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Karachi Stock Exchange (Guarantee) Limited

Table of Contents
Table of Contents............................................................................................................................ ii Equity Market ............................................................................................................................... vii Legal Framework........................................................................................................................... vii The Regulator............................................................................................................................... viii WHAT IS STOCK EXCHANGE?........................................................................................................ viii WHY DO COMPANIES GO PUBLIC?................................................................................................. viii WHAT ARE SHARES?..................................................................................................................... viii How Can you Participate?............................................................................................................ ix THE INITIAL OFFERING OF STOCKS (IPO):.................................................................................... ix BOOK BULIDING PROCESS FOR NEW COMPANIES:......................................................................ix REGULATING THE STOCK MARKET ................................................................................................. ix HOW DOES KSE REGULATE TRADING ACTIVITIES?......................................................................ix THE REGULATORY INFRASTRUCTURE OF KARACHI STOCK EXCHANGE.......................................ix MARKET AND IT'S WORKING............................................................................................................ x WHAT ARE THE MEASURES OF MARKET PERFORMANCE?............................................................x WHAT INFLUENCES MARKET MOVEMENTS?..................................................................................x HOW DO OTHER ECONOMIC INDICATORS AFFECT THE MARKET?................................................x WHAT ARE STOCK MARKET INDICES? HOW DO THEY WORK? ........................................................xi KSE INDEX:.................................................................................................................................. xi WHY SHOULD I INVEST IN SHARES?............................................................................................ xi WHAT ARE THE RISKS OF INVESTING IN STOCKS?......................................................................xii WHAT IS THE MINIMUM AMOUNT OF INITIAL INVESTMENT?....................................................xiii HOW CAN I BUY AND SELL SHARES?...................................................................................... xiii HOW CAN I DECIDE WHICH SHARES TO BUY?........................................................................xiii HOW CAN I FIND A STOCKBROKER?.......................................................................................... xiv DEALING OR EXECUTION ONLY:.............................................................................................. xv ADVISORY: .............................................................................................................................. xv DISCRETIONARY: .................................................................................................................... xv A. WHEN YOU BUY................................................................................................................... xv B. WHEN YOU SELL.................................................................................................................. xv HOW DO I SAFE KEEP THE ACQUIRED SHARES?.........................................................................xv HOW MUCH DOES IT COST TO BUY SHARES?............................................................................xvi HOW CAN I KEEP TRACK OF MY SHARES?.................................................................................. xvi ii

HOW ARE SETTLEMENT AND CLEARING DONE?........................................................................xvii WHAT IS THE CENTRAL DEPOSITORY COMPANY (CDC)/CENTRAL DEPOSITORY SYSTEM (CDS)?. .xvii TAXES AND LEGAL ASPECTS ....................................................................................................... xvii INCOME TAX............................................................................................................................. xvii CAPITAL GAIN TAX.................................................................................................................... xvii WHO IS INELIGIBLE TO OPEN A TRADING ACCOUNT?..............................................................xviii DISPUTE RESOLUTIONS:.............................................................................................................. xviii HOW DOES THE CLIENT KNOW IF HE/SHE HAS A CASE AGAINST STOCK EXCHANGE MEMBER? ................................................................................................................................................ xviii WHAT ARE THE DIFFERENT WAYS TO HANDLE A PROBLEM WITH STOCK EXCHANGE MEMBER? ................................................................................................................................................ xviii 1. AMICABLE SETTLEMENT:................................................................................................... xviii 2. ARBITRATION COMMITTEES OF STOCK EXCHANGES:.........................................................xix 3. SECP:.................................................................................................................................. xix 4. CIVIL COURTS:.................................................................................................................... xix WHAT ARE DIFFERENT FORUMS AVAILABLE FOR PURSUING A CLAIM AGAINST STOCK EXCHANGE?............................................................................................................................... xix 1. ARBITRATION COMMITTEES OF STOCK EXCHANGES:.........................................................xix 2. SECP:.................................................................................................................................. xix 3. CIVIL COURTS:.................................................................................................................... xix WHAT IS ARBITRATION?............................................................................................................. xix WHO ARE THE PERSONS WHO CAN ACT AS ARBITRATORS?.......................................................xx Investment Instruments................................................................................................................ xx What to buy ............................................................................................................................... xx Alerts.......................................................................................................................................... xx Fundamental data...................................................................................................................... xx Broker forecasts......................................................................................................................... xx Directors information................................................................................................................ xx When to buy................................................................................................................................. xxi Trade data ................................................................................................................................ xxi Technical analysis..................................................................................................................... xxi News analysis............................................................................................................................ xxi Monitoring and selling .............................................................................................................. xxi Portfolio analysis ......................................................................................................................... xxii Heat map ................................................................................................................................. xxii How to Invest............................................................................................................................... xxii Exposure Limits:....................................................................................................................... xxii iii

T+2: ......................................................................................................................................... xxii Futures Contract: ..................................................................................................................... xxii Clearing House Protection Fund: ............................................................................................ xxiii Investors Protection Fund: ...................................................................................................... xxiii Market Surveillance: ............................................................................................................... xxiii Minority Shareholder's Interest: .............................................................................................. xxiii First Time Investors.................................................................................................................... xxiii Why Invest in Shares............................................................................................................... xxiii Introduction ............................................................................................................................ xxiii What are shares?.................................................................................................................. xxiii What are the benefits of share ownership?..........................................................................xxiv The risks of investing............................................................................................................ xxiv Investing in other Stock Market Instruments ........................................................................xxv Exchange Traded Funds........................................................................................................ xxv Buying shares........................................................................................................................ xxv Buying funds........................................................................................................................ xxvi Buying bonds........................................................................................................................ xxvi Buying other investments.................................................................................................... xxvi Who does what in the market?.................................................................................................. xxvii The Karachi Stock Exchange................................................................................................... xxvii Regulators.............................................................................................................................. xxvii Registrars............................................................................................................................... xxvii Stockbrokers.......................................................................................................................... xxviii Market makers....................................................................................................................... xxviii Company advisors................................................................................................................. xxviii Shareholders........................................................................................................................... xxix Market Mechanics....................................................................................................................... xxix At Best.................................................................................................................................. xxix Limit orders........................................................................................................................... xxx Stop orders............................................................................................................................ xxx Fill and Kill orders.................................................................................................................. xxx How companies raise money.................................................................................................... xxx IPOs/new issues.................................................................................................................... xxxi Bond issues.......................................................................................................................... xxxi Rights issues........................................................................................................................ xxxi Stock splits and scrip issues................................................................................................ xxxii iv

Share buybacks and special dividends................................................................................ xxxii How you are protected........................................................................................................... xxxii Your rights and responsibilities .......................................................................................... xxxiii Who is responsible for what? ............................................................................................. xxxiii What to do when things go wrong ..................................................................................... xxxiv Experienced Investors............................................................................................................... xxxiv What factors influence share price?....................................................................................... xxxiv The Economy...................................................................................................................... xxxiv Company news ................................................................................................................... xxxv Monitoring news on a company.......................................................................................... xxxvi Newspapers and magazines............................................................................................... xxxvi The internet ...................................................................................................................... xxxvii Television.......................................................................................................................... xxxvii Stockbrokers and investment banks.................................................................................. xxxvii Investment Ratios................................................................................................................. xxxvii Earnings per share (EPS).................................................................................................. xxxviii Price Earnings ratio (P/E).................................................................................................. xxxviii PEG ratio............................................................................................................................. xxxix Return on capital ............................................................................................................... xxxix EBITDA and EV.................................................................................................................... xxxix Current ratio and quick ratio.............................................................................................. xxxix Dividend cover.................................................................................................................... xxxix Discounted cash flow.......................................................................................................... xxxix Following Indices...................................................................................................................... xl Why indices are important ...................................................................................................... xl The major Pakistani indices...................................................................................................... xl Overseas indices..................................................................................................................... xli Index trackers and ETFs.......................................................................................................... xli Investing in Shares................................................................................................................. xlii Tactics and strategies................................................................................................................... xlii How to build a portfolio/How investors categories shares........................................................xlii Cash is king........................................................................................................................... xliii Your attitude to risk............................................................................................................... xliii Dont forget property............................................................................................................ xliv Buying shares........................................................................................................................ xliv Strategies for investment............................................................................................................ xliv v

Top Down and Bottom Up...................................................................................................... xlv Value vs growth...................................................................................................................... xlv Large v small cap.................................................................................................................. xlvi Thematic investing................................................................................................................ xlvi Technical analysis................................................................................................................. xlvi Managing your portfolio.............................................................................................................. xlvii Monitoring your investments................................................................................................ xlvii Maintaining a balanced portfolio.......................................................................................... xlvii Sell strategies...................................................................................................................... xlviii

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Equity Market
In 1991, the secondary market was opened for foreign investors on an equal basis with the local investors. This measure along with the government policy of privatization has resulted in rapid growth of the market since 1991. It may also be mentioned that "privatization" has bee n adopted as a philosophy and most of the business & finance activities which were previously reserved for the public sector have now been opened for the private sector. The change of policy is most visible in the financial sector where a number of commercial banks, investment banks, discount houses, leasing companies, modarabas, life insurance companies and mutual funds have been allowed in the private sector. Liberalization policy has led to rapid deregulation of the national economy and the impediments to private initiative have been speedily removed. Foreign exchange holdings and transfers have been liberalised, industrial sanctioning has been done away with except for few sectors where, for strategic reasons, prior permission of the government is necessary.

Legal Framework
The securities market and the corporate sector are regulated by the provisions of the Companies Ordinance 1984. The Securities and Exchange Ordinance 1969 and Rules framed there under in 1971. The Securities & Exchange Commission Act 1999. There are also Federal legislations relating to specific areas like -

Monopolies and Restrictive Ordinance, 1970.

Trade

Practices

(Control

and Prevention)

Investment Companies and Investment Advisors Rules 1971. Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980. Companies (Issue of Capital ) Rules 1996. Leasing Companies (establishment and Regulation) Rules 1996. Asset Management Companies Rules 1996. Insurance Companies Ordinance 2000. Guidelines for insiders trading.

In addition to above, the listed companies are also subject to the Rules and Regulations of the stock exchanges.

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The Regulator
The regulatory authority for the securities market and corporate sector in Pakistan is the Securities and Exchange Commission of Pakistan. The Commission was established on January 01,1999 by dissolving the Corporate Law Authority which was formed in 1981 under a Special Law. The Commission administers the compliance of the Corporate laws in the country. The Commission is run by the Commissioners under a Chairman. The Asian Development Bank's Capital Market Development Programmed envisaged the conversion of CLA into Securities and Exchange Commission of Pakistan, as an autonomous regulatory authority. The new system provides administrative, operational and financial autonomy to the Commission and at the same time provides an accountability mechanism through establishment of a Securities and Exchange Policy Board. All policy decisions are made by the Board on the recommendations of the Commission which is also empowered to take suo motto action. The Board is directly answerable to the Parliament. Members of the stock exchanges are also subject to the discipline of self-regulation under various Rules and Regulations of the stock exchanges. Self-Regulation is the essence of market regulation and for this purpose the legal framework has been amended to facilitate the attainment of SRO status by the stock exchanges.

WHAT IS STOCK EXCHANGE?


A stock exchange, share market or bourse is an organization which provides "trading" facilities for stock brokers and traders, to trade shares of the listed companies and other financial instruments such as Term Finance Certificates and Derivatives. Stock exchanges also provide facilities for the issue (listing), redemption (delisting) of securities and other capital events including the payment of income and dividends. Karachi Stock Exchange (KSE) is a modern market where trading takes place with electronic trading system called Karachi Automated Trading System (KATS), which gives the Exchange advantages of speed and minimum cost of transactions. Trades on an exchange are by members only.

