If you are a
beginner or potential stock market investor, this brief tutorial will
help you to familiarize with the nature of this business. We hope you
enjoy this text as it answers many of your trading queries. The focus of
this tutorial is of sharing knowledge and to educate the potential
investors about the working of the stock market and available investment
avenues-risks and benefits. However, it is intended for the purpose of
information and education only and is not guaranteed by S.Z
Securities (Private) Limited as to accuracy, completeness, nor any
trading result, and does not constitute trading advice or constitute a
solicitation of the purchase or sale of any securities. The Rules and
Regulations of the Stock Exchanges and Securities and Exchange
Commission of Pakistan (SECP) should be consulted as the authoritative
At S.Z Securities (Pvt) Ltd our customers always
come first. This guidance is provided
as introductory material for individuals and beginners who want to
develop an understanding of investing in the stock market. By clicking
on the following links you can get description of particular concept.
The links are given as follow:
POLICY & TAX INCENTIVES
& Settlement System:
What is the Stock Exchange?
The stock exchange can be best defined as:
An organized marketplace for securities featured by the centralization
of supply and demand for the transaction of orders by member brokers
for institutional and individual investors.
Stocks in publicly traded companies are bought and sold
at a stock market also known as a stock exchange. This is the most
common way of buying and selling shares.
The Stock Exchange can be also seen as a control to regulate
the Marketplace where listed public companies and traders buy and
Types of Stock
There are three Stock Exchanges in Pakistan, namely
1. Karachi Stock Exchange; formed in 1947,
Lahore Stock Exchange; formed in 1971,
Islamabad Stock Exchange; formed in 1989.
Out of all the three Exchanges, the Karachi Stock Exchange
is the premiere Stock Exchange of the country, with over 700 listed
companies. It was established soon after the creation of Pakistan
What are Shares?
The term ‘shares’ can be best defined as ‘represented ownership
in part of a company. When you buy a share in a company you become
a joint owner of the business and share in the future of that business.
This is also known as equity’.
WhyCompany Issue Share?
Companies issue shares to raise money from investors. This
money is used for the development and growth of businesses of companies.
A Company can issue different types of shares such as ordinary
shares, preference shares, shares without voting rights or any other
shares as are permissible under the law. These give shareholders
a stake in the company’s equity as well as a share in its profits,
in the form of dividends, and a voting right at general meetings
Tips for Investing.
Thinks to avoid.
Greed; being greedy
can be a problem as it corrupts wisdom,
Making the same
crowd, as the loss at the end is of the individual and not the
Putting all your
‘eggs in one basket’. You should diversify and spread your investment,
Using rumors as
tips, as this can result in losses. A tip can end up as a ‘pit’,
emotional can effect reasoning. Traders should use research
backed by fundamental reasoning.
pays, perseverance gains,
loan repayment is not an investment.
Thinks to remember
Information; it must be checked. Opinion, facts or fiction?
Knowledge; Stock Market principles and practices are unique.
Master its cycles, its ups and downs,
Wisdom; success depends on your discipline and self improvement,
Action plans; plan a scheme, act and follow through. Have options
and tactics to win the Stock Market game,
Shrewd and Thrifty; be prudent with your money. Avoid stocks
that are overvalued but keep the cash or save for other investments,
Stock Value; be aware of stock’s true value, despite its ups
Risk Vs. Reward; minimize your risk, maximize your returns,
Investment protection; safety of your portfolio and Share Capital
is more important.
A good example of understanding the above can be in the
case of Hershey’s. Just because the chocolate tastes good does not
mean that the position of the company is strong. A point should
be made that the product of a company does not provide merit to
its strength in the index.
Things You Should Know Before Trading.
the Company Do?
the Company Profitable?
Is the Company's Earnings History and Outlook?
Richly Is the Company's Stock Valued?
Are the Company's Competitors?
Runs the Company?
You Read the Company's Annual Reports?
Risk & Reward
shares can offer advantages over saving in deposit accounts:
your investment may increase in value besides paying you dividends.
You share the rewards when the company does well and the price of
the shares goes up. But if the company performs badly, the share
price may go down and the value of your investment will be reduced.
