NAVIGATING THE PAKISTAN STOCK EXCHANGE: A BEGINNER'S GUIDE TO SMART INVESTING

In this guide, I will provide valuable advice for those looking to start their investment journey on the Pakistan Stock Exchange. Lets first understand the facts and basics of stock market:

Why Save & Invest: 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:

1. Planning the next vacation
2. Buying a home theater
3. Planning a destination wedding
4. Renovating your house
5. Upgrading your car

There is also a list of things you have to do in the distant future. These life goals may include:

1. Children’s college and university education
2. Investment for retirement
3. Entrepreneurial set-up
4. 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:

1. Severe/ terminal disease
2. Accidents
3. 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:

1. We beat the effects of inflation which eats up the value of our money.
2. 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!

BEGIN SAVING: 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.

BEGIN 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:

1. Bonds
2. Treasury Bills (T-Bills)
3. Term Finance Certificates (TFCs)
4. Mutual Funds
5. Stocks

WHERE TO INVEST: 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.

WHAT THE STOCK MARKET CAN DO FOR YOU: By purchasing shares of the selected companies, you build your portfolio of stock investments. This portfolio is formed and selected on the basis of:

1. Company
2. Sector
3. Returns you are expecting
4. Risk capacity (how much can you invest in spite of market volatility)
5. Risk tolerance (how much market downturn and volatility can you sustain)
6. Payouts (dividends or bonus shares)
7. 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 the increase in the 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 most other investment vehicles available in the country.

Returns earned from the Stock Exchange compared to other asset classes over the eleven year period ended 30th June 2022:

*Data as of 30th June 2022

*(Returns are shown on a compounded annual basis)

The KSE-100 Index provided compounded annual returns of 11.92% over the last eleven years, June 30th, 2011, to June 30th, 2022. 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.

HOW THE STOCK MARKET WORKS: 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 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.

WHY & HOW ARE SHARES OF COMPANIES LISTED: PRIMARY AND SECONDARY MARKET:

The main purpose of the stock market is raising 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 to be 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 Capitalization (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 to measure the performance of a section of the stock market.

INDICES LISTED ON PSX: There are 14 Indices listed on PSX which are:

1. KSE 100 Index
2. KSE All Share Index
3. KSE 30 Index
4. PSX-KMI All Shares Index
5. KMI 30 Index
6. BKTI (Tradable Banks Index)
7. OGTI (Tradable Oil & Gas Index)
8. NITPG Index
9. UPP9 Index
10. MZNPI Index
11. NBPPGI Index
12. PSX Dividend 20 Index
13. JSMF Index
14. ACIETF Index

SHARIAH COMPLIANT INVESTMENTS: For those investors who want to invest in Shariah compliant companies, there are listed companies on the Stock Exchange that are Shariah compliant. The PSX-KMI All Shares Index & the KMI 30 Index (KMI: KSE-Meezan Index) represent listed companies that 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.

BASIC GUIDELINES FOR STOCK INVESTMENT

DEFINE YOUR INVESTMENT OBJECTIVES: A basic guideline is to understand what you really want from your stock investment:

1. 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)?
2. Do you want to invest for dividends or for capital gain or for both?
3. 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:

1. Investing in different products listed on the Stock Exchange such as stocks of listed companies, T-bills and mutual funds
2. Investing in stocks based on different industrial sectors or their market capitalization
3. Investing in stocks based on shares that give dividends or shares that provide for sufficient capital gain or both
4. 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.

1. 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 the market risk level.
2. 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.
3. 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 in, you may want to look at:

1. The fundamentals and financials of the companies
2. The volume of activity in the stock market
3. The prevailing share price
4. The Price to Earning ratios (P/E)
5. The Earning per Share (EPS)
6. The indices in which the companies are listed (are they blue-chip KSE 100 Index companies?)
7. The annual payouts given by the companies
8. 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 in.

WHEN TO ENTER OR EXIT THE STOCK MARKET: A lot of investors are usually confused about 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. Similarly, 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.

