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A stock, or share, is a type of asset which represents ownership in the issuing corporation. Stocks are mostly traded on stock exchanges, which in Pakistan’s case is the Pakistan Stock Exchange. Corporations issue stock to raise funds for their operations, and in return stock holders may have a claim to the company’s assets and earnings.
A stock exchange is a marketplace for formal buying and selling of shares in publicly listed companies. Pakistan Stock Exchange (PSX) is Pakistan’s only stock exchange.
A listed company is one whose securities are listed on an exchange. The share price of a listed company is quoted and traded on a stock exchange. An unlisted company is one whose securities are not listed on an exchange. Its shares are therefore not available for trading to the general public. Private limited companies are examples of unlisted companies.
A stock broker is an organization that matches investors who want to buy shares with investors who want to sell shares (or vice versa). Stock brokers offer a fast and efficient way to connect buyers with sellers, and charge a fee (commission) for this service. They are licensed by the Securities and Exchange Commission Pakistan.
One way companies may raise funds is by issuing bonds. Bonds represent the amount of funds lent out to the company. A bond is a debt instrument which entitles the bondholder to a fixed rate of interest. Shares on the other hand are equity instruments and represent proportionate ownership in the issuing company.
An investment is an asset bought by an individual or an organization with the expectation that it will generate some future income or profit. For example, this could be stocks, bonds, real estate or commodities. The type of asset any investor chooses depends on their specific risk and return constraints, and this will varies from one individual to another. For example, stocks generally provide a higher return than bonds, but are more risky.
It is a standardized contract which allows buying or selling of eligible underlying shares at a certain date in the future, at futures price i.e., the price on which it is bought or sold in the CSF market. It is settled in cash, where the result of the settlement is the cash difference between the futures price and final settlement price. The minimum lot for trading in CSF is 1 contract that provides exposure of standard 500 shares of underlying shares. Contract maturity is 90 days after the contract is listed. The new 90-day contract for the upcoming month is listed on Monday (or the next trading day if Monday is a holiday), following the last Friday of the current month. The contract matures or expires on the last Friday (or preceding trading day if Friday is a holiday) of the expiry month. Settlement takes place on T+1 basis.
A dividend is the distribution of company earnings to its shareholders. It may be in cash form or bonus shares. These are often paid out quarterly and are determined by the company’s board of directors. The dividend yield is simply the dividend per share divided by the share price, expressed in percentage form.
The ex dividend date is the date before which you must own the stock to avail the issued dividend. This date may be different for different companies. Once the ex dividend date passes, a stock is generally referred to have gone ‘ex dividend’. For example, if TRG is trading at PKR 100 per share and issues a PKR 5 dividend, then once the ex dividend date passes (i.e. the company distributes the dividend), the share will go ex dividend and will now trade at PKR 95 per share.
A portfolio is simply a collection of financial investments like stocks, bonds, commodities, cash, real estate and private investments. Many factors influence how a portfolio is designed, including the investors risk appetite, return requirements, time horizon and liquidity constraints
Diversification is a risk management strategy which involves building a portfolio will a wide array of assets. Diversification may be achieved by investing across different asset classes and by investing widely within a single asset class. For example a diversified portfolio may contain four different asset classes, namely stocks, bonds, real estate and gold. Within stocks, the portfolio may contain twelve different stocks i.e. diversification within the asset class.
Bull & bear markets are terms used to describe how the stock market is performing. A market which trends upwards where the economy is stable is generally referred to as a bull market. A bear market exists in a weakening economy where most stocks are on the decline.
A fiscal year is a twelve month period chosen by a company to report its financial information, and is commonly used for accounting purposes to prepare financial statements.
A fiscal year is a twelve month period chosen by a company to report its financial information, and is commonly used for accounting purposes to prepare financial statements.
In order to raise additional funding, a company may issue right shares to the existing shareholders. A right issue therefore allows shareholders to buy shares of a company before it is offered to the public, usually at a discounted price. The new shares are usually issued in proportion to the existing investors’ holdings.
A Central Depository System (CDS) is an electronic book-entry system for custody and transfer of securities. CDS was introduced to replace the manual system of physical handling and settlement of shares at the stock exchange. The CDS is managed by the Central Depository Company (CDC) which is incorporated under the Central Depositories Act 1997. Investors can open their accounts directly with CDC, called Investor Accounts, or open sub-accounts with a brokerage firm. With the introduction and implementation of the CDS and automated trading system, trading and settlement of securities have become efficient.
A primary market is a market where securities that have never been issued are being offered to the public. This is an initial public offering (IPO), also called the primary issue and is therefore a transaction between the issuing company and the investor. A buyer of the initial issue may consider selling the security to another party, and this transaction is done in the secondary market where the outstanding securities are traded amongst investors.
Inflation is the rate for which prices for goods and services rise. The most common indicator of inflation is the CPI which is released monthly.
A market order is an order to buy or sell a stock at the market’s current best available price. It generally ensures execution, but does not guarantee a specific price. These types of orders are best to in situations where the goal is to execute the trade immediately.
A limit order is an order to buy or sell with a restriction (the ‘limit’) on the maximum price to pay when buying, or the minimum to sell at when selling. If the order is filled, it will only be at the specified limit price or better.
A stop loss order is an order place to buy or sell a specific stock once the stock reaches a certain price. It is designed to limit the investor’s loss on any specific position. One advantage of such orders is that investors don’t need to monitor their holdings continuously as the stop loss will trigger automatically once the stock reaches the specified price.