnerable communities pay their premiums.

 Trust and Transparency

The success of microinsurance hinges on establishing and maintaining trust and transparency. Insurance providers must make customer service a top priority and guarantee swift and equitable claim processing. This approach is essential for fostering credibility and instilling confidence in the product, particularly within low-income communities.

 The Role of Technology in Microinsurance

Technology, particularly mobile technology, has played a transformative role in developing and distributing microinsurance products. It has revolutionized the way microinsurance is delivered, making it more accessible and efficient than ever before.

Mobile-Based Insurance Platforms

Mobile-based platforms enable individuals to purchase, manage, and claim insurance policies using their mobile phones. This approach is particularly effective in regions with high mobile phone penetration but limited access to traditional banking and insurance services.

Data Analytics and Risk Assessment

Advanced data analytics can enhance risk assessment and pricing accuracy for microinsurance products. By analyzing data from various sources, insurers can better understand low-income populations’ risks and tailor their products accordingly. This can result in more customized pricing and better risk management.

Blockchain for Transparency

Blockchain technology is a game-changer in microinsurance. It enhances transparency and trust by providing a secure and immutable record of transactions, ensuring that policyholders receive their benefits promptly and fairly.

Conclusion

Microinsurance is a powerful tool for promoting financial safety and inclusion for all. By providing affordable, accessible, and straightforward insurance products, microinsurance helps protect low-income individuals and families from financial shocks, contributing to economic stability and empowerment. While challenges remain, innovative solutions and the strategic use of technology can help overcome these barriers and unlock the full potential of microinsurance. As we strive for financial safety for all, microinsurance will play a vital role in building a more resilient and inclusive financial system.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post Financial Safety for All: What is Microinsurance? appeared first on Smartchoice.pk.

Microinvesting in Pakistan is just starting to take off, with several banks facilitating microinvesting through their banking apps. Notable amongst these are the Zindagi app by JS Bank, as well as the HBL, and Meezan banking apps, which facilitate investments in their mutual funds through their bank accounts. These allow users to invest small amounts, as low as PKR 1,000 into their stock or mutual fund accounts. 

This guide will give you a thorough understanding of micro-investing in Pakistan and outline its advantages. 

What is Micro-Investing?

Micro-investing is a method of slowly accumulating savings by investing small amounts of money. It’s similar to collecting spare change in a digital format and then using it to grow your investments. 

On international platforms, users can link their debit cards to their accounts. Whenever they make a purchase, the app automatically rounds up the transaction to the nearest dollar and invests the leftover change into a designated investment account. This allows people to invest small, manageable amounts over time, ultimately contributing to their long-term financial goals.

Micro-investing is a strategy that involves regularly investing small amounts of money over time. Unlike traditional investing, which typically requires larger sums of capital, micro-investing allows individuals to start with as little as a few thousand. This approach is especially attractive for beginners in the world of investing or for those with limited funds to allocate towards investments.

 The Benefits of Micro-Investing

Micro-investing has gained popularity in recent years due to its unique advantages, especially for individuals new to investing or with limited funds. Here’s a detailed look at the key benefits of micro-investing:

Accessibility:

One major advantage of micro-investing is that it enables you to start with very little money. Traditional investing often demands significant initial capital, which can be a hurdle for many. 

Micro-investing platforms, on the other hand, permit you to start with as little as a few thousand, thus making investing accessible to a wider audience.

Diversification:

While many international micro-investing platforms offer diversified investment options, which helps reduce risk and increases the potential for steady growth.  In Pakistan, we are currently restricted to stocks and mutual funds and cannot spread our money across multiple investment options.

Affordability:

With micro-investing, you can begin investing with very little money. This makes it possible for anyone to start building their wealth, even if they can only contribute small amounts at a time. with the use of banking or investing apps, you can transfer a few thousands into your investment account and earn some additional profit from it. 

Smaller Investments: 

Since micro-investing involves small amounts of money, the financial risk is relatively low. This makes it an excellent option for those who are risk-averse or just starting their investment journey. It allows investors to gain experience and confidence without fearing losing a significant sum of money.

Learning Opportunity:

Micro-investing serves as a practical learning tool. With minimal financial risk, investors can experiment with different investment strategies and learn about the market’s dynamics without the pressure of substantial financial loss.

Consistent Savings Habit:

Micro-investing encourages a consistent savings habit. By investing small amounts regularly, you can develop a disciplined approach to saving and investing, which can pay off in the long run. 

A word of advice: don’t be unsettled by reductions in your investment amount over the short term; it is part of standard stock and mutual fund market fluctuations.  

How to Get Started with Micro-Investing

Unfortunately, there is currently no organized or official micro-investing platform in Pakistan. Most of the apps available require that you open an account with the financial service provider or register with the mutual fund. 

After this, micro-investment can be easily done through the many mutual fund apps, which usually require an initial deposit of PKR 5,000 and monthly contributions of as low as PKR 500. This can be done both through physical visits and through phone apps.

Why Micro-Investing is Important

Micro investing is at the takeoff stage, with many financial institutions beginning to explore avenues for offering investment options for small investors. There are multiple options for large-sum investors like fixed-income certificates, the evergreen SSCs, and DSCs, the small denominations of which are also good options for micro-investments. 

Large investors can also invest in the Stock Exchange, buy prize bonds, SSCs, DSCs, and invest in gold and real estate. Microinvesting allows individuals with smaller amounts to invest and with smaller risk appetites to invest their capital safely. 

Whatever the avenue you choose, the following tips will help you grow your micro-investment pool steadily.

1. Start Small and Be Consistent:

Don’t worry about investing large sums of money right away. Start small and focus on consistency. Over time, these small investments can grow to a sizable amount. 

2. Take Advantage of Educational Resources:

Many micro-investing platforms offer educational resources like articles, videos, and webinars. Utilize these resources in the Pakistani context to learn more about investing and make informed decisions.

3. Be Patient:

Investing is a long-term game. Be patient and avoid making impulsive decisions based on short-term market fluctuations. Stick to your strategy and allow your investments to grow over time.

Conclusion

Micro-investing is an excellent way for beginners to get started in investing. With low entry barriers and the ability to start with small amounts of money, it’s an accessible and effective strategy for building wealth over time. 

You can begin your journey toward financial growth and stability by choosing the right platform, setting up your account, and investing consistently. Remember to monitor your investments, stay informed, and be patient as your nest egg grows through micro-investing.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post A Starter Guide to Micro-Investing: Grow Your Wealth with Small Steps appeared first on Smartchoice.pk.

There is a common principle of investing that claims that the best investments are those done when the markets are dropping, and everything is in the red. The basic principle is that the time for making good investments is when all investors are rushing to sell and there is a low demand for stocks.

In simple market terms, when everyone is selling, stock prices fall due to excess supply and low demand. This makes it a great time to buy as we can pick up great bargains. This advice is difficult to follow as very few investors follow this strategy of buying when the market is crashing.

Why Invest In Falling Markets

Most share investors follow a herd mentality when investing in stock markets. They invest where everyone is investing (and usually buy shares are higher prices). When markets are in a decline, many investors panic and start to sell off their shares. This generally pushes the prices further towards decline, and more investors start to sell.

