What is Stock Market?

The stock market is where investors connect to buy and sell investments most commonly, stocks, which are shares of ownership in a public company.

A stock market is similar to a share market. The key difference is that a stock market helps you trade financial instruments like bonds, mutual funds, derivatives as well as shares of companies. A share market only allows trading of shares. Click here to start your journey on Stock Market. The stock market is where investors can trade in different financial instruments, such as shares, bonds and futures/derivatives. The key factor is the stock exchange the basic platform that provides the facilities used to trade company stocks and other securities. In Pakistan, the only primary stock exchange is the Pakistan Stock Exchange (PSX) with its trading floors in Karachi, Lahore and Islamabad.

Initially Karachi Stock Exchange was established on 18 September 1947 and was incorporated as Karachi Stock Exchange Limited on 10 March 1949. The KSE began with 5 companies as KSE 50 with a total market capitalization of ₨37 million (US$220,000). It is also Pakistan’s first stock exchange and has since then played an important role in the Pakistani stock market.

The exchange shifted from an open outcry system to an automated trading environment in 2002, the Karachi Automated Trading System or KATS was launched. This shows that Pakistani stock markets have a strong history. PSX was established in 11th Jan, 2016 after the integrated under the Stock Exchanges (Corporatization, Demutualization and Integration) Act, 2012 to form Pakistan Stock Exchange from individual exchanges of Karachi, Lahore and Islamabad.

Types of Share Market:

There are two types of markets;

• Primary Market: This where a company gets registered to issue a certain amount of shares and raise money. This is also called getting listed in a stock exchange.
• Secondary Market: Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares.

What is SECP and Its Role:

Stock markets are risky. Hence, they need to be regulated to protect investors. The Security and Exchange Commission of Pakistan (SECP) is mandated to oversee the secondary and primary markets.
Securities and Exchange Commission (SECP) has the responsibility of both development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities. However Pakistan Stock Exchange acts as a frontline regulator looks after the day to day affairs of market/exchange.
The Securities Exchange Commission of Pakistan (SECP), Pakistan Stock Exchange, brokers, and traders/investors are the participants in this whole workflow. The stock exchange provides a platform for trading in financial products. The companies (listing their shares), brokers and traders must register with SECP and Pakistan Stock Exchange (PSX) likewise Investor has to register UIN before trading.
Its basic objectives are:

• Protecting the interests of investors in stocks
• Promoting the development of the stock market
• Regulating the stock market

Quick Recap:

• Stock exchanges are financial intermediaries that connect buyers and sellers and facilitate a trade of the stocks listed on that exchange.
• Stockbrokers act as a link between the stock exchanges and investors/traders like you. To be able to buy and sell shares in the stock market, you need to open a trading account with a stockbroker.
• In Pakistan, there is one premier exchange - Pakistan Stock Exchange (PSX) after the integration of three exchanges from Karachi, Lahore & Islamabad 2016.
• KSE-100 Index is the bench mark index of the Exchange and represents the top 100 companies of the exchange.
• The Securities and Exchange Commission of Pakistan (SECP) is a government entity that’s responsible for the regulation and development of financial markets in the country.

How Stock Market Works?

Introduction to Stock Market Indices

Stock market indices are indicators that reflect the performance of the market as a whole or of a certain segment of the market.

A stock market index consists of a group of companies whose shares are traded on an exchange. Each index measures the price movement and the performance of the shares of its constituent companies. This effectively means that the performance of the index is directly proportional to the performance of the stocks in the index. To put it simply, when the prices of the stocks in an index go up, that index, as a whole, also goes up.

How Indices are formed?

An index consists of similar stocks. This could be on the basis of industry, company size, market capitalization or another parameter. Once the stocks are selected, the index value is calculated. This could be a simple average of the prices of the components. In Pakistan, the free-float market capitalization is commonly used instead of prices to calculate the value of an index.

The two most common kinds of indices.

Indices are an important part of the stock market. Here’s why we need stock indices. Every stock has a different price. So, a 1% change in one stock may not equal similar change in another stock’s price. So, the index value cannot be a simple total of the prices of all the stocks. Here is where the concept of stock weight-age comes into play. Each stock in an index has a particular weight-age depending on its price or market capitalization. This is the amount of impact a change in the stock’s price has on index value.

Price Weightage:

In this method, an index value is calculated on the basis of the company’s stock price, and not market capitalization. Stocks with higher prices have greater weightages in the index than stocks with lower prices. The Dow Jones Industrial Average in the US and the Nikkei 225 in Japan are examples of price-weighted indices. There are also other kinds of weightages like equal-value weightage or fundamental weightage. However, they are rarely used by public indices.

Market Cap Weight-age:

Market capitalization is the total market value of a company’s stock. This is calculated by multiplying the share price of a stock with the total number of stocks floated by the company. It thus takes into consideration both the size and the price of the stock. In an index using market-cap weight-age, stocks are given weight-age on the basis of their market capitalization in comparison with the total market-capitalization of the index. For example, if stock A has a market capitalization of Rs. 10,000 while the index it is part of has a total m-cap of Rs. 1,00,000, then its weight-age will be 10%. Similarly, another stock with a market-cap of Rs. 50,000, will have a weight-age of 50%.

Indices in Pakistan Stock Market:

KSE-100 Index:

• Most recognized Index of the PSX.
• Representation from all sectors of the PSX and includes the largest companies on the basis of their market capitalization
• Represents over 85% of the market capitalization of the Exchange.
• AZEE Securities through its daily market commentary gives the highlights of the major stocks contributors in 100-Index movement.


• KSE-30 Index :
• KSE-30 Index introduced in 2006.
• The composition of KSE-30 index based on the “Free Float Methodology”
• Includes only the top 30 most liquid companies listed on the PSX.


• ALL SHARE Index:
• Consists of all the companies listed on the PSX.


• KMI-30:
• Tracks the 30 most liquid Shariah compliant companies listed at PSX. KMI was introduced in September 2008. KMI comprises of 30 Companies that qualify the KMI Shariah screening criteria and are weighted by float adjusted market capitalization. 12% cap on weights of individual securities. The Rebalancing of the index is carried out biannually. _{(Shariah Supervisory Board of Meezan Bank chaired by eminent Shariah scholar Justice (Retd.) Mufti Muhammad Taqi Usmani.)}

Quick Recap:

• Stock market indices are indicators that reflect the performance of the market as a whole or of a certain segment of the market.
• A stock market index consists of a group of companies whose shares are traded on an exchange.
• Each index measures the price movement and the performance of the shares of its constituent companies.
• In Pakistan Stock Market, there are other indices KSE-100 Index is considered as benchmark.
• The KSE-100 index comprises the top 100 largest and most frequently traded stocks within the Pakistan Stock Exchange.
• Indices provide important information for benchmarking and help reduce your exposure to risk.

What are Stock Quotes?

You must have often seen a ticker on a business news/business channels on the TV or on the huge billboard outside the Pakistan Stock Exchange, constantly showing a bunch of letters and numbers in green or red lettering. These are stock quotes. The bunch of letters you see is a stock symbol, while the numbers that follow signify the stock price.

What are Stock Symbols?

A stock symbol is a unique code given to all companies listed on the exchange. Once you know the stock code or symbol of the company, you can easily obtain information about the company. This is important for investors who wish to conduct a financial analysis before purchasing a company’s shares. For example, PTC stands for Pakistan Tele Communications Ltd. Or PPL stands for Pakistan Petroleum Ltd. Often, it is not possible to write the full name of a company. It would take up a lot of space on the ticker board or stock board. In such a case, the stock symbol comes handy and it is just 3-4 letters. Stock quotes are available very easily. Some of most accessible avenues to get stock information are the internet and business news channels. Newspaper or business newspapers also regularly publish a list of stock quotes, called the stock table. You could alternatively access the azeetrade.com and get all the information that you wanted within a matter of seconds.

Stock Board:

The stock board – available in financial papers and online – contains the information of all stocks. It can be a little confusing to understand. It has the following elements:

• Company Name and Symbols: The stock board needs space to fit in details of as many shares as possible. There is thus a space crunch. For this reason, company symbols, and not names, are used. On the internet, though, company’s names too are given. This helps you identify the stock.
• Stock price: This is the price an investor or trader pays to buy a single share of the company. This fluctuates constantly during market hours, and remains constant when markets are closed for trading. It reflects the value the market has allotted to the company.
• Volume: If a company has a stipulated number of shares floated on the exchange, not all of them may be traded in a single day. It depends on demand for the stock. This is understood in the ‘volume’ section of the stock quote, which shows how many stocks changed hands. A higher trading volume is usually followed by a significant change in the stock price.
• High/low: During market hours, share prices keep changing as more trades are conducted. This is because buying makes the stock more valuable, while selling makes it less valuable. This in turn affects the share price. To give an investor a basis for comparison, the stock quote mentions the highest and lowest prices the stock hit in that day. If the share price is constantly rising, the ‘high’ would keep climbing. In the same way, the ‘low’ would keep falling in a down market. Once the market closes, the difference between the highest and the lowest prices gives an idea about the volatility in the stock’s price.
• Net change: The closing price also helps calculate how much the stock’s price has changed. This change is written in both percentage as well as absolute value format. It is calculated by subtracting today’s price from the previous closing price, and then dividing with the closing price to get the percentage change. A positive change indicates the stock price has increased from the previous day. When the net change is positive, the stock is written in green color, while red color is used to denote share price has fallen.
• Close: Stock prices stop fluctuating once the market is shut for trading. The ‘close’ or the ‘closing price’ thus reflects the last price at which the stock traded. During the market hours, it represents the previous day’s closing price, again giving investor a benchmark to compare against. Since the newspaper is delivered in the morning, it reflects the price at which the stock closed the previous day.
• 52-week high/low: This shows the highest and lowest stock price in one year or 52-weeks. This too helps the investor understand the stock’s trading range over a broader period of time.
• PE Ratio: Some stock tables and quotes also mention the PE ratio. This is the amount an investor pays for each rupee the company earns. It is calculated by dividing the stock price with the company’s earnings per share. This is important because stock price is a market-assigned value. It largely depends on market sentiment about the stock, and hence may not be in synchronization with the share’s internal value. The PE ratio, thus, helps give perspective about the share’s value in comparison to the company’s financial performance. A high PE ratio means the stock is costly, while a low PE ratio means the stock is cheaply available.
• Dividend details:Companies distribute a portion of their profits to shareholders as dividends. While an investor holds the share, dividends are the primary source of income. For long-term investors, this is of great importance. This is because higher dividends mean greater returns for the investor. For this reason, many stock quotes mention the dividend yield, which helps compare the dividend with the share price. The dividend yield is calculated by dividing the dividend per share with the stock price. Higher the dividend yield, greater is the investor’s income through dividends.

Quick Recap:

• The stock market is an important avenue for investment. As an investor, you pay money and buy a few stocks, which then reap dividends over your investment horizon.
• A stock symbol is a unique code given to all companies listed on the exchange. Once you know the stock code or symbol of the company, you can easily obtain information about the company.
• The stock exchange electronically facilitate the meeting of buyers, and sellers
• Stock quotes are available very easily. Some of most accessible avenues to get stock information are the internet and business news channels. Business newspapers also regularly publish a list of stock quotes, called the stock table. You could alternatively access the AZEE Securities website and get all the information that you wanted within a matter of seconds.
• Different opinions makes a market
• News and events moves the stock prices on a daily basis
• Demand supply mismatch also makes the stock prices move
• Since the share prices of a company that’s listed on the stock exchange keep fluctuating, you can utilize the short-term price movement to your advantage.
• When you own a stock you get corporate privileges like bonus, dividends, rights etc

What are different types of Stocks?

When share prices rise, everyone wants to know what share to buy. Investors are keen to be a part of the wealth creation process. Stock markets are engines of economic growth for a country. A vibrant stock market is essential for a country like Pakistan. There are multiple ways an investor could participate.

Types of Stocks:

Stocks can be classified into multiple categories on various parameters – size of the company, dividend payment, industry, risk, volatility, as well as fundamentals.

Stocks on the basis of Ownership Rules:

This is the most basic parameter for classifying stocks. In this case, the issuing company decides whether it will issue common, preferred or hybrid stocks.

