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Trading Terminologies

What are Shares?

Shares represent partial ownership claim in a company. They give the holder the right to receive dividend distributions and a vote at the company's annual meeting. The shareholders vote to elect the directors of a company who appoint the company's management. The shareholders have specific rights under corporate law and the company's bylaws. Companies whose shares are " publicly listed " on stock exchanges are required to provide information or "disclosure" to their shareholders in return for being publicly traded. Common shares are also referred to as "equity securities" or "equities" alluding to the accounting term "Owner's Equity".

The stock exchange is a market place where shares are bought and sold. Once a company has sold shares to the public, the initial buyer can then resell those shares to other buyers. This buying and reselling is done at the stock exchange.

What is the Stock Exchange?

The stock exchange is a market place where shares are bought and sold. Once a company has sold shares to the public, the initial buyer can then resell those shares to other buyers. This buying and reselling is done at the stock exchange.

What is the Role of the Stock Exchange?

The role of the stock exchange is to bring companies and investors together in one place, such that it provides a market for: Shares of publicly listed companies to be bought and sold Raising capital Additionally, the exchange is also responsible for monitoring the market to ensure that it is working efficiently, fairly and transparently.

Stock Exchanges in Pakistan

Pakistan has three stock exchanges of which the one in Karachi is the largest: Karachi Stock Exchange (Guarantee) Ltd. Lahore Stock Exchange (Guarantee) Ltd. Islamabad Stock Exchange (Guarantee) Ltd.

What are the Different Types of Stock?

  1. Common Stock

    Common stock holders have partial ownership and enjoy voting rights in the company. However, in the event of bankruptcy, common stock shareholders are entitled to assets left over after creditors, bondholders and preferred shareholders have been paid in full.

  2. Preferred Stock

    Preferred stock holders have ownership in the company but may not enjoy voting rights like their common stock holders. However, they do have other benefits. There are four classes of preferred stocks, outlined below:

    1. Cumulative

      Shareholders have the right to accumulate dividend payments that were skipped in earlier years. They are the first to receive payments once the company resumes dividend payout.

    2. Non Cumulative

      Shareholders do not accumulate skipped dividend payments.

    3. Participating

      Shareholders receive more than the normal dividend payments if the company makes more than expected profit.

    4. Convertible

      Shareholders can convert the preferred stock into a specified number of shares of common stock.

How Does Trading Take Place?

Trading takes place in the stock exchange through a computerized system to ensure a fast, fair, efficient, cost effective and transparent trading mechanism.

What is Settlement?

Once a deal has been made, the settlement process transfers stock from the seller to the buyer and arranges the corresponding exchange of money between buyer and seller.

What are the Different Trading Segments?

T+2 Settlement System Purchase and sale of securities is netted and the balance is settled on the second day following the trade. Provisionally Listed Counter The shares of companies, which make a minimum public offering of Rs.100 million, are traded on this segment from the date of publication of the offer documents. When the company completes the process of dispatch/credit of allotted shares to subscribers, it is officially listed and placed on the T+2 counter through the CDC. Trading on the provisionally listed counter then comes to an end and all the outstanding transactions are transferred to the T+2 counter with effect from the date of official listing. T+1 or Spot Transactions Spot transactions imply delivery upon payment. In spot transactions, the trade is generally settled within 24 hours. Futures Contract A futures contract involves the purchase or sale of a financial or tangible asset at some future date, at a price fixed in the present.

How do you Trade?

Trading involves first selecting a broker, opening an account with the broker and then proceeding to buy/sell shares in the market. Broker Selection The first step is to find a stock broker or advisor. Brokers assist you in getting the best price available when you want to buy or sell shares. It is important to select an appropriate and experienced broker who is well versed in market practices and has knowledge of market trends. Account Opening Following broker selection, the individual must fill out an account opening form. It is imperative that the terms and conditions prescribed in the account opening form are read very carefully and well understood. It is also recommended that the individual specify that business can only be transacted in the account on his/her instructions. Buying/Selling When the individual decides to buy/sell shares of a particular company, the stock broker is contacted and asked to buy/sell a particular number of shares up to a certain value. Following this, a contract note is received which contains important information listed below: Name and number of securities Date on which the order is executed Nature of transaction (spot, ready or forward and also whether bought or sold) Price at which transaction is executed Commission charged by broker

What are the Different Types of Orders?