The thing to do, and what many successful investors do is to go sale shopping. Many investment gurus claim to pick up their best investments during market crashes. However, the average investor with a limited investment budget and an even smaller capacity to absorb risk is scared to do this. This hesitation is due to a fear that prices will fall further, and the trade will prove to be a loss.

The challenge for anyone that wants to invest in stocks is to time their purchase and do so successfully. A strategy of waiting for prices to reach rock bottom and then buying is not practical. A strategy to buy while prices are low is a better approach.

It takes a lot of nerve to invest when people around you are losing their investment values as prices fall.  The main point here is to be realistic and pick up shares at bargain prices that you couldn’t earlier due to their high prices. Maybe you haven’t been able to buy your favorite blue chip stock because they were too pricey. If you buy them during dips, you get to invest in a performing stock, and at a bargain.

A clear example of such a situation will be that of a store owner, who didn’t stock luxury items because he didn’t have the space in his shop (and the capital to buy the items). In a pricing dip, he gets to pick up items at lower prices and has space freed up in his shop to stock the items since his cheaper goods are now sold.

Supply and Demand Principles

The basic rules of supply and demand economics state that low demand pushes prices down. When markets fall and investors panic. When panic induced selling starts, there is an excess supply of shares and a lack of demand.

This low demand pushes prices down, and the availability of stocks means that the price conscious investor can go bargain shopping and pick up stocks of their choice at low prices. Such markets make for good bargaining grounds and opportunities to pick up good stocks at low prices. Investing in markets when there are price dips allows for great bargains to boost portfolio returns.

Fighting the Herd Mentality

Falling markets always give rise to good bargains but few investors are alert enough to take them. The herd mentality is a difficult one to step away from, particularly when you see blood red on your trading screens. Trading against market trends is what allows investors to recuperate from any losses and earn profits by picking up good bargains.

Something that we need to remember as investors are that the markets always come back up. In fact, many investors feel that the deeper the fall, the higher the rise afterwards.

The key focus point here is to make sure that you do not end up buying high and selling low just because you panicked seeing all the red in your portfolio. Study the past crashes if you like and see how shares behaved.

If major crashes didn’t impact share prices and returns in the medium term, the regular dips and troughs of trading will not impact them either. Take all dips as opportunities and treat them as stock sales.

Make a List of Stocks to Buy During Dips

To be prepared for any significant market dips, have a bucket list of shares prepared. Someone I know prepares a list of shares that they want to get at specific prices. for instance, shares currently overpriced are selected and their buying prices listed so that if their prices fall, the investor is prepared to pick them up. Making this watchlist of shares that you want because of their returns, growth potential, or whatever criteria you use is an excellent cheat sheet during market falls.

It takes virtually no time to look up shares, recalculate their valuation, and see if they are worth investing in at their current prices. they can be picked up during the market downturn.

Another strategy investors use is to pick up more of their existing shares during market falls. Even if your shares are in the red, you picked them for a reason, and if there has been no change, you can increase your holdings by picking them up on the cheap. This helps to reduce your investment costs and improve returns when the market eventually picks up after the fall

Defending Your Existing Portfolio during Market Dips

The first thing to do in volatile or falling markets is to make sure that your current portfolio of shares is properly diversified between a variety of asset classes, and not just the stock market sectors.

Diversification helps to reduce the volatility that tends to rise during bear markets and can subject investor portfolios to unnerving fluctuations. Among shares, sectors that are insulated from market dips include  companies dealing in consumer staples, utilities, banking and health care.

The goods and services these sectors supply tend to be in demand regardless of economic or market conditions. They also generate plenty of cash, which supports strong dividend yields.

An investor confident about a market’s impending rise could also buy the riskier stocks that tend to outperform in the early stages of the recovery. Of course, those are also the stocks likely to get savaged if the hoped-for bull market turns out to be another bear market rally.

The Bottom Line

Investing during a falling market is not for the faint-hearted, nor is it usually the right time to take outsized risks. And that’s just as true for the risk of selling all your stocks as the risk of being fully invested in equities. Diversifying one’s portfolio and prioritizing strong, well-capitalized balance sheets over hype when it comes to stock selection can pay off huge even if prompted by a bear market.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post Investing in the Pakistani Stock Exchange in the Current Situation appeared first on Smartchoice.pk.

However, this is now a myth. While saving is key for achieving both goals, making smart investments with your money is what makes them much more attainable in the world.

The fear that stops most of us from investing is a reasonable one, the process of investment is complicated and time-consuming. Many people face financial loss instead of financial gain, particularly in stock and commodity investments. 

When we work hard and discipline our lives to leave off spending and save, the thought of losing our hard-earned money makes us uncomfortable. As a result, most of us place our precious money away in a fixed deposit or saving certificate.

This is where the problem arises, the money we place into our safe and sure accounts is almost certain to lose value. The low-interest rates that these options offer are not even linked with inflation. This means that our money’s purchasing power falls as long as we are placing it there only.

Why you HAVE to invest

Saving and investing are two sides of the same coin. While looking to build wealth, saving is a key part of the financial process. BUT saving is important not because it produces wealth on its own, but because it creates the capital needed for investment. 

At the least, investing allows you to keep your savings on track with the cost-of-living increases that inflation causes. At the most, the main benefit of investment is the option of compounding interest or growth earned on growth.

How much to save

Given that we all enter the investor market because of unique needs, the best answer to how much to save is ‘as much as you can’. A baseline is to save 20%. As a guideline, saving 20% of your income is the lowest point to start from. In savings, more is always better, but the 20% baseline lets people build up a meaningful amount of capital throughout their work life.

The first step is to use these savings to set up an emergency fund to meet at least three to six months’ worth of living expenses. Once these emergency savings are set up, invest the funds that are not needed for specific short-term expenses. Once you make this a habit, and invested well, this will multiply your capital and help it multiply over the inflation rate. 

How investments work

To invest in any form of assets, like stocks, bonds, or other assets, you need to open an investment account. For stocks, this can be with a broker, through a brokerage account. Most people place their investment funds in their brokerage accounts and then use them to fund their trading accounts. 

Stocks are small units of ownership in a company. When a company goes from private to public, its stock is open for public trading in the stock market. A stock price is generally reflective of the value of the company, but the actual price is determined by what market participants are willing to pay or accept on any given day.

Stocks are seen as riskier investments than bonds because of their price volatility. If bad news floats about a company, people will want to pay less to buy shares, which will lower the stock price. If you bought the stock for a higher price, and the price falls, you risk losing that money.

In stocks, you make or lose money based on the purchase and sale price of what you buy. If you buy a stock at Rs. 10 and sell it at Rs. 15, you make Rs. 5. If you buy at Rs. 15 and sell at Rs.10, you lose Rs.5. 

Gains and losses are only booked or counted when you sell the asset, so the stock you bought at Rs.10 could drop to Rs.6 one day, but you only “lose” the Rs.4 if you sell the stock at Rs.6. At times, if you wait out the low-price period, and then sell the stock when it’s up to Rs. 12, you end up gaining Rs.2 per share.

How to Invest Reasonably?

Once you know how investing works, it’s time to think about where you want to put your money. In general, younger investors with years before retirement can afford to have riskier portfolios. 

