20 Most Important PSX / Stock Market Questions answered here!

I understand that if you are thinking about investing in the stock market, you will have 100 questions. So we have compiled a list of 20 questions and answered them below.

These were the all the questions that we were asked through our YouTube channel, emails, and tweets are compiled and answered here in one go!

Let’s start!

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Written by Furqan Punjani (LinkedIn profile) who has more than 15 years of experience in investing and financial services in Pakistan.

Q. What are stocks and How do they work?

Stocks represent ownership in a publicly listed company. When someone buys a stock, they become part owner of the company and in return share their profits and dividends.

Companies can issue stocks to raise capital for expansions or value realizations of their assets.

Once a company becomes listed, shares become tradeable on the exchange and new investors can buy or existing investors can buy/sell their shares.

Example:

BlueEx

listed their stock on Pakistan Stock Exchange in November 2021 to improve their tech.

Q. What is an IPO or Initial Public Offering?

IPO or Initial Public Offering is a way through which a company lists itself on the stock market. Once a company is listed its stocks are available to be traded through brokers.

Under the IPO process, a company shows its history, and its financial numbers like earnings and sales, and tells the market why it wants to list on the stock exchange. Usually, these companies require cash for expansion and for that, they need money from investors.

Recently the IPOs have started to happen through Book Building Process. It determines the price at which it will get listed and the general public then subscribes to these shares. More on it below!

Q. What is Book Building in IPO?

Book Building is a process through which a new company determines the price at which it will get listed on the stock exchange.

The new company decides on a base price for its stock and opens the book-building process for big individual and institutional investors. If the company has promising financials and if the market conditions are good, the book-building price goes higher than the base price like in the case of Al Shaheer in 2015.

However, if the market conditions are bad, the book-building price and the base price remain the same like in the case of Adamjee Life’s IPO in 2022.

Under this process, high-net-worth individuals and institutional investors bid for the shares at the price they think is reasonable. Once the price is decided, it becomes the price at which the general public can get shares. Moreover, this price also becomes the first-day opening price for the newly listed company.

If the market conditions are good and the new delivers on its promise to grow the business, then the stock price on the stock exchange goes up. However, if the market conditions are bad, the stock may come down.

Q. What is reverse listing?

Other than doing an IPO, another way of getting listed on the stock exchange is to get reverse listed.

Under this process, the new company finds a small target company which usually has no operations of its own, and marge the two companies as one.

Through this process, the new company gets listed, and the name of the old company changes.

The best example of this is Service Fabrics.

Ghani Group acquired this company and merged its operations into it. Later the name was changed from Service Fabrics to GTech.

When investors are buying reverse-listed stocks they should be very cautious since we have seen that after an initial surge in price, usually these companies fail to deliver on their promise and their stock prices go far lower than their reverse-listed price.

Q. What are right shares?

If an already listed company wants to raise money for expansion, they issue the right shares.

Through this process, they offer new shares to existing shareholders. The issue price can be higher or lower than the market price. This depends on the market condition and other market-related factors.

Example:

Maple Leaf Cement (MLCF)

issued 85% right shares in 2019 to increase their cement production.

Q. How does the stock market work in Pakistan?

The stock market works as an intermediary between buyers and sellers.

All the shares that are traded during a day happen on an exchange and in Pakistan it’s called Pakistan Stock Exchange or PSX. Here are the link to PSX’s website and PSX’s Database Website.

Q. When do stocks go up or down?

Stocks go up when the company’s financial results are better than expectations. This creates demand for the stock and the price of the stock goes up. Stock prices also go up when the economy in general is doing well. Investors expect that the company they own will benefit from the economic growth and hence their financial position will be better in the future.

However, when the economy is expected to fall down, or if inflation and interest rates are going up, stocks in general fall. This is because investors expect that the company’s earnings will fall and hence stock prices should also fall. When most of the investors sell, the supply increases vs the demand and the prices fall.

Q. Who can invest in the stock market of Pakistan?

Anyone can invest or trade in the stock market but they have to open an account with a broker. Once the account is open, an investor is linked to the stock exchange to buy or sell shares.

Q. How to open a brokerage account in Pakistan?

To open an account, you need to first choose a broker. There are many well-known brokerage houses in Pakistan. We have a detailed guide to choosing the best stock broker in Pakistan below.

Once you have chosen a broker, you need to either visit their branches or visit their website for an online account opening form.

Nowadays every broker has a dedicated page to open new accounts.

Stock Brokers ask for these details before opening an account in Pakistan:

Names

NIC numbers

Cell phone numbers that are registered in their own names

Bank Account number or IBAN Numbers and

Signatures

Q. How to choose a broker in Pakistan?

Choosing a broker depends on four things.

How much does a broker charge in commissions?

How many platforms do they provide for trading?

Do they provide leverage to his traders?

Do they provide research reports?