• Preferred & common stocks:The key difference between common and preferred stocks is in the promised dividend payments. Preferred stocks promise investors that a fixed amount will be paid as dividends every year. A common stock does not come with this promise. For this reason, the price of a preferred stock is not as volatile as that of a common stock.
• Hybrid stocks: Some companies also issue hybrid stocks. These are often preferred shares that come with an option to be converted into a fixed number of common stocks at a specified time. These kinds of stocks are called ‘convertible preferred shares. Since these are hybrid stocks, they may or may not have voting rights like common stocks.
• Stocks with embedded-derivative options: Some stocks come with an embedded derivative option. This means it could be ‘callable’ or ‘put able’. A ‘callable’ stock is one which has the option to be bought back by the company at a certain price or time. A ‘put able’ share gives the stockholder the option to sell it to the company at a prescribed time or price. These kinds of stocks are not commonly available.

Stocks on the basis of Market Capitalization:

Stocks are also classified on the basis of the market value of the total shareholding of a company. This is calculated using market capitalization, where you multiply the share price by the total number of issued shares. There are three kinds of stocks on the basis of market capitalization: • Small-cap stocks:
• Mid-cap stocks:
• Large-cap stocks:

Stocks on the basis of Dividend Payments:

Dividends are the primary source of income until the shares are sold for a profit. Stocks can be classified on the basis of how much dividend the company pays.

• Income Stocks: These are stocks that distribute a higher dividend in relation to their share price. They are also called dividend-yield or dog stocks. So, a higher dividend means larger income. This is why these stocks are also called income stocks.
• Growth Stocks: Not all stocks pay high dividends. This is because, companies prefer to reinvest their earnings for company operations. This usually helps the company grow at a faster rate. As a result, such stocks are often called growth stocks.

Stocks on the basis of Fundamentals:

Followers of value investing believe that a share price should equal the intrinsic value of the company’s share. They, thus, compare recent share prices with per-share earnings, profits and other financials to arrive at the intrinsic value per share.

• If a share price exceeds this intrinsic value, the stock is believed to be overvalued. In contrast, if the price is lower than the intrinsic value, the stock is considered to be undervalued.
• Undervalued stocks are also called ‘value stocks’. They are preferred by value investors, as they believe the share price will eventually rise in the future.

Stocks on the basis of Risk:

Some stocks are riskier than others. This is because their share prices fluctuate more. However, just because a stock is risky does not mean investors should avoid it. Risky stocks have the potential to make you greater profits. Low-risk stocks, in contrast, give you lower returns.

• Blue-Chip Stocks: These are stocks of well-established companies with stable earnings. These companies have lower liabilities like debt. This helps the companies pay regular dividends. Blue-chip stocks are thus considered safe and stabile. They are named after blue-colored chips in the game of poker, as the chips are considered the most valuable.
• Beta Stocks: Analysts measure risk – called beta – by calculating the volatility in its price. Beta values can have positive or negative values. The sign merely denotes if the stock is likely to move in sync with the market or against the market. Higher the beta, greater the volatility and thus more the risk. However, a smart investor can use this to make greater profits.

Stocks on the basis of Price Trends:

Prices of stocks often move in tandem with company earnings. Stocks are thus classified into two groups:

• Cyclical Stocks: Some companies are more affected by economic trends. Their growth moderates in a slow economy, or fastens in a booming economy. As a result, prices of such stocks tend to fluctuate more as economic conditions change. Stocks of automobile companies are the best example of cyclical stocks.
• Defensive Stocks: Unlike cyclical stocks, defensive stocks are issued by companies relatively unmoved by economic conditions. Best examples are stocks of companies in the food, beverages, drugs and insurance sectors. Such stocks are typically preferred when economic conditions are poor, while cyclical stocks are preferred when the economy is booming.

How to Open Stock Trading Account?

Initially, stocks and shares used to be exchanged via physical receipts called certificates. However, this resulted in lengthy paperwork and took up a lot of time. To counter this and to take advantage of an electronic trading platform. These accounts are of crucial importance today because, the entire financial platform of investing, trading and maintaining have become digitized. Hence, to enable the user with a seamless and straightforward experience, online trading accounts are the necessity of the day. These accounts are essential to trade in Pakistan Stock Exchange.
Most often, stock broking firms have thousands of clients. It is not feasible to take physical orders from every client on time. So, to make this process seamless, you open a online trading account. Using this account, you can place buy or sell orders either online or phone, which will automatically be directed to the exchange through the stock broker.
Before you buy and sell on the stock market, you might want to read about How to analyze the stock market and more.

Step by Step Guide on How to Open a Trading Account

Opening a trading account online opens up a host of investing possibilities. You must be wondering how to open a trading account. You can open a trading account in a few simple steps.

• First, select the stock broker or firm. Ensure that the broker is good and will take your orders in a timely manner. Remember, time is of utmost importance in the stock market. Even a few minutes can change the market price of the stock. For this reason, ensure that you select a good broker like AZEE Securities.
• Get in touch with Customer Relationship Officer +9221-111-293-293 of AZEE Securities or visit the nearest branch office to opening a trading account. You may also visit our website AZEE Securities to download the account opening form.
• Next, after enquiring about the trading account opening procedure. Fill up the account opening form and the Know Your Client (KYC) form. Read here to know more about the KYC details. A representative from the brokerage firm will assist you with the process.
• Fill these forms up. Submit along with Copies of valid CNIC/CNICOP for the Account holder along with Nominee of Account holder also and proof of your income and address.
• You will be requested for bio-metric thumb impression in person for NADRA verification. Besides IBAN # of your bank account and Mobile number has to be on your name to generate your UIN.
• Your application will be verified either through an in-person check or on the phone, where you will be asked to divulge your personal details.
• It generally takes 2-3 days to activate the trading account after the completion of the verification process, you will be given your trading accounts details. Congrats, you will now be able to conduct trades in the stock market.

Documents required opening trading account:

Just like the procedure for opening a trading account, you need to submit proofs of income and address along for opening a trading account. • You need to submit Copies of valid CNIC/CNICOP for the Account holder along with Nominee of Account holder also.
• KYC form declaration along proof of income.
• Proof of address
• Zakat Declaration Form duly attested copy from notary public in-case of non-payable.
• Mobile Number Ownership
• Online bio-metric thumb impression with Centralized KYC.

An investor can open the account online in no time through any financial institution. There are various options available to open the account online; one such option is of AZEE Securities. However, opening an account comes with its fair share of charges which would involve an annual maintenance fee, a transaction fee or commission for every transaction carried out by the broker. Additionally, a fee charged for CDC of the shares.

How to Place Orders:

You can easily buy stocks through azeetrade.com, one of Pakistan's leading retail stock brokers, with a variety of services and products to cater to all your investment needs at very reasonable brokerage rates. Once you are registered with us, you can trade using the AZEE Securities website, our mobile trading app, our desktop trading application, or through the phone using our Call & Trade facility.

Different Types of Order:

You can place different kinds of orders such as market orders, limit orders, stop loss orders, , after-market orders (AMOs), etc.
Market order:
A market order is an order to buy or sell a stock at the current market price. However, as market prices keep changing, a market order cannot guarantee a specific price.
Limit order:
A limit order is an order to buy or sell a share at a specific price. To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order.
Stop loss order:
A stop loss order is a normal order placed to sell a stock when it reaches a certain predetermined price called the trigger price. Sometimes the market movements defy your expectations. Such market reversals often result in loss-bearing transactions. The stop loss trigger price is your defense mechanism.
Cancel Order:
Cancel order allows to buy or sell a stock as soon as the order is released into the market, in case order failed to full fill the total quantity it will be removed from the market.
Short Sell Order:
At any point of time when the shares are sold and the same are not delivered to the exchange called short sell. Short selling is not legally allowed in the Regular Market. Although short sell could be executed in the future contract but through separate window i.e. through F8 window option.

AZEE Securities has developed various trading platforms to suit the needs of different types of investors. Some investors need different types of charts and financial data, while some investors need just research reports. Depending on the level of investor’s sophistication, AZEE offers different next generation platforms.

Quick Recap:

o Stock markets have become electronic. This means, trading is conducted online. Today, you need a CDC- Sub Account and a Trading Account to invest in the stock market.
o First, Get in touch with our Customer Relationship Officer of AZEE Securities or visit website AZEE Securities to download the account opening form.
o Next, Fill up the account opening form and the Know Your Client (KYC) form.
o Submit along with Account holder’s proof of address & employment/business.
o Your application will be verified either through an in-person check or on the phone.
o Once processed, you will be given your trading accounts details. you will than be able to conduct trades in the stock market.

What is Roshan Digital Pakistan Account?

The movement of people is a hallmark of the globalized world. People migrate to other countries in the search for better opportunities and contribute to their home country through remittances. Pakistanis are one of the biggest expat communities in the world, working and living in multiple countries. At the end of 2018, around 10 million Non-Resident Pakistani’s and People of Pakistan Origin were estimated to be residing outside the country. Pakistan’s living outside the country remit billions of dollars every year back to the country. In 2019-20, Pakistani’s sent back $24 billion in remittances, which was highest so far.
Overseas Pakistani’s and Non-Resident Pakistanis (NRPs) are allowed to purchase stocks and convertible debentures of a domestic organization through stock exchanges. Such investments can be made under the Portfolio Investment NRP either on repatriation or non-repatriation basis.
Many factor’s that entices NRPs to invest in Pakistan Stock Market for better returns and growth prospects. NRP’s investments are allowed in Pakistan stock market through an entirely digital and online process without any need to visit a bank branch, embassy, or consulate. Roshan Digital Account is a unique opportunity for Overseas Pakistanis to open an account online with any designated bank from the comfort of their homes.

Features:

1. The customer can choose either foreign currency or rupee dominated account, or both. Funds in these accounts will be fully repatriable, without the need for any regulatory approval.
2. Non-Resident Individual Pakistani, Pakistan Origin Card holders & Employees or officials of the Federal or Provincial Governments posted abroad are eligible to open Roshan Digital
3. Pakistan Account.
4. Roshan Digital Account to be opened in 48 hours, if everything is in order.
5. No minimum balance requirement.

Why a Non Resident Pakistani’s should Invest:

Here are key factors why you should invest and seek the best investment opportunity in Pakistan for Overseas Pakistani’s.
Prepare for Retirement: Preparing for your old age starts today. Well, it should actually have started yesterday already. You need to put money away in in different forms of investment to ensure a secure retirement plan. The amount of money you save and invest will determine the standard of living you can afford when you retire.
Get Returns: Money used correctly will make more money. Investing money is a good example of this. Whatever you invest will grow according to the interest rate or growth rate on your Roshan Pakistan Investment in Pakistan. Invest wisely to ensure good returns without taking a risk you can’t afford.
Send Money to Family: Your current salary is probably enough to help you and your immediate family. But, when you invest with “Investment in Stock Market” option you’ll have more income to spend. You can send some of your extra income to family members back home. Better yet, dollars converted to rupees may give your family the help they need.
Build Financial Assets: Investing helps to grow your financial wealth and build up financial assets. The best investment for Overseas Pakistani’s in Pakistan will help to grow your financial assets the fastest.

Steps to be followed to Open Roshan Digital Account:

1. Non Resident Pakistanis can visit any of the designated bank’s online portal for Roshan Digital Account fill out Basic Information Form & submit the same.
2. After you have submitted your application, a bank representative will contact you within 2 working days to guide you through the account opening process.
3. After opening bank account, the bank will provide NRP the option to select “Investment in Stock Market” on your bank’s portal / website /app. With the following three further steps, you can start investing in Pakistan Stock Market through Roshan Digital Account:
a. Click on the ‘Consent’ tab to share Roshan Digital Account details with Central Depository Company (CDC) and other Capital Market entities
b. Click ‘I Agree’ to Terms and Conditions for Investing in Pakistan Capital Market
c. Select broker just like AZEE Securities as your preferred broker.
4. The brokerage house will perform their own due diligence and confirm to NRP and CDC regarding the opening of the Trading Account (CKO is exempted for all such accounts) within 24 hours/one business day. The acknowledgement mail from CDC and if your information/credentials were found complete and correct, you will receive an Account Opening Package email from CDC, comprising of the following actions and details:
• Opening of your Trading Account with Stock Broker.
• Creation and Registration of your Unique Identification Number (UIN).
• Opening of your Custody Account (CDC Account).
• Activation of Direct Settlement Service (DSS) in your Investor Account (if you have opted for the same).
• Creation of your CDC Web Access Login ID and Password

Before you initiate your first trade, you have to initiate a Fund Transfer request from your Roshan Digital Account to CDC Bank Account maintained with your bank (details of which were provided with the Account Opening Package). As a Non Resident Pakistani, you can invest in Pakistan stock markets through the RDA regulated platform of CDC. Before investing in Pakistan stock markets the NRP can also make use of online portals to their investment strategy. Learn about share market terminologies, basics of stock market, trading requirements and all you need to know about Pakistan Stock Market at Knowledge Centre for Non Resident Pakistani’s.
Pakistan being one of the growing economies serves as the most promising investment destination in the world. The stable security environment has made Pakistan even more favorable for investment purposes. Vibrant and well regulated capital markets coupled with developed banking system has further enhanced the entire scenario.
AZEE Securities offers all the best investment options in Pakistan for Non Residents Pakistani’s by way of providing highest standards of services.
You may ask for more details from our dedicated help desk +9221-111-293-293 or drop an email nrp@azeetrade.com.