A long time frame gives investors more years to face the fluctuations of the market and during their work life, investors are usually adding to their investment accounts and not taking money out.

If you have started investing late, and are near retirement, you are more exposed to the volatility of the market. This means that you opt for lower risk and volatility options like bonds and fixed return options. 

A higher-risk portfolio would ideally have a higher proportion of stocks and fewer (if any) bonds. As young investors grow older and need to reduce their risk profile, the investment in stocks should decline and investment in bonds rise.

One of the most important steps to take is to make saving automatic. Have your bank automatically transfer a portion of your paycheck into an account specifically for saving. This guarantees that you save constantly instead of making an active choice to set money aside.

This saving should stay in a low-risk option like a bank account and should remain in cash form.   This means that you have access to cash for emergencies whenever you need it. 

How to Build Up a Portfolio of Investments

The first step is to decide what percentage of your funds you want to place in riskier options like stocks and what percentage you want in safer assets like cash and bonds. This distribution will depend on your risk tolerance. Somebody young and working should invest in stocks entirely, while somebody near retirement age should have a larger allocation to bonds.

The primary purpose of investing is to grow your savings. Investors can achieve this growth through investments in stocks, bonds, and other less common options. Experts invest in commodities like oil, gold, and even crops and can earn huge gains.

In any investment form, you should make it your goal to have a diverse spread of investments.  In case you are just starting on your portfolio building journey, you have to make sure that you include options that include both stocks and bonds. Doing this will allow your portfolio to cover both high and low-risk investments.

For someone just starting to invest, take a look at mutual funds or ETFs (both are a collection of stocks, bonds, and other investment vehicles) instead of individual stocks. ETFs and mutual funds are safer options for building a diversified account.

Diversification (which means owning a set of different assets) is important because it reduces the risk of loss. Diversification means that there is a lower risk that your whole portfolio will lose value in a market decline. You will have to look for funds with solid track records and reasonable fees; plenty of popular press and dedicated research sites l will provide this information.

Depending on your financial strength and risk tolerance, you can consider investing in precious metals, commodities, and real estate, all of which are available for investment in the market. All these investments can be effective means to achieve portfolio diversification and manage risk.

A well-constructed portfolio should cover different types of assets (like stocks, bonds, etc.) that do not move in tandem. This reduces the volatility (and risk) of a portfolio without necessarily lowering its return (income) potential.

Save vs. Invest Checklist

The checklist below will help you understand if you need to save or are ready to invest:

1. Do you have a cash cushion that can cover three to six months of living expenses? If not, then start saving.
2. Do you have other short-term goals requiring quick access to cash (like travel plans)? If so, start saving.
3. Are you on track toward reaching your retirement goal by your desired age? If not, start investing.
4. Do you understand the risks involved in investing money for a long-term goal like retirement? You may not be able to access it until age 60  without taxes and a penalty. If so, you may want to start investing.
5. Do you feel comfortable with your current split of saving and investing every month? Where does it feel like you’re falling short?

Is It Better to Save Money or to Invest?

The answer to this depends on your risk tolerance, financial requirements, and when you need to access your money. Investing has the potential to generate much higher returns than savings accounts, but these higher returns come with risk, especially over shorter time frames.

If you are saving up for a short-term goal and will need to withdraw the funds in the near future, you’re probably better off parking the money in a savings account. If your goals are longer-term, you’ll generally find you can obtain more satisfactory results from investing.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post Stop saving, start investing: How to make more money from your money? appeared first on Smartchoice.pk.

What is a stock?

Stocks are the basic units of a company. If you own a stock, that means that you have a little part of the company. Being an owner of the stock of a company means that you are a part-owner of the company and, therefore, should be getting some part of the company’s profits and income.

Stocks have a specific value, which is usually Rs. 10, Rs. 100, Rs. 500, or even Rs. 1000 per share. This is known as the face value of the stock. This value is technically what the company should always have available.

Most stocks are issued at a price either above or below their face value. The stock is then traded in the stock market. People who are looking to earn from selling or buying the stock are called traders.

If the company is selling the stock for the first time, the issuance is called an Initial Public Offering or an IPO. It is called a stock issuance if it’s done it before.

Companies usually sell their stocks, which are also known as shares, to raise funds for the company. These funds help the company to run its business and buy machinery, plants, and other assets that would allow it to do business better. The money that it gets from selling stock can also be used for debt servicing, expansion, etc. The details of why the company is issuing stock are usually disclosed to some extent. They are specified in detail, particularly if the stock issuance is being done for the first time.

What is the stock market?

Stock markets are just that, marketplaces. People and companies that have bought or want to buy shares come to stock exchanges to sell and buy shares. Since there are many shares to buy and sell and many buyers and sellers, this entire process has become digitized, and most stock transfers are done electronically. Stock markets are also known as Stock Exchanges (since shares and money are exchanged)

The buyers for a specific share help to push its price up or down. For instance, if many people want to buy Google shares, the price of Google will increase, as the people selling Google shares will sell to a person that is paying the highest price. Stock markets only allow the buying and selling of shares that are listed on the exchange, for example, a stock listed only on the Karachi Stock Exchange (KSE) cannot be traded on the Islamabad Stock Exchange (ISE).  People buy and sell stocks through specialized stock traders which are usually known as Stockbrokers or dealers

Stock markets can be of two kinds, the primary market, where companies issue their shares in an initial public offering (IPO) to raise funds for their operations. A general exchange is one where trades of already issued shares are made.

How Does the Pakistani Stock Market Work?

Pakistan’s Stock Markets work like most other markets globally. The stock market operates like an auction house or a trading floor in which buyers can bid on shares and buy at prices that they find attractive. If the price is too high, they pull away from the deal, and if there isn’t a good deal coming, the price is lowered. The buying price is called the bid, and the ask price is the one at which the seller wants to sell. Where the bid and ask prices are the same, a successful trade occurs.

This makes stock markets pretty much like traditional markets. The more a share is in demand, the pricier it would become. Similarly, if a share is not selling at a specific price, its price would continue to fall. This is the basic rule of demand and supply that determines market operations and ideally sets the prices of shares.

The stock market is different from other markets in the sense that it moves through the demand and supply cycle and price determination process at a very rapid pace. Such rapid changes in fluctuations of stock prices have led to most stock markets implementing ticks. Ticks are designed to keep price changes within specific ranges. This means that the price of a share cannot fall or rise beyond a specific minimum range.

Ticks serve to act as safety nets to protect investors from price crashes. Crashes occur when people start selling in a panic to limit their losses. This selling push begins to snowball, and a lot of people end up losing their money and investments.

How Does the Stock Market Affect An Average Investor?

The impact of the stock market performance and its rise and fall affects you, even if you aren’t an investor in shares and bonds. In rising stock markets, share prices tend to increase, and in falling markets, companies may need to cut jobs and try to reduce their overheads. This means fewer jobs and lower pay rates.

Falling stock prices and bond prices mean that pension funds are making lesser profits, and people lose money on their pension funds. The same applies to other saving funds and businesses as well. When stocks fall, there is less wealth to spread and spend.

