Before you invest in shares, you must consider a number of factors.9.1 Know what investment products are available:
The following types of securities are available on the stock market for
investment:
• Ordinary/preference shares,Modaraba Certificates of listed companies
• Unit trust schemes
• Mutual funds (Open-end and Closed-end) certifi cates
• Corporate bonds/Debt Instruments i.e., Term Finance Certificates
(TFCs)
• Government securities i.e., Federal InvestmentBonds (FIBs), Pakistan
Investment Bonds (PIBs) and Special US Dollar Bonds.
Out of the above, most common product is the ordinary shares traded on the Stock Exchange.
9.2 Understand your risk profile:
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. A wise and prudent investor chooses
an investment product not only according to his
goals and the amount of capital available but also according to
his tolerance for risk. All investments carry a certain degree of
risk. You have to determine whether you are a “risk-prone” or
a “risk-averse” person. Depending upon the extent of risk you
intend to take, you should pursue an investment strategy
(aggressive, moderate or conservative) that fits your risk profile.
9.3 Do your homework before you invest:
Don’t put in your money until you have gathered and understood all relevant
information regarding the investment. Prepare yourself
for the vigorous homework of analyzing companies’
annual reports, accounts and other statements while
keeping abreast of what’s happening in the industry,
country and elsewhere that may affect your
investment. Consult your investment adviser/broker
to get latest market information about shares you
intend to buy or sell. Be skeptical of any thing picked up from rumors,particularly if you cannot explain the choice rationally. Please take your time
over your investment decisions. Do not be pressured by anyone telling you
that you are about to miss an exceptional opportunity to make money – It
is better to lose an opportunity than to lose your money.
9.4 Think long-term:
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 at a low price in case of an urgent
cash requirement. Bear in mind that even in the best of
securities/shares, there can be short-term aberrations. It is
important to have the capacity to hold your investments for
longer periods. Studies have shown that investments properly
timed and based on strong fundamentals have been proved very profitable
for investors in the longer term.
9.5 Avoid putting all your eggs in one basket:
The best way to minimize risk is to diversify your investments across various
investment products. If equities are your sole investments, it makes sense to
diversify between different sectors and companies. In
this way, loss incurred on some investments can be
absorbed or compensated by gains made in others,
keeping the overall return on investment positive.
You can also diversify your investment by investing in open-end mutual
funds managed under various unit trust schemes. While investing in mutual
funds check the credit rating of the fund and instrument. Similarly, while
investing in any security, check the credit rating of the concerned company,
if available.
9.6 Taxes & Commision:
Youmust know the rates of taxes and commissions charged
by the Central Board of Revenue (CBR)/broker as these
affect your costs, and hence your returns. There is no scale
of commission rates prescribed. As such the investors may
negotiate the rate of commission based on the services
desired and the volume and nature of their trades.The Finance Act, 2004 has imposed following two taxes on securities
transactions, which Brokers may charge to and collect from their clients
for onward depositing in government treasury:
1 - Capital Value Tax (CVT) @ 0.01% on purchase value of shares.
2 - Withholding tax @ 0.005% on sale value of shares.
9.7 Judgment of timings:
The aim of investing in stocks and shares is to buy at low
and sell at high. Knowing when, however, is the challenge.
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 determine.
9.8 Avoid greed and fear:
The stock market is driven by two emotions: greed and fear. People are
usually caught up in the boom fever and pay beyond the worth of
shares. This is the greed that drives bullmarkets. Never allow greed
to become your need. 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.
9.9 Handling of trades:
Give clear instructions to avoid ambiguity, check trade
confirmations received and keep a proper record of all your
transactions.
9.10 Beware of scams:
Beware of promises of quick profits or sky-high returns.
Remember: higher the gain on investments, higher is the risk
involved. This is the fundamental risk-reward trade-off.9.11 Keeping eye on Stocks’ performance:
In general terms, when you witness if the stock price and
volume of a stock suddenly jumps, there may be typically
three reasons for this:
i. Company’s fundamentals have changed, say a financial or structural
reform has been undertaken which has turned around the company’s
financial standing.
ii. The sector to which the company belongs, could be experiencing a
seasonal or circumstantial boom.
iii. Unfair trading practices by market participants which
may be in the form of cornering, insider trading, front
running, blank selling, etc. These practices may cause
sudden change in price chart, even of an inactive and
illiquid stock. These practices are discouraged and
curbed by the regulators through effective market
surveillance and investigations.
Moreover, there are several types of investors: 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 variousways.Adaily indicator of share price movements
is available in newspapers and also on website of the relevant stock exchange.