What are IPO and Investor’s

You may have often come across that a certain company has decided to launch an IPO. Be it in the newspapers or during your conversations with your office colleagues, you may have heard about the term IPO.

First understand what an IPO is. Just to initiate you, it is an abbreviation of initial public offering. An Initial Public Offering - IPO is essentially a process by which a privately held company offers its shares out to the public for the first time. Basically, this is the time when a private business decides to go public and get listed in the stock exchanges.

How Do Businesses Raise Funds in the Primary Market?

In the world of finance, the Initial Public Offering (IPO) of a company is commonly known as the primary market.
There are four common ways:

• They can sell securities to the public through a public issue.
• They can offer new securities to existing shareholders through a rights issue.
• They can approach institutional investors through private placement.
• They can sell securities to select investors through preferential allotment.
• (In this case, the price of the security may or may not match its market value.)

Keep in mind that many businesses approach large institutional investors during IPOs. In such a case, small investors may not be able to buy securities through the primary market. However, once the securities have been sold, they can be traded freely on the secondary market.

What is a Secondary Market?

Here, the trade in securities occurs via a stock exchange. Instead of the issuer, the current holder of the security sells the security to a new buyer. The seller typically aims to sell the security at a price that is higher than his purchase price.
The Secondary Market can be of two types:

• An auction market is a physical location where buyers and sellers gather. They state the rate at which they are willing to buy or sell the securities. All the information is public. As an investor, you can take a call accordingly.
• In a dealer market, the trade happens electronically (e.g. through fax or telephone). Here, a dealer serves as the middleman and carries a security inventory. He aims to make a profit on the transaction. So, you may need to shop around to get the best prices.

Points of Difference	Primary Market	Secondary Market
Transaction between	Issuer of security and buyer	Holder of security and buyer
Aim of Sale	To raise funds for the corporate entity	To earn a profit for the holder of the security

That’s not all. How you invest in both the markets also differs. Let’s read that next.

Who can invest in an IPO?

There are different types of investors:
Institutional investors - The underwriter will try and sell large chunk of these share to a handful of its institutional clients like insurance companies, mutual funds etc. at a lucrative price before the IPO. A lock up contract with such institutional investors varying from 90-180 days ensures minimal volatility on the day of IPO.

• High net worth individuals (HNIs) – Individual investors looking to invest more a value of more than PR 1,000,000 are categorized as HNIs. The allotment of shares to HNIs is proportionate and falls under 10 – 15%.

• Retail investors – The class of investors subscribing in an IPO for a minimum 500 shares of or less fall under this category. The probability of getting an allotment is higher under the retail quota as SECP has designed the allotment method in a way that maximum retail investors are included. Allocation under the retail quota is nearly 25-35%.

IPO Jargons:

Before the IPO process, If you happen to read through a prospectus or an IPO document, you’d come across plenty of jargons. Knowing what these terms they mean can be of immense help to you as an investor, since it allows you to better understand the issue. So, here’s a glimpse of some of the key IPO-related terms that you need to know.

Offer Date:

The date on which the IPO issue opens up for subscription is commonly known as the offer date.

Price Band:

Typically, in an IPO issue, the company issues a price range with an upper and a lower ceiling limit. This is what is known as the price band. The IPO applicants have the freedom to choose any price as they deem fit from the issued price band.

Cut-off Price:

The price within the price band that gets the highest number of bids from applicants is generally fixed by the company as the cut-off price. Any bids below the cut-off price are automatically not considered for the IPO allotment process.

Lot Size:

The lot size is the minimum number of shares that you can make a bid for in an IPO. Any bids that you intend to make should always be a multiple of the lot size. For instance, if the lot size of a company’s IPO is 500, you cannot make a bid for a lesser number of shares than 500. But if you wish to bid for more, it has to be in multiples of the lot size, say, 1,000 or 1,500 or even 2,000.

Undersubscribed Issue:

An IPO issue is said to be undersubscribed when the number of bids received from the public is less than the total number of shares in the issue. For instance, if the number of shares up for sale in an IPO issue is 500,000 and the number of bids received from the public is 430,000, the IPO issue is said to be undersubscribed.

Oversubscribed Issue:

An IPO issue is said to be oversubscribed when the number of bids received from the public is higher than the total number of shares in the issue. For instance, if the number of shares up for sale in an IPO issue is 500,000 but the number of bids received from the public for those 500,000 shares is 1,000,000, the IPO issue is said to be oversubscribed by 2 times.

Green Shoe:

Also called the over allotment option, green shoe is essentially an agreement that allows the company to issue additional shares (usually 15% of the issue size) in the event of an oversubscribed IPO issue. Why is it called a green shoe? The term is derived from the name of the first company, Green Shoe Manufacturing, which permitted underwriters to use this practice in an IPO.

Quick Recap:

o An Initial Public Offering is essentially a process by which a privately held company offers its shares out to the public for the first time.
o The issuing company then receives the entire proceeds generated on account of the public buying its shares.
o In the world of finance, the Initial Public Offering (IPO) of a company is commonly known as the primary market.
o Once an IPO allotment process concludes and the shares are listed on the stock exchange, they move from the primary market to the secondary market.
o Right from the listing day, the shares of the company are publicly traded on the stock exchanges.
o Once the shares move from the primary market to the secondary market, the company is no longer a part of the picture. The trade happens between you and another person, who currently owns the shares.
o When you participate in an IPO, you essentially get early access to the shares of a company.
o By investing in an IPO, you get to be a part of and enjoy the value appreciation process of the company’s shares right from the start.
o The date on which the IPO issue opens up for subscription is commonly known as the offer date.
o In an IPO issue, the company issues a price range with an upper and a lower ceiling limit, known as the price band. The IPO applicants have the freedom to choose any price as they deem fit from the issued price band.
o The price within the price band that gets the highest number of bids from applicants is generally fixed by the company as the cut-off price.
o The lot size is the minimum number of shares that you can make a bid for in an IPO.
o An IPO issue is said to be undersubscribed when the number of bids received from the public is less than the total number of shares in the issue.
o An IPO issue is said to be oversubscribed when the number of bids received from the public is higher than the total number of shares in the issue.
o Also called the over allotment option, green shoe is essentially an agreement that allows the company to issue additional shares (usually 15% of the issue size) in the event of an oversubscribed IPO issue.

How can you invest in IPOs?

After spending much time trying to understand IPOs, we’ve finally reached the main crux of this module. In this chapter, we’ll not only learn how to invest in an IPO, but also take a look at the evaluation process that you need to conduct as an investor. Let’s jump right into the chapter.

What should you do before investing in IPOs?

Investing in an IPO is the easy part. Try to assess whether an IPO is worth investing. Assume that you wish to invest in the IPO of Agha Steel Industries. Before you start mobilizing your funds for investing, there are some key things that you need to do.

Reading Prospectus:

The very first thing that you should do when an IPO comes out is read through the entire prospectus from cover to cover. This little booklet contains almost everything you need to know about the company. Right from the details of the IPO issue down to the company’s financials, every important piece of information is included.

For instance, let’s take up ASIL’s prospectus to quickly analyze its contents. Here’s a brief look at some of the information about the issue that you’re likely to find on the opening page of the prospectus.

Number of shares up for subscription	120,000,000 equity shares
Face value of each equity share	Rs. 10
Issue price band (book building)	Rs. 30 – Rs. 42 per share
Total Offer Book Building 75 % of the issue	90,000,000 shares
Total Offer Book Building 25 % of the issue	30,000,000 shares
Offer opening date	Wednesday, Oct 14, 2020
Offer closing date	Thursday, Oct 15, 2020

The rest of the prospectus goes into detail about the company, the risk factors involved, financial information, legal information, terms and structure of the offer, and other information.

Examine the Financials of the Company:

Once you’ve made a preliminary read of the prospectus, the next step is to take an in-depth look at the attached financial statements of the company. This will throw some light on the performance of the company and help you take a call on whether to invest in the IPO or not.

Do a Valuation Exercise:

Once you’ve extensively analyzed the fundamentals of the company and have decided to invest in the IPO. But has the IPO been priced fairly? To find that out, we move on to valuation. Is that the right price to pay for the company’s shares? Or, is it set too high? A simple analysis using the discounted cash flow (DCF) method or any other valuation method will give you the answer to these questions.

Read Analyst Reports

You thought analysts give reports only on companies that are already trading on the exchanges? Turns out that they also compile research reports on upcoming IPO issues as well. You can make full use of analyst reports to support your decision to invest in the company’s IPO.

While analyst reports can be a great way to gain information about a company that you might have missed during your own analysis, it is not a good idea to rely entirely on those reports to base your investment decision.

How to Invest in IPOs?

As you already know by now, a CDC Sub Account is mandatory for purchasing or selling shares of companies. Similarly, before you can invest in an IPO, you need to first make sure that you possess a CDC Sub Account. Once your CDC Sub account is active, you can proceed to invest in IPOs by using one of two ways - through your trading account.

Investing in IPOs through a trading account

If you’re an investor who possesses a trading account with a stock broker, you can apply for an IPO itself. At AZEE Securities, we have made the entire IPO application process extremely simple. Applying for an IPO through your trading account is so simple that it hardly takes more than 5 minutes to complete the process. All it requires download the IPO form www.azeetrade.com/ipo and after filling the form submit with designated branches near you along with Payees Cheque on the name of IPO Company. However if you are not having bank account any of the listed banks then you may get pay order from any of the designated bank in favour of IPO company.

Investing in IPOs through a bank account

You can quickly and easily apply for an IPO using just your banks account (provided if you are account holder of any of the listed bank). In this process if you have no trading account with any brokerage house you could still subscribe IPO. All it requires download the IPO form www.azeetrade.com/ipo and after filling the form leave the CDC Sub Account/Investor Account box blank, submit with designated branches near you along with Payees Cheque on the name of IPO Company. However if you are not having bank account any of the listed banks then you may get pay order from any of the designated bank in favour of IPO company. In this case you will be receiving Share Certificates in the physical form from the same very bank branch where did you subscribed IPO. However for selling purpose you still need to open an account with any brokerage house prior to that same share certificate got to be converted into CDC format at first place then transaction can takes place.

Quick Recap:

o Before investing in IPOs, there are some key things that you need to do.
1. Read through the prospectus
2. Examine the financials of the company
3. Do a valuation exercise
4. Read through the analyst reports
o The prospectus contains almost everything you need to know about the company. Right from the details of the IPO issue down to the company’s financials, every important piece of information is included.
o The prospectus also goes into detail about the company, the risk factors involved, financial information, legal information, terms and structure of the offer, and other information.
o Once you’ve made a preliminary read of the prospectus, the next step is to take an in-depth look at the attached financial statements of the company.
o Analysts also compile research reports on upcoming IPO issues as well, which you can use to support your decision to invest in the company’s IPO.
o While analyst reports can be a great way to gain information about a company that you might have missed during your own analysis, it is not a good idea to rely entirely on those reports to base your investment decision.
o Conduct your own thorough analysis and compare the results with those of the analysts. This way, you can arrive at fairly accurate results.
o Before you can invest in an IPO, you need to first make sure that you possess a CDC Sub Account/Investor Account.
o You can invest in IPOs either through a trading account or through a bank account directly in physical form.
o Once you’ve successfully completed the IPO application process and upon the closure of the bidding date, the share allocation process takes place.

Glossary

Some of the stock market terminology and concepts you would frequently hear with respect to the Stock Markets are:

1.

Stock Exchange:

Stock exchanges are financial intermediaries that connect buyers and sellers and facilitate a trade of the stocks listed on that exchange. In Pakistan, there are two principal exchanges - the Pakistan Stock Exchange (PSX) and the Pakistan Mercantile Exchange (PMEX).

2.

Stockbroker:

Stockbrokers are financial intermediaries who play a major role in the stock markets. These entities are registered & licensed with the Stock Exchange & SECP as trading members. They act as a link between the stock exchanges and investors/traders like AZEE Securities. To be able to buy and sell shares in the stock market, you need to open a trading account with a stockbroker.

3.

Market Order:

A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.

4.

Limit Order:

To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the current market price. However, although a limit order guarantees a price, it cannot guarantee execution of the trade. This is because the stock might not reach the desired price on that particular trading day owing to market-related factors.