Broker Commissions:

Most of the brokers in Pakistan charge just the minimum commissions. It is 0.15% of the value of the share if the share is higher than Rs20 or Rs0.03 if the share price is lower than Rs20/share.

For example, if a share is trading at Rs100, the broker will charge Rs0.15/sh commissions. But if you buy a share that is say Rs10 per share, they will charge Rs0.03/sh.

Make sure to look for the commission schedule before opening an account.

Broker Platforms:

In Pakistan, most brokers provide all three types of platforms for investors to trade on. Desktop Applications, Mobile Applications, and Web Applications.

Make sure they at least have two platforms available at all times.

Leverage:

If you trade frequently or you prefer to use leverage products like Margin Financing, Margin Trading, or Futures contracts, make sure that your broker is providing them.

Not all brokers provide leverage facilities to their clients in Pakistan.

Research Reports

In Pakistan, research reports are of two kinds. Fundamental Research Reports and Technical Research Reports.

Fundamental research reports help investors to invest in a company for a longer duration while technical research reports are more helpful to traders that provide daily buy and sell levels.

Choose a broker that provides both types of research reports.

Q. What is the minimum amount to invest in the stock market in Pakistan?

The minimum amount to open a stock market account in Pakistan varies between Rs1,000 and Rs,5000.

Q. How to invest as a beginner in the stock market?

Before buying any stock you need to know a few basic things about that stock like:

Which sector is the stock in?

Are its earnings and dividends going up or down?

How is the economic situation these days and will it improve or further go down?

Q. How do I buy my first stock?

Think about the end goal!

Answer three things:

Do you want to earn passive income?

If yes, then buy high-dividend stocks. These stocks will give you dividends every quarter and they will create side income for you!
Usually, fertilizer stocks, banking stocks, power stocks, and oil and gas stocks give quarterly dividends.

Do you want to make capital gains i.e. buy stocks for a lower price and sell it when it goes up?

If yes, then buy growth stocks. These stocks grow their earnings by re-investing them into the business and see compounding benefits.
Usually, these are cement stocks, textile stocks, and steel stocks.

Do you want to trade stocks?

If yes, learn technical analysis or follow daily technical reports.
They tell you the best rates to buy (support prices) and the best rates to sell (resistance prices)
Please note that these are just expected levels and stocks can down below their advised buying prices and can go high over the advised selling prices.

Q. How to learn about the stock market in Pakistan?

You can learn about the basics of the stock market through our videos and other channels out there.

InvestKaar YouTube Channel

Once you have covered the basics and you are still interested to go in deep there are paid courses in Pakistan that you can benefit from.

Always choose the course that is taught by someone who is experienced in Pakistan Stock Market. There are many people out there selling low prices courses however they just teach basics which can be covered by free YouTube videos.

Q. What stocks are haram?

Stocks are not haram.

Trading stocks on a daily basis, without having them in your portfolio is haram.

There are two types of stocks listed at the Pakistan Stock Exchange.

Islamic Stocks

Non-Islamic or Conventional Stocks

Islamic Stocks

Islamic stocks are those that:

have less bank debt,

the ones that don’t earn a lot of interest income and

the ones that are not involved in non-Islamic activities like selling tobacco, alcohol, etc.

This is the detailed list of Halal / Islamic Stocks at the Pakistan Stock Exchange.

If you invest in companies that are approved in the list above, it will be a halal investment.

Q. Is the stock market profitable in Pakistan?

Coming Soon!

Q. How many stocks should I buy the first time?

Instead of buying a long list of stocks, you should not buy more than 5-7 stocks the first time.

You should:

Understand the company you are buying - its business model, its earnings, and multiples

Understand its debt levels

Understand when a stock or its sector performs.

You can make a much better return by buying 5-7 stocks that you know about instead of a long list of stocks that you have no idea about.

Q. Can I earn monthly income from the stock market?

There are stocks that pay quarterly dividends which can become a good source of monthly income for you.

These are old and mature companies and hence risk to their business model is less.

Actually, you can make much more than putting your money in fixed deposit accounts maintained at a bank.

We have written a detailed guide on How to make passive income from the stock market. This is a must-read for you if you are interested to make monthly income in Pakistan from the stock market.

What is the best stock to invest money in 2023 in Pakistan?

The answer to the question lies in what you want your stock to do.

Do you want it to give dividends every quarter? - Passive Income Strategy - Here is the list of highest-paying dividend stocks in Pakistan

Do you want it to go higher in price? - Capital Gains Strategy - Here is the list of stocks that have rallied the most in 2023 so far.

Depending on these, you will decide your stock market portfolio!

But these are the worst stocks to own in 2023!

Where to invest 5000 rupees in Pakistan? Small Amount Investment Series! The only guide you need to understand FMR Report in 2023

Furqan Punjani

Founder at InvestKaar.com. 15 years of investing and wealth management experience. Worked at most renowned brokerage houses in Pakistan. Won the best sales trader award for 2021 by CFA Society of Pakistan.