|
Investor
Guide
ALL
YOU NEED TO KNOW Volume:
(2)
1.
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.
2.
IMPORTANT THINGS TO KNOW ABOUT EQUITIES
-
If
you can afford to take some risk and have the ability to endure the market’s ups
and downs, equity investments may grant you good returns.
-
Do not
invest any money with the stockbroker as a deposit at fixed rate of return.
Such a deposit has no legal standing and the investor is exposed to risk of
losing his money.
-
You must
know the rates of fees and commissions charged by the broker/stock exchange
as these affect your costs, and hence your returns.
-
The
aim of investing in stocks and shares is
to buy at low and sell at high. Knowing
when is however, the problem. Many investors
attempt to time the market: they try to
figure out when the market is going up and
buy before it does and then anticipate when
it is going to crash and sell before that.
Usually you try to buy when the upswing
has begun and sell as the downswing starts.
However, such accuracy is extremely difficult
to achieve.
-
The
stock market is driven by two emotions:
greed and fear. People are caught up in
the boom fever and pay beyond the worth
of shares this is the greed that drives
bull markets. In bear markets, people get
carried away with the ruling pessimism and
are eager to sell their investments believing
in the worst rumors this is the fear that
dominates bear markets.
-
Be
careful in selecting your broker. Ensure
that he/she is licensed by the SEC to trade
and the stock broking firm has a good track
record. Give clear instructions to avoid
ambiguity, check trade confirmations received
and keep a proper record of all your transactions.
All the registered brokers are listed at
the web site of SEC www.secp.gov.pk
3.
HOW TO TRADE?
Your first step is to
contact a stockbroker or an investment adviser.
3.1
Introducing Stockbrokers:
Stockbrokers are your link to the stock market.
Their job is to help you get the best price
available when you want to buy or sell your
shares. Be careful in selecting your broker.
3.2
The Mechanics of Share Dealing:
There are various ways of investing in the stock
market: you can deal directly in shares; invest
through a unit trust or investment trust or
let your investment be handled by an advisor.
3.3
Opening of Account:
Once you have decided the broker with whom you
intend to deal, you should ensure that an account
is opened in your name by filling the account
opening form. It is imperative that the terms
and conditions prescribed in the account opening
form are read very carefully and well understood.
It will be in your interest if you give clear
instructions as to who can operate the account.
It is preferred if the investor gives instructions
that business can only be transacted in the
account on his instructions.
3.4
Buying/ Selling Directly:
When you have decided to buy/sell shares in
a particular company, contact your stockbroker.
You can ask to buy/sell a fixed number of shares
or shares up to a certain value. Get the contract
note confirming your order immediately and check
for the following information.
-
Name and number of
securities;
-
Date on which the order
is executed;
-
Nature of transaction
(spot, ready or forward and also whether bought or sold);
-
Price at which
the transaction is executed; and
-
Commission
charged by the broker;
There are two types of
orders:
Limit Orders: In a limit
order, the client specifies the price at which the order is to be executed.
Market Order: Also known
as at best order, the order is executed at the prevailing market rate.
4.
VARIOUS WAYS OF BECOMING A SHAREHOLDER:
4.1
Initial Public Offering (IPO):
When companies offer shares to the general public
for the first time it is known as a flotation
or an Initial Public Offering (IPO). These shares
can be bought directly from the company without
paying stockbroker’s commission. You might see
an advertisement in a newspaper from a company
issuing shares or your stockbroker might tell
you about a company making an IPO. Simply fill
in the share subscription form and deposit the
form along with subscription cheque in a branch
of the designated bank(s).
4.2
Right Issues:
Right shares are issued when companies need
to raise additional capital to finance their
new expansion projects or to meet working capital
needs, etc. In case of rights issues, the existing
investors have the right to subscribe to these
new shares in proportion to their respective
shareholdings.
4.3
Trading Market:
The most common way of buying/selling in stock
market is through trading in the secondary market.
Through a stockbroker you can buy shares from
existing investors who wish to sell them and
vice versa.
5.MPORTANT
CONSIDERATIONS FOR INVESTORS
Before you invest in
shares, you must consider a number of factors
5.1
How Much Money Can You Afford to Invest?
