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.

Read also: How to Know If an Investment Scheme is a Scam?

Investing in Fixed Deposit

Fixed deposits are believed to be the safest form of investment and give you guaranteed results after the specified time duration. It will not only develop your habit to save but will also give you higher interest rates as compared to normal saving accounts. Another benefit of a fixed deposit is that it can serve you as a rescuer in your tough times or when you need a big amount of cash for an uncertain situation. If you are a salaried person, you must invest in a fixed deposit and ensure liquidity for any painful situation or hard times in your life.

Prize Bonds

Prize bonds are the easiest and a hassle-free way to invest with a limited amount in your hands. In this case, you are not only risk-free, the bonds guaranteed by the government and being an owner of the bond you can claim your money back whenever you want to.

The prize bonds in Pakistan come with various values starting from PKR 100 up to PKR 40,000. With this variation, you are not bound to invest a large amount or any specific amount of money in the market. You can start with a very small amount as well.

You can buy these bonds from the State Bank of Pakistan or any designated branch of a commercial bank operating in Pakistan. Your bond will have a specific serial number based on which the draws will be held every three months and if your number wins the draw you will be rich overnight. If not, your money is secure with the government, better luck next time.

Read also: How to Prepare Yourself Against Uncertainties in Life?

Mutual Funds

If you are not much interested in doing research and deal with the ups and downs of a business, a mutual fund is the best idea. You can keep your attention to whatever you are doing in your life and leave the hassle of business and market strategies to the expert who will be managing your funds.

Mutual funds are a pool of money where your assets are managed by the professional aided finance management companies. This is a professionally run business with the saving collected from the general public like you and invests that amount in a different business like real estate and stock etc. You will get the profit on your invested money after a specific time. If you are willing to invest your money is something but the savings are lower than what is required, you can invest in a mutual fund and make you money from it. In mutual funds, the risk is shared and it also offers a tax rebate in your investment.

Mutual funds are of many different types including; open-end, closed-end, low-risk, high-risk, equity or fixed income funds. It depends on you which of these you are willing to invest your amount in.

Become a Silent Business Partner

Do you know active businessmen in your circle that need some capital to expand? Investing your saved amount in that business will make you an angel investor for the business and that capital will help the business grow, giving you some extra profit in the invested amount.

Rather than thinking about it as a loan to the business owner, become his business partner. Let him manage everything that way he was doing in the past but the profit will be shared with you for any further deal made in the past. Being a silent partner to that business you will need to put efforts but just keep a check on the profit and loss sheet of the business.

Read also: Want to Know How to File Tax Returns in Pakistan? Read this Guide

Investing in Foreign Exchange

The term forex is used for foreign exchange trading and currency trading. It is the biggest market around the globe and is equally appreciated and operational. The market is highly liquid and makes a massive amount of trading on a daily basis. Although there are risks in investing in forex you can also make a lot of money if you are taking the assistance of the experts who are trained professionals in making a deal in the forex market.

The forex market works round the clock and you can surely find an open market anywhere in the world. The high volume of liquidity offers you the opportunity to take your money out of the market anytime you want to. The forex market does not implement any restrictions and you can earn profit from rising and falling prices and you are completely open to make a deal anytime you want to.

Insurance Policies

Despite many arguments, the life insurance is advocated as a handsome investment plan. You can find many people referring you to the cash-value component of permanent life insurance and the options which can be considered as an investment idea. There are life insurance plans that can earn you tax-deferred growth which means that you do not need to pay taxes on any interest or to any dividends or a capital gain from the life insurance plan.

You can keep a policy till age 100 or as long as you can pay the premium. There are some life insurance policies in which you will not lose your coverage after set years or defined time. You can also put this money in savings accounts or in an account on which you do not pay fees or any kind of commission. A permanent life insurance can offer you accelerated benefits and help you in case you get seriously ill.

Read also: How to Manage your Expenses when you get Unemployed in Pakistan

Investing in Stocks

Most of us know that investment in stocks is something that can make you rich overnight. But it can also leave you with a massive loss if you are not working on the deals properly and the reason is that few of the new investors have the idea about how to make money from their shares in the stock market. However, if you are able to deal with the stock market dealing effectively you can earn a capital growth in your stocks and share prices. It will also help you to build a worthy financial portfolio to earn a profit in the future. The stock market offers you higher returns as compared to bonds or cash deposits and also offers some protection against inflation and in any such case, the corporate profiles increase in cash terms so that the dividends and the share prices can go up.

Every person aims big in his or her life and if planned accordingly from the very first day, they could get success in achieving their goals. The advance technology aided lifestyle of this century have brought a wide range of opportunities to get your goals perfectly. However, a worthy financial portfolio can be of great help to you to achieve your goals. The above-mentioned ideas do not need a huge amount to invest but can lead you to greater benefits in your future.

Khurram Zahid

The post How to Start Your Investment Portfolio Right from Your Salary? appeared first on Smartchoice.pk.