How Does The Stock Market Work?
After the Initial Public Offering of the shares of a company, the stakes continue to be traded on the stock exchange and change hands between buyers and sellers.
A stock market is where companies list themselves to make their shares available to a broad range of investors to purchase them. Any person, as an investor, has the option to choose from multiple stocks of different companies to buy in order to build his investment portfolio. The share prices of the shares listed on the Stock Exchange fluctuate according to the buy & sell transactions.
Why and how are shares of companies listed?
Primary And Secondary Market
The primary purpose of the stock market is to raise capital through investment in shares of listed companies. Listed companies issue shares in the stock market to raise capital.
This is done either through an Initial Public Offering or Rights issue.
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An IPO or Initial Public Offering (Primary market) is the issuance of shares by a company in the stock market to make its shares available to the general public for purchase. Once the IPO has taken place, the shares continue to be traded in the stock market (Secondary market), changing hands between buyers and sellers.
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A company also may raise its capital by issuing the right shares at a specific price to existing shareholders. A shareholder interested in purchasing the right shares may do so if he wishes.
PSX & its Listed Companies
Pakistan Stock Exchange (PSX) comprises more than 500 companies in 35 different sectors or industries. The Pakistan stock market is suitable for international and domestic investment. In January 2016, the country`s three major stock exchanges in Lahore, Karachi, and Islamabad merged to form Pakistan Stock Exchange Limited (PSX).
How To Start Investing In Psx
To begin investing in the stock exchange, one must first understand the workings of a stock exchange. The Stock Exchange may be thought of and understood as an auction. Investors who assume a company will do well will raise the prices of its shares and vice versa. In order to avoid riskier stocks and losses, it is essential to focus on and determine low-risk stocks and assets, profitable stocks, and non-profit stocks so one can keep them into account when making serious decisions about investing. Therefore, understanding the risks and potential returns associated with each stock is extremely helpful in creating a high profit and avoiding losses. A sensible approach for a reasonable equity portfolio is having a balanced portfolio with different levels of equity market risk and their returns.
Steps To Start Investment In PSX
Opening A Brokerage Account:
- To start investing in the Stock Exchange, an investor must open a brokerage account in a brokerage firm. The said Account must be opened in your name.
- He will be given a Client Identification Number or an Account Number against this account. The terms and conditions prescribed in the Account Opening Form must match the Standard Account Opening Form available on the PSX website.
Opening A Central Depository Company (Cdc) Account:
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Subsequently, the investor will open a CDC Sub Account. The CDC Sub Account is the account through which he can trade in the stock market.
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Investors should also open a CDC Investor Account. This account is opened at the CDC, adding to more excellent safety and personal custody of the investor’s shares. A CDC Investor Account is more secure than a CDC Sub Account because it provides more control over securities. After all, they can only move once the account holder gives a transaction order.
Unique Identity Number (Uin) Of The Investor:
An investor is required to ensure that he is assigned a Unique Identity Number (UIN). It is this number against which all his brokerage accounts and transactions will be recorded.
Deposit Of Funds For The Purchase Of Shares:
Initial funds for the purchase of shares shall be deposited. It must be ensured that it is not a cash deposit.
Place Your Order & Get Confirmation:
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Once the decision has been made about which companies’ shares to buy, the orders should be placed through the stock-broker (or through the online application provided by the brokerage firm)
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A Trade Confirmation against the executed order shall be received after placing and executing the order.
Settlement Of Transactions & Stock Market Ecosystem:
The shares purchased or sold are settled (payments made or received) through NCCPL (National Clearing Company of Pakistan Limited). The share exchange occurs through the CDC (Central Depository Company Limited). These two organizations and the brokerage firms/ TREC holders form the major part of the ecosystem of PSX.
Online Trading Facility:
Many brokerage firms offer Online Trading facilities for their customers. This allows you, as an investor, to trade on the Stock Exchange through the online application or software.
Basic Taxes & Charges:
There are several taxes and charges applicable on shares trading at PSX; the basic ones are listed as follows:
CGT (Capital Gains Tax) [Tax Return Filers: 15%, Tax Return Non-filers: 20%], Brokerage Commission [Varies amongst brokerage firms], CVT, IPF, SECP Fee, etc.