5.

Stop Loss Order:

A stop loss order is a normal order placed with a broker to sell a security when it reaches a certain predetermined price called the trigger price. Sometimes the market movements defy your expectations. Such market reversals often result in loss-bearing transactions. The stop loss trigger price is your defense mechanism – an amount at which you will be able to sustain yourself against such unanticipated market movements.

6.

Advances & Declines:

Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction. As the name suggest 'advances' inform you how the market has progressed. In contrast, 'declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical analysis tool that indicates market movement.

7.

Dividends:

A share is a portion of the company and when the company makes profits, you often receive a part of it. This is the idea behind dividends. Every year, companies distribute a small amount of profits to investors as dividends. This is the primary source of income for long-term shareholders – those who don’t sell the stock for years together.

8.

Market Capitalization:

Different companies issue varied amounts of shares when they get listed. The value of one share also differs from that of another company’s stock. Market capitalization smoothens out these differences. It is the market stock price multiplied by the total number of shares held by the public. It, thus, reflects the total market value of a stock taking into consideration both the size and the price of the stock. For example, if a stock is priced at Rs. 50 per share, and there are 1,00,000 shares in the hands of public investors, then its market capitalization stands at Rs. 5,000,000.

Market capitalization matters when stacking stocks into different indices. It also decides the weightage of a stock in the index. This means, bigger the company’s market value, the more its price fluctuations affect the value of the index.

9.

Stock Market Indices:

Stock market indices are indicators that reflect the performance of the market as a whole or of a certain segment of the market. A stock market index consists of a group of companies whose shares are traded on an exchange. Each index measures the price movement and the performance of the shares of its constituent companies.

10.

Clearance and Settlement:

Clearing is the process of updating the accounts of the trading parties and making arrangements for the transfer of the funds and the securities. Settlement is the process of the actual exchange of money and securities between the parties involved in the trade.

11.

Circuit Breakers and Trading Bands:

Some stocks are more volatile than others. Too much volatility is not good for investors. To curb this volatility, SECP has come up with the concept of circuit breakers. The market regulator has specified the maximum limit the price of a stock can move on a given day. This is called a price trading band. If a stock breaches this limit, trading is halted in that stock for a while. There are three levels of limits. Each limit leads to trading halt for a progressively longer duration. If all three circuit filters are breached, then trading is halted for the rest of the day.

12.

Bull & Bear Markets:

Markets are often described as ‘bull’ or ‘bear’ markets. These names have been derived from the manner in which the animals attack their opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if stock prices trend upwards, it is considered a bull market; if the trend is downwards, it is considered a bear market.

13.

Margin Trading:

Many traders trade on the stock market using borrowed funds or securities. This is called margin trading. It is almost like buying securities on credit. Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities, it also subjects you to a number of unique risks such as interest payments charged for the borrowed money. AZEE Securities offers its customers the facility of margin trading.

14.

Averaging:

Rupee-cost averaging is a concept when you buy a stock in small bunches, instead of buying in lump-sum. This helps reduce the average cost of your investment.
Let us use an example. Suppose you bought 100 shares of a company costing Rs. 10 each, your total investment cost is Rs. 1000. Instead of that, if you buy 50 shares for Rs. 100 and 50 for Rs. 95, your total cost of investment would be lower. Not just that, even your average cost per share would be lower. This is called rupee-cost averaging.

15.

Market Volatility:

Stock prices constantly fluctuate. This is because the demand for the stock changes. As more stocks change hands, greater is the change in its share price. This is called stock volatility. Even the amount of volatility in the market changes on a daily basis. To measure this volatility, the Pakistan Stock Exchange introduced the KSE-100 index is an indicator of stock price trends.

16.

Price-Targets and Stop-Loss Targets:

As an investor, to maximize your profits, you need to get your pricing right – both when it comes to buying and selling. However, sometimes, prices fluctuate more than expected. So, it can become a little difficult to gauge whether to trade now or wait a little more. This is where stock recommendations help.
Analysts put out price targets and stop-loss measures, which let you know how long you should hold a stock. A price target indicates that the price of share is unlikely to climb above the level. So, once the share price touches the target, you may look to sell it and pocket your profits. A stop loss, meanwhile, acts as a target on the lower end. It lets you know when to sell before the stock falls further and worsens your loss.

17.

Insider Trading:

Insider trading is 'the trading of shares based on knowledge not available to the rest of the world’. It is illegal to trade after receiving 'tips' of confidential securities information.
This applies to corporate personnel as well as traders and brokers. This is why company management have to report their trades to the exchange. This applies to employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded. Even government employees, who trade after learning of such information, are considered to have broken the law on insider trading. It is a punitive offence.

18.

After Market Order:

Though you cannot trade when the markets are shut, but you can place orders. Such orders are called After-Market Orders. AMO is for those customers who are busy during market hours but wish to participate. When you place an AMO, you have to keep in mind the closing price of the stock. You can choose a price which is 7.5% higher or lower than the closing price. That said, your order will be processed as soon as the market opens the next day at the opening price if it falls within this 7.5% band. AMOs come handy when you need time to plan your orders after conducting research. During market hours, you need to actively track the price as it is constantly fluctuating. This is not the case for AMOs.

19.

Stock Recommendations:

You cannot invest without conducting research. Often, many analysts and brokerage firms undertake their own stock market research keeping in mind the economy, industries, currency valuation, and so on. They often use public data from institutions like the State Bank of Pakistan, National Bureau of Statistics and speak to experts as part of their research. This is not easily possible for retail investors. As a result, findings of such research are extensively followed by investors, which also give a buy or sell recommendation for specific stocks.

20.

Bottoming Out:

Stock prices move in trends – an upward and a lower trend. During periods of bear markets, prices keep falling. However, there will come a time when the market starts to look cheap. This is when it starts to rise again as people start buying slowly. This phenomenon when the market free-fall ends and the rise begin is called bottoming out. Similarly, on the higher end, there will come a point when too much buying has made the stock costly. Traders then start selling in droves to book profits. So, the price does not rise beyond this level. This is called 'peaking'.

Basics of Derivative

The financial derivatives have been around for a long time now. The derivative market in Pakistan, like its counterparts abroad, is increasingly gaining significance. Since the time derivatives were introduced in the year 2000, their popularity has grown manifold. This can be seen from the fact that the daily turnover in the derivatives segment on the Pakistan Stock Exchange currently stands at significant, much higher than the turnover clocked in its recent years.

‘Derivatives’ as they are called is a security, whose value is derived from another financial entity referred to as an ‘Underlying Asset’. The underlying asset can be anything a stock, bond, commodity or currency. The value of the underlying assets changes every now and then.

The types of Derivatives traded on PSX & PMEX are:

• Deliverable Futures Contract (DFC):
• Single Stock Cash Settled Futures (CSF):
• Stock Index Futures Contract (SIFC):
• Cash Settled Future (CSF)

In Pakistan Stock Market (PSX) Deliverable Future Contracts (DFC) are traded significantly and popular avenue of derivatives, which offers 30 days contract. However Cash Settled Future (CSF) traded in Pakistan Mercantile Exchange (PMEX) offers range of derivative instruments such as commodities, indices and popular currency pairs.

Options:

In the stock market, options are derivative contracts that give the buyer of the contract the right to buy or sell the stock of a company at a predetermined price, on a predetermined date in the future. Here, the buyer has the choice to either buy or sell the asset, while the seller has no such right.
The derivative product of Options will be introduced in near future on Pakistan Stock Exchange - PSX.

Use of Derivatives:

In the markets, Future & Options are standardized contracts, which can be freely traded on exchanges. These could be employed to meet a variety of needs.
• Earn money on shares that are lying idle: So you don’t want to sell the shares that you bought for long term, but want to take advantage of price fluctuations in the short term. You can use derivative instruments to do so. Derivatives market allows you to conduct transactions without actually selling your shares – also called as physical settlement.
• Benefit from arbitrage: When you buy low in one market and sell high in the other market, it called arbitrage trading. Simply put, you are taking advantage of differences in prices in the two markets.
• Protect your securities against: fluctuations in prices The derivative market offers products that allow you to hedge yourself against a fall in the price of shares that you possess. It also offers products that protect you from a rise in the price of shares that you plan to purchase. This is called hedging.
• Transfer of risk: By far, the most important use of these derivatives is the transfer of market risk from risk-averse investors to those with an appetite for risk. Risk-averse investors use derivatives to enhance safety, while risk-loving investors like speculators conduct risky, contrarian trades to improve profits. This way, the risk is transferred.

Derivative Trading:

On the basis of their trading motives, participants in the derivatives markets can be segregated into four categories – hedgers, speculators, margin traders and arbitrageurs. Let's take a look at why these participants trade in derivatives and how their motives are driven by their risk profiles.

• Hedgers: Traders, who wish to protect themselves from the risk involved in price movements, participate in the derivatives market. They are called hedgers. This is because they try to hedge the price of their assets by undertaking an exact opposite trade in the derivatives market. Thus, they pass on this risk to those who are willing to bear it. They are so keen to rid themselves of the uncertainty associated with price movements that they may even be ready to do so at a predetermined cost.
• Speculators: As a hedger, you passed on your risk to someone who will willingly take on risks from you. But why someone do that? There are all kinds of participants in the market. Some might be averse to risk, while some people embrace them. This is because, the basic market idea is that risk and return always go hand in hand. Higher the risk, greater is the chance of high returns. Then again, while you believe that the market will go up, there will be people who feel that it will fall. These differences in risk profile and market views distinguish hedgers from speculators. Speculators, unlike hedgers, look for opportunities to take on risk in the hope of making returns.
• Margin Traders: Many speculators trade using of the payment mechanism unique to the derivative markets. This is called margin trading. When you trade in derivative products, you are not required to pay the total value of your position up front. . Instead, you are only required to deposit only a fraction of the total sum called margin. This is why margin trading results in a high leverage factor in derivative trades. With a small deposit, you are able to maintain a large outstanding position. The leverage factor is fixed; there is a limit to how much you can borrow. The speculator to buy three to five times the quantity that his capital investment would otherwise have allowed him to buy in the cash market. For this reason, the conclusion of a trade is called ‘settlement’ – you either pay this outstanding position or conduct an opposing trade that would nullify this amount.
• Arbitrageurs: Derivative instruments are valued on the basis of the underlying asset’s value in the spot market. However, there are times when the price of a stock in the cash market is lower or higher than it should be, in comparison to its price in the derivatives market. Arbitrageurs exploit these imperfections and inefficiencies to their advantage. These are done when the same securities are being quoted at different prices in two markets. In PSX Ready Market’s & Future Market’s arbitrage is very popular and offers some lucrative returns.

Quick Recap:

o In the stock market, futures are basically derivative contracts that obligate a buyer and a seller to trade the stock of a company at a predetermined price, on a predetermined date in the future. Here, both the buyer and the seller are obligated to honour their end of the contract.
o In PSX there essentially three types of futures contracts available.
o Deliverable Future Contract DFC is the most popular among all contracts in Pakistan Stock Market.
o Options trading have yet not introduced in Pakistan Stock Exchange so far.
o Derivatives are mainly used by hedgers, speculator, margin traders and arbitrageurs.
o When you hedge your loss in the spot market it is offset by gains in the futures markets.

Introduction of Future

The forwards contract is the simplest form of derivative. Consider the forwards contract as the older form of the futures contract. Both the futures and the forward contracts share a common transactional structure, except that over the years the futures contracts have become the default choice of a trader.

In the Stock Market, futures are basically derivative contracts that obligate a buyer and a seller to trade the stock of a company at a predetermined price, on a predetermined date in the future. Here, both the buyer and the seller are obligated to honor their end of the contract.

There are essentially four main elements to a futures contract.

1. o The obligation of the buyer and the seller
   o The trade of an underlying asset between the two parties
   o The presence of a predetermined price
   o The presence of a predetermined date for the trade to occur
   

And as far as a futures contract is concerned, the buyer of the contract is the person who is obligated to buy the asset, while the seller of the futures contract is the person who is obligated to sell the asset.
Futures contracts are available on different kinds of assets Stocks, Indices, Commodities, Currency pairs and so on. Here we will look at the two most common futures contracts – stock futures and index futures.

Deliverable Futures Contract (DFC)

DFCs are forward contracts to buy or sell a certain underlying instrument with actual delivery of the said instrument occurring. The minimum lot for purchasing these shares is 500 shares. Settlement takes place 30 days after the contract is purchased. The Opening of the Contract is Monday, preceding the last Friday of the month. The Expiration of the DFC is the last Friday of the calendar month.