Other factors, such as the performance of the stock market as a
whole and the general economic climate, may also affect the price
of your shares. Investment in shares is therefore investment in
‘risk capital’. The shareholders can be rewarded for taking this
risk and the potential return on your money can be higher than that
on other investments. You can reduce your risks with careful planning.
When a Stock is Attractive to Trading?
There are two general ways of determining a stock's potential
as an investment. You can look at the “fundamentals” or you can
look at “technical analysis” and of course you can look at both.
Fundamental analysis looks at factors such as earnings,
cash flow, debt, strength in its industry, outlook for the industry,
general economic factors, interest rates, and so on. If these factors
are good, then even if there are short-term setbacks, over the long
run, the stock should do well.
Technical analysis looks at factors like volume of trading,
cyclical behavior, trends, moving averages and many others.
Some investors use both approaches. They use fundamentals
to determine the long-term potential of a company and technical
analysis to decide when to buy. For example, you may believe that
a certain company has great potential over the long-term and will
be worth much more in years to come.
However, it could be that the current market for this company’s
product is temporarily weak and that as a result, the stock price
could fall. Technical analysis could be helpful in determining how
far the price might fall and could provide help in indicating a
good time to buy.
What are Dividends?
Dividends are returns paid to shareholders out of the profits
of the company. Returns can be in the form of cash or additional
shares of the company called bonus shares. Dividends are usually
paid once or twice a year depending upon the company’s profit distribution
What is Capital Growth?
This is one of the ways in which shares differ from deposit
accounts. The principal amount of money you put in a bank or any
fixed income savings scheme always stays the same e.g. if you start
with Rs.100,000 you will always have Rs.100,000 (other than any
interest earned). changes in value according to the performance of
the company. With good management, the value of your investment
in shares of a company can grow over time so that your shares are
worth more than you paid for them. This is capital growth.
A rights issue gives the existing shareholders the right
to subscribe for new ordinary shares at an issue price lower than
the prevailing market price and at a ratio equivalent to their existing
shareholding. Companies carry out a rights issue when they want
to raise additional funds to finance their capital requirements
How to spot Scams
Minimize the risk of losing your savings to scams by recognizing
the different types of illegal investment schemes that are plaguing
our society. Here are some typical characteristics and promises
made by scams:
every investment that you make, you will receive a high return,
for instance, 20-30% per month, every month.
are told that the offer is for a limited time and that you MUST
join or buy today.
receive unsolicited phone calls offering investment opportunities
and you have no idea how the company has obtained your phone number.
receive unsolicited e-mails asking you for your bank account number
because they want to send you money.
are offered an investment product that guarantees large profits
with no financial risk.
is hard to find any information about the company’s license or physical
existence in any regulator or authority’s website.
What is the CDC
Central Depository Company of Pakistan Limited (CDC) started
in 1993 to manage and operate the Central Depository System. CDS
is an electronic book entry system to record and transfer securities.
Electronic book entry means that the securities do not physically
change hands and the transfer from one client account to another
takes place electronically. CDC is to operate as a central securities
depository on behalf of the financial services industry to support
an effective capital market system that will attract institutional
and retail level investors from Pakistan and abroad. Its basic purpose
is to operate and maintain an electronic book entry settlement system
for equity, debt and other financial instruments.
To track how your stocks are doing, you have to look at
stock listings. Stock listings are published in most of the newspaper
(e.g. Dawn). The listings look confusing at first, since they look
like a mixture of numbers, but can be a very useful tool when tracking
your stock's progress. The listings are organized into many columns,
including the following information:
Company name: This field is usually abbreviated in
the listings, and listed alphabetically.
Symbol: This field is a one to five character symbol
used as a sort of nickname for the company.
Volume: The volume is the amount of stocks that were
traded the day before.
High, Low and Close: These are the highest and lowest
price of the stock the day before, and the closing price for the
day before. This is an indicator of how much the price of the stock
fluctuated throughout the previous day.
Net change: This is the change of the price of the
stock from the previous day. This gives you an idea whether the
price is dropping or rising.
