We all save some money from our monthly income as a hedge to unpredictable events or to materialize our future plans.
Well, what if we can get a decent return on the savings?
It is important that your savings are prudently invested so that it doesn’t lose the value rather earn some profit on it. There are various investment opportunities available in the market. Some products are risk free while some have a higher risk.
If you keep your savings in a bank account, you will get nominal returns which is generally lower than other avenues. You can also invest in government issued certificates and bonds such as MTBs, PIBs etc. These products give a good return while the risk of default is negligible.
On the other hand, you can invest in Shares / Stocks where you can earn a handsome return by taking a little risk. As they say high risk high return. So, it is always a good idea to invest your money where you get good returns, unless your risk appetite is zero.
The return on stock market has historically been significantly higher in Pakistan than other available options. The average rate of return of Pakistan’s Stock Market over the years is around 15.13% per annum. Investment in stock is also flexible as you can invest for a longer period or you can sell the shares on the very next day. If you invest for a longer period you can earn through capital gain as well as dividends. The stock / shares are traded in Pakistan Stock Exchange (PSX) which is the stock exchange of Pakistan
So let’s introduce you to the Stock Market world. Here you will get to know about the first step to start investment in the stock market.
What is a Stock Exchange?
The Stock Exchange is a place where shares of listed companies are traded i.e. buying and selling. The companies raise capital from the stock market by issuing shares. Each share represents ownership of the shareholder in the company to the extent of the investment amount.
PSX has around 558 listed companies. The shares are in script-less form and their custodian is the Central Depository Company (CDC). The settlement of shares is carried out through another company known as the National Clearing Company of Pakistan Limited (NCCPL).
How to Open Trading Account
The first and foremost step to invest in the stock market is to open a stock trading account through a brokerage firm.
Select a Brokerage Firm
There are multiple brokerage firms where you can open a stock trading account. Make sure that the brokerage firm you choose is recognized by the PSX and holds Trading Rights Entitlement Certificate. The firm should also have a valid license issued by the Securities & Exchange Commission of Pakistan (SECP).
While choosing brokerage firm, you should also check their ratings assigned by JCR-VIS of PACRA. Arif Habib Limited is currently the highest rated firm followed by AKD Securities Limited and Taurus Securities Limited.
You should also keep in mind some other things such as whether the firm is providing research material, an online trading facility, the amount of fee they charge.
Stock Trading Account Opening
Once the brokerage firm is selected, you can proceed to open a stock trading account with the firm. The account should be opened in your own name. You can submit the application form for account opening directly at the brokerage firm offices, or through their sales representatives. Some of the firms accept the application form over email. While major firms have also facility to fill the application form online on their website and submit.
The following documents will be submitted along with the account opening application form:
- Attested copies of National Identity Card of the applicant(s).
- Attested copies of passports of the applicant (in case of non-residents)
- Copy of the letter of authorization from the Account Holder(s) of the person authorized to trade on your behalf (if other than the account holder).
The firm will review the application and inform you when the application is approved after the required verification. You will be given a Unique Identity Number (UIN) or an Account Number against this account.
CDC Sub Account / Investor Account
Subsequently, you will open a CDC Sub Account through which you can actually trade in the stock market. CDC Sub Account is maintained by the brokers on behalf of its clients. However, the securities in the sub account are your property.
Alternatively, you can open an Investor Account with CDC. This allows you to directly manage your shares while ensuring safety at the same time. You have to submit a duly filled Investor Account Opening Form at CDC.
Deposit funds into your account
You need to deposit an initial amount to your newly created account to purchase shares. Most of the companies have a minimum deposit policy which is around Rs. 25,000/-.
You can deposit the amount either through cheque, demand draft or payment order. Further, you can also deposit the amount via electronic fund transfer.
If you are opening the account through a sales representative, make sure that the deposit is not in the form of cash.
Activation of Stock Trading Account
After making the minimum deposit amount, the firm will activate your trading account. Thereafter you can you can start trading.
Some firms allocate relationship manager to look after your trading needs, including advice, order execution.
Purchasing Stocks
If you want to buy shares of a company, you can place the order through your brokerage firm.
Many brokerage firms are offering online trading facility for their clients. You can log in to your online account through a mobile phone, computer or any other device and trade yourself on the Stock Exchange.
You will receive a confirmation report after completion of the transaction. Congratulations now you are a partial owner of a company.
Divided Income
As mentioned earlier, you can receive dividend income on your investment if you keep the investment for a longer period. The dividend payment frequency varies from company to company. Generally it is on a quarterly basis or semiannual basis.
If you want your dividends to be directly credited into your bank account, then you have to submit your bank account details as well. You should also submit the Zakat Declaration (CZ-50 form) if you want Zakat exemption on dividend income.
