A stock exchange is a regulated market where stocks, bonds, and other securities are traded. It provides companies and governments a platform to sell securities to the investing public. Some major stock exchanges in the world include the New York Stock Exchange (NYSE), the Nasdaq Stock Market, the London Stock Exchange (LSE), and the Pakistan Stock Exchange (PSX).
The Pakistan Stock Exchange, located in Karachi, is the main stock exchange of Pakistan. It has over 538 listed companies representing approximately 35 different sectors. Investors can buy and sell shares of these companies on the PSX.
What is a Share?
A share, also known as equity or stock, represents part ownership in a company. When a company issues shares, it divides its capital into multiple units. Each unit is a share. Anyone who purchases these shares becomes a shareholder of that company.
Shares give shareholders certain rights such as the right to receive dividends if profits are distributed, the right to vote on important company matters, and the potential for capital appreciation if the share price rises. However, shareholders also bear risks – they can lose the money they invested if the company performs poorly or goes bankrupt.
Types of shares, preference shares, preference shares, and ordinary shares
There are a few main types of shares:
- Reference shares – These shares give shareholders preferential rights over ordinary shareholders. Examples include cumulative preference shares and convertible preference shares.
- Preference shares – These shares have priority over ordinary shares in payment of dividends and distribution of assets in case of liquidation. They carry lower risk than ordinary shares.
- Ordinary shares – Also called common stock or equity shares. These represent ownership in a company and give shareholders voting rights. However, ordinary shareholders receive dividends only after preference shareholders are paid.
Why Does a Company Issue Shares?
There are several key reasons why companies issue shares:
- Raise capital – One of the primary motives is to raise funds for business operations, expansion plans, paying off debts, etc. Selling shares allows companies to raise large amounts of capital.
- Dilute ownership and control – Founders of companies may sell shares to the public to reduce their stakes and distribute ownership and control more widely.
- Enhance company image – A publicly listed company is perceived to have greater credibility, making it easier to obtain further financing.
- Facilitate mergers or acquisitions – Shares can be issued to pay for acquiring another company.
- Reward employees – Shares or share options are commonly offered as incentives to retain employees and align their interests with shareholders.
By offering shares, companies can fund growth opportunities and operational objectives while engaging a broad group of investors.
How Does the Stock Exchange Market Work?
The stock exchange market functions as an auction place where the shares of publicly listed companies are traded between buyers and sellers. The demand and supply forces determine the prices at which stocks are traded.
Here is a quick overview of how the stock exchange market works:
- Publicly listed companies issue shares that are available for trading on the stock exchange.
- Interested buyers and sellers place orders through brokerage firms to trade shares.
- Buyers bid the highest price they are willing to pay, and sellers ask for the lowest price they are willing to receive.
- When bid prices and ask prices match, a trade is executed.
- The exchange matches and facilitates these buy and sell orders of market participants.
- The constantly changing prices of stocks reflect investor sentiments, economic events, company performance, and future earnings potential.
By providing liquidity, price discovery, and transparency, stock exchanges enable investors to easily trade ownership of companies.
Invest in the Pakistan Stock Exchange
Some effective strategies for investing in the PSX include:
- Conduct thorough research – Analyze company financials, growth trends, management quality, etc.
- Take a long-term view – Equity investing is meant for long time horizons of over 5-10 years.
- Diversify across sectors and market caps – Spread your investments to reduce risks.
- Invest regularly – Use techniques like rupee cost averaging to minimize market timing risks.
- Reinvest dividends and capital gains
- Work with a trusted broker – They can provide research, advisory, and execution services.
Types of Investment in the Stock Exchange Market
There are two main investment horizons to consider – short-term and long-term:
- Short-term investments – Held for less than 1 year. Examples are day trading, swing trading, investing in certificates of deposit, money market funds, etc.
- Long-term investments – Held for over 1-2 years. Examples are value investing, growth investing, dividend investing, investing in bonds and mutual funds, etc.
Short-term investors aim to profit from price fluctuations over weeks or months. Long-term investors are focused on compounding returns over many years.