Companies end up not getting enough money to spend on expansions and their operations. Retired people do not get as much pension from their funds as before, and overall, people end up having less to spend. This reduces income for smaller businesses and companies, and overall economic growth is affected. This reduces the spending for other consumer groups as well, and the slowdown of economic activity continues

A strong performing stock market is taken to symbolize economic well-being, and a dipped market over a long period causes an economic slowdown and sends out poor signals to investors.

Is Investing in the Stock Market Risky?

Placing your money anywhere, be it the stock market, the bank, under your mattress, or with your parents, is risky. There are different types and levels of risks involved, for instance, you or your parents can get robbed.

When you invest money in the stock market, the profit you will make is not fixed. The earnings will depend on the selling price of your investments on the day and hour in which you will sell them.

This means that you face the risk of the price being lower than what you bought and losing some of your hard-earned money. This means that as an investor in the stock market, you must follow the prices of your investments and make sure that they are progressing upwards. If they are falling steadily and there is negative news that seems to be continuing, you should think about cutting your losses and pulling out your money.

Another risk that affects the stocks and their investors directly is inflation. Rising prices and lowering demands means that the economy is losing its value as the actual buying power of the currency falls.

This makes investments lose their value as their actual buying power reduces. Investors in fixed return options like mutual funds end up getting less than their money’s worth. The best way to avoid risk is to follow the markets, and make sure to set your benchmark ranges in which you want to remove your investments so that you don’t lose too much of your investment.

How Can I Make Money in the Stock Market?

People earn money on the stock market in two ways. One way is through price appreciation.

You buy a stock for Rs. 50, and it goes on to rise to Rs. 75. If you purchased 100 shares at Rs. 50, this makes your investment worth Rs. 5,000. When you sell these 100 shares for Rs. 75, you earn Rs. 7,500. This means that you earned Rs. 2,500 from this transaction.

The example above gives you a profit rate of 50%. This is much above what any other means of investment would provide you. Even if the example is a little extreme in terms of the gains made, many investors do make such profits through a serious focus on market trends and share prices. This method requires continued monitoring of the stock market and related developments to follow price trends.

The second way to earn money is through dividend earnings. In this method, you invest money in shares, which you know will pay good returns to their shareholders. Dividends are a part of a company’s income that it pays to its shareholders.

This method involves identifying and investing in companies that have records of paying good dividends and then accumulating a portfolio of such shares. A portfolio is a group of shares that you own. It is commonly called an investment portfolio.

 This method of earning from the stock market is a long-term method and usually involves less trading. This is more of a hold and earn approach and is generally adopted for the long term. When a publicly listed company pays dividends to its shareholders, that adds value (and income) for the shareholder.

When stocks increase in price and are trading at more than what the shareholder paid, that’s a positive outcome.

How can I make money in the stock market?

As a beginner to the stock market, it is always advisable to remember that the markets will always trend upwards. However, this does not at all mean that the shares in the market will also move upwards; many will fall and die off. The stock markets are notorious for their unpredictability and volatility. Seasoned traders and experts also lose on their investments despite all their technical skills.

So for a new investor, it is best if you go for index funds. Index funds are funds that select some stocks from a specific stock market, and they follow these stocks. Some index funds issue dividends as well. The advantage of such index funds is that they will follow the stock market in its rise upwards and help you to increase your investments as well. But this strategy is going to be effective in the long run.

Avoid the dream of making a few hundred thousand in a few months. Invest in middle-market stocks if you can otherwise opt for funds and shares that are known for paying out good dividends.  This means that you look for companies with good profitability and sound leadership.

Don’t go for market darlings and overhyped companies. Follow the price-to-earnings ratio (P/E). P/E is a formula that gives the value of a stock. It has its shortcomings but would give you an idea of a share’s worth. You can also follow the growth in earnings of a company to gauge its attractiveness.

How do I get started investing?

The younger you are when you start, the more you will make from your investments.  There are some necessary steps to take, which are more like habits to form and stick to. Set an amount that you can set aside for investment for a month and stick to it.

Figure what your goals are and what you want to do with your investment income. Travel the world? (short term goal), set up a college fund for your kids? (Long term goal), do you want to buy a house? (medium to long-term goal). Having your financial priorities sorted will help you identify what sort of returns and time frame you have for your investments.

Figure out what works for you.  Do you want to track share prices and follow market trends rigorously? Or do you want to be a passive investor and get returns over the long run, without moving your investments around too much?

If the first option suits you, then you want to be an active investor.  These are investors that do active trading and ride trending share prices and try to get the maximum return out of the stock market fluctuations.

If the second option suits you, then you are set to become a passive investor. In such investments, the majority of holdings are in index funds and mutual funds. These funds help to mitigate the risks and cut down the stock market volatility.

The key to both strategies is to avoid placing your investments in limited sectors of the economy and spread them into diverse sectors to ensure that at a time, any one of your investments would be doing well.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post How Pakistan Stock Market Works? Understand the Basics appeared first on Smartchoice.pk.

More experienced investors invest in commodities like foreign currency, gold, and crypto. All investment options can give good gains but have risks associated with the investment. To avoid risks in any form of investment, you should make it your goal to have a diverse spread of investments.

In case you are just starting on your portfolio building journey, you have to make sure that you pick options that include both low risk (fixed deposit certificates) and high risk (shares). Doing this will allow your portfolio to cover both high and low-risk investments.

Risks in Investment

However, not everyone is skilled enough to invest in any of these options without incurring some losses. Many people just do not have the time or strong enough nerves to invest in any asset directly.

If you are such a person or have already faced losses in your investment and don’t want to risk-reducing your savings further, you can opt for the low-risk options available. These fund options will help reduce your risk and offer a comparatively stable investment growth over time. The two most common investment options in funds are mutual funds and exchange-traded funds (ETFs). We will discuss ETFs in detail.

What is an ETF?

An Exchange Traded Fund (ETF) is an investment product offered by Asset Management Companies (AMC). It consists of a mix of securities that follows an index (which is called its Benchmark Index). ETFs are available to investors on Stock Exchanges through stockbrokers (TREC Holders). They can be traded like stocks with real time pricing during trading hours on an Exchange. Therefore, they share the characteristics of both open-ended mutual funds and stocks.

Internationally, the demand for ETFs is growing because of the convenience they offer and the lack of financial acumen (and time) on part of the investors to make successful stock picks. Similarly, retail investors are also wary of paying hefty fees to financial advisors and traditional mutual funds which leads them to invest in ETFs.

If you want to invest in equity or fixed income securities and find it challenging to pick sectors, identify securities, conduct research, track dividends/coupons, and capital gains, then the ETF does it all for you. An ETF aims to track its specified benchmark index while providing real time price of the fund throughout the trading time.

An ETF can have tens of stocks across various industries or it could be isolated to one particular industry. For example, a banking-focused ETF would contain various stocks from the banking industry. An ETF can also track an existing index like the KSE – 30 indexes etc.

How to Invest in an ETF?

Investors can buy and sell ETFs in the stock market through a stockbroker of the Stock Exchange. A new investor will need to open trading (brokerage) account with any of the PSX TREC Holders or brokerage firms.

An existing investor in the stock market can buy and sell ETF units through their existing trading (brokerage) account with any of the PSX TREC Holders.