Single Stock Cash Settled Futures (CSF)

It is like a standardized contract which allows buying or selling a certain underlying instrument at a certain date in the future, at specified price. Single Cash Settled Futures are standardized contracts to buy/sell single stock futures to be settled in cash, where the result of the trade is the cash difference between the buying and selling price. Settlement occurs purely on cash basis. Settlement can occur 30, 60, & 90 days after the contract is purchased.

Stock Index Futures Contract (SIFC)

SIFC is an agreement to buy or sell a standardized value of a stock index (basket of shares) on a future date at a specified price. SIFC gives opportunity to investors to trade in entire stock market by buying index futures instead of buying individual securities with the efficiency of mutual funds. Currently 90 days SIFCs are available at PSX. The SIFCs currently available on PSX are as follows:
• KSE-30 Index, consisting of 30 stocks, commonly known as KSE-30 Index.
• OGTI, Oil and Gas Tradable Sector Index
• BKTI, Banking Sector Tradable Index.

Cash Settled Future (CSF)

Pakistan Mercantile Exchange (PMEX), the country’s only commodity futures exchange, listed Cash Settled Futures (CSF) contracts of corn, wheat, soybean, palladium and Japan equity index $1 & $5 and made them available for trading. At present, the Exchange offers 22 commodities with 110 contracts of different denominations which can be clubbed into six main asset classes: Metal, Agriculture, Energy, Indices, Currencies and Financial Futures.

Trading in Future Contracts:

Trading in the derivatives market is a lot similar to that in the cash segment of the stock market.
• First do your research. This is more important for the derivatives market. However, remember that the strategies need to differ from that of the stock market.
• Arrange for the requisite margin amount. Stock market rules require you to constantly maintain your margin amount. This means, you cannot withdraw this amount from your trading account at any point in time until the trade is settled.
• Conduct the transaction through your trading account. You will have to first make sure that your account allows you to trade in derivatives.
• Select your stocks and their contracts on the basis of the amount you have in hand, the margin requirements, the price of the underlying shares, as well as the price of the contracts.
• You can wait until the contract is scheduled to expiry to settle the trade. In such a case, you can pay the whole amount outstanding, or you can enter into an opposing trade.

Quick Recap:

o If you have a directional view on an assets price, you can financially benefit from it by entering into a futures agreement
o To transact in a futures contract one needs to deposit a token advance called the margin
o When we transact in a futures contract, we digitally sign the agreement with the counter party, this obligates us to honor the contract.

Basics of Commodities Market

Your local supermarket is also a kind of commodities market, It operates on a small scale. However, a Commodities Market is a place where selected commodities are traded between members, based on fixed rules and regulations. In a commodities market, the objectives of trading can be any one of these two:
o To take delivery of the commodities in order to actually use them, or
o To profit from the price movements of the commodities

Commodities basically are raw materials used for making the finished products that are used in our everyday lives. Wheat and coffee beans, and sugarcane are the raw materials for finished products coffee and bread, and sugar respectively. Likewise, cotton & copper are raw materials for textiles used in clothing, and electric wires are used at our homes for electrification as well as in the industries.

To regulate the trading of commodities, we have many commodity exchanges operating in the market. Primarily, Pakistan has commodity exchanges namely,

Pakistan Mercantile Exchange Limited (PMEX) is Pakistan’s first and only multi commodity futures exchange, which is licensed and regulated by the Securities & Exchange Commission of Pakistan (SECP).
The Exchange offers a diverse range of domestic and international commodities and financial futures. With a sophisticated infrastructure based on state-of-the-art technology, PMEX provides a complete suite of services i.e. trading, clearing and settlement, custody as well as back office. The Exchange has average daily trading volume is normally in the range of PKR 3 to 5 billion. AZEE Securities became PMEX member back in 2013.

Recent Developments in Pakistan:

The advent of economic liberalization helped the cause of laying emphasis on the importance of commodity trading. Pakistan Mercantile Exchange Limited started its operations in May 2007 as a fully electronic exchange with nationwide reach. The Exchange offer a diverse range of domestic and international commodities and financial futures.

Trading in PMEX:

A Commodity market is a market that trades in primary economic sector rather than manufactured products. Soft Commodity are agricultural products such as wheat, coffee, cocoa and sugar. Hard Commodity are mined, such as gold and oil.
The four categories of trading commodities include:
• Energy (including crude oil, heating oil, natural gas and gasoline)
• Metals (including gold, silver, platinum and copper)
• Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)
• Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)

Characteristics Pakistan Commodity Market:

• Use of Price Discovery:

Just like how the share market gives you a great deal of insight into the price of stocks and therefore, to a certain extent, the company behind it, the commodities market also offers information about the prevailing prices of commodities consistently. By studying these price movements and speculating upon the potential future trends, it becomes easier to make business decisions, particularly for manufacturing entities who use these commodities as raw material. Wholesale traders can also make use of this information to fix the prices for their retail-facing goods.

• Used for Hedging Risk:

During times of crisis like wars or recession, traditional financial assets like stocks and bonds often tend to plummet, leading to possible losses for traders. But in times like these, commodities can help hedge against this investment risk. In fact, trading in commodities is also a strategy that’s often used to hedge against the inflation that occurs during crises.

• A Variety of Contracts Traded:

The commodity market in Pakistan PMEX offers Cash Settled Future (CSF) contracts, where you buy and sell commodities for the full price. It also includes futures contracts that can be bought and sold for a fraction of the original price. With such a variety of contracts to choose from, there are many trading strategies that can be employed in the commodities market.

• A Vibrant Derivatives Segment:

The derivatives segment of the commodities market, which consists of futures, is particularly vibrant. A huge volume of trades occur on the commodities exchange in this segment each day, meaning that it’s significantly liquid. Traders often seek to take advantage of this factor to make quick gains.

Quick Recap:

o A commodities market is a place where selected commodities are traded between members, based on fixed rules and regulations.
o In a commodities market, the objectives of trading can be to take delivery of the commodities in order to actually use them, or to profit from the price movements of the commodities.
o To regulate the trading of commodities, we have Pakistan Mercantile Exchange PMEX operating in the market.
o The goods traded in the commodities market can clearly be classified into one of two categories - hard commodities and soft commodities.
o Hard commodities include natural resources like metals and oil reserves that make up the backbone of a country’s economy. Some other examples of hard commodities include gold, silver, iron, steel, aluminum and copper.
o Soft commodities are basically goods that are grown and nurtured. Think of agricultural produce, cattle and other livestock and any other agricultural or allied products.
o The commodities market is widely used for price discovery.
o Commodities can also be used for hedging risks associated with other investments.
o The commodities market also has a vibrant derivative segment.

Difference Between Future & Options

Derivatives are instruments that derive their value from an underlying security like a share, debt instrument, currency or commodity. Futures and options are the two type of derivatives commonly traded. Investing in futures with AZEE Securities can help make your financial infrastructure secure.

Future Contract:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Such an agreement works for those who do not have the money to buy the contract now but can bring it in at a certain date. These contracts are mostly used for arbitrage by traders. It means traders buy a stock at a low price in the cash market and sell it at a higher price in the futures market or vice versa. The idea is to play on the price difference between two markets for the same stock.

Options:

An Option gives the buyer the right but not the obligation. As a buyer, you may choose to let the option to buy call or put option lapse. The seller has an obligation to comply with the contract. In the case of a futures contract, there is an obligation on the part of both the buyer and the seller.

Options are of two types:
• Calls Options
• Puts Options

'Calls' give the buyer the right, but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.
'Puts' give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date.
If the buyer of options chooses to exercise the option to buy, the counter-party (seller) must comply. A futures contract, on the other hand, is binding on both counter-parties as both parties have to settle on or before the expiry date.

How Futures & Options Differs:

If you are a buyer in the futures market, there is no limit on the profit that you make. At the same time, there is no limit on the loss that you make. A futures contract carries unlimited profit and loss potential whereas the buyer of a Call or Put Option's loss is limited, but the profit potential is unlimited.

Purchasing a futures contract requires an upfront margin and normally involves a larger outflow of cash than in the case of Options, which require only the payment of premium.

Futures are a favorite with speculators and arbitrageurs whereas Options are widely used by hedgers.
While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore is obliged to sell/buy the asset if the buyer exercises it on him. Presently, at PSX, futures are traded on the Index and stocks. However Option Trades have yet to be introduced in Pakistan Stock Exchange.

Quick Recap:

o In the stock market, futures are basically derivative contracts that obligate a buyer and a seller to trade the stock of a company at a predetermined price, on a predetermined date in the future. Here, both the buyer and the seller are obligated to honour their end of the contract.
o The buyer of the futures contract expects the share price to go up. But the seller of the contract expects the share price to fall in the future.
o In the stock market, options are derivative contracts that give the buyer of the contract the right to buy or sell the stock of a company at a predetermined price, on a predetermined date in the future. Here, the buyer has the choice to either buy or sell the asset, while the seller has no such right.
o If the buyer of the options contract chooses to exercise their right to buy or sell the asset, the seller of the contract will be obligated to act accordingly.
o And if the buyer of the contract chooses not to exercise their right, then the seller will again have to act accordingly.

Open Interest

Before we conclude on “Futures Trading”, we must address one of the questions that is often asked- “What is Open Interest (OI)?”, “How is it different from Volumes?”, and “How can we benefit from the Volumes and Open interest data?”
Open Interest (OI) is a number that tells you how many futures (or Options) contracts are currently outstanding (open) in the market. Open Interest becomes nil past the expiration date for a particular contract. Open interest information tells us how many contracts are open and live in the market. Volume on the other hand tells us how many trades were executed on the given day.
Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.
Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

Open Interest Vs Volume:

Volume and Open interest are two key technical metrics that describe the liquidity and activity of options and futures contracts. "Volume" refers to the number of contracts traded in a given period, and "open interest" denotes the number of contracts that are active, or not settled. Here, we examine these two metrics and offer tips for how you can use them to understand trading activity in the derivatives markets.
• Volume and open interest both describe the liquidity and activity of options and futures contracts.
• Volume refers to the number of trades completed each day and is an important measure of strength and interest in a particular trade.
• Open interest reflects the number of contracts that are held by traders and investors in active positions, ready to be traded.
• Volume reflects a running total throughout the trading day, and open interest is updated just once per day.

Benefits of monitoring Open Interest:

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.
• Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or sideways) will continue.
• Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.
• A knowledge of open interest can prove useful toward the end of major market moves.
• A leveling off of open interest following a sustained price advance is often an early warning of the end to an up-trending or bull market.

Quick Recap:

o Open Interest (OI) is a number that tells you how many contracts are currently outstanding (open) in the market
o OI increases when new contracts are added. OI decreases when contracts are squared off
o OI does not change when there is transfer of contracts from one party to another.
o Unlike volumes, OI is continuous data.
o On a stand along basis OI and Volume information does not convey information hence it makes sense to always pair it with the price to understand the impact of their respective variation.
o Abnormally high OI indicates high leverage, beware of such situations.

Glossary

1. Underlying Asset:

The asset on which the value of a derivative is based is known as the underlying asset. It can be anything from stocks and indexes to currencies and commodities.

2. Spot price:

The spot price is the price at which an asset is being traded for in the spot (cash) market.

3. Bid price:

The highest price that a buyer of a contract is willing to pay is known as the bid price.

4. Ask price:

The lowest price that a seller of a contract is willing to accept is known as the ask price.

5. Strike price:

The strike price is the price at which you, as the owner of an option, get to either buy or sell the underlying asset on the predetermined date.

6. Lot size:

A lot size is the minimum quantity of asset covered by a derivative/future contract. For instance, the lot size of single futures MCB Bank is 500 shares.

7. Expiry:

Also known as contract expiry, it is the date on which a Commodity contract ceases to exist. If you don’t square off your open positions before the day of the expiry, you will either have to buy or sell the underlying asset according to the terms of your contract.

8. Long:

The term long is used to denote the buying of either a futures contract or an options contract.

12. Short:

The term short is used to denote the selling of either a futures contract or an options contract.

13. Intrinsic value:

The intrinsic value is the difference between the spot price of the underlying asset and the strike price of the option contract of the underlying asset. The intrinsic value of a call option can be calculated by subtracting the strike price from the spot price, while the intrinsic value of a put option can be calculated by subtracting the spot price from the strike price.

14. Open interest

The open interest is the total number of open contracts of a particular financial asset in the market.

15. Margin

The amount that you deposit with an exchange to either buy or sell a futures contract is known as the ‘margin.’ This margin money is only a percentage of the entire contract value and is liable to change according to the price movements of the underlying asset.

16. Margin call

When your initial margin money is not sufficient to cover your mark to market (MTM) losses, the stock exchange demands an additional margin deposit to nullify the risk of default. This demand for additional margin deposit is known as ‘margin call.’