WHY DO COMPANIES GO PUBLIC?


The primary purpose for companies to be publicly listed at the exchange is to cost-effectively raise capital. It reduces the company's reliance on the traditional financiers such as financial institutions and individuals. Listing allows business expansion without increasing borrowings or draining the company's cash reserves. History of listed companies indicate that companies that convert to public ownership are more likely to become successful than control companies that remain private. Companies that go public are also more likely to become acquirers than control companies. IPO companies grow faster than control companies after going public. However, both public and private companies must disclose financial information to regulators.

WHAT ARE SHARES?


Shares, as the name says, are shares in a limited company. Each shareholder is a partial-owner of the company in which they have bought shares and investors can buy and sell their shares on the stock exchanges. Companies on incorporation issue shares, (also called equities) and later perhaps when they are building up a business. The original shareholders might still own them, or they may have sold them to someone else through the stock market. If the company makes a viii

profit, the shareholders normally have some of it passed to them in the form of dividends. The amount paid in dividends varies year by year, depending on how profitable the company has been and how much money the directors and the company management want to keep in reserve for future expansion.

How Can you Participate?


There are different ways in which you can participate in the stock market: 1. Directly: by buying and selling shares; 2. Indirectly: through a collective vehicle, in which shares are grouped together, such as a mutual fund or Exchange Traded Funds (ETFs).

THE INITIAL OFFERING OF STOCKS (IPO):


The initial offering of stocks and bonds to investors is by definition done in the primary market (IPO) and subsequent trading is done in the secondary market. Initial Public Offering (IPO) is the initial sale by a company of shares of its stock to the public in the financial market.

BOOK BULIDING PROCESS FOR NEW COMPANIES:


Book Building is the process of price discovery and pricing a new share issue. The process by which an underwriter attempts to determine, at what price to offer an IPO based on demand from institutional investors for its efficient price discovery based on actual supply and demand by informed investors.

REGULATING THE STOCK MARKET


HOW DOES KSE REGULATE TRADING ACTIVITIES?
The regulatory authority for the securities market and corporate sector in Pakistan is the Securities and Exchange Commission of Pakistan (SECP). The SECP administers the compliance of the corporate laws in the country and is run by commissioners under a chairman. The Securities and Exchange Commission of Pakistan, is an autonomous regulatory authority, and at the same time provides an accountability mechanism through establishment of a Securities and Exchange Policy Board. All policy decisions are made by the board on the recommendations of the commission and the board is directly answerable to the Parliament.

THE REGULATORY INFRASTRUCTURE OF KARACHI STOCK EXCHANGE


Members of the stock exchanges and trading at the Exchange are also subject to the discipline of self-regulation under various Rules and Regulations of the Stock Exchanges. KSE is regulated by the provisions of the following regulations: 1. General Regulations of Karachi Stock Exchange 2. Listing Regulations of Karachi Stock Exchange 3. Regulations Governing Over the Counter Market 4. Regulations Governing Future Contracts 5. Regulations Governing Cash-Settled Future Contracts 6. Regulations Governing Provisionally Listed Companies 7. Regulations Governing Short Selling, 2002 8. Regulations Governing Proprietary Trading ix

9. Regulations Governing Margin Trading, 2004 10. Regulations Governing Karachi Automated Trading System (KATS) 11. Regulations Governing System Audit, 2004 12. Regulations Governing Investors Protection Fund 13. Regulations Governing Continuous Funding System 2006 14. Regulations Governing Recovery of losses 15. Regulations Governing Risk Management 16. Regulations Governing Branch Offices 17. Regulations Governing Stock Index Future Contracts Trading activities are being monitored through the surveillance terminal to ascertain that, there are no illegal postings and dealings made in any of the issues listed in the Exchange. Through the Compliance and Surveillance Group, compliance of members to set rules and regulations are monitored.

MARKET AND IT'S WORKING


WHAT ARE THE MEASURES OF MARKET PERFORMANCE?
There a. b. c. d. are four indicators of market performance: Market Capitalization Value Turnover Traded Volume Composite Index

WHAT INFLUENCES MARKET MOVEMENTS?


General investors' sentiment indicates the direction of the market movement. However, the over-all market sentiment is influenced by a number of factors - economic, political, fiscal, etc.

HOW DO OTHER ECONOMIC INDICATORS AFFECT THE MARKET?


Interest rates, foreign exchange, inflation, growth rates - these are some other economic indicators, which affect the performance of the Stock Market. Favourable growth and inflation rates, as well as stabilized interest rates and foreign exchange, are good news for the stock market. They usually give a boost to the market performance as these indicate sound economic status. Soaring interest rates, on the other hand, usually push investors from the stock market to some interest-bearing investments, as they offer better returns than stock investing.

WHAT ARE STOCK MARKET INDICES? HOW DO THEY WORK?


KSE INDEX:
The Karachi Stock Exchange KSE-100 Index is the bench mark for our market, it comprises of the top companies from each of the 34 sectors on the KSE, in terms of market capitalization. The rest of the companies are picked on market capitalization ranking, without any consideration for the sector to make a sample of 100 common stocks with base value of 1,000 in late 1991. There are two other indices; KSE-30 Index, which is based on free float capitalization of top 30 companies and KSE all shares Index which is based on full market capitalization of all listed companies at the Exchange. An index, a composite figure, becomes a benchmark index when you choose it as the standard against which to measure your own portfolio's performance over time. Many investors like to keep track of how companies are performing in general. When a company's share price moves up or down, it shows, whether it is perceived to be lucrative by the investors. Movements in share prices are measured by various indices. These provide a benchmark against which you can compare the performance of your shareholdings. The most quoted index is the KSE-100. It comprises of the 100 largest companies on the Stock Exchange and is updated minute by minute during trading hours. The index reflecting all the companies on the Stock Exchange is the KSE-All Share Index and the KSE-30 Index comprises of top 30 companies. Various investment companies have made their own indices to keep track of the performance of their portfolios. There are three major types of indices calculated to help private investors track the performance of their investment portfolios: 1. 2. 3. The Income Portfolio represents the performance of a portfolio designed to provide a regular flow of income. The Growth Portfolio is for the investor seeking capital growth in his or her portfolio. The Balanced Portfolio represents a balanced portfolio providing both capital and income.

The indices are made up of three broad types of asset: Pakistani equities, foreign equities, bonds and PIBs.

WHY SHOULD I INVEST IN SHARES?


Almost everyone worldwide has an interest in shares, whether they realize it or not. Millions of people around the world own shares directly. However, many millions more have an indirect stake in the stock market through pension schemes, life insurance policies, NIT units, and other mutual funds. All of these, invest in shares traded on the stock market.

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Today, increasing number of people own shares around the world, while many more invest in pension schemes, have an insurance policy, National Saving Schemes (NSS) or another form of collective savings invested in shares traded in stock markets.

However, investing in shares is different from saving in a bank or National Saving Scheme. There is more risk - but there is the opportunity for better reward over the longer term. With deposit accounts, you earn interest on your capital. When you take your cash back, you get back exactly the same amount that you first deposited (plus the interest it has earned). With shares, you may receive dividends but when you sell those shares, you might get back more than you bought them for, which is your reward for taking a risk.

Nevertheless, because shares can go up as well as down in value, it is important to understand that taking a risk means you might get back lesser than you had invested initially. You can minimize your risk by investing in different shares or a collective fund. There is, however, the possibility of greater rewards. Funds invested in equities in the long term (five or more years) have outperformed regular saving accounts. You should remember that saving through the stock market should be seen as a long-term investment. Historically, money invested in shares over the long term (ten or more years) has almost always outperformed regular saving accounts. Before investing in stocks and shares, you should understand your own financial position and what you hope to achieve with your investments. Your regular financial obligations should be protected and preparation should be made for unexpected expenses. Having done this, you are ready to consider investing the surplus in stocks and shares. The three main rationales for owning shares are summarized below: a) Ownership in a Company - when an individual invests in the stock market, he automatically becomes a shareholder of that company. As a stockholder, he is entitled to the following benefits: 1) voting rights; 2) dividends to be declared by the corporation and 3) share of the remaining assets of the company if it is to be liquidated. b) Liquidity of Funds - a stock market investor has easier access to funds. Compared to banks, which have a high minimum balance requirement for deposits and credit, as an individual, you can start an investment with very low capital, and can expect high yields for your initial investment. You can always cash in or out your funds anytime, during trading hours, through your broker. c) Make Money - investors in the stock market make money through dividends and capital appreciation. When a listed company declares dividends, it increases the shareholders' investing power. An investor who buys into the company at a low market price and sells it at a higher price will gain capital appreciation.

WHAT ARE THE RISKS OF INVESTING IN STOCKS?


While it is true, that stock investment is the most volatile of all securities, investors might well recall the fact that uncertainty is a permanent feature of any investing perspective. This means that risk is always a part of any investment. A better attitude would be to limit and manage your xii

risk. A maximum level of gain or loss should be set, and calculated decisions should be made when this level is reached. WHAT IS THE MINIMUM AMOUNT OF INITIAL INVESTMENT? Some brokers may require a minimum initial investment to open an account depending on their requirement or may charge or waive other fees depending on the amount you initially invest. If you are just getting started with a small investment, look for an investment firm that would not penalize you based on the size of your investment. The minimum amount of money needed to invest in the stock market depends on the minimum number of shares to be traded for the stock. The minimum shares will be determined by the prevailing market price of a particular stock, as each stock, the minimum number of shares to be traded is fixed, called the market-lot, which depends on the price range of the stock.

The market lot is calculated biannually by NCCPL, keeping the lot size to 500-shares for scrip which are priced less than Rs. 50 and lot size of 100-shares for scrip priced above Rs. 50 HOW CAN I BUY AND SELL SHARES? You can buy shares when a company first comes to market - that is at flotation or privatization; or you can buy them through the stock market once they are in circulation and being traded. Companies which are about to issue shares often advertise in a daily newspaper. If you decide to buy these shares, you can seek more information from the company's website or you can fill up the application form at the affiliated bank or ask the company for a prospectus. Fill out the application form and submit it with your pay order, at the bank. There is nothing more to pay. Alternatively, you can go to a stockbroker who will buy them for you. Most share dealings take place in what is called the secondary market. This is where existing shareholders sell and new investors buy. Today, buying shares is easy. You can buy and sell shares by making contact with a stockbroker, bank or investment adviser, either in person or over the internet or telephone. HOW CAN I DECIDE WHICH SHARES TO BUY? 1) A stockbroker carries out buying and selling on his propriety accounts and on behalf of his clients as individuals cannot deal for themselves in the market. A list of stockbrokers is available from the Stock Exchange on KSE website www.kse.com.pk. Stockbrokers offer a variety of services but if you know exactly what you want, simply call the broker for an 'execution only' service and ask them to buy the shares of your choice. KSE offers three market segments a) Cash market based on two day clearing and settlement b) Continuous Funding system (CFS) MKII where cash market's net purchases can be carried over for another 22 working days c) Deliverable Future Contracts allow investors to purchase or sale on a forward contract basis clearing and settlement of these contract takes place on last Friday of the xiii

months and new contract starts on the following Monday Cash settled Future Contract where contract is for 90 days, but investor has a choice to enter into any of the three contracts that are always open for end of the month expiry based of cash settlement with under line cash market price of the scrip. 2) After having instructed your broker to buy shares, the broker will draw up contract notes, which typically are sent to your address or mobile phone number within next 24 hours. This will show details of the transaction carried out on your behalf. 3) You must send payment for your shares immediately upon receiving your contract note. In June 2007 the Stock Exchange adopted a two-day settlement system called T+2 system, under which transactions are due for settlement 2 working days after dealing. 4) Upon receipt of payment, the purchased shares are transferred in your name in your Central Depository Company (CDC) account electronically. You are now the proud owner of a portfolio. 5) 5) At this stage you can sell your shares if you wish. You are now entitled to attend the company's Annual General Meeting (AGM). Talk to the other shareholders, especially representatives from the institutional investors. Just one sizeable disinvestment could make all the difference to the outcome of your overall operation. A stockbroker or financial adviser can help you choose which shares to buy, and advice on the best time to sell.