Investment in shares does not result in instant
yields. Do not invest any money which you may
need immediately, since the price of shares
can go up and down, It is advisable to keep
some money in a deposit account to meet your
financial obligations in the near future. In
this way, you will not be forced to sell shares
even at low price, if cash is needed urgently.
5.2
How Do You Want to Invest?
There are various ways of
participating in the stock market:
-
You
can invest directly by purchasing shares
through a broker. You may buy shares in
one company or you may spread your risk
by investing in a number of different companies
to give you a ‘portfolio’ or collection
of shares.
-
You can invest
indirectly and through collective investment schemes such as open-ended unit
trusts and closed-ended mutual funds. This would reduce your risk further.
5.3
Do You Need Advice or Do You Want to Make Your
Own Decisions?
Investors can choose to make their own share
dealing decisions or take advice from a professional.
Buying and selling shares and tracking their
performance can be time consuming but it is
rewarding for those who have the time to manage
their own investments. Some investors deal with
stockbrokers directly while others prefer to
use the services of professional managers who
have discretionary powers to manage the investment
portfolio.
6.CDS
Electronic book-entry transfer of securities
i.e. CDS has been set up to eliminate physical
transfer of securities. This new book-entry
system is in line with the international practice
and has replaced the manual system of physical
handling and settlement of shares at stock exchanges.
With in the CDS, transfer of shares from one
client account to another takes place electronically.
The CDS is managed by the Central Depository
Company of Pakistan Limited, which has been
sponsored by the stock exchanges and leading
local and financial institutions. Presently,
97 percent of settlements are routed through
CDS. Investor Account Services have been introduced
in order to facilitate individual investors
to maintain their account directly with the
CDC. With the implementation of CDS and automated
trading system, trading and settlement of securities
have become transparent and efficient.
7.COSTS
Stock brokerage costs vary according to the
extent of services you avail. You should select
the service that meets your needs and requirements.
Before you start dealing in shares, determine
how much you to pay stockbrokers for their services.
You need to shop around for the right service
at the right price. Charges will differ depending
on whether you wish to invest directly or indirectly.
Ask
if there are any ongoing costs of stockbrokers,
other than the dealing commission each time
you buy or sell.
8.WHAT
HAPPENS ONCE YOU ARE A SHAREHOLDER
There are several types of shareholders: some
are long term investors who simply tuck away
their investments for years while others trade
frequently and keep a close eye on how their
shares are performing. You can check your shares’
performance in various ways. A daily indicator
of share price movements is available in many
newspapers and also on website of the relevant
stock exchange. You may access this information
directly or through your stock broker/advisor.Informative
articles about many companies are regularly
published in newspapers and investment magazines.
Your stockbroker may also provide valuable information.
Some publish newsletters for their clients,
reflecting their views on the performance of
selected companies. Annual reports of companies
also contain useful information. Some companies
have shareholder relations departments, which
can help with factual information.
9.INVESTOR
PROTECTION:
You should always ensure that the stockbroker
you choose is licensed by the Securities and
Exchange Commission of Pakistan (SEC) to trade.
Prefer stock brokerage firms with good track
record. As a shrewd investor, you should know
your rights and responsibilities and should
beware of the rules that govern your investments
as well as the legal recourse available, in
case things go wrong. You can report abuse to
the SEC, whose mission is to ensure the development
of a fair, efficient, and transparent securities
and futures market. Although its main function
is regulatory in nature, the SEC has the ultimate
responsibility to protect the investor through
market supervision and ensuring that its laws
and regulations are complied with stock exchanges
are the frontline regulators; they must play
a proactive role. Send all your complaints in
writing to the respective stock exchanges with
full details, including the complainant’s name,
address and telephone number etc. In case you
do not get a response to your complaint, please
contact the “Complaint Cell” in the SEC.
SECURITIES AND EXCHANGE
COMMISSION OF PAKISTAN
NIC Building,
Jinnah Avenue,
Blue Area,
Islamabad.
Fax: (92 51) 920 4915
Website: www.secp.gov.pk
|
