Investing in the Stock Market is a science that anyone can master. With the right technique and knowledge, the stock market can turn out to be one of the most profitable businesses. Many people nowadays are looking to invest in Pakistan Stock Exchange.
Pakistan Stock Market is one of the best-performing in the world. It remained depressed for a year but now it is picking up the pace again and is moving towards 50,000s from as low as 30,000s.
As I write this article, the Pakistan Stock Market stands at 48,108.88 points. It is a perfect time for Pakistani stocks if you are looking for highly profitable returns. However, before you take the plunge and invest in the stock market, make sure to do your research, read newspaper pages on economics and some good books on Stock Markets.
In this article, I will be explaining and answering your questions and concerns about investing in the stock market, so hang on with me.
What is the Stock Exchange?
Stock Exchange is an institute where you can buy and sell stocks. In simple words, you invest by buying shares of companies and selling them when they are profitable.
Stock market of a country shows how well the economy of the companies is. Stock prices show how much profit a company is making in a long term which impacts the overall earnings of the economy.
Pakistan Stock Exchange
Pakistan stock exchange is one of the most popular choices for investors in Pakistan to make good money. It is one of the best stock markets in the world.
Though investing in the stock market is a profitable business, most people are hesitant to get in this business due to several issues. Some of these issues are inability to understand how the stock market works, unpredictability of the stock market, political situation in Pakistan and doubts whether it is halal or not.
How does the Pakistan Stock Exchange Works?
All the stock exchanges in the world work in a similar way. A company distributes its shares to raise its capital. People buy or sell these shares through the stock exchange. There are two types of companies; private limited companies and public limited companies.
The working of the stock exchange is simple. For instance, you buy a stock for 100 rupees, and after a couple of hours, its value increases to 150 rupees, meaning you are getting a profit of 50 rupees if you sell the share at that time.
Stock Market Investment Types
Generally, there are two main types of investments in the Pakistan Stock Exchange; Short Term Investment and Long Term Investment.
Short Term Investment:
Short-term investment is when the investor trades shares on a daily basis according to the market value. These investors are called day traders. They meticulously analyze financial aspects for every trade which manages to earn profit for them.
Long Term Investment:
Some investors keep their shares for a long time and wait till the prices reach their peak to gain maximum profit. Long-term investment also earns dividends for them every 3 months. It is suitable for those who are busy and can’t follow the market trends on a daily basis.
Who Can Invest in Pakistan Stock Exchange?
Pakistani nationals, overseas Pakistanis and non-resident foreign nationals can invest in the Pakistan Stock Exchange. However, terms and conditions to invest in the Pakistan stock exchange are different for Pakistan Nationals than those for overseas Pakistanis and non-resident foreign nationals.
For Pakistani Nationals:
If you are a Pakistani nationality holder and living in Pakistan, you have to open a brokerage account to invest in the Pakistan Stock Exchange. To open a brokerage account, you will need a funded Pakistani bank account along with your national identification card.
For Overseas Pakistani and Non-Resident Foreign Nationals:
There are certain requirements that need to be met in order to invest in the Pakistan Stock Exchange. They have to open an account in some bank in Pakistan that offers custodial services.
Why Should I Invest in the Stock Market?
There are various benefits of investing in the stock market. It is one of the best ways to earn money. Some benefits of investing in the Pakistan stock exchange are as follows:
Listing shares are liquid which means they can be quickly bought and sold. You don’t have to purchase at a relatively low price as compared to other products or engage a broker. When trading on the exchange, you can sell some portion of the shares without buying back the whole product.
Selling a share at a greater price than the price at which you bought it is known as capital gains. It is the long-term goal of investing in stocks. Capital gain is only possible when there is a significant increase in stock prices.
The long-term investors are paid dividends which is a cash payment to the shareholders according to the company’s profit at the end of each financial year. The amount you receive as a dividend depends on the number of shares you have. The more you invest, the more money you will get.