You will need to decide: Will I need the money soon? On the other hand, can I leave my money to grow over a number of years? Alternatively, Do I want a combination of both? How much money can I afford to invest? Will I spread this over a small number of shares, or a larger number? Do I want to invest directly in shares? Do I want shares in blue chip companies, medium-sized companies or new, small companies (which can be less secure)? On the other hand, do I want the relatively safe government backed investment schemes available through National Saving System (NSS), or Pakistan Investment Bonds (PIBs)? Am I interested in indirect ways of investing, through closed end Mutual Funds or through Term Finance Certificates available at the Stock Exchange?

HOW CAN I FIND A STOCKBROKER?


Stockbrokers today have a range of services tailored for the needs of the growing numbers of small shareholders. Some operate from the Stock Exchange Building, some from Queens Road and other similar locations around the city, and some only by telephone. Most large banks offer share-dealing services as well. xiv

Before choosing a stockbroker, contact several of them and ask how much they will charge. They expect you to compare their fees with those of other brokers. An individual investor should choose a retail broker, preferably one that meets his requirements in terms of services needed. When he lacks the time to analyze individual companies and stocks, then a full service broker is recommended. In choosing a broker, the investor should see to it that the broker is a member of good standing at the Karachi Stock Exchange. It is important that the investor should trust his broker and that he is satisfied by the services it is giving him, such as market reports, quality of advice regarding stock selection and timing of purchases and sales, quality of trade executions, on-time delivery of important documents and other services. There are three levels of service you can take: DEALING OR EXECUTION ONLY: You simply call the broker and instruct them to buy or sell the shares you want. They carry out your instructions, but will not give you any advice on your decision. You can always take advice from any other properly qualified financial adviser. ADVISORY: With this service you will get the benefit of the broker's expert advice. They will discuss with you their views on various companies and recommend whether you should buy, sell or keep hold of your shares. Make sure you feel comfortable with and understand what your broker is saying to you. DISCRETIONARY: The broker will take all the buying and selling decisions, contact you regularly to keep you informed, and tell you how much your portfolio is worth. You can get a list of stockbrokers from: 1. The Member's Info section of the Karachi Stock Exchange (www.kse.com.pk) 2. By telephoning the Karachi Stock Exchange on (+21) 111-00-11-22 3. By checking with the local branch of your bank or Investment Company. A. WHEN YOU BUY Once you instruct your broker to buy shares, he/she buys the shares for you at the best price available at the time. By the end of day's trading, you will receive a confirmation-note. This shows the details of the transaction. Your broker will indicate when he/she needs to have your money to pay for the shares. B. WHEN YOU SELL Immediately you give your broker an order to sell, he/she again negotiates the best possible price. By the end of day's trading, you receive a contract note confirming the deal. If you hold the share certificate, you must send this to your broker in accordance with his/her instructions. If your shares are held in Central Depository Company (CDC), you will not have a share certificate to worry about.

HOW DO I SAFE KEEP THE ACQUIRED SHARES?


Once you have bought your shares, there are two ways to hold them: as a certificate or electronically (via CDC account). Your stockbroker can advise which option depending on individual company's shares. xv

Traditionally shares have been held in paper form, known as certificates. A share certificate is a piece of paper that is evidence that you are the owner of the shares. Your name will appear on the company's share register and this entitles you to receive directly all the benefit of share ownership including dividends, the right to vote at a company's annual meeting and to receive company reports twice a year. If you decide to sell your shares you will normally need to deliver the certificate to the broker in time for the transaction to be completed. Today you can choose to hold your shares as an electronic record, receiving a statement from time to time. This is similar to your bank statement, which shows your cash balance as held by the bank. If you choose to hold your shares electronically they are placed in a nominee account with the Central Depository Company (CDC). These accounts are often run by stockbrokers who administer the shareholding on your behalf. You do not have a certificate to keep safe or deliver to your broker in time for the transaction to be completed. You remain the real owner of the shares and you shall receive the dividends, even though the shares are registered in the name of the nominee. Your company also provides you with copies of the company reports and with the right to vote at general meetings. When you have bought or sold the shares, your transaction is completed (or settled) electronically through a service known as National Clearing & Settlement System (NCSS). This system links banks, stockbrokers and Central Depository Company (CDC).

HOW MUCH DOES IT COST TO BUY SHARES?


Costs of trading in stocks vary according to the level of service you get from your broker. You should select the service that meets your needs. Execution-only will generally be the cheapest service. You will pay more for research base advice. The most important figure to ask your broker is about the minimum commission you will be charged. You should also ask whether there are any other charges for their services. Ask if there are any ongoing costs, other than dealing commission, each time you buy or sell. You should note that you will pay a tax, known as CVT, when you buy shares but not when you sell. This is currently 0.002% percent of the price of the shares.

The way you choose to hold your shares will also vary in cost. If you decide to hold a certificate, there may be an additional charge as it will be necessary to transfer it to you or the new owner.

HOW CAN I KEEP TRACK OF MY SHARES?


Once you have bought shares, you can put them away for a long term or short term, you can keep an eye on how the price is moving. Details of share prices are published in most national newspapers every day. The daily price is also available on our website www.kse.com.pk. The newspapers' financial pages will comment on companies that are in the news - perhaps because they have published their profit figures, or they are subject to a takeover bid, or they have opened a new factory. xvi

Every piece of information about your company helps you build a clear picture and is expected to do. In addition, there are several specialist magazines investors. As a shareholder, and therefore part owner, of a business, you company if you want further information. Alternatively, your stockbroker informed through a regular newsletter.

of how it is doing to assist private can contact the might keep you

HOW ARE SETTLEMENT AND CLEARING DONE?


Clearing and settlement of all stock exchange transactions are provided by National Clearing Company (NCCPL), which acts as go between for KSE and Central Depository Company (CDC) which is the share depository company. Shares move between share-accounts held by the different participant-brokers of the Central Depository Company (CDC). Stock market transactions are settled on the second day after the trade. Transfers are based on trades done at KSE. Shares are transferred on settlement date (T+2) to the buyer, and the buyer pays the seller through the clearing banks within the same settlement period. This means that transactions done on Monday must be settled by Wednesday. Settlements of accounts are done in the clearing house through National Clearing & Settlement System (NCSS), which is a fully automated electronic settlement system. Visit NCCPL website for further details regarding clearing and settlement, www.nccpl.com.pk.

WHAT IS THE CENTRAL DEPOSITORY COMPANY (CDC)/CENTRAL DEPOSITORY SYSTEM (CDS)?


The CDC is a company that operates an electronic share register called the Central Depositary System (CDS). The CDS eliminates the need for physical movement of share certificates. CDC electronically manages 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 and 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. It has also solved investor problems related to stock handling on the settlement date, registration of shares, and exercise of corporate action benefits. Visit CDC website for further details regarding shares safe keeping. (www.cdcpakistan.com).

TAXES AND LEGAL ASPECTS


INCOME TAX
When you receive your dividend cheque, income tax has already been deducted by the company at basic rate. Basic-rate taxpayers have nothing more to pay. Higher-rate taxpayers have to pay the difference between basic and higher rate at the end of the tax year. Non-taxpayers can reclaim the tax deducted through their local tax office.

CAPITAL GAIN TAX


You make a capital gain when you sell shares at a higher price than you are paid. If you sell at a lower price, you make a loss. xvii

There is no Capital Gain Tax in Pakistan at present. Tax is a very complex subject - you should always speak to a properly qualified tax adviser to make sure you have a complete picture of the tax rules.

WHO IS INELIGIBLE TO OPEN A TRADING ACCOUNT?


Upon discovering that an investor fits any of the descriptions below, the stockbroker should refuse to accept his or her application to open an account, or refuse to take orders from such customer to buy, sell or subscribe securities: Minors who do not have the authorization of their legal guardian Personnel or employees of the authorities in charge of securities matters and regulators Person is declared bankrupt and rights have not been reinstated A person's opening an account that cannot supply proof of his identity Securities dealer who have not been approved by the competent authority.

DISPUTE RESOLUTIONS:
HOW DOES THE CLIENT KNOW IF HE/SHE HAS A CASE AGAINST STOCK EXCHANGE MEMBER?
Just because the client has lost money while dealing in securities doesn't mean that he/she has a case against the member. The financial markets have always gone through periodic down turns and upturns and these fluctuations are not always the fault of member. However, it is the responsibility of a member to invest money according to the client's instructions. There are certain malpractices against which a client can lodge a complaint such as: Unauthorized trading (Sale/Purchase) Unauthorized transfer/movement of shares Non-supply of statements of account Non-supply of trade confirmations within 24 hours Overcharged commission Failure to execute investors' instructions/orders Suspension of payment Non-Delivery of securities.

WHAT ARE THE DIFFERENT WAYS TO HANDLE A PROBLEM WITH STOCK EXCHANGE MEMBER?
1. AMICABLE SETTLEMENT: Although the client has the recourse to approach the relevant stock exchange, SECP or the Courts for lodging complaint, it is strongly advised that the complaint/problem should first be taken up directly with the member. This will not only save the time consumed in correspondence and procedures but will also preserve the trust and confidence. xviii

2. ARBITRATION COMMITTEES OF STOCK EXCHANGES: The client also has the alternative of taking up his/her complaint with the management of the concerned stock exchange. All the stock exchanges have their own Arbitration Committees that look into the grievances/disputes between the Investor and the Members. 3. SECP: The client can also lodge his/her complaint with the Vigilance Cell which has been setup at SECP to ensure that grievances/complaints of the general public are heard and redressed, in a quick and efficient manner. All the complaints received by the Vigilance Cell against Stock Exchange members are forwarded to the Investor Complaint Wing (ICW) of the Securities Market Division (SMD) for further processing. However, SECP is not empowered to force the member for compensation/damages. 4. CIVIL COURTS: The client can also file his/her complaint with the Civil Courts.

WHAT ARE DIFFERENT FORUMS AVAILABLE FOR PURSUING A CLAIM AGAINST STOCK EXCHANGE?
There are three forums available for pursuing claims against Stock Exchange members: 1. ARBITRATION COMMITTEES OF STOCK EXCHANGES: The Stock Exchanges are Self-Regulatory Organizations (SROs) empowered to take cognizance of complaints against the members under the approved Rules and Regulations. All the Stock Exchanges have their own Arbitration Committees that look into the grievances/disputes between investor and members. Arbitration Committees after perusing the documents and providing the parties an opportunity of being heard pass an Arbitration Award in accordance with the relevant Rules and Regulations of the Exchange. 2. SECP: The SECP has established a Vigilance Cell which is responsible for ensuring that grievances/complaints of the general public are heard and redressed, in a quick and efficient manner. The client can file his/her complaint with the Vigilance Cell against Stock Exchange members on the prescribed Complaint Registration Form (CRF) which is available, free of cost in the offices of Stock Exchanges and the Commission including the Company Registration offices (CROs). CRF may be downloaded from the official website of SECP: http://www.secp.gov.pk/ComplaintForm1.htm. The ICW after perusing the documents and giving the parties an opportunity of being heard passes an Order according to the relevant Rules and Regulations. Any party dissatisfied with the Order can file an appeal before the Appellate Bench of the Commission within thirty days from the date of issue of such Order under Section 33 of the SECP Act, 1997. 3. CIVIL COURTS: The client can also file his/her complaint with the Civil or Criminal Court. However this forum is more appropriate for claiming compensation or damages.

