The PSX website http://www.psx.com.pk includes a wide range of information about investing, including information on various market data and Rules & Regulations of the Exchange.
WHY SHOULD I INVEST IN SHARES?
Almost everyone worldwide has an interest in shares, whether they realize it or not. Millions of people around the world own shares directly. However, many millions more have an indirect stake in the stock market through pension schemes, life insurance policies, NIT units, and other mutual funds. All of these, invest in shares traded on the stock market.
Today, increasing number of people own shares around the world, while many more invest in pension schemes, have an insurance policy, National Saving Schemes (NSS) or another form of collective savings invested in shares traded in stock markets.
However, investing in shares is different from saving in a bank or National Saving Scheme. There is more risk – but there is the opportunity for better reward over the longer term. With deposit accounts, you earn interest on your capital. When you take your cash back, you get back exactly the same amount that you first deposited (plus the interest it has earned). With shares, you may receive dividends but when you sell those shares, you might get back more than you bought them for, which is your reward for taking a risk.
Nevertheless, because shares can go up as well as down in value, it is important to understand that taking a risk means you might get back lesser than you had invested initially. You can minimize your risk by investing in different shares or a collective fund. There is, however, the possibility of greater rewards. Funds invested in equities in the long term (five or more years) have outperformed regular saving accounts.
You should remember that saving through the stock market should be seen as a long-term investment. Historically, money invested in shares over the long term (ten or more years) has almost always outperformed regular saving accounts.
Before investing in stocks and shares, you should understand your own financial position and what you hope to achieve with your investments. Your regular financial obligations should be protected and preparation should be made for unexpected expenses.
Having done this, you are ready to consider investing the surplus in stocks and shares. The three main rationales for owning shares are summarized below:
a. Ownership in a Company – when an individual invests in the stock market, he automatically becomes a shareholder of that company. As a stockholder, he is entitled to the following benefits: 1) voting rights; 2) dividends to be declared by the corporation and 3) share of the remaining assets of the company if it is to be liquidated.
b. Liquidity of Funds – a stock market investor has easier access to funds. Compared to banks, which have a high minimum balance requirement for deposits and credit, as an individual, you can start an investment with very low capital, and can expect high yields for your initial investment. You can always cash in or out your funds anytime, during trading hours, through your broker.
c. Make Money – investors in the stock market make money through dividends and capital appreciation. When a listed company declares dividends, it increases the shareholders’ investing power. An investor who buys into the company at a low market price and sells it at a higher price will gain capital appreciation.
WHAT ARE THE RISKS OF INVESTING IN STOCKS?
While it is true, that stock investment is the most volatile of all securities, investors might well recall the fact that uncertainty, is a permanent feature of any investing perspective. This means that risk is always a part of any investment. A better attitude would be to limit and manage your risk. A maximum level of gain or loss should be set, and calculated decisions should be made when this level is reached.
WHAT IS THE MINIMUM AMOUNT OF INITIAL INVESTMENT?
The minimum amount of initial investment vary from case to case at BMA Capital, since we have 2 types of accounts i.e. Classic and Premium, they both have different account opening requirement. For classix account the minimum requirement is Rs. 5,000/- and for Premium accounts the minimum account opening requirement is Rs. 200,000/-
If you are just getting started with a small investment, look for an investment firm that would not penalize you based on the size of your investment.
The minimum amount of money needed to invest in the stock market depends on the minimum number of shares to be traded for the stock. The minimum shares will be determined by the prevailing market price of a particular stock, as each stock, the minimum number of shares to be traded is fixed, called the market-lot, which depends on the price range of the stock.
The market lot is calculated biannually by NCCPL, keeping the lot size to 500-shares for scrip which are priced less than Rs. 50 and lot size of 100-shares for scrip priced above Rs. 50
HOW CAN I BUY AND SELL SHARES?
You can buy shares when a company first comes to market – that is at flotation or privatization; or you can buy them through the stock market once they are in circulation and being traded.
Companies which are about to issue shares often advertise in a daily newspaper. If you decide to buy these shares, you can seek more information from the company’s website or you can fill up the application form at the affiliated bank or ask the company for a prospectus. Fill out the application form and submit it with your pay order, at the bank. There is nothing more to pay. Alternatively, you can go to a stockbroker who will buy them for you.
Most share dealings take place in what is called the secondary market. This is where existing shareholders sell and new investors buy.
Today, buying shares is easy. You can buy and sell shares by making contact with a stockbroker, bank or investment adviser, either in person or over the internet or telephone.
HOW CAN I DECIDE WHICH SHARES TO BUY?
1) A stockbroker carries out buying and selling on his propriety accounts and on behalf of his clients as individuals cannot deal for themselves in the market. A list of stockbrokers is available from the Stock Exchange on PSX website http://www.psx.com.pk. Stockbrokers offer a variety of services but if you know exactly what you want, simply call the broker for an ‘execution only’ service and ask them to buy the shares of your choice. PSX offers three market segments
a) Cash market based on two day clearing and settlement
b) Continuous Funding system (CFS) MKII where cash market’s net purchases can be carried over for another 22 working days
c) Deliverable Future Contracts allow investors to purchase or sale on a forward contract basis clearing and settlement of these contract takes place on last Friday of the months and new contract starts on the following Monday Cash Settled Future Contract where contract is for 90 days, but investor has a choice to enter into any of the three contracts that are always open for end of the month expiry based of cash settlement with under line cash market price of the scrip.
2) After having instructed your broker to buy shares, the broker will draw up contract notes, which typically are sent to your address or mobile phone number within next 24 hours. This will show details of the transaction carried out on your behalf.
3) You must send payment for your shares immediately upon receiving your contract note. In June 2007 the Stock Exchange adopted a two-day settlement system called T+2 system, under which transactions are due for settlement 2 working days after dealing.
4) Upon receipt of payment, the purchased shares are transferred in your name in your Central Depository Company (CDC) account electronically. You are now the proud owner of a portfolio.
5) At this stage you can sell your shares if you wish. You are now entitled to attend the company’s Annual
General Meeting (AGM). Talk to the other shareholders, especially representatives from the institutional investors. Just one sizeable disinvestment could make all the difference to the outcome of your overall operation.
A stockbroker or financial adviser can help you choose which shares to buy, and advice on the best time to sell.
You will need to decide:
Will I need the money soon?
On the other hand, can I leave my money to grow over a number of years?
Alternatively, Do I want a combination of both?
How much money can I afford to invest?
Will I spread this over a small number of shares, or a larger number?
Do I want to invest directly in shares?
Do I want shares in blue chip companies, medium-sized companies or new, small companies (which can be less secure)?
On the other hand, do I want the relatively safe government backed investment schemes available through National Saving System (NSS), or Pakistan Investment Bonds (PIBs)?
Am I interested in indirect ways of investing, through closed end Mutual Funds or through Term Finance Certificates available at the Stock Exchange?