Investing is like driving — it is best done with your eyes open. Legendary investor Warren Buffett defines investing as “The process of laying out money now to receive more money in the future.”
Investing can be used as a way to enhance your employment income, helping you buy the things you want because investing changes along with the investor’s desired goals.
Stock trading isn’t always what you see on the floor of the Pakistan Stock Exchange, though it’s possible to get started from the comfort of your couch. However, you’d better know what you’re doing before you place your first trade.
What is a Stock exchange? How does it work?
As the name suggests, a Stock Exchange is a place where you can trade or exchange stocks. Different companies list themselves in stock market to make their shares available to a broad range of investors to purchase these shares.
A business raises its capital by distributing shares. The prices of the shares listed on the Stock Exchange fluctuate according to the buy and sell transactions taking place. Investors who estimate that a company will do good bid up the prices and vice versa.
The basics
When people refer to the stock market being up or down, they’re generally referring to one of the major market indexes. You’re likely to hear most about the KSE-100 index. It is often used as proxies for the performance of the overall market.
Investors use indexes to benchmark the performance of their own portfolios and, in some cases, to inform their stock trading decisions. However, this isn’t your typical market, and you can’t show up and pick your shares off a shelf the way you select produce at the grocery store.
Individual traders are typically represented by brokers, nowadays. You place your stock trades through the broker, which then deals with the exchange on your behalf.
Bull vs bear
As an investor, the direction of the market is a major force that has a huge impact on your portfolio. So, it’s important to understand how each of these market conditions may impact your investments.
The market has picked the bear as the true symbol of fear: A bear market means stock prices are falling — thresholds vary. A market is usually not considered a true “bear” market unless it has fallen 20% or more from recent highs. During a bear market, the economy slows down and unemployment rises as companies begin laying off workers.
Bull markets are followed by bear markets, and vice versa, with both often signaling the start of larger economic patterns. In other words, a bull market typically means investors are confident, which indicates economic growth.
Step-by-step guide
If you’re trying your hand at stock trading for the first time, know that most investors are best served by keeping things simple. Once you get your head on straight, you can embark on learning to trade and start with these basic steps.
1. Open a Trading Account.
Sorry if it seems we’re stating the obvious, but you never know! Find a good online stock broker and open a stock brokerage account to invest in the Pakistan Stock Exchange. You must have these documents with you to do so: CNIC; A Pakistani bank account; Salary slip; if you are self-employed, provide a bank statement.
You must thoroughly research first to find out which brokerage will work for you. Once you finish all the paperwork and submit all the documents, you will have to wait for 1-2 weeks.
After this period, you will be granted the license to trade with PSX-issued stocks. You will not be required to visit your brokerage firm often as all your dealings and trades will be handled online by you.
2. Stock trading budget
Even if you find talent for trading stocks, allocating more than 10% of your capital to individual stocks can expose your savings to too much volatility. Invest only the amount of money you can afford to lose. Ratchet down that 10% if you don’t yet have a healthy emergency fund.
3. Learn to trade
Once you have your brokerage account and budget in place, you can use your online broker’s trading platform to place your stock trades. You’ll be presented with several options for order types, which dictate how your trade goes through.
Market order: Buys or sells the stock ASAP at the best available price. Limit order: Buys or sells the stock only at or better than a specific price you set. For a buy order, the limit price will be the most you’re willing to pay and the order will go through only if the stock’s price falls to or below that amount.
Final words
Being a successful investor doesn’t require finding the next great breakout stock before everyone else. By the time you hear that XYZ stock is poised for pop, so have thousands of professional traders and the potential likely has already been priced into the stock.
It may be too late to make a quick turnaround profit, but that doesn’t mean you’re too late to the party. Truly great investments continue to deliver shareholder value for years, which is a good argument for treating active investing as a hobby.