Benefits to the Shareholders:
Some of the companies in different sectors such as retail, hotel, entertainment, and financial services, offer huge discounts to its shareholders when they purchase goods or services from these companies. You have to own their stock to enjoy such discounts.
How to Invest in Pakistan Stock Exchange?
First, you have to open a brokerage account to invest in the Pakistan Stock Exchange. To open a brokerage account, you will require the following documents:
1. Your CNIC
2. A bank account in a Pakistani bank
3. Salary slip or a bank statement if you are self-employed
Below is a step-by-step guide to investing in Pakistan Stock Exchange
1. Visit the nearest brokerage firm to open a brokerage account. Look carefully to which brokerage will work for you. The preferable choice would one of the brokerage firms that are attached with the CDC (Central Depository Company). CDC is the only entity that handles the electronic settlement of transactions carried out at the Pakistan Stock Exchange (PSX). Some of these brokerage firms are given below:
- Arif Habib Limited
- Foundation Securities Private Limited
- Alfalah CLSA Securities Private Limited
- JS Global Capital Limited
- BMA Capital Management Limited
- Muhammad Munir Muhammad Ahmed Khanani Securities Private Limited
- Market 786 Private Limited
- Topline Securities Limited
2. After submitting all the required documents, you will have to wait for a couple of weeks after which you will be given the license to trade with PSX-issued stocks.
3. Your brokerage firm will send you and guide you with the software which you can learn easily. You will be handling your trades and dealings online.
4. Choose the sectors you want to invest in. Currently, the blue chips in Pakistan are cement, oil/gas, banking and foreign MNCs.
5. Purchase their shares through any reputable stockbroker.
6. Avoid indulging in day trading as it can be dangerous if you are not skilled. Do your research, talk to the brokerage firm and you can even send an email to the company you choose to ask them about the required information.
7. Master the art of trading in the stock market for at least three months before you start venturing in day trading.
8. Keep on buying more shares every month by saving a fixed amount.
Important Points to Keep in Mind While Investing In Pakistan Stock Exchange
If you are willing to invest in stock shares, you need to keep certain points in mind to avoid problems or fraud while investing your hard-earned money.
1. Verify the legality of the broker and the brokerage firm before investing.
2. Use a cross cheque to make payment in the name of the brokerage house.
3. Never sign a blank document or cheque at any cost.
4. Ensure the following things in the transaction slip:
- Type of transaction (sold or bought and forward, ready or spot).
- Date of order execution
- The price at which the transaction is made and the commission that the brokerage house charges.
5. Always keep evidence of the following documents:
- Copy of duly signed account opening form.
- Receipt of the payment made or received from the brokerage house.
- Daily written trade confirmations received from the brokerage house.
- Account and subaccount statement.
- Communication between the brokerage house and the investor.
Important Pieces of Advice for Investors
1. The major goal is not to lose money. So invest instead of speculating. Buy profitable stocks and stick to them instead of indulging in day trading.
2. Buy the shares whose Price/Earnings Ratio is less than 15. Price/Earnings Ratio is the ratio of a company’s stock price to the company’s earnings per share.)
3. The Price/Book Value Ratio of the shares you are buying should be less than or equal to 22.5. It is a financial ratio between a company’s current market price and its book value. This ratio indicates whether the investor is paying too much for what would be left if the company went bankrupt.
4. Prefer investing in companies with dividends and with constant dividend growth.
5. Avoid investing your money in companies that have had -ve earnings-per-share in the last three years.
6. Check the current ratio (current assets/ current liabilities). It should be greater than 2. It is a sign of a company’s financial security.
7. Look at market crashes as exciting fire sales on the best stocks. However, resist the urge to buy more stocks when the market has gone up too much too quickly.
8. Avoid buying shares just because they are cheap. Check its EPS growth (annual rate of growth of earnings from investments. It should be at least more than 30% over the last 10 years combined. This is a good sign of a sound and stable business model. For more information or any question click here.