MARKET ORDER: executed at the prevailing market rate. LIMIT ORDER: The individual specifies the price at which the order should be executed. It defines the highest price which the individual is willing to pay when buying and the lowest price which the individual is willing to accept when selling. STOP LOSS ORDER: This provides a method of protecting the investment when the price falls. Stop loss orders are applicable to selling, where the order price is set lower than the current market value and the order is triggered when the stock price falls.

How Can One Become a Shareholder?

Initial Public Offering (IPO) When companies offer stock to the general public for the first time, it is called a flotation or IPO. These shares can be bought directly from the company without using the services of a broker. For example, investors may see an advertisement in a newspaper from a company issuing shares. The investor has to simply fill in the share subscription form and deposit the form along with a cheque for the subscription amount in a branch of the designated bank(s) for the IPO.

Right Issue

Right shares are issued when companies need to raise additional capital to finance their new expansion projects or to meet working capital needs, etc. In case of rights issues, the existing investors have the right to subscribe to these new shares in proportion to their respective shareholding.

Trading Market

The most common way of becoming a shareholder is by buying shares through trading in the secondary market. Through a broker, an investor can buy shares from existing investors who wish to sell them.

What are the Criteria for Stock Selection?

Following are some criteria worth evaluating when selecting stocks: Earnings growth Price/Earnings (P/E) ratio Dividend yield Market capitalization Relative strength Sector analysis Research analysis Annual report analysis

What are the Different Stock Selection Strategies?

Several stock selection strategies can be employed. A few of them are mentioned below:

Buy and Hold

The buy and hold principle rests on the assumption that in the long term, stock prices and the market as a whole will rise, despite short term intermediary fluctuations.

Market Timing

Market timing employs an opportunistic strategy which suggests that it is sensible to buy when the market is low and sell when it is high in order to maximize profit


The growth strategy maintains that companies with high earnings growth are able to pay high dividends to the investors and will do well in the long run


Value investing focuses on traditional valuation metrics such as the P/E ratio


Income investors buy stocks that pay the highest dividends. They focus primarily on securing a steady income stream instead of pursuing capital gains

What is the Central Depository Company of Pakistan Limited (CDC) and the Central Depository System (CDS)?

The purpose of the CDC is to operate as a central securities depository on behalf of the financial services industry in order to contribute to the country's ability to support an effective capital market system, which will attract institutional and retail investors, both local and foreign. The CDC was incorporated in 1993 to manage and operate the CDS. CDS is an electronic book entry system used to record and transfer securities. Electronic book entry means that the securities do not physically change hands; rather, the transfer from one client account to another takes place electronically. With the launch of CDS, paper based settlement has been eliminated resulting in the reduction of workload and manpower, speedy transfer of ownership and reduction in risk of damaged, lost, forged or duplicate certificates.

What are the Different Types of Investment Analyses?

Fundamental Analysis The value of a security is evaluated by studying the financial data of the issuer. Focusing on the business fundamentals, it analyses the assets, liabilities, expenses along with the management and position of the issuer in the industry. Fundamental analysis is useful for a long-term investor looking for companies with solid foundation, growth and income potential, or for a short-term investor looking for companies that are on the verge of being discovered. Technical Analysis The value of a security is evaluated by studying market statistics. Unlike fundamental analysis, technical analysis disregards the issuer’s financial statements, focusing more on the market trends which include the upward or bullish trend and downward or bearish trend. Technical analysis is useful for a long-term investor who is not as concerned about one company's fundamentals because he or she will diversify to minimize risk, or for a short-term investor who is waiting for investor sentiment to change.

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