WHAT IS ARBITRATION?
Arbitration is an alternative dispute resolution mechanism provided by the Exchanges for those persons who do not wish to go to Court. Through this method disputes between the trading xix

members and between trading members and their constituents (i.e. clients of trading members), may be addressed and resolved in respect of trades done on the Exchange. This process of resolving a dispute is comparatively faster than litigation.

WHO ARE THE PERSONS WHO CAN ACT AS ARBITRATORS?


The Arbitrators are members and management of the Exchange and non-member directors of the Exchange. For further details please refer to Regulation 29 of the General Rules & Regulations of Karachi Stock Exchange (Guarantee) Limited

Investment Instruments
What to buy
Let's start by examining the first component of any successful investing strategy - deciding what to buy. The vast number of instruments trading on our markets provides Pakistani investors with fantastic opportunities but also with its own unique challenges. Equities, corporate and government bonds and Exchange Traded Funds (ETFs) are just some of the asset classes traded on the Karachi Stock Exchange. Understanding your own attitude to risk is vital when deciding which of these asset classes are appropriate for you to invest in.

Alerts
There may be a number of reasons why you might initially consider a potential investment press reports, news stories, share recommendations, sudden price movements and chart breakouts to name but a few. But as all long-term successful investors know, you must do your own research.

Fundamental data
Analysing the fundamental data is vital. And you'll need to be confident that that data is accurate, comprehensive and up to date. The fundamental data is collected direct from the companies themselves from their interim and final results and is updated within minutes of being released. This data is subject to various checks to ensure it is extremely high quality and very comprehensive.

Broker forecasts
Fundamental data research, though vital will only identify past performance - so how can you analyze future prospects? You can start by looking at the Broker Research. The Broker Research is a consolidated view of what all the leading analysts believe are the future prospects of a particular business. This will include key metrics such as EPS growth and consensus buy, hold and sell recommendations. Broker research data gives you an instant view of analysts overall position on that stock. This research data is available in the newsletters published by the brokers or their web pages.

Directors information
The next step might be to gauge what level of optimism the directors of a company may have in the business that they manage. That optimism (or pessimism) is usually reflected in the number of shares that the directors are buying (or selling) in their own company. Directors' buying and selling activity is therefore another way of analyzing future prospects, but this also needs to be interpreted carefully. Limited selling activity for example is not necessarily a negative sign as xx

directors may have very genuine reasons for looking to reduce their holdings or to generate cash for personal reasons. Buying activity is perhaps a more useful indicator. If there has been a significant level of buying activity (one, or preferably more, directors buying a substantial amount of shares over a number of transactions) might indicate that the managers of the business have expressed a high degree of confidence in their company. So let us presume that you have done your research and have identified a suitable investment opportunity. The fundamentals look great, the Broker Research indicates that the analysts have a positive view of the company's future prospects and this is shared by the directors themselves who have been actively buying stock. What next? Well getting the timing right can be equally as important as deciding what to buy.

When to buy
Sometimes in our investing experience we will find shares that seem to represent an excellent buying opportunity. But having bought them they fail to fulfill t heir promise. To a large degree, share price movements are directly influenced by two key factors - supply and demand. If enough investors share your view that the stock is worth buying and act accordingly, then the price will start to rise. So how can you assess whether other investors are buying? You can look at the extended trading data on Exchanges website.

Trade data
As well as listing every trade in real-time, a Bid and Offer price is shown alongside each script. As a lot of the trading is between market intermediaries such as market makers, it is important to realize that this is not an exact science and should be viewed with a degree of caution. None the less it can be a useful indicator of the buying and selling activity at any given time.

Technical analysis
Technical Analysis can be one of the most effective ways of finessing the timing of a purchase. Technical analysis is a huge subject in its own right, but even a number of very simple studies can help. For example, a short term moving average rising above a long term moving average known as a golden cross- can be a very positive signal.

News analysis
An understanding of forthcoming corporate events will also influence the timing of a purchase. Is the company about to go ex-dividend for example? Or are the interim or annual results expected shortly? Would it be sensible to delay the purchase until after these events? Understanding how a share reacts to news stories may also influence the timing of a buy. Exchange Insight news analysis enables you to look at all the announcements for a particular company and then see how the share price has subsequently reacted to that news. If you are looking for long term steady growth and find a high degree of volatility resulting from announcements, then you may decide to pass up the opportunity.

Monitoring and selling


Before entering into any trade it is important to have a clear understanding of the expected future performance of that stock, and an exit strategy, either in the form of a stop loss if the share fails to perform as expected, or a target price to sell at. You can instruct your broker to set a stop loss at the time of purchase, as well as, to let you know when the target price has been xxi

reached. To monitor the details to your relevant portfolio and you can use the My KSE facility to review the change in price and monitor the scripts that you have a stake in.

Portfolio analysis
The advanced portfolio analysis facilities will enable you to see which sectors your portfolio is invested in and to manage risk by ensuring that your investments are diversified and you are not overexposed in any sectors. Karachi Stock Exchange only can provide data for your own advanced portfolio analysis facilities, for this please review our data portal.

Heat map
Heat maps can serve a dual purpose. Firstly they give a valuable instant visual representation of how a particular index or sector is performing. Color coded to show price movement they can be a useful early-warning indicator that might highlight short term opportunities. They are also a good way of monitoring an existing portfolio. A portfolio heat map will highlight which of your shares are rising and falling at any given time could help you exit losing positions before incurring significant losses. Karachi Stock Exchange only can provide data for your own heat maps, for this please review our data portal. How can we measure the long term success of our investment strategy?

Comparing the performance of our portfolios against individual indices or sectors is one way. This type of benchmarking is the way in which the performance of most professional fund managers is measured. Comparisons can also be made between the overall portfolio and the individual shares within it. This will help identify over and under performing shares.

How to Invest
Exposure Limits:
The KSE has an effective var based Risk Management System under the regulation governing Risk Management of Exchange. As a part of risk management, KSE has devised circuit breakers as under.

T+2:
There shall be a circuit breaker in case of price fluctuation 5% or Rs. 1.00, whichever is higher, from the closing price of the previous day. Accordingly trading will be restricted within upper and lower limits of 5% or Re. 1.00 whichever is higher from last closing price.:

Futures Contract:
There shall be a circuit breaker in case of price fluctuation 5% or Rs. 1.00, whichever is higher, from the closing price of the previous day. No trade in the Futures Contract market will be allowed beyond the above price fluctuation In order to strengthen the Risk Management, the amount of Net Capital Balance has been enhanced to Rs.2.5 million under the Capital Adequacy Ratio the members are allowed to trade up to 25 times of the Net Capital balance.

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Clearing House Protection Fund:


In order to ensure smooth settlement, the KSE has established a Clearing House Protection Fund. In case of default of a member, shortfall, if any, is fed through this fund up to a certain limit as approved by the Board from time to time. The contribution to the Fund is made by the members of the Exchange.

Investors Protection Fund:


An Investors Protection Fund has also been established to protect small investors from the consequences of a member's default. The fund is operated under a set of Regulations.

Market Surveillance:
The advent of the Automated Trading System has enhanced the market surveillance capability of KSE to devise a market control system. An independent Market Control and Surveillance department has been established to monitor price fluctuation and trading patterns to ensure compliance with regulations and detection of speculative activities.

Minority Shareholder's Interest:


The Exchange has played a proactive role in safeguarding small shareholders' interest and has strengthened its monitoring and enforcement capability to ensure corporate governance. During past couple of years a number of cases have been referred to the SECP in this regard.

First Time Investors


Why Invest in Shares
Whether it is for retiring early, saving for the childrens education or paying off the mortgage, everyone has dreams they can achieve by saving.

Introduction
What are shares? There are a number of different shares you can buy, including preference shares, bonds, and gilts but the most popular type is the ordinary share. Ordinary shares simply represent ownership of a company. So, when you buy shares, also known as equities or stocks, you literally become a part-owner of that business. If, for example, a ABC Plc has 100,000 shares worth Rs. 1 each and you buy Rs. 1,000 of shares, you own 1% of the company. Companies do not have to list on the stock market to issue shares. Many businesses start life with friends and family as shareholders. These businesses are called unlisted firms and their shares are often referred to as unquoted. There are more than 654 companies listed on the KSE market, from big international brands such as P&G, SCB and etc to national household names such as OGDC, MCB, PSO and NBP. xxiii

As a shareholder you have a say in the companys affairs by voting at company meetings and, of course, the ability to share in its fortunes. If the company does well, the value of your investment should rise but if it does badly, you could see your shares fall in value. What are the benefits of share ownership? There are two ways you can benefit from owning shares. The first way is through the growth of the company. Say, for example, ABC Plc earns revenue of Rs.100,000 in one year. After deducting its costs, it has Rs.50,000 left its profit. It then reinvests this money in the business, perhaps by investing in better technology, which enables it to cut costs and, therefore, make a bigger profit the following year. If it can continue to improve its profits, demand for its shares will grow and the share price will rise. This type of company, known as a growth stock, is popular with investors who do not need income from their investments. Many companies also pay a dividend. Say, for example, XYZ Plc earns revenue of Rs.1,000,000. After deducting its costs and reinvesting in the business it has Rs.100,000 left over. It decides to return this money to shareholders by paying a dividend. If the company has 10,000 shareholders, each share will get a dividend of Rs.10 per share. So, if you own 100 shares, your total dividend will be Rs.1,000. Shares that pay dividends are generally known as Income stocks. Companies can return money to shareholders in other ways too such as buying back their shares. This increases the value of those shares still in circulation. By investing in shares you are also linking your financial wealth to the health of the Pakistan and overseas economies. The proportion of goods and services sold in the Pakistan and abroad typically rises when economies are growing and falls when in recession, thus affecting profits. The fact economies spend longer in a growth period than in recession has helped shares produce better returns than other assets and, crucially, beat the effects of inflation. If you left Rs.10,000 under your mattress, for example, it would be worth just Rs.9,750 a year later, assuming inflation had increased the cost of goods and services by 2.5% that year. After five years it would have fallen to just Rs.8,810. Savings accounts do little to protect your money from inflation as your real rate of return is small, averaging 1.8% a year after inflation according to Credit Suisse First Bostons Equity Gilt Study 2003. Shares, on the other hand, do have the ability to produce better gains. But, as investors it needs to be understood that share ownership is not without its risks. The risks of investing Inflation may eat away at your savings over the long term but if share prices fall, you run the risk of losing money. If a company you invest in goes bankrupt, your shares could become worthless. But companies do not have to go under for you to lose money. Other investors may simply decide that the company is not worth as much as when you paid for it, perhaps because it is losing market share, and if enough of them think that, your investment will fall in value. Shares also tend to fall when the economy is deteriorating as investors recognize profits will be lower. These are not, however, reasons for you to stay out of the stock market. But they should help you recognize the importance of building a broad portfolio with shares in different companies, industries and, even, countries. A good way for a beginner to do this is to invest in a fund, which spreads your money across 30-100 companies. It is also worth noting that apart from those companies that go bust, shares that have fallen in value can recover in time. Sometimes if a share has fallen in value it can be worth holding on until it recovers but at other times it may be better to cut your losses and invest in a company that has better prospects. The option you choose will depend on the company you are invested xxiv

