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A stock, or share, is a type of asset which represents ownership in the issuing corporation. Stocks are mostly traded on stock exchanges, which in Pakistan’s case is the Pakistan Stock Exchange. Corporations issue stock to raise funds for their operations, and in return stock holders may have a claim to the company’s assets and earnings.
A stock exchange is a marketplace for formal buying and selling of shares in publicly listed companies. Pakistan Stock Exchange (PSX) is Pakistan’s only stock exchange.
A listed company is one whose securities are listed on an exchange. The share price of a listed company is quoted and traded on a stock exchange. An unlisted company is one whose securities are not listed on an exchange. Its shares are therefore not available for trading to the general public. Private limited companies are examples of unlisted companies.
A stock broker is an organization that matches investors who want to buy shares with investors who want to sell shares (or vice versa). Stock brokers offer a fast and efficient way to connect buyers with sellers, and charge a fee (commission) for this service. They are licensed by the Securities and Exchange Commission Pakistan.
One way companies may raise funds is by issuing bonds. Bonds represent the amount of funds lent out to the company. A bond is a debt instrument which entitles the bondholder to a fixed rate of interest. Shares on the other hand are equity instruments and represent proportionate ownership in the issuing company.
An investment is an asset bought by an individual or an organization with the expectation that it will generate some future income or profit. For example, this could be stocks, bonds, real estate or commodities. The type of asset any investor chooses depends on their specific risk and return constraints, and this will varies from one individual to another. For example, stocks generally provide a higher return than bonds, but are more risky.
It is a standardized contract which allows buying or selling of eligible underlying shares at a certain date in the future, at futures price i.e., the price on which it is bought or sold in the CSF market. It is settled in cash, where the result of the settlement is the cash difference between the futures price and final settlement price. The minimum lot for trading in CSF is 1 contract that provides exposure of standard 500 shares of underlying shares. Contract maturity is 90 days after the contract is listed. The new 90-day contract for the upcoming month is listed on Monday (or the next trading day if Monday is a holiday), following the last Friday of the current month. The contract matures or expires on the last Friday (or preceding trading day if Friday is a holiday) of the expiry month. Settlement takes place on T+1 basis.
A dividend is the distribution of company earnings to its shareholders. It may be in cash form or bonus shares. These are often paid out quarterly and are determined by the company’s board of directors. The dividend yield is simply the dividend per share divided by the share price, expressed in percentage form.
The ex dividend date is the date before which you must own the stock to avail the issued dividend. This date may be different for different companies. Once the ex dividend date passes, a stock is generally referred to have gone ‘ex dividend’. For example, if TRG is trading at PKR 100 per share and issues a PKR 5 dividend, then once the ex dividend date passes (i.e. the company distributes the dividend), the share will go ex dividend and will now trade at PKR 95 per share.
A portfolio is simply a collection of financial investments like stocks, bonds, commodities, cash, real estate and private investments. Many factors influence how a portfolio is designed, including the investors risk appetite, return requirements, time horizon and liquidity constraints
Diversification is a risk management strategy which involves building a portfolio will a wide array of assets. Diversification may be achieved by investing across different asset classes and by investing widely within a single asset class. For example a diversified portfolio may contain four different asset classes, namely stocks, bonds, real estate and gold. Within stocks, the portfolio may contain twelve different stocks i.e. diversification within the asset class.
Bull & bear markets are terms used to describe how the stock market is performing. A market which trends upwards where the economy is stable is generally referred to as a bull market. A bear market exists in a weakening economy where most stocks are on the decline.
A fiscal year is a twelve month period chosen by a company to report its financial information, and is commonly used for accounting purposes to prepare financial statements.
A fiscal year is a twelve month period chosen by a company to report its financial information, and is commonly used for accounting purposes to prepare financial statements.
In order to raise additional funding, a company may issue right shares to the existing shareholders. A right issue therefore allows shareholders to buy shares of a company before it is offered to the public, usually at a discounted price. The new shares are usually issued in proportion to the existing investors’ holdings.
A Central Depository System (CDS) is an electronic 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. The CDS 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. With the introduction and implementation of the CDS and automated trading system, trading and settlement of securities have become efficient.
A primary market is a market where securities that have never been issued are being offered to the public. This is an initial public offering (IPO), also called the primary issue and is therefore a transaction between the issuing company and the investor. A buyer of the initial issue may consider selling the security to another party, and this transaction is done in the secondary market where the outstanding securities are traded amongst investors.
Inflation is the rate for which prices for goods and services rise. The most common indicator of inflation is the CPI which is released monthly.
A market order is an order to buy or sell a stock at the market’s current best available price. It generally ensures execution, but does not guarantee a specific price. These types of orders are best to in situations where the goal is to execute the trade immediately.
A limit order is an order to buy or sell with a restriction (the ‘limit’) on the maximum price to pay when buying, or the minimum to sell at when selling. If the order is filled, it will only be at the specified limit price or better.
A stop loss order is an order place to buy or sell a specific stock once the stock reaches a certain price. It is designed to limit the investor’s loss on any specific position. One advantage of such orders is that investors don’t need to monitor their holdings continuously as the stop loss will trigger automatically once the stock reaches the specified price.