ETFs can be bought with a very small amount. In the odd lot market, even one ETF unit can be bought or sold, whereas in the regular market, the ETFs can be traded in a lot size of 500 units.

ETFs Explained

An exchange-traded fund (ETF) is a mutual fund that invests in securities linked to a particular index. Investing in an ETF offers exposure to a group of stocks. Instead of dealing with individual stocks, you can get multiple shares through a single ETF investment.

The stocks in an ETF are selected based on its investment criteria. ETFs can have different investments like stocks, commodities, bonds, or a mix of these types. Again, these are pre-specified, and you won’t be shocked, provided you read their investment documents thoroughly.

ETFs differ from mutual funds because they can get registered on stock markets and are bought and sold there like ordinary stock. ETFs can be traded through both online brokers and the usual broker-dealers.

Assets Under Management:

For an ETF or a mutual fund, assets under management (AUM) are the current trading prices of all the investments it handles on behalf of investors. It is a factor like the capitalization of a company. AUM shows the fund’s size, and generally, higher AUMs mean higher trading volumes and imply better liquidity. The AUM is used to calculate management fees and other charges.

Benefits of Investing in ETFs

ETFs have lower operating costs than traditional open-ended funds, and they offer flexible trading (unlike mutual funds) and have greater transparency as they are mandated to disclose all their holdings.

An ETF is a simple and efficient way to invest in the stock market without going into the hassle of investing and researching individual stocks. By investing in an ETF, your investment is instantly diversified across all the underlying securities in the basket.

ETFs provide an easy way to diversify across different stocks, commodities, bonds, or other securities in the markets where many ETFs across multiple asset classes exist.

ETFs can yield two types of returns:

 Capital Gains:
Investors can trade ETFs like a stock by buying them at a low price and selling it at a high price to realize the profit/gain.

Dividends:

The fund manager receives dividends from the securities that comprise the ETF basket. The dividends may be distributed to ETF unit holders after the deduction of management fees etc. The dividend distribution policy of the ETFs is described in their Prospectus or Offering Document.

Individual stocks and ETFs trade alongside each other on the Stock Exchange. But there are two major differences:

• ETFs are generally much more diversified as they are comprised of a basket of stocks.
• Most ETFs track specific indices, while stocks do not.

Better is a relative term; investing in ETFs is generally better from the diversification perspective.

Why it is Smart to Invest in an ETF

ETFs are generally passive instruments formed to track an index. ETFs provide real-time pricing. This means that investors can see their prices change throughout the trading day like those of shares. ETFs are bought and sold at market price through a brokerage account and offer intraday trading liquidity. The price of ETF can be above (premium) or below (discount) the respective NAV. Investors also have the benefit of having Indicative NAV available at specified times during the trading hours to help them make trading decisions.

Comparatively, a mutual fund isn’t priced until the trading day is over. When encashing, you buy the mutual fund units directly from the mutual fund at its respective Net Asset Value (NAV). Investment in mutual funds can be subject to front-end or back-end load/sales charges, while investors in ETFs only have to bear brokerage charges.

Being a passive investment option, ETFs are great for long-term investments. This is subject to your investment objectives, considering factors like risk and return goals. Most ETFs track an underlying index, and as the index updates, so should the ETF.

Investing in ETFs also saves the investor time and money. Investors do not have to do the research and make security-specific investment decisions themselves. The costs for the ETF are also generally lower than those of any mutual fund units purchased.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post How to Start with ETF Investment in Pakistan appeared first on Smartchoice.pk.

Mutual Funds are a good option for new investors because of the following advantages:

• Mutual funds are designed to make investing low-cost and straightforward. You can begin investing with as little as Rs. 5,000.
• Investors are not burdened with the decision and research involved in selecting the stocks and bonds to be purchased in the funds or the daily management and safekeeping of the chosen investments.

What are Mutual Funds

A mutual fund is a selection of stocks, bonds, money market instruments, or any similar assets bought by the investors’ money. A mutual fund can be different combinations of stocks, stocks & bonds, or any other variety of securities combined under the mutual fund as a single investment pool.

This combination is specified in the mandate of the mutual fund, and they cannot deviate from the set mandate.

Mutual fund investments are managed by Money or Fund Managers, who make the investment decisions and manage the funds to ensure that capital gains are maximized for investors.

Mutual funds are run by Asset Management Companies (AMCs), usually public limited companies. A Trust (and Trust Deed) is established by the Asset Management Company under which a mutual fund is launched. The Trustee acts as the custodian of the fund’s assets while the Fund Manager makes the investment and related operational decisions regarding the fund. Asset Management Companies can launch and manage multiple mutual funds with different or overlapping, or entirely distinct mandates.

Why Invest in Mutual Funds:

Mutual funds offer an optimized investment option to yield competitive returns to meet long-term or short-term financial goals. The investor can invest with the long-term financial goals of arranging funds for their child’s higher education or retirement savings or child’s marriage etc. An investor can also have short-term financial goals like saving for a vacation or buying a new car or a new home.

Before investing in mutual funds, all investors need to know their investment objectives. This will help determine the risk and return profile, investment timeline, and target goals. Understanding these questions will allow an investor to make more effective investment decisions.

By investing in mutual funds, the investor gets the advantage of exposure to different securities under a single investment package. They allow the investor to develop a diversified portfolio of assets while enjoying financial management by professionals.

Another key advantage of investing in mutual funds is that the investor can avail tax credit.

Types of Mutual Funds:
There are two primary forms of mutual funds. These are

1. Closed-Ended Mutual Fund:  These funds are traded on the Secondary Market after their launch through an Initial Public Offering.
2. Open-Ended Mutual Funds: These funds are issued in the form of Units to investors, which can be redeemed (sold back) based on their Net Asset Value (NAV) at any time. These funds can be purchased and redeemed through the Fund Management Company, which daily announces their offer and redemption prices. These funds can also be listed on the Stock Market.

Categories of Mutual Funds:

Mutual Funds are of different categories. These categories are based on where the fund invests, its risk profile, and the investment strategy. In Pakistan, the following mutual fund categories are approved by the SECP.

1.     Money Market Fund

These funds invest in short-term fixed-income securities like government bonds and certificates of deposits, and commercial paper. Their aim is to maintain high liquidity by investing in low-risk instruments that are generally safer.

2.     Income Fund

These funds generally invest in market securities, term finance certificates/sukuks, commercial paper, and spread transactions. They aim to generate a regular stream of income for their unitholders.

An income fund is generally seen as less risky compared to an equity fund as it is not likely to be affected by market volatility. The probability of capital appreciation is also limited.

3.     Equity Fund

These funds invest in stocks and grow faster than money market or fixed-income funds. This means they carry a higher risk as they are exposed to market volatility.  An equity fund aims to provide exposure to listed equity securities and capital appreciation over the medium to long­ term.

4.     Balanced Fund

A balanced fund offers exposure to both growth and regular income by investing in equities and fixed income securities. Regulations require that balanced funds keep 30% to 70% of their net investments in listed equity securities.

The other remaining can be invested in other certified investments. Balanced funds are exposed to both risks of fluctuations in equity markets and interest rate variations. Balanced funds can be risky like equity funds but are less risky than equity funds based on asset allocation.

