“Give a man a fish and you feed
him for a day. Teach a man to fish and you feed him for a lifetime.”
It’s all about empowerment. At AHCML we believe in empowering our clients by keeping them informed about the different
forms and dynamics of investing in the financial markets. Our goal
is to equip our clients with the knowledge and insight they require
to make intelligent investment decisions. That is what will “feed”
them in the long run.
What are Shares?
Shares represent partial ownership claim in a company.
They give the holder the right to receive dividend distributions
and a vote at the company's annual meeting. The shareholders vote
to elect the directors of a company who appoint the company's management.
The shareholders have specific rights under corporate law and the
Companies whose shares are " publicly listed " on stock exchanges
are required to provide information or "disclosure" to their
shareholders in return for being publicly traded. Common shares
are also referred to as "equity securities" or "equities" alluding
to the accounting term "Owner's Equity".
What is the Stock Exchange?
The stock exchange is a market place where shares are bought
Once a company has sold shares to the public, the initial buyer
can then resell those shares to other buyers. This buying and reselling
is done at the stock exchange.
What is the Role of the Stock Exchange?
The role of the stock exchange is to bring companies and
investors together in one place, such that it provides a market
- Shares of publicly listed companies to be bought and sold
- Raising capital
Additionally, the exchange is also responsible for monitoring
the market to ensure that it is working efficiently, fairly and
Stock Exchanges in Pakistan
Pakistan has three stock exchanges of which the one in
Karachi is the largest:
- Karachi Stock Exchange (Guarantee) Ltd.
- Lahore Stock Exchange (Guarantee) Ltd.
- Islamabad Stock Exchange (Guarantee) Ltd.
What are the Different Types of Stock?
Common stock holders have ownership and enjoy voting
rights in the company. However, in the event of bankruptcy, common
stock shareholders are entitled to assets left over after creditors,
bondholders and preferred shareholders have been paid in full.
Preferred stock holders have partial ownership in
the company but may not enjoy voting rights like common stock
holders. However, they do have other benefits. There
are four classes of preferred stocks, outlined below:
Shareholders have the right to accumulate dividend payments
that were skipped
in earlier years. They are the first to receive payments once
resumes dividend payout.
2. Non Cumulative
Shareholders do not accumulate skipped dividend payments.
Shareholders receive more than the normal dividend payments
if the company makes more than expected profit.
Shareholders can convert the preferred stock into a specified
number of shares of common stock.
How Does Trading Take Place?
Trading takes place in the stock exchange through a computerized
system to ensure a fast, fair, efficient, cost effective and transparent
What is Settlement?
Once a deal has been made, the settlement process transfers stock
from the seller to the buyer and arranges the corresponding exchange
of money between buyer and seller.
What are the Different Trading Segments?
T+2 Settlement System
Purchase and sale of securities is netted and the
balance is settled on the third day following the trade.
Provisionally Listed Counter
The shares of companies, which make a minimum public
offering of Rs.100 million, are traded on this segment from the
date of publication of the offer documents. When the company completes
the process of dispatch/credit of allotted shares to subscribers,
it is officially listed and placed on the T+2 counter through the
CDC. Trading on the provisionally listed counter then comes to an
end and all the outstanding transactions are transferred to the
T+2 counter with effect from the date of official listing.
T+1 or Spot Transactions
Spot transactions imply delivery upon payment. In
spot transactions, the trade is generally settled within 24
A futures contract involves the purchase or sale of
a financial or tangible asset at some future date, at a price
fixed in the present.
How do you Trade?
Trading involves first selecting a broker, opening an account with
the broker and then proceeding to buy/sell shares in the market.
The first step is to find a stock broker or advisor.
Brokers assist you in getting the best price available when
you want to buy or sell shares. It is important to select
an appropriate and experienced broker who is well versed in market
practices has knowledge of market trends.
Following broker selection, the individual must
fill out an 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 is also recommended that the individual
specify that business can only be transacted in the account on his/her
When the individual decides to buy/sell shares of
a particular company, the stock broker is contacted and asked to
buy/sell a particular number of shares up to a certain value. Following
this, a contract note is received which contains important 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 transaction is executed
- Commission charged by broker
What are the Different Types of Orders?
Order executed at the prevailing market rate
The individual specifies the price at which the order
should be executed. It defines the highest price which the individual is
willing to pay when buying and the lowest price which the individual
is willing to accept when selling
Stop Loss Order
This provides a method of protecting the investment
when the price falls. Stop loss orders are applicable to selling,
where the order price is set lower than the current market value
and the order is triggered when the stock price falls
How Can One Become a Shareholder?
Initial Public Offering (IPO)
When companies offer stock to the general public
for the first time, it is called a flotation or IPO. These shares
can be bought directly from the company without using the services
of a broker. For example, investors may see an advertisement in
a newspaper from a company issuing shares. The investor has to simply
fill in the share subscription form and deposit the form along with
a cheque for the subscription amount in a branch of the designated
bank(s) for the IPO.
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 shareholding.
The most common way of becoming a shareholder is by buying shares
through trading in the secondary market. Through a broker, an investor
can buy shares from existing investors who wish to sell them.
What are the Criteria for Stock Selection?
Following are some criteria worth evaluating when selecting stocks:
- Earnings growth
- Price/Earnings (P/E) ratio
- Dividend yield
- Market capitalization
- Relative strength
- Sector analysis
- Research analysis
- Annual report analysis
What are the Different Stock Selection Strategies?
Several stock selection strategies can be employed. A few of them
are mentioned below:
Buy and Hold
The buy and hold principle rests on the assumption
that in the long term, stock prices and the market as a whole will
rise, despite short term intermediary fluctuations.
Market timing employs an opportunistic strategy which
suggests that it is sensible to buy when the market is low and sell
when it is high in order to maximize profit
The growth strategy maintains that companies with
high earnings growth are able to pay high dividends to the investors
and will do well in the long run
Value investing focuses on traditional valuation
metrics such as the P/E ratio
Income investors buy stocks that pay the highest dividends.
They focus primarily on securing a steady income stream instead
of pursuing capital gains
What is the Central Depository Company of Pakistan Limited (CDC)
and the Central Depository System (CDS)?
The purpose of the CDC is to operate as a central securities
depository on behalf of the financial services industry in order
to contribute to the country's ability to support an effective
capital market system, which will attract institutional and retail
investors, both local and foreign.
The CDC was incorporated in 1993 to manage and operate the CDS.
CDS is an electronic book entry system used to record and transfer
Electronic book entry means that the securities do not physically change
hands; rather, the transfer from one client account to another
takes place electronically.
With the launch of CDS, paper based settlement has been eliminated
resulting in the reduction of workload and manpower, speedy transfer
of ownership and reduction in risk of damaged, lost,
forged or duplicate certificates.
What are the Different Types of Investment Analyses?
The value of a security is evaluated by studying the
financial data of the issuer. Focusing on the business fundamentals,
it analyses the assets, liabilities, expenses along with the management
and position of the issuer in the industry. Fundamental analysis
is useful for a long-term investor looking for companies with solid
foundation, growth and income potential, or for a short-term investor
looking for companies that are on the verge of being discovered.
The value of a security is evaluated by studying market
statistics. Unlike fundamental analysis, technical analysis disregards
the issuer’s financial statements, focusing more on the market
trends which include the upward or bullish trend and downward or
bearish trend. Technical analysis is useful for a long-term investor
who is not as concerned about one company's fundamentals because
he or she will diversify to minimize risk, or for a short-term investor
who is waiting for investor sentiment to change.