in and your individual circumstances. Read more about How to build a portfolio and reducing investment risk. Investing in other Stock Market Instruments Buying shares or funds arent the only way of getting exposure to the stock market. Over the past few years a whole host of different stock market related investments have been introduced that give investors access to a completely different way of making money. Some of these investments, such as Exchange Traded Funds provide cheap ways for novice investors to get access to the moves in a specific stock market index or sector. Others, such as spread betting and Contracts for Difference, can give you the ability to make money when share prices fall and, perhaps, double up your exposure to the gain in a particular shares value. This does, however, make some of these investments more suitable for experienced investors so you should tread carefully and make sure you understand the risks you are taking before you invest. Exchange Traded Funds Exchange Traded Funds (ETFs) work like index tracker funds, giving you access to the performance of specific indices such as the KSE 100 or sectors, such as technology. But unlike index tracker funds, ETFs are set up as companies and rather than using computer modeling to track an index, they build portfolios of real shares. While there should be very little difference between the performance of index tracker funds and ETFs, being set up as companies gives ETFs a real advantage they can be traded throughout the day like ordinary shares. Index trackers can only be bought and sold at a price set at the end of the day. The annual fees on ETFs are similar to tracker funds, but you will also have to pay stockbrokers commission. Investing in other Stock Market Instruments Successful investing is not just a matter of picking the right investments at the right time but finding the best, and most cost effective way of buying them. Buying shares Trading in overseas stocks Buying funds Buying bonds Buying other investments

Buying shares Investing in the stock market is as far removed from the image of the dapper city gent in his bowler hat as you can get. These days you can trade shares through your bank, over the phone or the internet. The first thing you need to do is decide what type of broker you want. If you want help with your investments you might be best suited to a full advisory service, where the broker will look at xxv

your individual circumstances and devise a strategy specifically to suit your needs, monitor your investments and make suggestions on buying and selling shares. Some may even buy and sell shares for you without asking for your approval first. This service, known as discretionary broking, is highly tailored and, unsurprisingly, can prove expensive. These days most people are prepared to do their own research, which, after all, half the fun of investing. If you are in this camp you need to look for an execution only stockbroker. Execution only means that the broker will simply take your order and execute it for you. These brokers cannot legally offer you any advice on your decisions and to keep costs down usually operate over the phone or the internet. This does not, however, mean they will not provide you with any tools to help you make the best investment decisions. Many execution only brokers, particularly the larger firms, offer all kinds of research and online tools for everyone from the novice to the real expert. To a large degree, finding the right broker for you will depend on your individual requirements but there are four factors you should look for: quality of information, speed of execution, markets available and cost. Generally speaking, the better the information on offer, the more you will pay. While telephone and internet services may give you access to instant dealing, completing your deal takes a little longer. By law all share deals have to be settled two days from when they were struck, often known in the trade as T+2. Deals can be settled so quickly because shares can now be held electronically rather than in paper form. Buying funds The main routes open to investors wanting to buy funds are: directly, through an independent financial adviser (IFA) or through a fund mutual fund company or distributor. If you want some help picking your investments, you should choose an independent financial adviser who will research the entire market and look at your individual circumstance before recommending funds. Some advisers will charge a fee for this advice, others will take commission from the fund group. Buying bonds You can buy government issued bonds, known as PIBs simply through the commercial banks or a stockbroker. Corporate bonds can only be bought through a stockbroker. Buying other investments If you are a more adventurous investor, you might want to buy other stock market- related investments, such as Exchange Traded Funds (ETFs) or derivative products you should be able to buy them through a stockbroker. The costs of trading should be similar to what you pay for trading ordinary shares.

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Who does what in the market?


When you buy or sell shares in a company your only contact will usually be with your stockbroker. But if you read the financial pages of newspapers or the information sent to you by stockbrokers or companies, you will see a whole host of other business mentioned, such as market makers, registrars and regulators. Each of these organizations has a different but crucial role in the efficient working of the stock market. So, while you may not actually deal with them day to day, it is worth understanding the role they play. The Karachi Stock Exchange Regulators Registrars Stockbrokers Market makers Company advisors Shareholders

The Karachi Stock Exchange


The Karachi Stock Exchange is the principle Pakistani exchange for investors who want to buy and sell shares or bonds. It is known in regulatory circles as a Recognized Investment Exchange, which means it provides a marketplace for investors. Companies who list on one of the Exchanges markets, have to abide by strict rules governing their listing and may have their shares suspended if they do not comply. But the Exchange does not get involved in regulating the advisers and brokers individuals deal with. That is the responsibility of the Security Exchange Commission of Pakistan.

Regulators
Regulators are there to protect you and your money. The main regulator in Pakistan is the Security Exchange Commission of Pakistan (SECP). Any financial companies whose main business is investment must be authorized by the SECP. That includes stockbrokers and independent financial advisers. These firms are required to ensure all the people who work for them meet the standards laid down by the SECP.

Registrars
If a company lists its shares on the stock market it needs to appoint a company registrar. The company registrar is responsible for the upkeep of a legal record of the companys shareholders.

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This means that every time you buy or sell shares, the registrar will make a record of the transaction. This is useful if you lose the certificate and need to trace your holding. But registrars will not always know you are the owner of shares if you buy through a nominee account.

Nominee accounts, operated by stockbrokers, enable you to buy and sell shares more quickly than if you hold the paper certificate but as the shares are held under a nominee account, the registrar will only know how many shares are held in that account, not who the individual owners are. That then becomes the responsibility of your stockbroker.

Stockbrokers
Stockbrokers are the people who will buy and sell your shares on your behalf for a fee. There are different types of stockbroker. If you want help with your investments you might be best suited to a full advisory service, where the broker will look at your individual circumstances and devise a strategy to suit your needs, monitor your investments and make suggestions on buying and selling shares. Some may even buy and sell shares for you without asking for your approval first. This service is highly tailored and, unsurprisingly, can prove expensive. These days most people are prepared to do their own research. That is, after all, half the fun of investing. If you are in this camp you need to look for an execution only stockbroker. These brokers cannot legally offer you any advice on your decisions and to keep costs down usually operate over the phone or the Internet. This does not, however, mean they will not provide you with any tools to help you make the best investment decisions. Many execution-only brokers, particularly the larger firms, offer all kinds of research and online tools for everyone from the novice to the real expert. To a large degree, finding the right broker for you will depend on your individual requirements but there are four factors you should look for: quality of information, speed of execution, markets available and cost. Generally speaking, the better the information on offer, the more you will pay.

Market makers
When you give an order to buy or sell shares to a stockbroker, they pass the deal onto a market maker who will execute the deal. Market makers have to offer stockbrokers separate prices for buying and selling shares (known as bid and offer prices). When you see a share price quoted in the newspaper it is usually the mid price (the average of buy and sell prices) and this determines the value, or market capitalization, of a company. Market makers are ultimately responsible for how much share prices move up or down. If, for example, demand for a companys shares is high, market makers will put up the price to attract shareholders to sell. If demand is low, the market maker will reduce the price to attract buyers.

Company advisors
If you read about one company taking over another, or that a company has diversified into a new area, you will usually see the reporter name a different firm as the companys advisor. xxviii

While listed companies have boards of directors who are there to advise the business on any future developments, they usually employ outside firms to help independently analyze the prospects for the business. These firms, often investment banks, may, for example, do some research into which of the businesss rivals may be ripe for takeover.

Shareholders
If you have bought shares in a company you are a shareholder. Owning shares gives you the right to vote at company meetings and to get any dividends the company pays out. You may also qualify for shareholder perks, such as discounts off the companys products, although you may have to hold the share certificate directly rather than through a nominee account. Shareholders are usually split into two types: institutional and private. Institutional holders are companies who may, for example, invest the pension schemes of their staff in shares. They can also be fund managers who run investment schemes such as unit trusts or investment trusts. So, if you have a pension or another investment scheme, these institutions will be investing on your behalf. Institutions have the biggest influence on the markets performance simply because they have millions or billions to invest. If they, for example, own a reasonable percentage of a companys shares, selling them will have a significant influence on the price.

Market Mechanics
Once you have done your homework and decided which companies you feel are worth investing your money in, you can go ahead and buy their shares. This is a simple process but there are some tips worth knowing before you start. Your first step should be to find a stock broker who offers the kind of services you need. Read more about choosing a broker. Once you have registered you need to decide what type of order you want to place. There are a variety of ways you can buy or sell shares, not just at the best price your broker can get. You can, for example, set limits on the prices between which you are happy for your broker to trade. Remember that not all brokers will offer every type of order so check with them when you register. At Best Limit orders Stop order Fill and Kill orders Trading systems

At Best At best orders are used by the vast majority of private investors. If you choose to buy or sell shares at best you are simply instructing your broker to trade immediately at the best price they can get. xxix

Limit orders If you place a limit order you are simply asking your stockbroker to buy or sell shares at a price that matches or betters the level you specify. You might, for example, have noticed that shares in XYZ Plc have fallen to Rs.3.5 in the past few days and you think they are worth buying at Rs.3.5. You could, therefore, ask your broker to buy the companys shares if they fall below this level. There is no restriction on when these orders can be placed and then can stay in force for anything up to 90 days. This would be useful if, for example, you were going away on holiday but didnt want to miss out on buying shares at a specific price. Stop orders This type of order enables you to buy or sell shares within a specified range once a price you determine has been reached and is a type of limit order. If, for example, you decide you want to buy shares at a specific level above the current market price you can ask your broker to place a contingent stop buy order. If you want to sell your shares once the price has dropped below a pre-determined level you can place a contingent stop sell order. This type of order can be useful if, for example, you are a momentum trader and want to reduce your exposure to a stock as prices fall or increase your holding as prices rise. Read more about momentum trading in strategies for investment. Fill and Kill orders If you want to buy or sell shares at a price that matches or betters the level you specify when the market next opens, you can place a fill or kill order. Your order with either be filled if your broker gets a price matching your requirements or killed if the price cannot be matched at the first attempt. You can only place fill and kill orders outside market hours. These orders expire when the market opens on the first business day after the order has been taken. So, if you place a fill or kill order on a Tuesday evening, the order will be filled or killed at the start of the next days trading.