5.     Asset Allocation Fund

These funds can invest in any type of securities subject to conditions to diversify their assets across different types of securities and investment styles as written in their offering document. Asset allocation funds are generally considered high-risk funds due to their potential to be fully invested in equities at any point in time.

6.     Capital Protected Fund

This type of fund makes investments in such a way that the original amount of investment is safe to ensure positive investment returns. This fund keeps a significant part of its net amount in a bank in the form of a term deposit. At the same time, the remaining is invested in accordance with the authorized investments stated in the offering document. Unlike other funds, the capital-protected fund has a fixed maturity period specified under the investment period or tenure.

7.     Index Tracker Fund

This type of fund is designed to carry out the activities of a particular index and show the probable tracking in the offering document. Investment of at least 85% of net assets is required in the securities that constitute the selected index or subset.

8.     Fund of Funds

This fund holds other mutual funds in its portfolio rather than investing directly in any security. However, each fund of funds will have its own category, for instance, equity fund of funds, income fund of funds, etc.

An investor can invest in the fund that suits his investment strategy, the investment time horizon, how much risk he can tolerate, his cash flow requirements, or any other investment objectives/ requirements.

The Mutual Funds Association of Pakistan has a very helpful website http://www.mufap.com/ with comprehensive details and comparisons of fund performance.

Key Terms:

Some key terms used in mutual funds investment that you should know are as follows:

Net Asset Value (NAV): 

Net Asset Value is the market value of a mutual fund’s assets after deducting its expenses and liabilities on a particular day. The per unit NAV is the Net Asset Value of the funds divided by the number of units/ certificates outstanding on the Valuation Date. The NAV shows the performance of a mutual fund.

NAV = (Current Market Value of all Assets – Expenses – Liabilities) / (Total Number of Units Outstanding)

Expense Ratio: 

Expense Ratio is the fund’s annual fund operating expenses, expressed as a percentage of its average net assets. An Expense Ratio of 1% p.a. means that 1% of the fund’s total assets will be used to cover expenses each year. Expense Ratios are essential to consider when choosing a category of mutual fund as they can significantly affect returns.

Redemption: 

The units of open-end mutual funds can be partially or fully redeemed at any time from the Asset Management Company that manages the funds.

Fund Manager Report

This is a monthly report produced by an asset management company in which information on the composition and performance of the mutual funds is presented.

How to Invest in Mutual Funds:
The documents needed for opening a mutual fund account are as follows:

1. CNIC Copy
2. Application/ Account Opening Form/ Purchase of Units Form
3. Zakat Affidavit (Optional)
4. KYC Form/ FATCA Form
5. Cheque/ Pay Order/ Demand Draft (payable to the respective Trustee)

Fees & Charges:

You must keep in mind that there are charges involved with investing in mutual funds. Some of these charges are as follows:

1. One-time Fee: This fee is paid for investment/ divestment in an open-end fund. Details of these fees are disclosed in the offering documents.
2. Front-end Load: This is charged on the purchase of units of the fund.
3. Back–end Load: This is charged when an investor redeems his investment in the mutual fund.
4. Contingent or Deferred Sales Load: This is charged only when there is no front-end load. This load ischarged on redemption of investment. However, funds can reduce it progressively if an investor holds an investment for a more extended period.
5. Management Fee: This is the fee charged by the AMC for the management of a fund.
6. Trustee Fee: This is the fee charged by the Trustee to provide trusteeship and other services for the fund’s assets.

Benefits Of Investing In Mutual Funds:

Asset management companies manage mutual funds. They evaluate investment opportunities by researching, selecting, and monitoring the performance of the securities purchased by the fund. These tasks are done by qualified financial professionals who make calculated investment decisions on your behalf.

Diversification

A mutual fund can help reduce investment risk if a company or sector fails by spreading its investments over other securities and investment sectors.

Affordability

Mutual funds are ideal for investors without a lot of money to invest. They have relatively low Rupee amounts for initial purchases and subsequent monthly purchases. For example, you can add funds at set amounts of, say, PKR 1,000 to 5,000 per month or other intervals. This is not difficult to set aside for savings or investment purposes.

Liquidity

Mutual fund unit holders can easily redeem their units into cash on any working day. They will receive the applicable value (NAV) of their investment within six working days. Investors do not need to look or wait for a buyer. The fund buys back (redeems) the units at the current net asset value (NAV).

Well regulated

The SECP continuously monitors all mutual funds through reports that the mutual funds are required to file with the SECP regularly.

Transparency

a mutual fund’s performance is reviewed by different publications, rating agencies, and the SECP. This makes it convenient for investors to compare the performances of different funds. Unit holders also receive regular updates, like daily NAVs, fund’s holdings, and the fund manager’s monthly strategy report.

Tax benefits

Investment in mutual fund schemes entitles the investor to avail tax credit that enhances the overall return on their savings

Things to Know Before Investing In A Mutual Fund

Before selecting an appropriate mutual fund for your savings, you must identify your investment objectives. Your financial goals are determined by your income, expenses, financial independence, age, lifestyle, family stage, etc.

Here are some questions that you should ask yourself and likely answers that will help you select an appropriate mutual fund.

• Why am I investing?

I need some side income, need to save up to buy a home, fund a wedding, save for higher education, or a combination of all these needs.

• What is my risk tolerance?

I am unwilling to take any risk, or I accept that to earn long-term gains, I may book short-term losses.

• What are my cash flow requirements?

I want to multiply my assets for the future and do not need periodic cash flow; I need a regular cash flow, or I need X amount to meet a need in X years.

• What is my time horizon?
• I need some money in under a year (short term), or one to five years (medium-term), or five years or more (long time)

If you answer these questions honestly, you will have clarity of what to expect from your investment.

This will help you determine an appropriate mutual fund investment strategy.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post All you need to know about Investing In Pakistani Mutual Funds appeared first on Smartchoice.pk.

Investing in the 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 dividends 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 hope 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 of 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 that trade shares at least ten times a month an active trader. 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 in 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 a number of 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 on its website. Remember that the registration of all the brokerage houses/brokers and agents are valid for a period of 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 behaviours. A comprehensive trading platform that is easy to use and understand is essential to place orders on the stock exchange.

Research

Availability of research into industries, sectors and market behavior can be helpful in making 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; if you are self-employed, provide a bank statement. 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.
• After the verification and account processing is done, you will be granted access to trade with stock exchange issued stocks.

Once the account opening formality is completed you will not need to visit your brokerage firm as the majority of dealings and trades will be handled online on the platform.

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. These events and news could be directly related to the company or could impact it indirectly by being connected to the industry that the company works in.

This can be confusing for investors as while the company’s financials and valuation are the same, the market price is affected by different news or events. An example would be shares prices falling after a poor World Cup performance.  Unrelated and related events can influence prices for the short term but this is not relevant for passive investing we discussed above.

In spite of the challenges, investing in shares has some benefits to offer:

1.    Capital Gain

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

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 shares is a liquid investment. Most shares can be easily bought and sold on any working day on the stock market

How to Trade in 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, 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.

The more information you have, the more reliable your buying decision is going to be. The process of analyzing a company’s financials as well as non-financial components is known as intrinsic analysis.