In addition to the stock listings, other useful information
about companies is available in the Annual Reports that reflects
the balance sheet, income statement and cash flows and states the
reasons for changes in these financial statements during the year.
Costs that are associated with stock dealing usually fall
under the following heads:
Daily trade charges cost incurred by the investor for intra
charges are the charges incurred by the clients for carry over transactions
commonly known as COT.
charges cost incurred by the investor for delivery
transactions. It is highly recommended that the investors should
have a proper understanding of the commission structure of the brokerage
service. The structure varies from broker to broker in most cases.
It is advisable that the investor should ask his broker about all
the cost associated with stock dealings to arrive at his net profit
What is Badla?
Badla is a mechanism to carry forward a speculative trade.
It is also known as the Carry Over Transaction (COT).
Badla Finance in simple terms means putting money on interest.
The mechanism is very easy for the stock broking society but complex
for the ordinary investor. History says Badla was born in the nineteenth
century. Then, till today, the purpose has remained the same, the
mechanism has hardly changed but the process has. These changes
have made Badla Finance safer, more secure and transparent to clients
besides a fair business practice for the stockbrokers
Mechanism Of Badla?
A person buys shares with the intention to make profits
but without blocking money. The purchase at the end of the settlement
is carried forward to the next settlement. Here is where the client
/ Badla financiers steps in. The financier's block the money for
taking delivery of shares purchased by the speculators. He gives
the money to the exchange for shares bought. For this facility the
speculator pays interest to the financiers. This interest is known
Badla Financing Through Stock Broker?
The financier gives money to his broker who in turn, hands
over the same to the Exchange. The shares are retained by the Exchange
under custody, on behalf of the broker's client. Since the shares
and the money lie with the Exchange, broker's risk is also eliminated.
Example: If "A" has purchased 1000 shares of MCB
@ Rs. 50 per share in Settlement 1, he has to take delivery from
"B" who has sold the same. "A" would like to
carry forward his position to the next settlement by letting "C"
(Badla Financier) take delivery at the prevailing interest rate.
In settlement 2 "A" will have to purchase the
shares at a higher badla rate as determined by the Exchange. If
the Badla was Rs. 0.20 in settlement no.1, "A" will have
to buy MCB @ Rs. 50.20 per share from "C".
The difference in purchase price in settlement no.1, and
sale price in settlement no.2, is the earning for the Badla Financier.
List of COT Eligible Securities?
Oil & Gas
Development Co. Ltd.
D. G. Khan Cement
The Hub Power
POLICY & TAX INCENTIVES
Foreign Investor -
The foraging investors
are freely allowed to operate in the capital market with out
any retention period.
There are no restrictions on the extent of
foreign ownership stake except in life insurance companies.
however, permission of the State Bank of Pakistan (central bank)
is required in case of transfer of 5% or more shares of any
bank of financial institution. There is no limit for holding
the shares for trading purposes.
Funds invested in the capital market are freely
transferable along with dividend income.
Foreign investor re treated at par with local
investors in tax treatment.
Local Investor Specific:
Capital gains on sale
of listed securities are exempt from income tax up to for 2007.
This exemption is available since 1974. The dividend is subject
to withholding tax at different rates. where recipient is a
public company or an insurance company the rate is 5%. for other
the rate is 10%. however, where the company declaring dividend
is a power generation entity the tax is withhold at 7.5% from
recipient other that public and insurance company.
Dividend income is taxed as a separate block
of income in the hands of individual shareholders.
any income derived from TFCs is subject to
income tax with effect from income year 2001 - 2002.
Listed companies are
allowed discount in corporate tax up to year 2007.
All mutual funds and modaraba companies (other
than trading modarabas) are exempt from income tax, subject
to the distribution of 90% of their income .
Provident funds can also invest in approved
listed securities. they are also allowed to invest in open end
mutual funds established under the Assets Management Companies
No turnover tax is payable by companies on
their turnover representing transaction in the securities listed
on stock exchanges.