17. Leverage

Leverage is the ability to control a contract with a large value by simply depositing a fraction of the total value. For instance, when you buy or sell a futures or an options contract with a large contract value by depositing a small margin or a premium amount, you’re said to have utilized leverage.

Investment Strategy Basics

You know that you need to feature your risk and returns while building a portfolio of investments. But the questions remains as a beginner investor your head is perhaps flooded with a lot of other queries.
o How much should you invest?
o What’s the best time to invest?
o How frequently should you invest?
o And what are the different methods of investing?

How much should you invest?

There are no hard and fast rules regarding this. It’s a very subjective issue. In fact, how much you invest depends on a number of factors, like
o Your monthly/annual income
o The nature of your job (salaried or self-employed)
o Your fixed and regular expenses
o The amount of debt you owe

What’s the best time to invest?

Best time to start investing is as early as possible. But timing is much more than merely knowing when to start investing. For instance, what’s the best time to invest in specific assets like the stock market or real estate? The timing also depends on your age, depending on how old you are, you may choose to invest in different investment options.

How frequently should you invest?

Some investors frequently infuse more capital into their portfolio, while others invest a huge amount upfront and wait patiently for their capital to grow. Based on your income, your choice of investments and your goals, you can invest in any of the following frequencies.
o Monthly
o Quarterly
o Half-yearly
o Annually

You can also change the frequency of your investments periodically to suit your life goals.

What are the different methods of investing?

Lump sum investments and Systematic Investment Plans (SIPs) are two of the most basic investing strategies. In the lump sum investment method, you invest a huge amount upfront. In the SIP investment method, you invest small amounts periodically.

Rebalancing your portfolio:

Once you’ve constructed an investment portfolio based on your goals and needs, it’s not enough to let it sit. You’ll need to revisit your portfolio every once in a while and ensure that your investments are performing as you need them to. If they’re not, you may need to sell off some poorly performing assets and reinvest that capital by buying assets that show potential for growth. This is effectively what it means to rebalance your portfolio.

You can rebalance your portfolio at set points in time, on a monthly, quarterly, or annual basis. Another way to rebalance your portfolio is to do it when your assets change by a certain amount. For instance, say you’ve built a portfolio that has 50% equity and 50% fixed income investments. You could revisit it and rebalance it every 6 months. Or, you can rebalance it when either of the sections of your portfolio change by 10%. So, in this case, if the equity component drops to 40%, that is when to rebalance your portfolio.

Quick Recap:

o How much you should invest is a very subjective issue. It depends on a number of factors, like your income, the nature of your job, your fixed expenses and your debt level.
o What’s the best time to invest? That depends on your investment strategy, your goals and your general outlook.
o Based on your income, your choice of investments and your goals, you can make your investments monthly, quarterly, half-yearly, or annually.
o Lump sum investments and Systematic Investment Plans are two of the most basic investing strategies.
o Once you’ve constructed an investment portfolio based on your goals and needs, you’ll need to revisit your portfolio every once in a while, and ensure that your investments are performing as you need them to.
o You can rebalance your portfolio at set points in time, on a monthly, quarterly, or annual basis.
o Another way to rebalance your portfolio is to do it when your assets change by a certain amount. o

The Need to Invest

Invest is to allocate money in the expectation of some benefit in the future. In finance, the benefit from an investment is called a return. The return may consist of a gain or loss realized from the sale of a property or an investment, unrealized capital appreciation or depreciation, or investment income such as dividends, interest, rental income etc. or a combination of capital gain and income.

Why to Invest:

Investing your money can allow you to grow it. Most investment vehicles, such as stocks, certificates of deposit, or bonds, offer returns on your money over the long term. This return allows your money to build, creating wealth over time.

There are a few compelling reasons for one to invest.

• Fight Inflation – By investing one can deal better with the inevitable – growing cost of living generally referred to as Inflation
• Create Wealth – By investing one can aim to have a better corpus by the end of the defined time period.
• To meet life’s financial aspiration

Where to invest?

Having figured out the reasons to invest, the next obvious question would be – Where would one invest, and what is the returns one could expect by investing. When it comes to investing one has to choose an asset class that suits the individual’s risk and return temperament.

An asset class is a category of investment with particular risk and return characteristics. The following are some of the popular asset classes.

1. Fixed income instruments
2. Equity
3. Real estate
4. Commodities (precious metals)

Fixed Income Instruments:

These are investable instruments with very limited risk to the principle and the return is paid as an interest to the investor based on the particular fixed-income instrument. The interest paid, could be quarterly, semi-annual or annual intervals. At the end of the term of deposit, (also known as maturity period) the capital is returned to the investor.
Typical fixed income investment includes:
1. Fixed deposits offered by banks
2. Bonds issued by the Government of Pakistan
3. Bonds issued by corporate’s As of June 2020, the typical return from a fixed income instrument varies between 6% and 10%.

Equity:

Investment in Equities involves buying shares of publicly listed companies. The shares are traded on the Pakistan Stock Exchange (PSX). When an investor invests in equity, unlike a fixed income instrument there is no capital guarantee. However, as a trade-off, the returns from equity investment can be extremely attractive. Pakistan Equities have generated returns close to 14% – 18% returns (compound annual growth rate) over the past 10 years. Investing in some of the best and well run Pakistani companies has yielded over 20% returns in the long-term. This is comparatively a lower rate of tax than the other asset classes.

Real Estate:

Real Estate Investment involves transacting (buying and selling) commercial and non-commercial land. Typical examples would include transacting in sites, apartments and commercial buildings. There are two sources of income from real estate investments namely – Rental income, and Capital appreciation of the investment amount. The transaction procedure can be quite complex involving legal verification of documents. The cash outlay in real estate investment is usually quite large. There is no official metric to measure the returns generated by real estate, hence it would be hard to comment on this.

Commodity – Bullion:

Investments in gold and silver are considered one of the most popular investment avenues. Gold and silver over a long-term period have appreciated in value. Investments in these metals have yielded returns of approximately 8% over the last 20 years. There are several ways to invest in gold and silver. One can choose to invest in the form of jewelry or Pakistan’s Mercantile Exchange PMEX is recognized exchange which offers basket of products to invest.
It would be interesting to work how much one would have saved by the end of 20 years considering he has the option of investing in any one – fixed income, equity or bullion. Clearly, equities tend to give you the best returns especially when you have a multi-year investment perspective.
Investment optimally should have a strong mix of all asset classes. It is smart to diversify your investment among the various asset classes. The technique of allocating money across assets classes is termed as ‘Asset Allocation’ .

Quick Recap:

o Investing is a great option. Investment is to secure your future.
o Choose an instrument or that best suits your risk and return appetite
o Investment asset is an asset that generates income and also increases by value.
o Asset class is grouping of assets that exhibits similar characteristics
o Asset class can be broadly classified into Equity, commodity, property and cash.
o Equity offers ownership, capital appreciation and dividend income. It is high risk high reward investment. It is a liquid investment also.
o Government securities and T-Bills are risk free debt instruments
o To invest in Commodities, various investment vehicles such as Gold, Crude Oil and US Future Indices are available.
o Investment is large real estate is facilitated through investment in Real Estate Investment Trust (REIT).
o Maintaining some part of investment as cash and cash equivalent is important.

Stock Market Investment for beginners

Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks are a good investment even during periods of market volatility a stock market downturn simply means that many stocks are on sale. The best way for beginners to get started investing in the stock market is to put money in an online investment account, which can then be used to buy shares of stock or stock mutual funds. With many online brokers, you can start investing for the price of a single share.

Stock Market for Beginner’s:

Before you go ahead to reap profits from the trade, here are a few share market basics for beginners which you need to know:

• Understand the Entire Procedure:

Every person begins with the basics when starting anything new. This rule is applicable when investors decide to invest in the Pakistan stock market as well. There is plenty of information available on the Internet that can be used to understand the basics of the stock market, investing, and other related concepts.

• Learn to Choose:

While investing, it is crucial to enter the market at the right time when the shares are trading at their lowest levels. Similarly, exiting when the prices are peaking is important. Investors must also make the right choice about the companies in which they want to invest. It is common for many investors to follow the herd mentality and follow professional traders and analyst reports. Though this may help to gain an understanding of the workings of the market, investors need to use their discretion before making investment decisions. An individual must understand his personal needs and preferences while choosing the sectors and stocks. Moreover, not every company is profitable, and doing the research and due diligence before investing will help mitigate some risks associated with stock market investing.

• Open your Account:

Deciding an online brokerage house is one of the biggest steps that you need to take to open an account in Pakistan. If you’re interested to open your account with such brokerage house which offers reliable online trading with variety of product basket then you may click the link to fill account opening application.

• Determine the Investment Amount:

Investors must be prudent on how much exposure they take in various financial products. Some of the available instruments include shares, bonds, mutual funds, and derivatives. Although diversification is a good idea to mitigate market movement risks, investors must invest only in those products that they understand. In addition, limiting the investment in high-risk products to amounts that they can afford to lose without facing a financial crunch is crucial. This is an important stock market tip, which is often overlooked by investors in the hope of making huge profits.

• Track and Review the Portfolio:

It is not uncommon for investors, especially long-term investors, to invest in certain products and then not look at these until they want to exit. This is one of the biggest errors while investing in the stock market. The markets are dynamic and volatile; even the smallest news or event can result in huge movements to the performance of the various products. This is why it is important for investors to regularly track the performance of their various investments and review it. If any news or event significantly affects their product portfolio, the necessary modifications must be made to minimize the potential losses resulting from the share market investments.

• Learn from Errors:

Professional traders with several years of experience make mistakes; so if a beginner makes erroneous decisions, he must not be disheartened. Investing is a learning experience and making mistakes is an in-built component. While reviewing their portfolios, investors must learn to identify their mistakes and learn from these to ensure the errors are not repeated in the future. Gaining experience as a person continues investing in different products and learning from his or her mistakes is the best teacher that helps him or her become a seasoned investor. When investors stick to the stock market basics, they can sail smoothly even through difficult market conditions. They will not only be successful, but can enjoy a secured financial future.

Quick Recap:

o Investing in the stock market is smart way of wealth creation.
o One needs to understand the basics of stock market before starting the business.
o While investing one must know how to choose the stocks and when is the right time to enter in the market.
o Open your account with such brokerage house which offers reliable online trading with variety of product basket.
o One should always keep the track of his/her portfolio and review it periodically.
Investor must learn from his/her mistakes rather repeating the same error.

What is Value Investing?

At a time when the PSX was hovering around the same level as ten years ago, it was a challenge for investors to find value. The stock market is not easy game to play.
Value investing is one of the most basic investment strategies. It operates under the assumption that the stock market does not function efficiently, resulting in many assets being overvalued or undervalued. An undervalued stock means it is traded at a price significantly lower than its intrinsic value. This strategy therefore focusses on purchasing the shares at a price lower than their real value, believing that the market will re-evaluate them in the future and the price will rise to reflect its true value.

How to Identify Cheep Stocks:

We often hear analysts use phrases like ‘stock valuation’, ‘PE ratio,’ ‘price-to-book’ among many other terms. The bottom line is that everyone wants to buy stocks with a ‘cheap’ valuation.
Intrinsic value is estimated using price multiples. This is done in two ways:
• In the first approach, an investor selects a company and calculates the price multiples for it and a group of its closest competitors. Then, he averages the value of the multiple for its competitors and compares it with the company’s multiple. If the company is trading at a lower multiple than its competitors, it is deemed to be undervalued. He buys the stock and waits for it to appreciate.
• In the second approach, the investor calculates the average of the competitors’ multiples, just as in the first case. Then, he uses this multiple to calculate the fair value of the company’s stock. If the market price of the stock is below this, he considers it undervalued and buys it.
Value investing involves a detailed fundamental analysis of the company and the overall industry. The basis for successful value investing lies in a thorough study of the firm's activities. To determine the real value of the stock, an investor has to run a financial analysis, studying a company's fundamental factors, such as its business model, brand, target market and competitive advantages, as well as financial performance, including cash flow, revenue and profit. Some common metrics used to value a company's stock include price-to-book (P/B), price-to-earnings (P/E) and free cash flow.

Price-to-earnings ratio A price to earnings multiple or the P/E ratio compares a company’s share price and its earnings. It reflects how much investors are shelling out for each rupee that a company earns and provides a common tool for comparing various stocks. A higher P/E value means that investors are shelling out more for a company’s profit of one rupee as compared to another stock with a low P/E. However, it should not be used to compare companies from different industries. The P/E ratio is calculated by dividing the share price of the company by either the historical or expected earnings per share or EPS --- the company’s net profit divided by the total number of its equity shares. Analysts usually use the P/E ratio on the basis of expected earnings per share. It is called one-year forward multiple.