Youmay 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.
The following types of securities are available on the stock market for
investment:
• Ordinary/preference shares,Modaraba Certificates of listed companies
• Unit trust schemes
• Mutual funds (Open-end and Closed-end) certifi cates
• Corporate bonds/Debt Instruments i.e., Term Finance Certificates
(TFCs)
• Government securities i.e., Federal InvestmentBonds (FIBs), Pakistan
Investment Bonds (PIBs) and Special US Dollar Bonds.
Out of the above, most common product is the ordinary shares traded on the Stock Exchange.
9.2 Understand your risk profile:
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. A wise and prudent investor chooses
an investment product not only according to his
goals and the amount of capital available but also according to
his tolerance for risk. All investments carry a certain degree of
risk. You have to determine whether you are a “risk-prone” or
a “risk-averse” person. Depending upon the extent of risk you
intend to take, you should pursue an investment strategy
(aggressive, moderate or conservative) that fits your risk profile.
9.3 Do your homework before you invest:
Don’t put in your money until you have gathered and understood all relevant
information regarding the investment. Prepare yourself
for the vigorous homework of analyzing companies’
annual reports, accounts and other statements while
keeping abreast of what’s happening in the industry,
country and elsewhere that may affect your
investment. Consult your investment adviser/broker
to get latest market information about shares you
intend to buy or sell. Be skeptical of any thing picked up from rumors,particularly if you cannot explain the choice rationally. Please take your time
over your investment decisions. Do not be pressured by anyone telling you
that you are about to miss an exceptional opportunity to make money – It
is better to lose an opportunity than to lose your money.
9.4 Think long-term:
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 at a low price in case of an urgent
cash requirement. Bear in mind that even in the best of
securities/shares, there can be short-term aberrations. It is
important to have the capacity to hold your investments for
longer periods. Studies have shown that investments properly
timed and based on strong fundamentals have been proved very profitable
for investors in the longer term.
9.5 Avoid putting all your eggs in one basket:
The best way to minimize risk is to diversify your investments across various
investment products. If equities are your sole investments, it makes sense to
diversify between different sectors and companies. In
this way, loss incurred on some investments can be
absorbed or compensated by gains made in others,
keeping the overall return on investment positive.
You can also diversify your investment by investing in open-end mutual
funds managed under various unit trust schemes. While investing in mutual
funds check the credit rating of the fund and instrument. Similarly, while
investing in any security, check the credit rating of the concerned company,
if available.
9.6 Taxes & Commision:
Youmust know the rates of taxes and commissions charged
by the Central Board of Revenue (CBR)/broker as these
affect your costs, and hence your returns. There is no scale
of commission rates prescribed. As such the investors may
negotiate the rate of commission based on the services
desired and the volume and nature of their trades.The Finance Act, 2004 has imposed following two taxes on securities
transactions, which Brokers may charge to and collect from their clients
for onward depositing in government treasury:
1 - Capital Value Tax (CVT) @ 0.01% on purchase value of shares.
2 - Withholding tax @ 0.005% on sale value of shares.
9.7 Judgment of timings:
The aim of investing in stocks and shares is to buy at low
and sell at high. Knowing when, however, is the challenge.
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 determine.
9.8 Avoid greed and fear:
The stock market is driven by two emotions: greed and fear. People are
usually caught up in the boom fever and pay beyond the worth of
shares. This is the greed that drives bullmarkets. Never allow greed
to become your need. 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.
9.9 Handling of trades:
Give clear instructions to avoid ambiguity, check trade
confirmations received and keep a proper record of all your
transactions.
9.10 Beware of scams:
Beware of promises of quick profits or sky-high returns.
Remember: higher the gain on investments, higher is the risk
involved. This is the fundamental risk-reward trade-off.9.11 Keeping eye on Stocks’ performance:
In general terms, when you witness if the stock price and
volume of a stock suddenly jumps, there may be typically
three reasons for this:
i. Company’s fundamentals have changed, say a financial or structural
reform has been undertaken which has turned around the company’s
financial standing.
ii. The sector to which the company belongs, could be experiencing a
seasonal or circumstantial boom.
iii. Unfair trading practices by market participants which
may be in the form of cornering, insider trading, front
running, blank selling, etc. These practices may cause
sudden change in price chart, even of an inactive and
illiquid stock. These practices are discouraged and
curbed by the regulators through effective market
surveillance and investigations.
Moreover, there are several types of investors: 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 variousways.Adaily indicator of share price movements
is available in newspapers and also on website of the relevant stock exchange.
Youmay 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.
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