Since such analysis involves multiple factors, many investors make mistakes in their stock valuation.

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.

You should have a list of sectors, stocks, and performance history to know which stock performance and valuation fits into your investment preference or risk appetite. Ideally, you should also know which stock should be bought at which price range and sold off at what level.

Some basic rules to follow before you start investing in a new stock are:

1. 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?
2. How long has the company been in business? Does it have a good stock performance record?
3. Does it have sound Corporate Governance policies?

The stock market is all about news and perceptions. It is fueled and runs on the information. But should you invest in shares based on the news? A hot tip from a dealer or your broker should be taken with some healthy scepticism.

A golden rule is to buy on the rumour and sell on the news. Institutional investors would already be aware of the rumours, and jumping onto the buying bandwagon will only reduce your margins if there are any left. For instance, if market rumours 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. Once the rumour is proven to be false, everyone who bought during the rise would stand to lose money. However, if you had already purchased before the rumours and sold during the rise, then you stand to gain from your investment.

Buying based on rumours and news means that the stock price has already risen to accommodate the rumour prices and would be priced higher than its actual prices. 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.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post All you need to know about investing in Pakistan’s Share Market appeared first on Smartchoice.pk.

What Kind of Investor Are You?

Before you decide to invest money someplace, you need to know what type of investor you are. This means that you figure out how much risk you’re willing to take. This is because most investment choices have some risk. Risk can be seen as the chance of losing your original money, which is also known as your capital. Some people are not willing to have their capital at risk at all. This is known as being risk averse. Others are very comfortable with risking their money if there is a prospect that they can gain more in time. Most of us have risk preferences that fall in some range between these two extremes.

Most investment choices are categorized according to their risk level. For example, many people see Defence and Special Saving Certificates as safe investment avenues in Pakistan. Similarly, the stock market is riskier and more prone to manipulation.

As a new investor, it is up to you to decide what risk levels you are more comfortable with. standard options through which you can invest are as follows:

1. Investing through your employer

One of the safest options for investment can be to simply ask your employer to deduct an extra percentage of your salary into the retirement plan offered by your employer. This is an effortless and safe way of investing money with minimal hassle. Once you get used to this extra deduction, you won’t even feel its absence.

Most work-based retirement plans deduct your contribution before taxes, making it even more convenient. The charm is that you can continue to increase this deduction as your salary increases through promotions and annual raises.

2. Investing in stocks

A stock is an ownership unit in a business that gives the person ownership rights. Stocks are also called shares. A person holding stock in a company is the shareholder of that company. Most companies issue stocks to generate money for their businesses. Investors can buy and sell shares on stock exchanges or markets to earn profit from price fluctuation or dividends.

· What is a Stock Exchange?

A Stock Exchange is a specific market where you can buy or sell stocks. Units of stock are called “shares.” You can buy shares from companies, use them for investment and sell them again, in turn making a profit. A Stock Exchange allows complete anonymity of the person on the other end of the trade.

· How does it work?

Stock Exchanges work the same way globally. A business raises money (known as capital) by issuing shares. The people who buy these shares usually plan to sell them someday. This selling (and buying) will be done through the Stock Exchange. Others buy shares to earn dividends from the shares.

The Federal Board of Revenue claims that there are roughly 300,000 registered stock traders under the Sales Tax Act. in comparison, the National Clearing Company of Pakistan (NCCPL) stated in April 2021 that about 250,000 are listed as earning from their trading activities.

· What are Dividends?

The company issues dividends to its shareholders. It is a part of the company’s profits given to the shareholders as payments. Most companies do not guarantee dividends, and they can vary year to year.

· Types of Investments in the Stock Market

Two types of investments can be made on any Pakistani Stock Exchange:

i. Short Term Investment:

In short-term investment, the investors buy and sell shares frequently based on the market price. They do so by their skill of analyzing the pricing projections of stock prices. The principle is to buy at low prices and sell as soon as the price rises.

ii. Long Term Investment:

In long-term investments, the investors keep their shares for an extended period. Ideally, they earn dividends and hold the share until the prices reach their peak to maximize profit.

Things to Remember when investing in Shares

When we buy a product, we usually have a list or know what we want to buy, where to go, and which shops to browse. The same applies to investing in the stock market.

You have to do a lot of research into sectors, companies, and their performance history to know which stock performance and valuation fits into your investment preference or risk appetite.

The main factors that influence the pricing for stocks are the financial data related to the company, the state of the industry in which the company is working, the interest rates offered by banks, and investor sentiments.

Financial information is available in financial statements issued by the company every quarter. They give investors insight into the financial situation of the company. However, understanding financial statements can be tough for even experienced investors.

Investing in stocks can be rewarding, but not everyone is fortunate enough to pick performing stocks and earn good returns. There are other options for people who find the stock market too complicated for their comfort.

3. Mutual Funds

Mutual Funds are a form of stock investment that is less risky and more convenient. A mutual fund collects money from multiple investors to invest in securities like stocks, bonds, money market instruments, and other assets. The investment options for a mutual fund are predefined and available for everyone.

Mutual funds offer an edge to investors as they offer a diversified portfolio, which professionals manage for a specific price. This price is known as the management fee.

Assets under management (AUM) is the market value of all investments that the fund handles on behalf of investors. AUM shows the fund’s size, and generally, higher AUMs mean higher trading volumes and imply better liquidity.

Mutual funds are considered more advanced and less risky than stocks as they place the investors’ capital in a combination of shares, bonds, and even real estate. They are less risky because of this.

How It works

As an investor, you buy the mutual fund in units and earn a profit or grow your investment, depending on the type of mutual fund you invest in. You can shop around for a fund that you find suitable.

You can also invest in multiple funds covering foreign securities or industries. Mutual funds give returns in dividends, coupons, or even profits, depending on the type of assets they invest in.

The mix of investment choices is known as asset allocation. For an individual, asset allocation involves splitting the investment funds among various assets, like stocks, bonds, and cash.

4. An Exchange-Traded Fund (ETF)

An exchange-traded fund (ETF) is a form of mutual fund that invests in a group of securities linked to an index. The stocks are selected based on the ETFs investment criteria.

ETFs can have different investments like stocks, commodities, bonds, or a mix of these types. ETFs are separate from mutual funds as they are listed on exchanges and can be traded there like ordinary shares.

Investing in an ETF gives exposure to a group of stocks. Instead of dealing with individual stocks, you can get multiple shares through a single ETF investment.

For an ETF, assets under management (AUM) are the market value of all investments that it handles on behalf of investors. AUM shows the fund’s size, and generally, higher AUMs mean higher trading volumes and imply better liquidity.

The process of settling on a mix of assets to invest in is a very personal one and usually depends on your investment goals and your age when you start investing. Opting for a mutual fund or an ETF simplifies the decision-making process.

Investment Strategy

An investment strategy is used to select what securities you will invest in. These strategies are made according to your risk appetite and saving preferences. This means the amount of risk you are willing to take on your money when you want your capital back and an estimate of how much you want to increase it.

In theory, your investment strategy determines which securities and investment avenues you will place your funds. Many younger investors, who have the funds and can take risks, invest in riskier investments since they can afford to gamble with their funds, as they have less responsibility and can take the shock of losing (some of) their capital.