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A balance sheet is a financial statement that provides a snapshot of what a company owns and owes. It reports the company’s assets, liabilities, and shareholder equity. Balance sheet, along with other financial statements, can be used to conduct fundamental analysis and calculate financial ratios.
The income statement shows the company revenues and expenses during a particular period, and is also known as the profit or loss statement. It provides valuable insights into the efficiency of the company’s operations.
A cash flow statement shows the amount of cash and cash equivalents entering and leaving the company during a particular period. It shows how well the company is managing its cash position. The three main components of a cash flow statement are operating activities, investing activities and financing activities.
Net income is calculated as revenues minus expenses, interest, and taxes. It is a useful indicator of how much revenue exceeds the expenses for a company.
Operating margin represents how efficiently a company is able to generate profit through its core operations. It measures how much profit a company makes on a dollar of sales after paying for variable costs of production but before paying interest or tax.
Depreciation is an accounting method used to allocate the cost of an asset over its useful life. It represents how much of the assets value has been used. Two types of depreciation are straight line and double declining balance.
The earnings per share (EPS) is the company’s profit divided by the number of outstanding shares and is an indicator of the company’s profitability.
The price/earnings ratio (P/E) is simply the company’s stock price divided by its EPS. This ratio represents the price the investor pays per unit of earnings.
The quick ratio is the company’s quick assets divided by current liabilities. Quick assets are defined as the very liquid assets which can be converted to cash easily. These are cash, cash equivalents, marketable securities, and net accounts receivable.
The current ratio is the company’s current assets divided by its current liabilities. The current assets listed on the company’s balance sheet include cash, accounts receivable, and inventory among other. Current liabilities include accounts payable, wages, taxes payable, short term debts, and the current portion of long term debt.
Debt ratio is the ratio of total debt to total assets. This can be understood as the proportion of company assets that are financed by debt. A high debt ratio may be indicative of a risk of default.
Liquidity refers to the extent to which the stock market allows assets to be bought or sold at stable, transparent prices. Generally, when the bid-ask spread tightens the market is said to be more liquid and vice versa.
The bid-offer spread, also known as the bid-ask spread, is the amount by which the ask price (the price at which seller is willing to sell) exceeds bid price (the price at which buyer is willing to buy).
Short selling occurs when an investor borrows shares from a broker or another investor, and sells them on the open market hoping to buy the back at a lower price later on. Short sellers profit from a drop in the share price.
A margin call occurs when a margin account runs low on funds, usually because of a losing trade. In a margin call, brokers demand the investor to deposit additional capital to bring the investors account back up to the minimum maintenance margin. If the trader does not deposit funds, the broker may be forced to sell the investors assets to meet the margin call.
A stock split is when a company increases its number of shares to increase liquidity. If a company has 100,000 shares each at PKR 100 and announces a 2 for 1 stock split, this will lead to 200,000 shares each priced at PKR 50.
A primary market is a market where securities that have never been issued are being offered to the public. This is an initial public offering (IPO), also called the primary issue and is therefore a transaction between the issuing company and the investor. A buyer of the initial issue may consider selling the security to another party, and this transaction is done in the secondary market where the outstanding securities are traded amongst investors.
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Beta is a measure of volatility of an asset compared to the market (usually the KSE – 100 index) as a whole. Stocks with a beta of more than 1.0 can be interpreted as more volatile than the KSE – 100, and vice versa.
CAGR, or compound annual growth rate, is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investments life span.
Enterprise value is a measure of a company’s value and can be calculated as the sum of the market capitalization and debt minus cash & equivalents.
The book value of a company is the difference between its assets and liabilities, and represents the total value of a company’s assets that shareholders would receive in case of bankruptcy. An asset’s book value is its carrying value on the balance sheet.
The debt to equity ratio can be calculated by dividing a company’s total liabilities by its shareholder equity. It is an indicator of the company’s reliance on debt. A high D/E might indicate more risk, while a lower one may indicate a suboptimal capital structure.
Working capital is the amount of capital that is available to use for a business, for their daily operations. It is calculated as current assets minus current liabilities.
The Sharpe ratio is a tool used for performance measurement of a portfolio. It is calculated as the average return earned in excess of the risk free rate per unit of total risk. A high Sharpe ratio is good when compared to similar portfolios with lower returns.
Fill or Kill Order (FOK) is a type of order used in stock trading to execute a transaction immediately and completely, or not at all. This order must be filled completely at the specified price, or else are cancelled.
A market if touch order is a conditional order that becomes a market order when the stock reaches a specified price. These are typically used to buy when the price is falling or sell when the price is rising.
Correlation is statistic that measures the degree to which two variables move in relation to each other. In investments, correlation can measure the strength of the relationship between a stock and index. A positive correlation between a stock and an index means the stock will likely rise in response to an increase in the index.
The relative strength index (RSI) is a momentum indicator used in technical analysis, and provides traders with signal about bullish or bearish price momentum. A stock is generally considered overbought when the RSI is above 70 and oversold when it is below 30.
