You want to live your life and follow your dreams. We all have a list of things that we want to achieve in our lives which require money to attain them. These may include goals for the near future like:
- Planning the next vacation
- Buying a home theater
- Planning a destination wedding
- Renovating your house
- Upgrading your car
There is also a list of things you have to do in the distant future. These life goals may include:
- Children’s college and university education
- Investment for retirement
- Entrepreneurial set-up
- Buying your own house
All these life goals are achievable if you plan well, save early and invest prudently
While planning our investments we must also account for the unforeseen and emergency situations we may be faced with. Life is unpredictable and we can come across any situation like:
- Severe/ terminal disease
- Accidents
- Loss of employment or business downturn
All the above need planning our investments. In order to invest, we begin with savings. We must invest our savings to ensure:
- We beat the effects of inflation which eats up the value of our money.
- We multiply/ increase the value of our money saved instead of leaving it idle
If you have thought of all of the above, Congratulations - You are ready to save and invest!
You can start saving as early as possible. Perhaps a chunk of your salary should be saved every month until you have enough to invest; a rule of thumb is to save 20% of your income. At the same time, if you have family support or other sources of income, a monthly addition of these funds can definitely help you save more until you have enough funds to start investing.
There are many savings & investment plans and products available in the market to choose from. If you keep your money in a bank account, you will get nominal returns on your savings. However, you are bound to get higher returns and cushion yourself against risk if you can invest your savings in a diversified portfolio of different investment vehicles such as:
- Bonds
- Treasury Bills (T-Bills)
- Term Finance Certificates (TFCs)
- Mutual Funds
- Stocks
It is always a good idea to invest your money where you get good returns.
The stock market is one such avenue where there is good upside potential, historically, and where the returns have been higher than those from other investment avenues. Investing for the long term is a better option than investing for the short term in the stock market. It will not only allow you to compound your earnings but will also enable you to earn dividends which can be re-invested in the stock market, thereby increasing your earnings. So you must focus on compounding your earnings, reinvesting your dividends, and achieving capital gain.
By purchasing shares of the selected companies, you build your portfolio of stock investments. This portfolio is formed and selected on the basis of:
- Company
- Sector
- Returns you are expecting
- Risk capacity (how much can you invest in spite of market volatility)
- Risk tolerance (how much market downturn and volatility can you sustain)
- Payouts (dividends or bonus shares)
- Any other considerations you may have according to your stock investment preferences
By purchasing the shares of a company, you become a shareholder of that company and are entitled to dividends and other payouts such as bonus or right shares issued by the said company, along with the advantage you can have of capital gain from increase in price of the shares.
If you have decided to invest in the stock market, then it is a decision well worth taking. Consider this that Pakistan Stock Exchange has performed better over the last several years, above and beyond other investment vehicles available in the country
Returns earned from the Stock Exchange compared to other asset classes over the ten year period ended 30th June 2021:
*Data as of 30th June 2021
*(Returns are shown on compounded annual basis)
The KSE-100 Index provided compounded annual returns of 14.55% over the last ten years, June 30th, 2011 to June 30th, 2021. These figures compare fairly well with other avenues of investment in Pakistan.
The fact that the Pakistan Stock Exchange has given good returns historically, it is safe to say that investment in stocks in Pakistan Stock Exchange may well be worthwhile for the long run
The stock market is a place where companies list themselves to make their shares available to a broad range of investors to purchase these shares. You, as an investor, have the option to choose from multiple stocks of different companies to buy in order to build your investment portfolio. The share prices of the shares listed on the Stock Exchange fluctuate according to the buy & sell transactions taking place.
PRIMARY AND SECONDARY MARKET:
The main purpose of the stock market is raising of capital through investment in shares of listed companies. Listed companies are those which issue shares in the stock market to raise capital. This is done either through an Initial Public Offering or Rights issue.
An IPO or Initial Public Offering (Primary market) is the issuance of shares by a company in the stock market in order that its shares are purchased by the general public. Once the IPO has taken place, the shares continue to be traded in the stock market (Secondary market), changing hands between buyers and sellers.
Another way a company raises its capital is by issuing right shares at a certain price to existing shareholders. A shareholder interested in purchasing the right shares may do so if he deems it fit.