How companies raise money


Some 30 companies have decided to list their shares on the Karachi Stock Exchange. But why? What do they get out of it? There are, after all, tremendous costs involved in gaining a stock market listing and maintaining it. Quite simply, listing on the stock market is all about raising money to enable your business to expand. Imagine you have a brilliant idea for a new company but you dont have the money necessary to buy equipment such as computers and office furniture. You might initially think about raising some money from family and friends and giving them a stake in your business in return. This is, in fact, the way many companies start life. Shares issued by companies not listed on the stock exchange are often referred to as unquoted. But if you need money on a large scale or you are a small business looking to expand, you might need more than your close acquaintances can provide. At this stage some people look to borrow money from venture capitalists or the bank. Others decide to try and raise money from a wider group of investors through a stock market listing. These shares are known as quoted or listed on the stock exchange. It is rare, however, that companies approach the market just once for money. As you flick through the financial pages of your newspaper you will often read about rights issues, share xxx

splits and share buy backs. These are all terms used to describe different ways companies raise money from investors and, pay it back. IPOs/new issues Bond issues Rights issues Stock splits and scrip issues Share buybacks

IPOs/new issues Raising money by issuing shares is a viable option for a company because investors have to rely on the companys performance in the future to get their money back. If the company borrowed money from the bank instead they would have to make interest repayments on set dates. A company that decides to raise money by issuing shares is said to be floating on the stock market but this option is not open to all companies. It has to seek approval from various regulators and banks before asking the public for money. It also has to issue a prospectus, which explains what the company does why it is raising money and what opportunities and risks there are to investors from buying shares in the firm. When you buy shares through an IPO you are buying them on what is known as the primary market. New issues of shares are distributed through a broker appointed by the company and are sold at a fixed price. Investors sometimes buy shares in a new issue hoping to sell them immediately at a profit rather than hold them. These investors are known as stags. Once the new issue is completed and the company is officially listed on the stock market, it is known as a public limited company (plc) and shares can be traded between investors. This is known as the secondary market. Shares sold on the secondary market trade for whatever someone is willing to pay for them. The more valuable a company is perceived to be, the more investors are prepared to pay for it and vice versa. Bond issues If a company does not want to issue shares, it can issue bonds instead. Bonds are different to equities because rather than investors having to rely on the companys returns to make money, the company pays a fixed sum back to investors every year. It also promises to repay the full amount it borrowed after a set number of years. This way of raising money is called issuing debt as the company is effectively borrowing money from you. Rights issues A public limited company is free to go back to the market whenever it pleases to ask for more money. This is known as a rights issue. You are not, however, under any obligation to take up its offer. Companies decide to raise more money for a variety of reasons but usually it is to fund expansion, perhaps to take over a rival or to diversify into a new business area. Rights issues are almost always offered to existing investors and the amount they are offered depends on how xxxi

many shares they already own. They could, for example decide to issue two new shares for every one held. Shares offered under a rights issue are usually offered at a discount, often between 20% and 40% of the current share price. Existing shareholders receive a Provisional Allotment Letter which tells them how many shares they are entitled to and what the price will be. If you receive this letter you can either take up the offer or decide to sell the letter onto another person who can subscribe for the shares instead. This is known as rights nil paid. Another option is to do nothing. If you do this the company will sell the shares in the market, retain the subscription price and remit any excess proceeds from the sale to you. You should remember that once a company has issued extra shares, you own a smaller proportion of it and so your shares should be worth a little less. How much less will depend on how much other investors are prepared to pay for them. Companies can also issue new shares through a placing. This is when new shares are created and sold through the companys financial adviser, usually at a price just below the price of the existing shares. Stock splits and scrip issues Companies can decide at any time to increase the number of shares they have in issue by doing a stock split. This often happens when a company decides its share price has got too high and is concerned that trading will decline as a result. If a stock splits and, for example, give you two shares for every one you own, there is no real change in the value of your holding, even though you own more shares. Another way for companies to issue more shares is through a scrip issue. This happens when a company decides to turn part of the reserves it has accumulated into new shares. These shares are usually issued to existing holders but are not, as many people mistake them, free shares. The company is simply moving its money from one part of the balance sheet to another. Share buybacks and special dividends Companies have to have a certain amount of money in reserve to protect the business if, for example, profits were to collapse. If the company has done very well for a number of years it can build up excess reserves. It may decide to use this money to fund an acquisition or may pay a special dividend to investors. Alternatively, it might choose to buy back some of its own shares. When a company buys back its own shares it makes the shares still in issue more valuable. Say, for example, a company has 100 shares worth Rs.100 each and you have five shares, you own 5% of the company. If it buys back and cancels 20 of those shares, you still own five but your stake in the company has increased to 6.25%.

How you are protected


While all of us hope that investing will improve our wealth, we have to accept that investing does involve some kind of risk. As investors who suffered losses during the bear market of 2005 to 2008 will testify, there is always a risk that shares will simply fall in value, no matter how much research you have done. xxxii

Unfortunately for investors who have lost money simply because of a fall in the stock market, there is no way to gain recompense if you have decided to invest of your own free will. But investors do run the risk of losing money through no fault of their own. There is, for example, the risk of losing money because your stock broker has run off with your money. Or perhaps you have been encouraged to invest in a product that proved unsuitable for your needs. All advisers and brokers have responsibilities when dealing with consumers and you should understand what to look for in a company before you hand over your money. You should also know what to do if something does go wrong. You should also understand what your responsibilities are as an investor. Your rights and responsibilities Who is responsible for what? What to do when things go wrong

Your rights and responsibilities Before you take investment advice from anyone or hand over any money you should check the person you are dealing with is authorized to conduct investment business. All firms who conduct investment business and who deal with the public, whether they are mutual funds, investment companies, stockbrokers or independent advisers, must be authorized by the Pakistans regulator, the Security Exchange Commission of Pakistan (SECP). These firms have to prove to the SECP that they are competent, financially sound and treat their customers fairly. If you have received any advice, the firm must make sure that any recommendations are suitable for you. However, you are only protected by the KSEs complaints and compensation schemes known as the investor protection fund, if you deal with authorized firms so check carefully that the firm or individual you are dealing with is authorized by the SECP to conduct investment business before you hand over any money. As an investor you do have to accept some responsibility as well. You should never invest any money in any share or financial scheme without understanding exactly what you are getting into. Make sure you read any literature you are given too. It may look boring but remember that you may end up putting your money at risk if you are not careful. Another responsibility you have is to make sure you do not profit from any inside information. You might think you would never find out any inside information but it can be as easy as overhearing a conversation on a train or in a pub. If you find out any information not generally available to the public and use it to make a profit, it is insider trading and is illegal. Who is responsible for what? There are a whole host of organizations responsible for making sure that financial companies follow strict rules designed to protect investors. The main organization responsible for the regulation of Pakistans financial companies is the SECP and State Bank of Pakistan (SBP). Any financial companies whose main business is investment must be authorized by the SECP or SBP. That includes stockbrokers, independent xxxiii

financial advisers, mutual funds, investment companies and banks. These firms are required to ensure all the people who work for them meet the standards laid down by these authorities. What to do when things go wrong Although the whole system of regulation in the Pakistan is designed to ensure financial services firms carry out their business responsibly sometimes things can go wrong. If you think, for example, that a firm has given you misleading advice there is a chance that you may be able to get all or part of your original investment back. Your first step should always be to contact the firm that sold you the product or provided the service. If you are not satisfied, you should then take your complaint to the regulator.

Experienced Investors
What factors influence share price?
When you look at the performance of the stock market at the end of a trading day it can be hard to work out why shares have either risen or fallen in value. Broadly speaking, share prices are influenced by news or information: new data on employment, manufacturing, directors dealings, political events or even the weather, all kinds of news can influence the way shares move. You will sometimes, however, see little move in share prices when, for example, interest rates shift. This is because investors try to anticipate what is going to happen in the next few months and try to move their portfolios in or out of these stocks before the rest of the market catches on. Sometimes, of course, these expectations can be wrong and if this happen, markets can move very sharply. If you want to trade successfully in the stock market you will need to know what news other investors look at and how they will look at it. This will help you pick the best moment to buy and sell your shares The economy Company news Analysts reports Press recommendations Sentiment Technical influences

The Economy The health of the global economy has a fundamental influence on share prices because it is ultimately responsible for driving company profits. Broadly speaking, if the economy is growing, company profits improve and shares will become more highly valued. If the economy is weakening, company profits will fall and share prices will go down. Investors look at a vast amount of data to try and work out what is going to happen to the economy and shift their portfolios before the events occur. This is why you will often see markets move well ahead of an actual event occurring. You may, for example, get little reaction from the xxxiv

stock market when interest rates rise. This is because investors have already anticipated the shift months in advance and adjusted their portfolios beforehand. You can usually assume that the stock market will anticipate moves in the economy by around six to nine months. So if you want to stay ahead of the game you will need to follow economic data as closely as the professionals. The kind of information you need to play close attention to is: employment data, the reports put out by the Finance Ministry and State Bank of Pakistan (to get an idea where interest rates, inflation and GDP are headed), trade with other countries, retail sales and manufacturing. Sentiment surveys produced independent research houses are also important indicators of where the economy is heading. It is not only news about the Pakistani economy that will impact on share prices. The signals coming out of other major economies, particularly Pakistans major trading partners United States, Hong Kong, Germany, United Kingdom, Japan, United Arab Emirates and so on will affect Pakistani shares as what happens in these economies will have an impact on our own. When looking at economic data, you need to think not only how the wider economy will be affected but whether certain areas will be more affected than others. A rise in interest rates is, for example, often bad news for house builders as people feel less confident about taking on debt. Retailers are often badly affected too as people spend less. Pharmaceutical companies are, however, usually unaffected as peoples demand for drugs is not influenced by the state of the economy. Companies whose profits are closely tied to the health of the economy are known as cyclical stocks. Those businesses that arent too affected by the economy are called defensive stocks. If economic conditions deteriorate you will often see investors shift from cyclical stocks to defensives Company news The way investors interpret news coming out of companies is also a major influence on share prices. If, for example, a company puts out a warning that business conditions are tough, shares will often drop in value. If, however, a director buys shares in the firm, it may be a signal that the companys prospects are improving. Companies put out a great deal of news and most of the major announcements are covered by the financial press. But some announcements not regarded as so important and sometimes, particularly among smaller firms that are monitored less by investors and financial journalists, indicators of the companys health can be missed. You can stay one step ahead of the game by looking carefully at all the information sent out by companies you own, their competitors and other companies you are interested in. This information is usually available on companies websites and the annual and quarterly reports published by the companies them selves. Try to think laterally about the information you are getting. If, for example, a competitor to a company you have shares in produces a revolutionary new product, it will probably hit profits at the company you own. Also think about the impact it will have on suppliers to that business. An increase in sales of mobile phones with cameras in them will not only be good for the phone company but the firms that supply the technology in the phones. xxxv

Takeovers or even rumors of takeovers also have a big influence on prices. This is because investors expect the bidder to pay a premium to shareholders.

