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10.1 Decision to trade – independently or on certain advice:
Investors can choose tomake their own share dealing decisions or take advicefrom 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.Many stocks fly on high and many leap on
very transient rumors. Evaluating merits and flows is always
the soundest approach. The quarterly and annual financial
statements published by the listed companies give you a
snapshot of a company’s financial standing. Since as a retail
investor you are most likely looking for companies to invest
in with a long termview, the stability factor is an important
consideration. Some investors deal with stockbrokers directly
while others prefer to use the services of professionalmanagers
who have discretionary powers to manage the investment portfolio.
10.2 Selection of stock broker:
Selecting a broker will be one of themost critical decision
you take in your investment experience. 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. To start with, ensure that
the broker you choose is registered with the SECP to trade and that the stock
brokerage firm has a good track record. Visit them and meet them in person
before you decide. If anyone of his existing clients are known to you, call up
a few of them and ask about his quality of service. After all, you are going
to entrust him withmoney you don’t want to lose. All the registered brokers
are listed at the KSE and SECP websites.
10.3 Opening of Trading Account with Broker:
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 on the standardized format approved by SECP
as per Annexure “A”. Make sure that you are assigned a unique account
identity and that all your transactions bear this identity. 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 specific instructions that business can only be transacted in the account
on his instructions.
10.4 The mechanics of share dealing:
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 youmay 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
further reduce your risk.
When you have decided to buy/sell shares of a particular company, contact
your stockbroker. You can ask to buy/sell a certain
number of shares at or upto a certain value. Get the
contract note confirming your order immediately and
check for the following information.
a) Name and number of securities;
b) Date on which the order is executed;
c) Nature of transaction (spot, ready or forward and also whether bought
or sold);
d) Price at which the transaction is executed; and
e) Commission charged by the broker;
There are two types of orders:
(i) Limit Order: In a limit order, the client specifies the acceptable price at
which the order is to be executed.
(ii) Market Order: Also known as at best order. It is executed at the prevailing
market rate.
10.5 Important Concepts to understand while Trading in Stocks.
a) KSE-100 Index:
The stock price index provides a sensitive barometer of general confidence
in the economy. The KSE-100 Index is a benchmark used for ascertaining
market direction. The KSE-100 Index comprises the top company from each
of the listed sectors on the KSE, in terms of market capitalization. The rest
of the companies are then picked on the basis of their respective market
capitalization ranking, without any consideration for the sector. The KSE-
100 index contains a sample of 100 representative common stocks with the
base value of 1,000 points.
b) Circuit Breaker:
Acircuit breaker refers to a measure used by stock exchanges to avert panic
selling or over-exuberant buying. After the stock’s price has risen or fallen
by a certain percentage, the exchange might activate restrictions or trading
halts. The KSE management has imposed a circuit breaker of 7.5% or Rs.
1.50 whichever is higher for the purpose of upward price fluctuations in the
stock price from the closing price of the previous day and a circuit breaker
of 5% or Re. 1/-, whichever is higher in case of downward price fluctuation
in the stock price from the closing price of the previous day.
c) Earning Per Share (EPS):
This is a ratio calculated by dividing a company’s net profit after tax by its
number of shares outstanding. This denotes the company’s earning capability
for each share issued.
d) Book Value or Break-up value:
This is a ratio which indicates the asset coverage that each equity share
represents in the company. It thus represents the net worth of assets that
each share commands. Book Value per share is arrived at by dividing total
equity by the number of shares outstanding. Shareholders’ equity includes
paid up capital, reserves and retained earnings, less losses, if any.e) Price Earning (P/E) Ratio:
This ratio is calculated by dividing current market price of the share by its
Earning per share (EPS).This ratio is used as a tool for valuation and indicates
whether price of a share is realistic in line with its earning. If the share is
over-priced then the ratio will be high, if it is under-priced the ratio will be low.
Investors can choose tomake their own share dealing decisions or take advicefrom 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.Many stocks fly on high and many leap on
very transient rumors. Evaluating merits and flows is always
the soundest approach. The quarterly and annual financial
statements published by the listed companies give you a
snapshot of a company’s financial standing. Since as a retail
investor you are most likely looking for companies to invest
in with a long termview, the stability factor is an important
consideration. Some investors deal with stockbrokers directly
while others prefer to use the services of professionalmanagers
who have discretionary powers to manage the investment portfolio.
10.2 Selection of stock broker:
Selecting a broker will be one of themost critical decision
you take in your investment experience. 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. To start with, ensure that
the broker you choose is registered with the SECP to trade and that the stock
brokerage firm has a good track record. Visit them and meet them in person
before you decide. If anyone of his existing clients are known to you, call up
a few of them and ask about his quality of service. After all, you are going
to entrust him withmoney you don’t want to lose. All the registered brokers
are listed at the KSE and SECP websites.
10.3 Opening of Trading Account with Broker:
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 on the standardized format approved by SECP
as per Annexure “A”. Make sure that you are assigned a unique account
identity and that all your transactions bear this identity. 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 specific instructions that business can only be transacted in the account
on his instructions.
10.4 The mechanics of share dealing:
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 youmay 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
further reduce your risk.
When you have decided to buy/sell shares of a particular company, contact
your stockbroker. You can ask to buy/sell a certain
number of shares at or upto a certain value. Get the
contract note confirming your order immediately and
check for the following information.
a) Name and number of securities;
b) Date on which the order is executed;
c) Nature of transaction (spot, ready or forward and also whether bought
or sold);
d) Price at which the transaction is executed; and
e) Commission charged by the broker;
There are two types of orders:
(i) Limit Order: In a limit order, the client specifies the acceptable price at
which the order is to be executed.
(ii) Market Order: Also known as at best order. It is executed at the prevailing
market rate.
10.5 Important Concepts to understand while Trading in Stocks.
a) KSE-100 Index:
The stock price index provides a sensitive barometer of general confidence
in the economy. The KSE-100 Index is a benchmark used for ascertaining
market direction. The KSE-100 Index comprises the top company from each
of the listed sectors on the KSE, in terms of market capitalization. The rest
of the companies are then picked on the basis of their respective market
capitalization ranking, without any consideration for the sector. The KSE-
100 index contains a sample of 100 representative common stocks with the
base value of 1,000 points.
b) Circuit Breaker:
Acircuit breaker refers to a measure used by stock exchanges to avert panic
selling or over-exuberant buying. After the stock’s price has risen or fallen
by a certain percentage, the exchange might activate restrictions or trading
halts. The KSE management has imposed a circuit breaker of 7.5% or Rs.
1.50 whichever is higher for the purpose of upward price fluctuations in the
stock price from the closing price of the previous day and a circuit breaker
of 5% or Re. 1/-, whichever is higher in case of downward price fluctuation
in the stock price from the closing price of the previous day.
c) Earning Per Share (EPS):
This is a ratio calculated by dividing a company’s net profit after tax by its
number of shares outstanding. This denotes the company’s earning capability
for each share issued.
d) Book Value or Break-up value:
This is a ratio which indicates the asset coverage that each equity share
represents in the company. It thus represents the net worth of assets that
each share commands. Book Value per share is arrived at by dividing total
equity by the number of shares outstanding. Shareholders’ equity includes
paid up capital, reserves and retained earnings, less losses, if any.e) Price Earning (P/E) Ratio:
This ratio is calculated by dividing current market price of the share by its
Earning per share (EPS).This ratio is used as a tool for valuation and indicates
whether price of a share is realistic in line with its earning. If the share is
over-priced then the ratio will be high, if it is under-priced the ratio will be low.
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