Stocks Basics
Stock Related Basic Information
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INTRODUCTION

Everyone today appreciates the need to save whether for a house, for children’s education, a wedding, or for use after retirement. All these goals can be realized through excellent financial planning. An intelligent plan entails investing your money in an appropriate combination of assets with potential to generate the income needed to achieve your goals. If you invest wisely, you can maximize the earning on your investments.There are many investment avenues available, but a wise investor does not invest on impulse, a hot tip or follow the herd. An investor should discriminate between information, casting away irrelevant and illogical pieces of information, and checking for opportunities and facts before making an intelligent choice of investments.

WHAT IS THE STOCK EXCHANGE?

The stock exchange provides a market place where shares can be bought and sold.

What is the Role of the Stock Exchange?

The stock exchange admits companies for trading at their securities.It provides a market for raising capital by companies.It provides a market place for shares of listed public companies to be bought and sold, by bringing companies and investors together at one place.The exchange’s role is to monitor the market to ensure that it is working efficiently, fairly and transparently.

Stock Exchanges in Pakistan:

There are three stock exchanges in Pakistan: Karachi Stock Exchange (Guarantee) Ltd. Lahore Stock Exchange (Guarantee) Ltd. Islamabad Stock Exchange (Guarantee) Ltd. Of these, Karachi Stock Exchange is the biggest exchange in the country.

Trading and Settlement:       

The stock exchanges have introduced a computerized trading system to provide a fair, transparent, efficient and cost effective market mechanism to facilitate the investors. The trading system comprises of four distinct segments, which are:< T+3 Settlement System;ii) Provisionally Listed Counter;Spot Transactions; and Futures Contracts.

T+3 Settlement System:

In the T+3 settlement system, purchase and sale of securities is netted and the balance is settled on the third day following the day of trade

Benefits of T+3 Settlement System:

It reduces the time between execution and settlement of trades, which in turn reduces the market risk.It reduces settlement risk, as the settlement cycle is shorter.

Provisionally Listed Counter:

The shares of companies, which make a minimum public offering of Rs.100 million, are traded on this segment from the date of publication of offering documents When the company completes the process of dispatch/credit of allotted shares to subscribers, through CDC it is officially listed and placed on the T+3 counter. Trading on the provisionally listed counter then comes to an end and all the outstanding transactions are transferred to the T+3 counter with effect from the date of official listing.

Spot/T+1 Transactions:

Spot transactions imply delivery upon payment. Normally in spot transactions the trade is settled within 24 hours.

Futures Contract:

A Futures contract involves purchase and sale of a financial or tangible asset at some future date, at a price fixed today

WHAT ARE SHARES?

Each share represents a small stake in the equity of a company. You can buy large or small lots to match the amount of money you want to invest. A company’s share price can rise or fall as a result of its own performance or market conditions.Once the shares are brought and transfered in your name your name will be entered in the company’s share register, which will entitle you to receive all the benefits of share ownership including the rights to receive dividends, to vote at the company’s general meetings to receive the company’s reports. If you decide to sell your shares you will need to deliver share certificates to the broker in time for the transaction to be completed. With the introduction of the Central Depository System (CDS), an investor can have shares in paper form or can own shares in an electronic book- entry form at the Central Depository Company (CDC).

Why Do Companies Issue Shares?

Companies issue shares to raise money from investors. This money is used for the development and growth of businesses of companies.A Company can issue different types of shares such as ordinary shares, preference shares, shares without voting rights or any other shares as are permissible under the law. These give shareholders a stake in the company’s equity as well as a share in its profits, in the form of dividends, and a voting right at general meetings of shareholders.

Why Do Investors Buy Shares?

Studies have shown that over a twenty-year span, investment in shares has provided greater returns than most other forms of savings. Shares can provide you with a regular stream of income through dividends as well as the potential for your investments to grow in value. If the prices of shares go up, you can sell them for more than you paid. This is called capital gain.

What are Dividends?

Dividends are returns paid to shareholders out of the profits of the company. Returns can be in the form of cash or additional shares of the company called bonus shares. Dividends are usually paid once or twice a year depending upon the company’s profit distribution policy.

What is Capital Growth?

This is one of the ways in which shares differ from deposit accounts. The principal amount of money you put in a bank or any fixed income savings scheme always stays the same e.g. if you start with Rs.100,000 you will always have Rs.100,000 (other than any interest earned).changes in value according to the performance of the company. With good management, the value of your investment in shares of a company can grow over time so that your shares are worth more than you paid for them. This is capital growth.    

Risks And Rewards:

Buying shares can offer advantages over saving in deposit accounts: your investment may increase in value besides paying you dividends. You share the rewards when the company does well and the price of the shares goes up. But if the company performs badly, the share price may go down and the value of your investment will be reduced. Other factors, such as the performance of the stock market as a whole and the general economic climate, may also affect the price of your shares. Investment in shares is therefore investment in ‘risk capital’. The shareholders can be rewarded for taking this risk and the potential return on your money can be higher than that on other investments. You can reduce your risks with careful planning.

TIPS FOR INVESTING WISELY

Know What Investment Products are Available: The following types of securities are available on the stock market for investment:Ordinary shares of listed companies Unit trust schemes Mutual funds certificatesCorporate bonds i.e., Term Finance Certificates (TFCs)Government securities i.e., Federal Investment Bonds(FIBs), Pakistan Investment Bond (PIBs) and Special US Dollar Bonds.

Know Your Investment Profile:

A wise investor chooses an investment product not only according to his goals and the amount of capital available but also according to his tolerance for risk. All investments carry a certain degree of risk. You have to determine whether you are a “risk-taker” or a “risk-averse” person. Depending on the extent of risk you intend to take, you should pursue an investment strategy (aggressive, moderate or conservative) that fits your risk profile.