Monitoring news on a company To decide when to buy and sell investments you need to monitor news on companies, the markets and the economy. But where are the best places to go for this information? The proliferation of the media over the past decade has meant private investors now have access to the same information as the professionals, at the same time. This has enabled private investors to react more quickly to news announcements and even encouraged some to give up their day jobs and trade shares every day, known as day trading. The amount of information available on the stock market, whether through newspapers, magazines or the internet, is enormous. But unfortunately not all of it is reliable so you must tread carefully. Newspapers and magazines The internet Television Stockbrokers and investment banks

Newspapers and magazines Newspapers and magazines are the traditional source of information on companies. Most national newspapers have City and business sections that cover the main business stories and stock market reports. There is a difference between the content of daily newspapers and the Sunday papers. During the week newspapers tend to focus on major company announcements, such as mergers and annual results, and takeover rumours. The Sunday newspapers however, do not have this option as companies do not make any announcements on Saturdays. Instead these papers focus more on analysing the previous weeks news and getting exclusives stories that will dominate the week ahead. They also often publish share tips which can influence the next days trading. The money or personal finance sections of newspapers cover a wide variety of subjects, including mortgages, loans and investments. They usually carry some advice on which shares, funds and stock markets the professionals are favoring. A number of magazines are also available covering shares, funds and other investments. You can expect to find detailed analysis of companies, stock markets and other investments such as unit trusts and investment trusts. If you are interested in a particular sector of the stock market it may also be worth subscribing to a specialist magazine covering that industry. These publications, known as trade papers, are not usually available in newsagents but are subscription-only so you may need to hunt around to find them. xxxvi

The internet The emergence of the internet has revolutionized the world of financial reporting. Rather than waiting until the next day to get news on the latest events affecting investors, you can get it minutes after it has happened. A number of websites focus on producing regular stock market reports and company stories throughout the day. You can also get detailed news on what investments the professionals have been making. On these web site you can get the full regulatory news service, an editorial news service and further news from different economist and fund managers. In addition to news, many websites offer tools that allow investors to monitor the value of their portfolios and analyze the performance of individual stocks and funds. Some of this information is free but if you want more detailed information, you will usually have to pay a subscription. A number of websites also publish regulatory news. These are official announcements companies are required to make on any events that can influence the value of their shares. Many of these news stories are published before the market opens. The internet has also improved the information you can get from companies themselves. Most companies have websites that publish the latest news announcements, some of which you may not pick up elsewhere. Before you use any website make sure you check its credentials. While there are many excellent financial websites, there is nothing to stop any individual setting up a webpage and publishing any information, whether reliable or not. Most reputable websites will have information on who they are and you will find many are owned by major publishers or stockbrokers. Television Mainstream news programmers tend to cover only a small amount of business news, normally reporting on the performance of major stock markets around the world and announcements by major companies, such as redundancies or mergers. There are, however, a number of specialist programmers to watch out for, on various business and news channels that are available on any cable TV network. If you have cable or digital television you can find more in depth financial news through specialist channels such as CNBC and Business Plus. These channels cover a wide spectrum of financial news and can often be more technical than the mainstream channels as they are typically watched by professional investors. Stockbrokers and investment banks Stockbrokers and investment banks produce a vast amount of research of companies, stock markets and economics.

Investment Ratios
When you read newspaper reports about companies you will come across a wide variety of financial ratios. These measures, such as the price-earnings ratio, discounted cash flow and dividend cover, can seem complicated to those new to stock market investing. But you will need to get a grasp of what the main ratios mean if you are to make the right investment decisions. This is because looking at how these different ratios compare from one xxxvii

company to another is an important way of judging whether their shares are good value or not and whether their share price will rise or fall. There are a wide variety of ratios used by investors but here we have focused on the main ones you should use to sift out the best performing companies.. You can find all the figures you need to work out these ratios from the companys annual report and accounts or if you dont want to go to that trouble or your maths isnt very good, you can usually find them on financial news and analysts websites. Read more about company accounts. Earnings per share (EPS) Price Earnings ratio(P/E) PEG ratio Return on Capital EBITDA and EV Current ratio and quick ratio Dividend cover Discounted cash flow

Earnings per share (EPS) The Earnings per share ratio, often shortened to EPS, measures the earnings a company makes for each share in existence. It is calculated by taking a companys net earnings and dividing them by the number of shares in issue. A higher EPS is regarded as better than a low EPS as it means investors are earning bigger profits for every share they own. Investors look not only at the current EPS but at estimates of future EPS to get an idea of the profits they will earn in future years. Price Earnings ratio (P/E) The ratio you will see mentioned more than any other is the Price Earnings Ratio, which you will often see represented as PER or P/E. The P/E measures whether a company is cheap or expensive. It is calculated by dividing a companys share price by its earnings per share (profits after tax divided by the number of shares in issue). As a rule, the higher the P/E, the faster its earnings are growing but if the P/E is high compared with other companies in the same sector, it could also mean the shares are overvalued. This ratio enables any business to be compared with another, although in reality investors tend to compare companies against those in the same industry sector or against the P/E on the entire market. Investors look not only at P/Es based on the past years earnings but also at estimates of future P/Es, also known as prospective P/Es. This gives investors an idea as to how fast a companys earnings are expected to grow in the future and, therefore, whether their shares are worth buying or not. xxxviii

PEG ratio If you are investing in growth companies it is worth looking at a companys PEG ratio. This ratio, which shows a companys P/E relative to its earnings growth rate, is worked out by taking the prospective P/E ratio and dividing this number by the prospective EPS growth. The lower the PEG ratio, the better value a companys shares are. Return on capital This ratio helps investors assess how hard a company is making its assets work. It is calculated by taking profits before interest and tax are removed and dividing this figure by the capital employed. Broadly speaking, the higher the return on capital, the more successful a company is. EBITDA and EV EBITDA is a profit key ratio that looks at the Earnings Before Interest, Tax, Depreciation and Amortization. It is used to assess the operative profitability of a company. You can use this ratio to analyze companies that reinvest heavily in their businesses by taking the Enterprise Value and dividing it by EBITDA. Current ratio and quick ratio As well as checking profitability ratios you need to look at a companys liquidity. One of the key ratios used for doing this is the current ratio. This takes the current assets and divides it by the firms current liabilities. You should also look at the quick ratio, also known as the acid test. It is known as the quick ratio because it gives you a quick grasp of a companys true liquidity. You work it out by taking the current assets and deducting stock and work in progress and then dividing this figure by the current liabilities. As a rule this ratio should be over 1 so that if a companys stocks were worthless it could still pay off its short term debts. Dividend cover If you are investing in a company that pays dividends, you need to understand a companys dividend cover. This ratio tells you if a company will be able to pay its dividend. It is worked out by looking at the margin by which the dividends paid to shareholders are exceeded by the companys earnings per share. Companies, and investors, like there to be a margin of at least 1 so the dividend payout will not be affected by a short term fall in profits. Discounted cash flow The discounted cash flow evaluates the future net cash flows and discounts them to their present day value. This ratio has become increasingly popular among investors since the bear market as it looks at the amount of cash available on a companys balance sheet. The more cash a company has available, the better it is able to protect itself through difficult economic times. Traditionally private investors have only been able to get information put out by their stock brokers, leaving the world of investment banking analysis available only to the professional. However in recent years these boundaries have blurred. Many newspapers and magazines publish summaries of investment banks research and some investment banks actually make their reports available for free on the internet. You should remember that the recommendation an analyst puts on a company will affect its share price very quickly and can become irrelevant within hours. This is because the analyst will usually say a stock is a buy within a particular price range. If the price moves above their xxxix

targets the improvements the analyst expects may be priced in and so the shares not worth buying. But analysts reports are always worth reading, even if the recommendation is out of date. The reports usually contain a great deal of useful information on the company and how its business is developing. They also often look at how the company rates against its competitors. Following Indices If you watch the TV news you will see newsreaders talk about the performance of the Pakistani stock market by referring to the KSE 100, KSE 30 , KMI 30 or the KSE All-Share indices. They may also discuss overseas indices such as the US Dow Jones Industrial Average, the S&P500, FTSE 100 or the Japanese Nikkei 225. If you already follow the business news you may know that these indices measure the movement of share prices within the stock market. But what is the importance of these indices, which are the major indices and why should you pay attention to them? Why indices are important The major Pakistani indices Overseas indices Index trackers and ETFs

Why indices are important Stock market indices are important because they provide an excellent guide to how profitable companies are and, therefore, how healthy the economy is. In simple terms, if investors think the economy is growing they will buy shares as companies are likely to produce better profits. This should result in a rise in a stock markets index. If, however, investors believe the economy is going to do badly, they will sell shares as companies are likely to produce poorer profits. This should result in a fall in a stock markets index. In reality, a stock market index will rise or fall day to day depending on the latest economic, political and company news that has emerged. Employment figures, retail sales, international trade negotiations, conflicts, new legislation, elections and the forecasts made by major companies can all result in a rise or fall in a stock markets index. Stock market indices are also used by investors as a way to measure their own performance. If you invest your money in a fund such as a unit trust, investment trust or open ended investment company, you will find that the fund managers job is to produce better returns than a particular stock market index which is the benchmark to track the funds performance. In the Pakistan, the main index used by fund managers to measure their performance is the either KSE 100 or KSE 30 and in case of Islamic fund its KMI 30. The major Pakistani indices In Pakistan the main index monitored by investors is the KSE 100 or KSE 30. This index, monitors the performance of the 100 and 30 top traded companies (Respectively) in the Pakistan. xl

The indexs focus on the biggest and the most liquid Pakistani companies, also known as blue chips, means it is the one newsreaders and newspapers refer to when they talk about the performance of the stock market. But the strong returns made by certain companies within this index means that in recent years it has become heavily dominated by three major sectors: banks, oils and cement. KSE All-Share index literally measures the performance of all the shares listed on the Karachi Stock Exchanges main market. So it includes the KSE 100, KSE 30 and KMI 30 companies and other medium and smaller companies in a variety of industries such as media, building and construction and technology, and etc. Because of the dominance of a few major Pakistani companies, the KSE All-Share is still heavily influenced by the performance of companies in the KSE 100 and KSE 30,for example, the KSE 100 and KSE 30 together make up the major percentage of the KSE All-Share index by market capitalization. If you want to get the full picture of what is going on in the Pakistani stock market you need to not only look at the performance of the KSE All-Share and KSE 100 but also the KSE 30 index, which covers the major free float companies in the market. Overseas indices Whether you are planning to buy shares listed on overseas markets or not, it is important to be aware of what is happening to other stock markets around the world. Arguably the overseas market that investors watch more closely than any other is the US. The American market is regarded as so important because the US is the biggest economy in the world and is home to many of the worlds largest companies. So, what happens to the American stock market tends to influence the performance of every other market in the world. The American index investors will be most familiar with is the American Dow Jones Industrial Average, which measures the performance of the top 30 companies in the US. Like the FTSE 100 in the UK, this index is not regarded as truly representative of the American economy and so professional investors tend to follow the S&P 500 index more closely. The NASDAQ index has also become more important to investors as it monitors the performance of the growing technology industry in the US. Asian and other emerging market indices are also very important, particularly to Pakistan-based investors, as Pakistani companies do a large proportion of their business in these markets.

The major international indices investors watch, apart from the US and UK, include the Japanese Nikkei 225 index, the Hong Kong Hang Seng index, Singapores Straits Times index and Thailands Bangkok SET. Index trackers and ETFs In recent years it has become increasingly common for international investors to put money into schemes that track the performance of local and overseas indices. These schemes have become popular because they do not rely on the skills of individual fund managers to produce returns but instead use computers to match the return produced by the index.

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More recently the Karachi Stock Exchange is in the process of introducing Exchange Traded Funds (ETFs). These schemes work like index tracker funds, giving you access to the performance of specific indices such as the KSE 100 or sectors, such as technology. But unlike index tracker funds, ETFs are set up as companies and rather than using computer modeling to track an index, they build portfolios of real shares. While there should be very little difference between the performance of index tracker funds and ETFs, being set up as companies gives ETFs a real advantage they can be traded throughout the day like ordinary shares. Index trackers can only be bought and sold at a price set at the end of the day. The annual fees on ETFs are similar to tracker funds. But you will also have to pay stockbrokers commission. Investing in Shares Company shares ('equities') are among world's most popular investments. Equities give investors the opportunity to share in the success of companies by benefiting from the potential for both income and capital appreciation. On the markets of the Karachi Stock Exchange investors can buy and sell shares in companies of all sizes active across all business areas from across Pakistan. Our high reporting standards help ensure investors are fully informed about the companies on our markets. The Exchange's unrivalled liquidity (the numbers of buyers and sellers in the market) also helps by making shares as easy as possible to buy and sell. This section provides an insight into the different markets and trading platforms at the karachi Stock Exchange. We also provide information on the different ways you and your broker can buy equities, highlighting the differences between on and off book trading. Understanding these differences gives investors a better insight into the market mechanics and could potentially enable them to get a better price when purchasing equities.