Ultimately, you have to assess yourself to see why you are investing. Are you looking to get a secondary source of income through investing? Or do you want to build another house for rental income? Do you want to save up money for your children’s future? The reasons can be diverse.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post Invest Money in Pakistan: An Ultimate Beginners Guide appeared first on Smartchoice.pk.

This is particularly true with the growing inflation that makes money fly out of our wallets. Inflation rose to 11.5 percent in November 2021, compared to about 9 percent in October.

This state of being broke at the end of the month is not the norm, and it can be avoided by having some discipline in your spending patterns. To do this, sit down and acknowledge that you have a problem. Once you do this, you are ready to build your budget around your income.

Budgeting is the basis of every savings plan. Whether you earn six figures or live paycheck to paycheck, you are likely wasting money somewhere you shouldn’t be if you don’t budget your income. Unlike the common misconception of pinching expenses and not doing anything fun, budgeting is just a process of keeping track of your income and going.

You can download many of the free budgeting apps available online for free to plan your budgeting campaign.
Words of caution, getting your spending habits on track and following the budget pattern can take time. You will have to follow it and keep following it regardless of failing initially.

Ignore the fails and keep on following your plans to achieve financial success. There is a step-wise process that you can follow to financial independence.

Steps to Financial Freedom in Pakistan

1. Set quantifiable financial goals

These are not the ‘mein bara aadmi banoon ga’ type of goals we all have as kids. This step is about consciously setting aside a fixed amount of money and giving up on some of your unnecessary spending to achieve it.

The amount should be realistic and possible to do. For instance, if you earn PKR 70,000 per month, saving PKR 20,000 may be difficult now if you are running a 4-member household with no other income.

Your goal should be achievable and realistic. Maybe try to save 10,000 but be prepared that a maximum of 5,000 may be used up in emergencies and month end money crunches.

The more detailed this goal is, the more possible it will be to work (and save) towards it. Break your goal into numbers to see how much you need to get there.

2. Split up your income into different bank accounts

Now that you have set a goal to save up a fixed amount every month, you should invest in opening two different accounts.
You already have a salary account to pay your bills, utilities and draw money. If you don’t get paid through bank transfers, open an account ASAP to deposit your salary as soon as you get it.

Having different buckets, or in this case, accounts, to keep your cash in will help to follow a financial plan.

You need to have separate accounts for the following purposes:

1. An account for your daily and fixed monthly expenses. This can be your salary account if you have one. Ideally, this account should have good online banking services and an efficient ATM network. It should also allow for automated monthly transfers.

2. An account for your savings. This should ideally be one WITHOUT any ATM or online banking support for withdrawals. You can have your savings amount directly debited via automatic transfer from your salary account.

The next account may seem to be a little extra, but it is for those who have multiple goals to save up for and don’t know how to prioritize or want to have different heads to organize their savings:

3. An account for your savings. Ideally, this should also be without any ATM or online banking support for withdrawals. You should be able to automate the savings amount transfer from your salary account. If you want to save up for a car or your kids’ higher education, or a house, have separate accounts for these heads setup.

3. Budget your spending to less than 50% on necessities

Now that you are clear about your goals and what you want to do with what you save, it’s time to deal with the practical stuff. If your take-home salary is Rs. 50,000, try to restrict your spending to PKR 25,000 on necessities.

A well-made financial plan can help you keep track of your spending habits and help you identify where your cash is going. Documenting all spending heads can expose areas where you are spending more than you should. Maybe you spend more on groceries because you go somewhere that charges more. A budgeting exercise would help you identify where you free up additional cash.

Now necessities are the groceries, utilities and rent that you pay. If your take home pay is Rs. 50,000, living in a rented place of PKR. 25,000 doesn’t make sense unless you share rent with others and save on commuting expenses.

Similarly, lunching out regularly or fancy coffees from expensive cafes do not make economic sense. If you have children, their school fees and van expenses are necessities. Outings to Sindbad and fancy tablets do not count as necessities no matter how much social media tells you otherwise.

Keeping to this 50% necessities rule means 50% of your earnings on savings and non-essentials.

4. Limit non-essentials to 20% of your income

Keep 30% of your income for savings and investments. At the same time, the balance of 20% should be used for hobbies, non-essentials like clothes, shopping, and entertainment.

The challenge here would be restricting yourself to stay within the 20% amount you get each month. This amount can be spent on high end clothes, tech gadgets or saved up for a vacation abroad, and it is entirely up to you. All you must focus on is to stay within the budget of PKR 10,000 (20% of Rs. 50,000).

Now, supposing you want to travel to Dubai, you will need to save at least Rs. 100,000 for your trip. This means that you must put aside some money from your 10,000 a month to save up for this holiday.

5. Save the remaining 30% by investing in high return accounts and investment options

Those who continued to get a paycheck during the lockdown in 2020 and 2021 are extremely lucky. Those that were laid off and had to rely on their savings would know just how important it is to have a sizable amount saved up for emergencies.

Ideally, this 30% of 50,000 (PKR 15,000) should be saved up in a high return savings account or other investment options like mutual funds, stocks or insurance policies. All options should be such that withdrawal can be possible at a week’s notice. Deposit interest rates in 2020 were 7.47%. The same deposit will earn you over 11% if placed in Defense Savings Certificates as of December 2021.

The charm of this is that you can diversify your savings into multiple heads. A fixed deposit for emergencies, a savings plan for children’s education or marriage, your marriage, and another long-term plan for retirement or health emergencies like disability.

• The emergency fund

The emergency fund can be used to save up money to get enough to make a down payment on an insurance policy, car, or even a home. This is also your backup funds in case of job loss, or medical emergency, or any other unexpected sudden expense like a microwave burnout or UPS battery replacement.

A basic rule to follow is to have 6 months’ salary or living expenses always saved up in this account. Anything over that can be placed in short-term investments. If you are in a stable and well-paying job that will give you a severance package if they fire you, keep up to 3 months’ salary in this account and invest the rest.

• Insurance or savings plan

If you get medical coverage from your employer, count yourself lucky. If you don’t get coverage from your employer, you need to invest in good medical insurance to cover medical consultations, investigations, and procedures.

Getting insurance is particularly important if you have dependents like your parents or children. Take a policy that offers payouts to dependents on your death or yourself in case of a disability or health issue that stops you from working.

Deciding on an insurance policy will require research into mixing and matching policies. You can visit our insurance guides or book an appointment for our insurance advisors to guide you on your insurance plan.

• Investments

Investing in higher return plans for long-term and retirement goals is a smart financial decision to make. You can opt for stocks, property, unit trusts and savings certificates.

Starting this early and saving up a little every month is key to keeping your investment growing. Compounding will do the rest for you.

Final Advice

According to the break-up detailed above, you can manage your money well by following the 50-20-30 rule. The rule is a standard for savings globally and should stand by you well.

In the case of dual-income households, the rule should apply to both incomes, or break up should focus on more savings and less spending on luxuries. Having more income will mean that you can save up more and have an effective savings plan lined up for your future wellbeing.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post Managing Income in Pakistan: A Guide to Budgeting Money and Expenses appeared first on Smartchoice.pk.