Most people have heard about investing in Pakistan Stock Exchange (PSX) but have not been able to do so due to lack of adequate information. This blog should help simplify a new investor’s concerns. A Capital Market is a type of Financial Market that deals with exchange of stocks, bonds, mutual funds, commodities etc. These securities are mostly long-term investments that yield fruitful returns in the long run. A stock market is a subset of a Capital Market that only deals with the buying and selling of shares issued by a corporation. A firm issues shares to increase capital. They use this capital to further better their company. Each share represents an equivalent stake in the equity of a company. The buyer and seller are both kept anonymous when these transactions are being made. Warren Buffet, one of the most successful investors till date stated, “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies”. This blog aims to educate an investor on 10 different ways to generate passive income from the comfort of their home.
Opening an Account with a Brokerage Firm
When an investor is looking to invest money in Pakistan via Pakistan Stock Exchange, they are to first open an account with a reliable brokerage firm.
Brokerage account: A brokerage account is a financial account. Money can be easily deposited into or withdrawn from a brokerage account.
An investor should know the type of brokerage account they want to open. Some examples include a standard brokerage account, margin account, custodial account or a retirement account. Different brokers have different fee structures. Brokers also charge commission which is a fee charged whenever an investor makes a buy or sell transaction. It is essential to have complete knowledge about the brokerage firm an investor is investing with, in order to avoid any fraudulent attempts by them. They must hold a Trading Right Entitlement Certificate (TREC).
TREC: A TREC is a certification that allows a broker to trade.
The selected brokerage firm will ask for relevant details before moving forward. This is part of the Know Your Customer (KYC) requirement by PSX. After the required documents are successfully processed by the brokerage firm and Pakistan Stock Exchange the investor will receive the license to trade in the stock Market. The investor also has their Unique Identification Number (UNI), registered with NCCPL. A sub-Account is then opened with CDC and is signed by the investor. The next step is to deposit funds into the brokerage account. Another important factor to take into account is the kind of advice offered by professionals managing the account. Professionals play a crucial role in the investor’s capital growth. Swift customer service is another vital factor to consider. A feature that attracts new investors is investor education. Some brokerage firms such as KTrade Securities Limited, aim to financially educate their investors through videos, blogs and seminars. After that, the investor may start researching on which stocks look the most appealing in terms of investments.
It is important to have a good understanding of the market before an investor starts investing. The basics to this include trends.
The market can either be in a:
Bullish Trend: A Bullish or upward trend means that the overall prices in an industry’s stocks have risen
Bearish Trend: A bearish or a downward trend means that the overall prices in an industry have fallen.
Most investors recommend buying when everyone else is selling. For example, when a company’s position does not look as stable is a point where many shareholders look to sell their shares. That is when sellers do not pay much attention to the prices that they are selling at and it is encouraged to buy then. It is also essential to be aware of the type of investment the investor wants to make. An investor is also advised to research the type of security they would like to invest in. For instance, an investor with little capital is not advised to invest in real-estate. Stocks would be a better option for them as an investor can buy stocks in Pakistan with initial capital as little as Rs.5000.
There are two types of stock analysis that an investor can do.
Two types of stock analysis
Fundamental analysis: A fundamental analysis refers to assessing the stocks asset value.
Technical analysis: A technical analysis is carried out by analyzing the stock’s price movements and charts.
These analyses assist an investor in studying how a stock might perform in the future.
An investor can either make a short-term investment, a medium-term investment or a long-term investment.
Day trading or short-term investments: These refer to transactions being made on a day-to-day basis.
Long-term investments: These refer to investments usually within a range of 7 to 10 years.
Medium-term investments: Medium-term investments are encouraged in Pakistan. They refer to investments being made for about 2 to 4 years.
Short-term investments are usually discouraged in Pakistan as there is a lot of volatility involved in the process. An investor should be self-aware of the kind of risk tolerance they have. Investments are encouraged to be made using idle funds. It is recommended to buy shares in a company an investor has background knowledge to. This includes information on what the company does and how it makes money. A firm’s financial reports provide access to the aforementioned points. Reviewing them gives the investor an idea about the financial standings of the firm. Observing historical performance statistics and comparing them to other stocks further helps make an informed decision.
Online Trading Applications
In order to make trading easier for a fresh investor, most brokerage firms now have online trading applications. These apps allow the investor to trade with just a click of a button. For example, the KASB KTrade App, allows the user access to the ‘Research Portal’ that gives an overall view of the market indices, dividend yield and payout. It also permits managing and monitoring the user’s portfolio. Such trading applications will also most likely have a watchlist option. A Watchlist allows the investor to add their preferred companies to it and view their performances through visual daily, monthly or yearly charts. Some applications will also allow the investor to trade virtually. Virtual Trading caters to new and uninformed investors. Using this, they can trade using dummy accounts in order to get an experience of what the trading world looks like. This assists new investors to make informed decisions when they buy stocks in Pakistan. These apps also permit the convenient buying and selling of stocks. Buying and selling stocks have never been this convenient. With just a few clicks, the user will be able to select the stock, enter the number of shares they wish to buy or sell and execute the order by entering your password. They can either place a limit or a market order. A limit order is one that allows the investor to set a specific threshold for the price that they would like to buy or sell at. The order is only executed once the limit is met. A market order however, is supposed to be executed instantly at the current market price.
Diversification and Advantages
Buying stocks is one of the best ways to invest money in Pakistan. An investor is encouraged to diversify their portfolio when they invest in the Stock Market. Successful investors recommend investing in multiple companies depending on the investor’s disposable income. It is crucial for an amateur investor to do their research on the different types of industries. It also helps to know which firms are leading in their specific industry. Companies with a ‘Defaulter’ label in front of their name have committed irregularities, hence most investors discourage investing in such stocks. There are multiple advantages of investing in the stock market. One of the advantages include shareholders being rewarded with dividends by most companies annually. The distribution of dividends depends on company policy. Another benefit includes capital gain. Capital gain is the profit from the sale of shares and so is encouraged instead of just accumulating wealth that stunts capital growth. Shares also have more liquidity compared to most other assets as they can be bought or sold instantly. Some companies also offer discounted services to shareholders which is an added incentive to invest in a stock. An added advantage in investing in Pakistan Stock Exchange as compared to depositing money in banks is that an investor has a chance to earn more from investing in stocks with the same amount of risk. The process of investing in stocks is also quite transparent. Investors are informed when their transactions are executed. They also receive monthly statements notifying them of their trades.
It is important for an amateur investor to have financial literacy before they can start investing in order to make informed decisions. There are multiple videos available online to guide them further about how to invest in the stock market.