How to Earn Money from Stock Exchange in Pakistan?

Types of Equity Markets

There are two types in which we can segregate the equity market. The first one is the primary market and the other is the secondary market. The primary market refers to the place where companies raise funds from the public by issuing their shares for the very first time. It is also called “ Initial Public Offering (IPO)” In such kinds of transactions, the investors directly deal with the companies and the proceeds from the sale of the shares would be received and utilized by the company. After the completion of the transaction, the company has the money which it is going to use in business operations and investors have the shares of the company from which they expect a specific return over a period of time. Now, what if some of the investors need money for any of their personal requirements? Will they go to the respective company and ask it to buy back its shares? No, because the company itself needs the money for its business operations, and that’s why it sold its shares/equity to public investors. Now, those investors who are in need of money will find new investors who have some capital and want to invest it somewhere. So, the place where investors are involved in Pakistan online shares trading with each other is called the secondary or stock market.

Why Investors Sell Shares in Stock Market?

The following could be the reasons why Investors want to sell their shares in the stock market:

1. Investors are not optimistic about the future performance of the company
2. Investors want to invest in any other opportunity which seems better than the current one
3. Liquidity requirement

Why Investors Buy Shares in Stock Market?

There is only one reason for the investors to buy shares from the stock market, and that is, the investors are optimistic about the company’s future performance, and they expect that they would get a handsome return within a certain period of time by investing in these shares.

How to make money from the stock market?

Investors can make money from the stock market in the following two ways:

1. Capital Gain
2. Dividend

Investors can get capital gains by selling their shares at a price higher than the purchase price. This could be made possible by investing in undervalued stocks with bright growth prospects. On the other hand, a dividend refers to that part of the earnings that the company decides to distribute to its shareholders in the form of cash. Now, the question comes into mind that how to select stocks for investment as there are several options available in the stock market and each share has its own unique traits. So, the answer to this question lies in the preference of the investor. Before going into that, we will briefly discuss the main types of shares/stocks.

Growth Stocks vs Value Stocks

Growth stocks, as the name would suggest, are the companies that are in the growth phase of the business cycle. As these companies have an ample number of opportunities to invest in, that’s why they usually don’t pay dividends to their shareholders. In this case, the shareholders get returns from capital gains as the retention of the earnings would allow the company to reinvest in other profitable avenues and grow its value. These stocks usually bear more risk, that’s why they are more volatile. This volatility allows the investors to buy the stocks at lower prices during depressed market conditions and sell them at higher rates during a bull run. On the other hand, value stocks refer to those companies that are at the peak of the business cycle. As these companies don’t have growth opportunities to invest in, that’s why they distribute a big part of their earnings to their shareholders as cash dividends. The prices of such shares are relatively stable which means that the investors won’t be able to earn significant capital gains from these companies as the major source of return from value stocks would be cash dividends.

Which Type of Shares to Buy in Stock Market?

Now we are well aware of the types of stocks and their unique traits. Now, we will discuss that which type of stock is suitable to buy. As mentioned earlier, it totally depends upon the preference and strategy of the investors. Investors who are more mature or retired are most likely to be risk-averse. They can’t afford to lose a significant part of their hard-earned life savings. Therefore, this kind of investor would be more interested in value stocks as the prices of these stocks are usually stable even in depressed times and they provide a regular stream of income in the form of cash dividends to their shareholders.

Contrarily, young investors with no or least responsibility on their shoulders are most likely to be risk-takers. This kind of investor is more interested in growth stocks as they can earn a lot more than value stock investors by taking more risk in terms of price volatility.

Introduction to Pakistan Stock Exchange / Market

Pakistan Stock Exchange (PSX) was established on 11 January 2016 after the merger of the Karachi Stock Exchange, Lahore Stock Exchange, and Islamabad Stock Exchange. There are about 557 companies from 36 sectors listed on the PSX. Investors can invest in any of these companies by opening an account with any registered broker like Abbasi and Company Private Limited. Abbasi and Company Private Limited (ACPL) is a leading equity brokerage house in Lahore, Pakistan. The company is a Universal Member of (PMEX) Pakistan Mercantile Exchange Limited and a TREC holder of the (PSX) Pakistan Stock Exchange (PSX) as well. Our services include online trading of stock/shares and commodities, advisory for entities, and market research in Pakistan.