Embarking on the path of investment, especially in the Pakistan Stock Exchange, offers a myriad of opportunities for financial growth and wealth accumulation. As you set out on this journey, it's imperative to recognize the transformative power of saving and investing. Whether your aspirations involve planning a dream vacation, buying a home theater, or securing your children's education, a strategic approach to investing can turn these dreams into reality. The Pakistan Stock Exchange, with its historical performance and competitive returns, stands as a promising avenue for long-term investment. The KSE-100 Index, showcasing compounded annual returns of 11.92% over the last eleven years, reflects the potential for substantial gains. To embark on this journey, begin by saving consistently and progressively, allocating at least 20% of your income towards your investment goals. As you transition to investing, diversify your portfolio wisely, considering a mix of stocks, bonds, and other financial instruments. Assess your risk tolerance and capacity, align your investment objectives with a long-term perspective, and meticulously select stocks based on comprehensive research. Remember, the key lies not just in when you enter or exit the market, but in your commitment to staying invested for the long haul. By embracing these principles, you position yourself to capitalize on the vast potential of the Pakistan Stock Exchange, fostering a secure and prosperous financial future. Following are some generic practical advice from my side:

1. Understand the Pakistan Stock Exchange (PSX): Before diving into the market, familiarize yourself with the workings of the PSX. Learn about the key indices, such as the KSE-100 index, and understand how the exchange operates. Explore the sectors that dominate the market and grasp the economic factors that influence stock prices in Pakistan.
2. Local Economic Landscape: Keep a close eye on the economic landscape in Pakistan. Understanding the country's economic policies, geopolitical factors, and industry trends can provide insights into potential investment opportunities and risks.
3. Select a Reliable Broker: Choose a reputable brokerage firm that operates in the PSX. Look for a broker that offers a user-friendly platform, transparent fee structures, and a range of services. Consider the broker's reputation and track record to ensure a secure and efficient trading experience.
4. Regulatory Environment: Stay informed about the regulatory environment governing the PSX. Be aware of any changes in regulations, as they can impact your investment decisions. Compliance with regulatory requirements is crucial for a smooth and legal trading experience.
5. Diversify Your Portfolio: Diversification is equally important in the Pakistani stock market. Spread your investments across different sectors to minimize risk. Consider industries such as banking, energy, technology, and manufacturing to build a well-balanced portfolio.
6. Stay Informed on Company Performance: Thoroughly research and analyze the performance of companies listed on the PSX. Review financial reports, earnings statements, and company announcements. Understanding the fundamentals of the companies you invest in is essential for making informed decisions.
7. Monitor Global and Local News: Keep yourself updated on global and local news that could impact the Pakistani stock market. Economic indicators, political developments, and international events can influence stock prices. Regularly follow financial news sources to stay ahead of market trends.
8. Risk Management: Assess your risk tolerance and implement sound risk management strategies. Set realistic profit and loss targets, and consider using tools like stop-loss orders to protect your investments from significant downturns.
9. Start Small and Learn: Begin your investment journey with a small amount of capital. This allows you to gain experience without exposing yourself to substantial risks. Learn from your successes and mistakes, and use this knowledge to refine your investment strategy over time.
10. Build a Long-Term Perspective: While day trading is an option, adopting a long-term investment perspective is often more sustainable. Focus on companies with strong fundamentals and growth potential, and be patient as you wait for your investments to mature.

Conclusion: Investing in the Pakistan Stock Exchange requires diligence, education, and a keen awareness of the local economic landscape. By following these tailored tips, beginners can navigate the PSX with confidence, increasing their chances of building a successful and resilient investment portfolio. Remember, continuous learning and adaptability are key to thriving in the dynamic world of stock market investment in Pakistan.

Disclaimer:

The information provided in this article is intended solely for educational and awareness purposes. It does not constitute financial advice, and the author does not accept any responsibility for the actions taken by individuals based on the content of this article. The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Readers are strongly encouraged to conduct their own research and seek professional financial advice before making any investment decisions. The author shall not be held liable for any financial losses, damages, or consequences arising from the use of information provided in this article. Investing in financial markets involves inherent risks, and individuals should carefully consider their financial situation and risk tolerance before making any investment decisions.