TRADING & SETTLEMENT
exchanges has introduced an state-of-art computerized trading system
known as Automated Trading System to provide a fair, transparent,
efficient and cost effective market for the investors.
the exchange conducts one trading session from Monday to Thursday
and two sessions on Friday. The Trading is divided into four distinct
segment, each of which has its own clearing and settlement procedure.
These are: T+3, Provisionally Listed Companies, Spot(T+1) Transaction
and Future Contracts.
Transaction in this segment are settled through the Clearing&
Settlement / NCCPL that nets out the purchases and sales and the
financial obligation thereon of each member/firm for the notified
clearing period. Payments from and to member are routed through
the Clearing & Settlement/ NCCPL.
For the securities declared "eligible securities" by the
Central Depository Company the Clearing & Settlement take place
In order to handle the clearing of all the three stock exchange
of the country under one roof, the National Clearing and Settlement
System (NCSS) has been introduced by NCCPl which managed by
Central Depository Company of Pakistan Limited.
Futures Trading in
Provisionally Listed Companies.
The shares of companies which make a minimum public offering
of Rs. 150 million are traded on this segment from the date
of publication of offering document. The period of contract of each
scrip is notified by the Exchange. the outstanding contract carried
out under the provisionally listed companies are settled on the
settlement date and member are not allowed to transfer their position
to the Ready Clearing Board or any other Board. On formal listing
, the trading in the shared of the company are shifted to the Ready
Board Counter under T+3 Settlement System from the date of formal
Spot / T+1 Transitions:
For about 5 days before the closure of shares transfer book notify
by the company for any corporate action, transaction are settled
on T+1 basis.
For non-CDC securities the delivery and payment is settled through
the Clearing House of the Exchange, however, delivery is tendered
directly between the buying and selling members as per the instruction
of Clearing & Settlement. the transaction in CDC eligible securities
are settle through NCCPL.
Under the Regulation Governing Future Contracts, trading
in Future Contracts started in July 2001. Presently 30 companies
are traded under Future contract.
Brokerage on transaction
are freely negotiable between the brokers and clients.
Stamp duty: Stamp
duty is charged at 1.5% of the face value of the shares under
the physical form of transfer. there is no stamp duty for transfer
settled through the Central Depository System, however, there
is a one-time stamp duty at the rate of One Paisa per share
at he time of deposit of securities in the CDS. The stamp duty
is born by the buyer and the seller.
Monday - Thursday
9:45 a.m - 2:15 p.m
9:30 a.m -12:00 noon
Afternoon Session: 2:30 p.m - 4:00 p.m
The stock exchanges have an effective system for payment of deposits
against exposure and losses under the Regulations. Governing Members'
Exposure, whereby member are required to deposit exposure / losses
as per approved slabs in cash or approved securities with margin
ranging from 5 to 25 %.
Stock Exchanges has devised scrip wise upward and downward circuit
breaker limits in order to control the extreme price fluctuation
on all trading counters i.e. T+3, Future, Odd Lots and Square-up
Markets. Theses are in the form of order rejects. i.e. system rejects
a bid or offer outside the circuit breaker limits. Details of the
same mentioned hereunder:
The existing upward circuit breaker limit is fixed at 5%
or Rs. 1.00, whichever is higher form last closing price and for
downward circuit breaker limit is 5% or Rs. 1.00 whichever is higher
form last closing price.
Circuit breaker limits placed are similar to T+3 i.e. 7.5%
or Rs. 1.50 for upward and 5% or Rs. 1.00 whichever is higher from
last closing price for downward movement. No trade in the Future
Contract market will be allowed beyond the above price fluctuation.
Odd Lots Market:
The circuit breaker limits for Odd Lot Market are 20% or
Rs. 3.00, whichever is higher form the last closing price in the
Ready Market, this is applicable on both the sides, i.e. upward
as well downward.
Currently the applicable upward and downward circuit breaker
limits in the Square- up Market are 5% or Rs. 2.00, whichever is
higher from the last closing price tine the Ready Market.
In order to strengthen the Risk Management, the amount of Net Capital
Balance has been enhanced Rs. 2.5 million under the Capital Adequacy
Ratio the members are allowed to trade yup to 25 time of the Net