Stock Market

In today’s inflationary world if our savings are not earning then they are in danger of losing their value very quickly. In order to protect these savings from devaluation a number of investment opportunities are available ranging from having high to low risk. A person may avail any of these opportunities depending upon his risk aversion. Financial markets all over the world provide a platform for all such savers and borrowers of money. 

Stock markets/Bourses are also a crucial part of these financial markets, which provide an avenue for individuals as well as institutions to invest in companies. These companies are registered with the Securities & Exchange Commission of Pakistan as public companies and are listed on any of the three stock exchanges of Pakistan i.e. Karachi, Lahore and Islamabad stock exchanges (KSE, LSE, ISE). One can buy the share/stock/scrip of such company through a licensed broker to become a part owner of the company. Your share could be stored in electronic form in the central depository that also sets you free from the hassle of physically securing your financial asset. Once you become the shareholder of the company, you get the right to vote in company’s annual meetings and direct corporate policy. 

One attractive feature of investing in stocks is that your liability is limited which means you risk to lose only which you have invested. Moreover, there are mainly two ways in which a shareholder could expect to be compensated for investing in a particular company i.e. dividends and capital gains. Dividends are that part of the earnings, which the company may decide to distribute to its shareholders. Paying of dividends is not mandatory for the companies but investors who eye dividends might be interested in buying stocks of those companies, which have historically paid them. On the other hand, capital gains refer to profit that is realized when you sell the share which you have previously bought. So either one can keep on holding his share and receive dividends or when the time is right sell his share for a profit and transfer the part ownership to another investor.

Like all other investment endeavors, plunging into the arena of stock markets also demands due diligence and constant monitoring of the markets as a number of factors are affecting the price of stocks. A truckload of paid and unpaid information is available providing detailed analysis on the companies and market as a whole. Stock indexes such as KSE-100 index is also one such indicator of the market performance which investors keep track of. These indexes provide a benchmark against which one can compare the performance of his own shares. 

Still if an individual feels that he is unable to comprehend or is pressed for time owing to other professional commitments, he can gain access to the stock markets through mutual funds. As the name indicates, mutual funds pool the money of a number of investors and then further invest them in stock markets. In this way, an individual investor does not have to worry about the technicalities of the stock market as financial experts hired by the mutual funds make investment decisions on their behalf. In addition to this, another benefit a small investor gets from getting exposure of stock market through mutual fund is diversification. An individual investor does not have enough resources to minimize his risk by buying multiple securities but mutual funds do exactly that after pooling all the funds. 

Except for a few shocks in 2005 and 2008, historically Pakistani stock markets have fared well. Especially in the past three years KSE, the leader of the local pack, has shown stellar performance. In 2014 KSE-100 index posted a return of around 25% while in the last two consecutive years preceding 2014, KSE-100 posted a return of around 50% and was ranked in the top 5 stock markets in the world. The relatively poor performance in 2014 was also attributed to the political situation of the country, which was marred by long sit-ins by the opposition parties. In a nutshell if someone is ready to accept the inherent volatility of equity markets, he can earn a handsome return. Today’s market is well regulated and evolving in order to safeguard investor’s rights. There is a risk management system in place and the market is equipped with state-of-the-art automated systems such as Karachi Automated System (KATS), Corporate Action Reporting System etc. that have made the operations streamlined. Through the stock market, investor could also get access to corporate and government fixed term securities. 

Recent determination of the government to privatize and ongoing military action named “zarb-e-azb” would be the driving forces behind deciding the fate of equity market return in 2015. Let us wait and see what the future holds in store.