Return on equity The return on equity is the profit a company earns as a percentage of the total equity. The value of the stock is cheap if it is trading at a low historical price to earnings multiple, but has a high or a rising return on equity. This means that the company is generating profits but the share price is beaten down.

Price-to-book ratio The price-to-book or P/B ratio compares a company’s share price to its book value --- the value of a company per share if assets were liquidated. This metric is also used to identify cheap shares as a P/B ratio indicates how much investors are willing to pay for each rupee of a company’s assets. Moreover, this does not take into account intangible assets of a company like brand or goodwill, thus giving us the company’s real value.

Debt-to-equity ratio Companies raise funds via debt instruments for the production of goods and services. This debt is paid back over long-term periods. However, it is also necessary to access a company’s debt while investing to find out if a company is borrowing more than it should. This is calculated by dividing the total liabilities a company has raised via loans and bonds by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Price/earnings-to-growth ratio The price/earnings-to-growth or PEG ratio is a modified version of the P/E ratio. This is a metric which takes into account a company’s growth in earnings. This helps identify companies that are growing, but have cheaper stock valuations.

Value investing is designed for long-term investment. It is especially effective during periods of market recession, as many good companies become undervalued. As the most successful value investing examples suggest, a financial crisis is a fruitful time for a value investor.

However, it is important to always consider the purchase price, even if you have a long-term investment horizon. One should never rely on the belief that long-term growth will cover all the spending. Buying incorrectly chosen stocks can lead to great losses.

Keep in mind that value investing is not only about cheap stocks. This strategy is aimed at the sound, high-quality companies with great potential.

Quick Recap:

o Value investing is one of the most basic investment strategies.
o Investors Identify Cheap Stocks by using price multiples and that is done with two ways.
o First approach, an investor selects a company and calculates the price multiples. o Second approach, the investor calculates the average of the competitors’ multiples.
o Value investing involves a detailed fundamental analysis of the company and the overall industry.
o Common metrics used to Value Company's stock include price-to-book (P/B), price-to-earnings (P/E) and free cash flow.
o Value investing is designed for long-term investment. It is especially effective during periods of market recession.

What is Mutual Investment

A mutual fund is an investment instrument that is managed by professionals. It collects money from investors and invests on their behalf.
You may be keen on investing in stocks but are not sure of how the markets work. This is where mutual funds can be useful. Asset Management Companies (AMCs) handle mutual funds. These fund managers pool money from shareholders like you. AZEE Securities also provide Mutual Fund distribution services for investors.

How to choose a mutual fund:

Before investing in a mutual fund, do some homework. This will put you on a firm footing about what you can expect by investing in a particular scheme. Here is how to go about it. • Check track record: A track record of the fund could be a pointer of what to expect from it. There is no guarantee that a fund will continue to excel just because it did so in the past. But, a research on the past performance can throw some light on the past performance of the fund. This includes the prudence of the fund managers, investment philosophy of the fund, and the returns it has generated over a period of three years to five years. • Match fund’s risk with your profile: Mutual funds invest in various portfolios to reduce risk. Yet, there are a few equity schemes that invest in particular sectors alone. These schemes are classified as high-risk and have the potential to maximize return. Match the fund’s risk exposure with your profile before you choose to invest.

Types of Mutual Funds:

There are a variety of mutual funds. They can also be classified into different categories on varying factors. Here’s a look at some of the types of mutual funds. There are two key kinds of mutual funds on the basis of the constitution of the fund.

• Close-ended schemes:

These schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. Once that window closes, such schemes cannot issue new units except in case of bonus or rights issues. After that period, you can only buy or sell already-issued units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors' expectations and other market factors.

• Open-ended schemes:

These funds, unlike close-ended schemes, do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund, on any business day. This means, the fund can issue units whenever it wants. These schemes have unlimited capitalization, do not have a fixed maturity date, there is no cap on the amount you can buy from the fund and the total capital can keep growing. These funds are not generally listed on any exchange.

Mutual funds based on assets invested in:

There three kinds of mutual funds based on the assets invested in. These are as follows:

• Equity funds:
These are funds that invest only in stocks. As a result, they are usually considered high risk, high return funds. Most growth funds – the ones that promise high returns over a long-term – are equity funds.
• Hybrid funds:
These are funds which invest in both equities as well as debt instruments. For this reason, they are less risky than equity funds, but more than debt funds. Similarly, they are likely to give you higher returns than debt funds, but lower than equity funds. As a result, they are often called 'balanced funds'.
• Debt funds:
These funds invest in debt-market instruments like bonds, government securities, debentures and so on. These are called debt instruments because they are a kind of borrowing mechanism for companies, banks as well as the government.

Mutual funds based on investment objective:

Every investor has a different reason for investing in financial instruments. Some do so for making profits and increasing wealth, while some others do so for a regular secondary source of income. Some others invest in mutual funds for a bit of both. Keeping these requirements in mind, there are three key kinds of mutual funds based on the investment objective.
• Growth funds:
These are schemes that promise capital returns in the long-term. They usually invest in equities. As a result, growth funds are usually high risk schemes. This is because the values of assets are subject to lot of fluctuations. Also, unlike fixed-income schemes, growth funds usually pay lower dividends. They may also prefer to reinvest the dividend money into increasing the assets under management.
• Balanced funds:
As the name suggests, these schemes try to strike a balance between risk and return. They do so by investing in both equities and debt instruments. As a result, they are a kind of hybrid fund. Their risk is lower than equity or growth funds, but higher than debt or fixed-income funds.
• Fixed-income funds:
These are schemes that promise regular income for a period of time. For this reason, fixed-income funds are usually a kind of debt fund. This makes fixed-income funds low-risk schemes, which are unlikely to give you a large amount of profit in the long-run. They pay higher dividends than growth funds. As with debt funds, they may be further classified on the basis of the specific assets invested in or on the basis of maturity.

What is a Systematic Investment Plan?

Sometimes, we may wish to invest a big some of amount, but won’t have the entire sum at once. A Systematic investment plan (SIP) comes handy in such a situation. It helps you spread your investment over time through fixed payments either on a monthly or quarterly basis. This also helps inject discipline into your investment habit, as many who wish to invest regularly forget to do so. Thus, you may end up spending more than you should, and not investing enough. SIPs help you avoid this.
Under SIP, you automate your monthly mutual fund investment activities. You, thus, invest small sums at regular intervals to buy mutual fund units. Many prefer an SIP over investing in lump sum in mutual funds. This is because SIP offers some benefits that a lump sum investment doesn’t.

Glossary

1. Investment:

An investment is a monetary asset that is purchased with the idea that the asset will provide income in the future, or that it will be sold at a higher price later, for a profit. It is a means to create wealth over the long term. Some examples of investment are fixed deposits, Stock Market, mutual funds, and real estate.

2. Portfolio Diversification:

Portfolio diversification is an investment strategy that helps you manage your risk. To diversify your portfolio, you need to allocate your capital across a wide variety of investments. A portfolio that consists of different kinds of assets has a greater potential to yield higher long-term returns. It also lowers the risk associated with each particular investment.

3. Financial Market:

Financial markets are virtual or physical spaces that are dedicated to the purchase and sale of financial assets. Assets like stocks, derivatives, and bonds are traded in financial markets.

4. Debt Market:

In a debt market, debt instruments like bonds and debentures are bought and sold. These instruments are issued by companies and government entities.

5. Equity Market:

Stocks of public limited companies are traded in the equity market. Here, you can carry out a variety of trades such as intraday transactions, delivery trades, Initial Public Offers (IPOs).

6. Money Market:

In a money market, monetary assets like treasury bills, commercial papers, and certificates of deposits can be bought. The investment horizon for these assets does not exceed a year.

7. Capital Market:

In a capital market, assets with medium-term and long-term investment horizons are traded. For instance, investors can buy assets like equity share capital and preference share capital and hold them over the long term. Capital markets are divided into primary markets and secondary markets.

8. Cash Market:

In the cash market, transactions are settled on a real-time basis. Here, financial assets are sold for cash and for immediate delivery

9. Futures Market:

In the futures market, you may pay the money at the time of making your transaction, but the delivery of the asset happens at a later date.

10. Over-the-Counter Market:

These are decentralized markets where buyers and sellers can interact with one another and engage in the trade of customized products, as per their requirements. There is no intermediary involved, and transactions occur electronically, over the counter.

11. Institutional Investors:

Institutional investors are corporate entities that invest in the stock market. They’re sub-classified into two categories based on their nationality: • Foreign Institutional Investors (FIIs) • Domestic Institutional Investors (DIIs)

12. Retail Investors:

Retail investors are individual, non-professional market participants who generally invest smaller amounts than larger, institutional investors. They’re sub-classified into the following three different categories, based on their residential status: • Resident Pakistani retail investors
• Non-Resident Pakistani (NRP) retail investors
• Overseas Citizen of Pakistan (OCI) retail investors

13. High Net worth Individuals (HNIs):

Individuals who possess an investable capital of more than Rs. 10 Mn. and take part in the investing and trading activities in the stock market are categorized as High Networth Individuals (HNIs).

14. Industry Risk:

This is a risk that affects all companies in a particular industry. This is because the companies in an industry may work in a similar fashion. This exposes them to certain kinds of risk unique to the industry.

15. Regulatory Risk:

Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations that will dramatically affect a business.

16. Business Risk:

These are the risks unique to an individual company. It refers to the uncertainty regarding the organization’s ability to conduct its business. Products, strategies, management, labor force, market share, etc. are among the key factors investors consider in evaluating the value of a specific company.

17. Bankruptcy:

Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer meet its financial obligations. Both stocks and bondholders fear bankruptcy. This is because you are unlikely to get all your money back. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible. However, in case the liabilities exceed the value of the company’s assets, even creditors may be at a loss.

Introduction to Technical Analysis

Now, we’ll see how versatile technical analysis can be, and primary assumptions that form the basis of technical analysis. However, the fundamentals of technical analysis are fairly easy if explained right. Once you know that, you can easily understand how to do technical analysis of stocks. The importance of technical analysis and learn technical analysis of stocks using these fundamentals.

Technical Analysis:

Technical analysis is an investment analysis technique that involves studying past price movements and trends in an asset in order to predict possible future trends in price. It is the study of chart patterns and statistical figures to understand market trends and pick stocks accordingly. It uses past information to speculate about what is most likely to happen in the near future, so traders can take advantage of possible future trends to make potential profits.

Fundamental Assumptions of Technical Analysis:

Technical analysis is pretty straightforward when it comes to the metrics that need to be analyzed. This technique only focuses on past price and trading volume of the asset, and using this information, future trends are speculated or predicted.

Market discounts everything:

Technical analysis of stocks and other assets assumes that any information that is relevant to a particular asset is already factored into the price of that asset. In other words, the market already factors in all available and rumoured information into the price of the asset concerned.
Technical analysts study how the price of a stock or any other asset reacts to all of this information. And based on the trends in the asset price, these analysts determine whether or not an asset makes for a good buy.

Prices Move in Trends:

Technical analysis of stocks is based on the idea that each stock chart has its own unique trend. Prices move only within this trend. Every move in the stock price will indicate the next move. Whether it is bullish (moving upward) or bearish (moving downward) . There are patterns that are identifiable over time, and once a price trend is established, technical analysis of stocks and other assets assumes that the asset continues to move in that direction till a new trend comes into force. These trends can be short-term, medium-term, or long-term in nature.

History Tends to Repeats:

This fundamental assumption that validates a technical analysis is that trends are repetitive. In other words, suppose a stock chart moves in a hypothetical pattern- A-B-C. So, each time we reach ‘C’, we will again start from ‘A’, and then go to ‘B’ and eventually ‘C’. This pattern will repeat itself without fail. Only once you make this assumption can you predict future stock prices based on technical analysis. Without this assumption, there is no way to tell where the price will go next by simply looking at a chart.

Technical Indicators:

Based on these assumptions, you can use three important technical indicators to identify market trends and predict future stock prices.

Charts:

Price and volume charts are the most typical tools that are used as technical indicators for technical analysis. A volume chart depicts the number of shares of a company that were bought and sold in the market during a day.
For the purpose of technical analysis, you may choose one of the traditional line or bar charts, or alternatively, use a candlestick chart. Charts are used together with trend-lines. Trend-lines indicate the direction of movement of a stock over a period of time.