PSX & ITS LISTED COMPANIES:
Pakistan Stock Exchange consists of a list of more than 500 companies in more than 35 different sectors or industries. The total Market Capitalisation (volume of outstanding shares x share price) was Rs 8.24 trillion as of July 30th, 2021
WHAT IS AN INDEX & WHAT IS ITS PURPOSE:
Index is a grouping of selected companies’ stocks according to certain financial parameters in order to measure the performance of a section of the stock market.
INDICES LISTED ON PSX:
There are eleven Indices listed on PSX which are:
- KSE 100 Index
- KSE All Share Index
- KSE 30 Index
- PSX-KMI All Shares Index
- KMI 30 Index
- BKTI (Tradable Banks Index)
- OGTI (Tradable Oil & Gas Index)
- NITPG Index
- UPP9 Index
- MZNPI Index
- NBPGI Index
SHARIAH COMPLIANT INVESTMENTS:
For those investors who want to invest in Shariah compliant companies, there are listed companies on the Stock Exchange which are Shariah compliant. The PSX-KMI All Shares Index & the KMI 30 Index (KMI: KSE-Meezan Index) represent listed companies which are Shariah compliant. There are more than 200 companies listed on the PSX-KMI All Shares Index. The PSX-KMI All Shares Index & the KMI 30 Index were developed by PSX and Meezan Bank Limited. The listed companies’ Shariah compliance status is based on certain technical parameters and specifications as approved by a Shariah Board. In case of KMI 30 Index, it was approved by Shariah Supervisory Board of Meezan Bank Ltd., chaired by eminent Shariah scholar Justice (Retd.) Mufti Muhammad Taqi Usmani.
DEFINE YOUR INVESTMENT OBJECTIVES
A basic guideline is to understand what you really want from your stock investment
- Do you want to invest for the short term (1-3 years), medium term (3-5 years) or for the long term (5 years or more)?
- Do you want to invest for dividends or for capital gain or for both?
- How much risk can you take in terms of market downturns?
These are the basic questions you must address before investing
Optimally, you may want to invest in stocks for the long term, in order to earn dividends (periodically, through dividend yielding stocks) and for capital growth (gain in share price) over a number of years
YOU SHOULD DIVERSIFY YOUR INVESTMENT
As mentioned earlier, it is important to have a diversified portfolio of investments. You can have a diversified portfolio of stocks in order to cushion the effects of market downturns & volatility and to keep your total investment relatively secure.
You can diversify your portfolio by
- investing in different products listed on the Stock Exchange such as stocks of listed companies, T-bills and mutual funds
- Investing in stocks on the basis of different industrial sectors or their market capitalisation
- Investing in stocks based on shares that give dividends or shares that provide for sufficient capital gain or both
- Investing in stocks with different risk/ return levels. Some providing greater returns while others providing less returns. At the same time, the risk level of former will be greater than that of the latter
EVALUATE YOUR RISK TOLERANCE AND CAPACITY LEVEL
You must evaluate how much risk you can take/ what is your risk tolerance level if the market takes a downturn.
- If you are risk-averse, your investment portfolio of stocks should be passive. In this way, you will be assured of receiving a return at market risk level.
- If you are less risk averse, your investment portfolio can be a combination of stocks which provide for returns at market risk level and above market risk level
- If you are investing as an aggressive investor, you can invest in stocks which provide for higher returns reflective of higher than market risk
Having a balanced portfolio with different market risk levels of shares and their returns is usually a good combination to build a portfolio of stocks.
You must also understand your risk-taking capacity. How much are you able to invest in the stock market in the face of the downturns and volatility it is undergoing?
STOCK SELECTION – LOOK AT THE PARTICULARS OF LISTED COMPANIES’ STOCKS
In order to select the companies you want to invest into, you may want to look at:
- The fundamentals and financials of the companies
- The volume of activity in the stock market
- The prevailing share price
- The Price to Earning ratios (P/E)
- The Earning per Share (EPS)
- The indices in which the companies are listed (are they blue-chip KSE 100 Index companies?)
- The annual payouts given by the companies
- The industry/ sector performance of the companies
The above are some of the guidelines you may want to go by in order to select the companies you want to invest into.
WHEN TO ENTER OR EXIT THE STOCK MARKET
A lot of investors are usually confused when to enter the market and when to exit it. It is a safe proposition to enter the stock market when the Price to Earning ratios are low and the stock market is in an oversold position. Similiarly, it may be profitable to exit the market when the opposite conditions are true. But, as a general rule, it is not when you enter or exit the stock market, but how long you can stay in it.