Tactics and strategies


How to build a portfolio/How investors categories shares
Most investors dream at some point of putting all their money into the shares of just one company and making a fortune overnight. Unfortunately, the chances of this happening are extremely slim and the risks all too high. Putting all your investment eggs in just one basket is a risk very few people can afford to take. Successful investing is not about taking big risks but balancing risk and return by investing in a broad portfolio of cash, bonds, property and cash. Cash is king Your attitude to risk Dont forget property Buying shares

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Cash is king The starting point for every investor is to make sure you have enough money tucked away safely for emergencies. The best place for this money is in a deposit account with a bank or building society where you can get to your cash quickly. The amount of rainy day money you need depends on whatever makes your comfortable but most experts say you should put away between three and six months salary. Your attitude to risk Your next step should be to decide what type of investor you are. This is crucial as it will determine the type of investments that will suit you. Investment experts tend to put investors in one of three categories: cautious, balanced or adventurous. Deciding which category you are in depends on how much risk you are happy taking but there are some guidelines to help you. If you are a young investor you can afford to be more adventurous with your investments in the hope of getting better returns as you have longer to replace any money you lose. You can also be adventurous if you are wealthy and have plenty of money in other assets. Balanced investors tend to be those who are slightly older, perhaps with families or who are prepared to take a little risk to get a better return. If you want to ensure your capital is completely safe you are a cautious investor and should think carefully about whether investing in shares is for you. This is particularly important for people in or near retirement who would suffer a decline in living standards if they were to lose money. You also need to consider whether you want income or growth from your investments, why you are saving and when you need to access your investment. All these factors will influence how much you can afford to put into shares. If, for example, you are saving for your retirement in 30 years you can afford to take more risk than someone who is saving to buy a house in three years. Broadly speaking, you should think carefully about investing in shares unless you can afford to leave it untouched for at least five years. It would be great if your investment were to rocket in value in just one year but shares can be volatile, suffering falls as well as gains. The longer you leave your investment untouched, the greater chance you are giving it to grow like a fine wine, shares can take time to reach their best. Once you have decided what type of investor you are, you can start allocating your investments. Corporate bonds should play an important part in your portfolio. Like shares, bonds are issued by companies but are a different type of investment. Rather than linking your returns to the companys profits, corporate bonds pay a fixed amount of interest, known as the yield, and provide little capital growth. This makes them very popular with investors who need income but even younger investors should have some bonds in their portfolio as they tend to be less volatile than shares. This makes them something of a safe haven investment and will provide some security in your portfolio. The amount of money you put in bonds depends again on your attitude to risk. But as a rough guide, most experts suggest you should have the same amount of bonds in your portfolio as your age. So, if you are 40 you should have around 40% of your portfolio in bonds. Remember though, xliii

this is a very rough guide and the amount you should have will depend on your personal circumstances. Dont forget property You should also try to have some property in your portfolio. If you are a homeowner you already have this covered but if not, then think about putting a small portion, say 5% to 10% of your portfolio, in a property fund. Property funds do not invest in houses but commercial property such as factories and offices so you might want to get some exposure here even if you are a homeowner. Buying shares The remainder of your portfolio can go into shares. The most important thing to remember about investing in shares is diversification. If you invest in a small number of shares the risk of you losing money is greater so you need to invest widely in different types of company and different countries. If you only have a small sum to invest the best way to do this is to put your money in an investment fund. Funds, which pool the investments of a number of investors, are a good bet because they employ professionals to invest your money in a variety of shares, usually more than 50. They also enable you to access markets where it is difficult to buy shares directly, such as the Far East and Japan. You can also use ETFs to access markets. If you have a larger sum to invest you can look at buying individual shares. Buying shares can be enjoyable and profitable but you need to invest time in picking the right shares and areas to invest in, monitoring your investments and, choosing the right time to sell.

Strategies for investment


Stock market investors spend a lot of time analyzing information before deciding which shares to buy and sell. But what is the best information to pay attention to and what do you ignore? Does the economic cycle, for example, have more influence on a companys share price than the quality of the management running that company? Unfortunately there is no right or wrong answer. Professional investors consistently argue for and against the effectiveness of using different types of information. In the end the best information to pay attention to depends on whether it works for you.

The different types of information individual investors pay attention to are categorized and called investment strategies. Among the most common of these are: top down, bottom up, value or growth, large or small cap, ethical investment and technical analysis. Top Down and Bottom Up Value v growth Large v small cap xliv

Thematic investing Technical analysis

Top Down and Bottom Up Are global economics a more important influence on how well your investments do than the health of individual companies themselves? Whichever you decide is more important will determine whether you can be categorized as a top down or bottom up investor. If you think that correctly analyzing the economic environment and basing your investment decisions on your assessment is the best way to pick shares, you can classify yourself as a top down investor. Followers of this investment strategy believe that picking individual stocks comes second because if the economic conditions are not right for the industry a company operates in, it will find it difficult to make profits, regardless of how efficient the company is. But, if you think that identifying individual companies that can grow rapidly and have attractive valuations is more important, you are a bottom up investor or a stock picker. Bottom up investors look at a variety of factors to work out which companies have the best opportunities, including strong management and growing market share and then look at whether these positive aspects are reflected in the share price. If they dont believe they are, the shares are worth buying. In reality professional investors tend to employ an element of both strategies when making investment decisions. Value vs growth Another way investors categorize themselves is by whether they are growth or value investors. Growth investors invest in companies they think will produce the fastest growth and are usually prepared to pay premium prices to buy them. Growth investors are usually happy to pay more for these companies, which tend to have high price earnings ratios; because they think that over time, share prices reflect the earnings a company is capable of producing. Growth investors also tend to follow the bottom up style of investing. Investors who spend most of their time trying to find companies that look cheap in relation to their real worth or potential future value are called value investors. Companies that fall into the value camp usually have low price/earnings ratios (P/Es) compared to other businesses in their sector. There is no simple answer to whether growth or value investing is best, as each goes through cycles and many investors tend to employ an element of both strategies. Growth investors will, for example, usually pay attention to the price they are paying for shares. They prefer to call themselves growth at a reasonable price or GARP investors. This means that they are only happy to pay what they regard as a fair price for a companys shares. Similarly, value investors do not simply go out and buy all the companies with low P/E ratios. Instead they look for reasons why the company is lowly rated to weed out the good companies from the bad. It may, for example, have poor management and therefore deserve its rating. But if the company later puts better management in place you might decide that the companys prospects have improved and that the shares are too lowly rated.

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Large v small cap Stock market investors often characterize themselves by the size of companies they invest in. Size in stock market terms is not measured by looking at the value of a companys assets but by the total value of its shares in the market, known as the market capitalization or cap. Big companies will often be referred to as large caps or, in the stock market term, as blue chips while smaller firms are known as mid caps or small caps. Shares in these three different size categories often perform in a similar way. The largest companies, for example, are usually more attractive to overseas investors because their shares are traded more frequently which makes them easy to buy and sell. Big companies are also more attractive to investors during a recession because they dominate their markets and so are less likely to go bankrupt than smaller firms. But large companies are very well researched by professional investors and this can make it harder to find ones that are undervalued. They also tend to produce lower growth rates than smaller companies. For this reason some investors prefer focusing their portfolios on this part of the market. Investing in smaller companies can, however, be more risky as these firms are more likely to suffer financial problems than larger companies. Other investors, however, think that it makes more sense to move between large, medium and smaller companies as market conditions dictate. These investors are often said to have a multicap approach to investing. Thematic investing With the world becoming an increasingly global marketplace an increasing number of investors have started to look at the major themes that drive share prices around the world rather than just focusing on how share prices move in local markets. This strategy is called thematic investing. One of the major themes that drives share prices, for example, is population change. Many countries, including the UK, Europe and US have ageing populations. Older people spend more on healthcare and financial services and, so the theory goes, companies in these sectors will do well regardless of the country where they are listed. Another theme is technological change, which could be positive for Technology Companys long term. Global themes are not, however, the main influence on all sectors of the market. Retail stocks, for example, are driven more by wages and employment in local markets than what is going on at a global level. A different type of thematic investing is ethical investment. Investors who follow this strategy seek out companies that adhere to certain ethical criteria, perhaps avoiding those that damage the environment. Shares in sectors such as tobacco and defense are typically avoided. Technical analysis The rise of home computing and the Internet has brought a whole new world to the fingertips of investors. Technical analysis of shares is no longer the preserve of the professional investor but something any private investor can do. Technical analysis, also known as Chartism, is simply the study of past share price movements and stock market index trends, which are then used to forecast how shares and stock markets will behave in future. xlvi

Some investors view technical analysis as a kind of crystal ball gazing but few ignore it completely and many professional investors employ people to analyse what history may teach us about the future. Technical analysts try to identify, for example, trends in a variety of stock market charts. They argue that if the charts show an upward trend, investors should continue buying. If, however, the charts show a downward trend, you should sell. They also look at moving averages, showing changes in the average share price over specific periods, say a month., and employ a range of other studies to predict future share price movements.

Managing your portfolio


Successful investment is, unfortunately, not just a matter of buying and holding shares for the long term. Like gardening, investing successfully is all about regular maintenance. You not only need to do research to decide what shares or funds to buy, but should keep a close eye on any news that could affect their value. If performance does start to slip you must be prepared to make changes. Monitoring your investments Maintaining a balanced portfolio Sell strategies

Monitoring your investments Once you have bought shares, you need to constantly take stock of news that could affect the value of your shares, such as new management or a profits warning, and decide whether the shares are still worth holding. Holdings in other investments you regard as short term, such as covered warrants also need reviewing regularly. Investing in funds is often regarded as long term but these schemes should still be reviewed once or twice a year. Look at how the fund manager has performed but dont panic if they havent done well. Even the greatest investors have poor periods of performance. The important thing is to understand the reasons why and then, based on their previous track record, work out whether the fund stands a good chance of recovery. Maintaining a balanced portfolio Before you start investing it makes sense to work out what you want from your investments. Do you, for example, want income or growth from your holdings; do you want to invest in specific stocks such as technology or companies with an ethical stance? Once you have built your initial portfolio it can be easy to lose sight of these aims so you need to regularly look at your portfolio and ask yourself if it still meets those aims. Work out the percentage of your portfolio made up by different stocks and sectors and make sure you have a sensible balance. You could find that a stunning increase in value of just one stock has meant your portfolio will no longer achieve the aims you set for it so you need to consider cutting back that holding and reinvesting the money elsewhere to improve diversification.

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Remember to ask yourself too if your investment aims have changed. You may, for example, start with the aim of taking big risks in the hope of getting the best returns. But over the years your priority might shift to protecting the money you have made. You might also decide that you need to start taking an income from your investments. Sell strategies One common mistake investors make is to focus all their efforts on when to buy stocks, not working out when to sell. But as any professional investor will tell you, knowing when to offload your holding is just as important as knowing when to buy. The most common way for investors to work this out is to set a price target what you believe is a fair price for the shares. If the shares hit your target you should then look to offload all or part of your holding. If you want to hold onto the shares you should at least reassess your holding to ensure you really believe the shares are worth more. Failing to sell shares when they reach fair value is a common mistake made by investors. Some times they get lucky and the shares continue to rise but you also run a very real risk that other investors will suddenly decide the shares are too expensive and mark them down in value. If your investments do fall in value, you need to work out if they are still worth holding. It doesnt necessarily make sense to hold on to your shares in the hope they will recover it may be better to cut your losses and switch your money into a share or fund that has better prospects. Every time you look at your investments you should do so with a fresh eye and ask yourself whether you would be prepared to buy that company today. If the answer is no, it may be worth moving your money elsewhere.

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