Moving Average:

Moving averages are calculated to remove sharp, frequent fluctuations in a stock chart. Sometimes, stock prices can move very sharply in a small period of time.
If you calculate the average of prices and compare them with the average of the next five days and the previous five days, you can ascertain a broad trend. This kind of moving average is called simple moving average (SMA). Other commonly used moving average concepts are exponential moving average (EMA) and linear weighted average (LWA). It may be noted though, that moving averages are calculated for longer durations than five days. Ten days and one month moving averages are more common.

Indicators:

Momentum indicators are statistical figures that are calculated based on price and volume data of stocks. These technical indicators act as supporting tools to charts and moving averages.
Some momentum indicators are signs that occur before the price move you expected occurs. They confirm that the price is indeed going to move as you thought it would. These are called leading indicators. Other signs come after the stock has started moving in a particular direction. They are called lagging indicators. They confirm that the stock will continue moving in this direction. Indicators are also used together with moving averages. Other popular momentum indicators include moving average convergence divergence (MACD), accumulation/distribution line and Aroon.

Trade Summary:

The Pakistan stock market is open from 9:15 AM to 15:30 PM. During the 6 hour 15 minute market session, there are millions of trades that take place. Think about an individual stock – every minute there is a trade that gets executed on the exchange. The question is, as a market participant, do we need to keep track of all the different price points at which a trade is executed?
The market opened at 9:15 AM and closed at 15:30 PM during which there were many trades. It will be practically impossible to track all these different price points. In fact, what one needs is a summary of the trading action and not really the details on all the different price points.
By tracking the Open, high, low and close we can draw a summary of the price action.
The open – When the markets open for trading, the first price at which a trade executes is called the opening price.
The high – This represents the highest price at which the market participants were willing to transact for the given day.
The Low – This represents the lowest level at which the market participants were willing to transact for the given day.
The close – The Close price is the most important price because it is the final price at which the market closed for a particular period of time. The close serves as an indicator for the intraday strength. If the close is higher than the open, then it is considered a positive day otherwise negative. Of course, we will deal with this in greater detail as we progress through the module. The closing price also shows the market sentiment and serves as a reference point for the next day’s trading. For these reasons, the closing price is more important than the Open, High or Low prices.
The open, high, low, close prices are the main data points from the technical analysis perspective. Each of these prices has to be plotted on the chart and analyzed.

Quick Recap:

o Technical Analysis is not bound by its scope. The concepts of Technical Analysis can be applied across any asset classes as long as it has a time-series data.
o Technical Analysis is based on a few core assumptions.
a. Markets discount everything
b. The how is more important than why
c. Price moves in trends
d. History tends to repeat itself
o A good way to summarize the daily trading action is by marking the open, high, low and close prices usually abbreviated as OHLC.

Moving Averages

We all learnt about averages, moving average is just an extension of that. Moving averages are trend indicators and are frequently used due to their simplicity and effectiveness. Before we learn moving averages, let us have a quick recap on how averages are calculated.

We all love cricket during a One Day 50/50 overs match, having team A scored 130 in 30 overs in response to team B scored 275 runs in allotted 50 overs. Let’s calculate the required average run rate in the given 20 overs for team A.

Formula is Required Score / Remaining Overs = Required Average Run Rate.
Total Score Team B – Total Score Team A = Required Score
276 – 130 = 146
Hence 146/ 20 = 7.30 Average Run Rate Required

Moving Average:

Consider a situation where you want to calculate the average closing price of PSO for the 5 days. The data is as follows:

Date	Closing price
21/07	239.2
22/07	240.6
23/07	241.8
24/07	242.8
25/07	247.9
Total	1212.3

= 1212.30/ 5
= 242.50

Hence the average closing price of PSO over last 5 trading sessions is 242.50.
Moving forward, the next day i.e., 28th July (26th and 27th were Saturday and Sunday respectively) we have a new data point. This implies now the ‘new’ latest 5 days would be 22nd, 23rd, 24th, 25th and 28th. We will drop the data point belonging to the 21st as our objective is to calculate the latest 5 day average.

Date	Closing price
22/07	240.6
23/07	241.8
24/07	242.8
25/07	247.9
28/07	250.2
Total	1223.3

= 1212.30/ 5
= 242.50

Hence the average closing price of PSO over the last 5 trading sessions is 244.66
As you can see, we have included the latest data (28th July), and discarded the oldest data (21st July) to calculate the 5 day average. On 29th, we would include 29th data and exclude 22nd data, on 30th we would include 30th data point but eliminate 23rd data, so on and so forth.
So essentially, we are moving to the latest data point and discarding the oldest to calculate the latest 5 day average. Hence the name “Moving Average”!

Exponential Moving Average-(EMA):

An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.
EMA today = Value Today X (Smoothing/1+Days)
Where EMA = Exponential moving average
While there are many possible choices for the smoothing factor, the most common choice is:
Smoothing = 2
That gives the most recent observation more weight. If the smoothing factor is increased, more recent observations have more influence on the EMA.

Application of Moving Average:

The moving average can be used to identify buying and selling opportunities with its own merit. When the stock price trades above its average price, it means the traders are willing to buy the stock at a price higher than its average price. This means the traders are optimistic about the stock price going higher. Therefore one should look at buying opportunities.
Likewise, when the stock price trades below its average price, it means the traders are willing to sell the stock at a price lesser than its average price. This means the traders are pessimistic about the stock price movement. Therefore one should look at selling opportunities.
We can define the moving average trading system with the following rules:
Rule 1) Buy (go long) when the current market price turns greater than the 50 day EMA. Once you go long, you should stay invested till the necessary sell condition is satisfied
Rule 2) Exit the long position (square off) when the current market price turns lesser than the 50 day EMA

Moving Average Crossover System:

A moving average crossover system is an improvisation over the plain vanilla moving average system. It helps the trader to take fewer trades in a sideways market. In a MA crossover system, instead of the usual single moving average, the trader combines two moving averages. This is usually referred to as ‘smoothing’.
The entry and exit rules for the crossover system is as stated below:
Rule 1) – Buy (fresh long) when the short term moving averages turns greater than the long term moving average. Stay in the trade as long as this condition is satisfied
Rule 2) – Exit the long position (square off) when the short term moving average turns lesser than the longer term moving average

Quick Recap:

o A standard average calculation is a quick approximation of a series of numbers
o In average calculation where the latest data is included, and the oldest is excluded is called a Moving Average
o The simple moving average (SMA) gives equal weightage to all data points in the series
o An Exponential Moving Average (EMA) scales the data according to its newness. Recent data gets the maximum weightage and the oldest gets the least weightage
o For all practical purposes, use an EMA as opposed to SMA. This is because the EMA gives more weightage to the most recent data points
o The outlook is bullish when the current market price is greater than the EMA. The outlook turns bearish when the current market price turns lesser than the EMA
o In a non-trending market, moving averages may result in whipsaws thereby causing frequent losses. To overcome this a EMA crossover system is adopted
o In a typical crossover system, the price chart is over laid with two EMAs. The shorter EMA is faster to react, while the longer EMA is slower to react
o The outlook turns bullish when the faster EMA crosses and is above the slower EMA. Hence one should look at buying the stock. The trade lasts up to a point where the faster EMA starts going below the slower EMA
o The longer the time frame one chooses for a crossover system, the lesser the trading signals.

Types of Charts

Analysis of stock market trends is the first tool that is used in technical analysis. However, trend analysis cannot be done unless historical stock charts are available. This is because trends are discovered in the charts themselves. It is, therefore, critical to understand what is a chart and how to perform stock chart analysis.
Technical charts are basically media that represent data in a graphical format. They make it easier to read and draw conclusions from huge volumes of data. Technical analysis charts are so versatile that they can accurately represent the price and volume movement of a share for any specific time period, ranging from one trading day to several years on end.
Charts can help you understand how the price of a stock moved over a particular period of time by plotting four key price points. For a chart that shows the price movements during one trading day, these are the four important points.
o The opening price: It is the price at which the first trade is executed when the markets open up for trading at 9.30 AM.
o The lowest point: It is the lowest price at which a trade is executed in a trading session.
o The highest point: It is the highest price at which a trade is executed in a trading session.
o The closing price: When the markets close for trading, the price at which the final trade for the day is executed is known as the closing price.
The ability to accurately and comprehensively summarize the price action of a stock is the primary reason why technical charts are considered to be the core of technical analysis.
Below are some of the chart types:
1. Line chart
2. Bar Chart
3. Candlestick

The Line and Bar Chart:

The line chart is the most basic chart type and it uses only one data point to form the chart. When it comes to technical analysis, a line chart is formed by plotting the closing prices of a stock or an index. A dot is placed for each closing price and the various dots are then connected by a line.
The line charts can be plotted for various time frames namely monthly, weekly, hourly etc. So, if you wish to draw a weekly line chart, you can use weekly closing prices of securities and likewise for the other time frames as well.

The Bar Chart:

It is a bit more versatile. A bar chart displays all the four price variables namely open, high, low, and close. A bar has three components.
A bar chart is more useful to a trader involved in technical analysis. It depicts these four price points of a stock for a particular period of time easily.
• The opening price
• The lowest price
• The highest price
• The closing price
A bar chart is generally depicted as a thin central vertical line with two horizontal lines emerging from it, one on the left and one on the right.

Candlestick Chart:

While in a bar chart the open and the close prices are shown by a tick on the left and the right sides of the bar respectively, however in a candlestick charts give the same information as bar charts but only offer it in a better way. Like a bar chart is made up of different vertical lines, a candlestick chart is made up of rectangular blocks with lines coming out of it on both sides. The line at the upper end signifies the day’s highest trading price. The line at the lower end signifies the day’s lowest trading price. The day’s trading can be shown in Intraday charts. As for the block itself (called the body), the upper and the lower ends signify the day’s opening and closing price. The one that is higher of the two, is at the top, while the other one is at the bottom of the body.
What makes candlestick charts an improvement over bar charts is that they give information about volatility throughout the period under consideration. Bar charts only display volatility that occurs within each trading day. Candles on a candlestick chart are of two shades-light and dark. On days when the opening price was greater than the closing price, they are of a lighter shade (normally white). On days when the closing price was higher than the opening price, they are of a darker shade (normally black).A single day’s trading is represented by Intraday charts. Higher the variation in colour, more volatile was the price during the period.

Quick Recap:

• Charts are basically media that represent data in a graphical format.
• They make it easier to read and draw conclusions from huge volumes of data.
• Charts can accurately represent the price and volume movement of a share for any specific time period, ranging from one trading day to several years on end.
• There are four key price points plotted in the charts used for technical analysis: the opening price, the lowest price, the highest price and the closing price.
• Charts can be line charts, bar charts, or candlestick charts.
• A bar chart is generally depicted as a thin central vertical line with two horizontal lines emerging from it, one on the left and one on the right. The horizontal line on the left indicates the opening price of the asset, the horizontal line on the right indicates the closing price of the asset. The lowest point in the vertical central line depicts the lowest price of the trading session, while the highest point in the vertical central line depicts the highest price of the trading session.
• A candlestick looks similar to a bar chart, except that it uses a rectangular body to depict the opening and closing prices of a stock instead of the two horizontal protrusions.

Technical Indicators

Stock chart displayed on a trader’s trading terminal, you are most likely to see lines running all over the chart. These lines are called the ‘Technical Indicators’. A technical indicator helps a trader analyze the price movement of a security.
Indicators are independent trading systems introduced to the world by successful traders. Indicators are built on preset logic using which traders can supplement their technical study (Candlesticks, Volumes, S&R) to arrive at a trading decision. Indicators help in buying, selling, confirming trends, and sometimes predicting trends.
Indicators are of two types namely leading and lagging. A leading indicator leads the price, meaning it usually signals the occurrence of a reversal or a new trend in advance. A lagging indicator on the other hand lags the price; meaning it usually signals the occurrence of a reversal or a new trend after it has occurred.

Relative Strength Index - RSI:

Relative strength Index or just RSI, is a very popular indicator developed by J.Welles Wilder. RSI is a leading momentum indicator which helps in identifying a trend reversal. RSI indicator oscillates between 0 and 100, and based on the latest indicator reading, the expectations on the markets are set.
The term “Relative Strength Index” does not compare the relative strength of two securities, but instead shows the internal strength of the security. RSI is the most popular leading indicator, which gives out strongest signals during the periods of sideways and non trending ranges.
The formula to calculate the RSI is as follows:

RSI = 100 – 100/ 1 + RS Where RS = Average Gain/Average Loss

Assume the PPL stock is trading at 99 on day 0, with this in perspective consider the following data points:

Sn	Closing price	Points Gain	Points Lost
01	100	1	0
02	102	2	0
03	105	3	0
04	107	2	0
05	103	1	4
06	100	0	3
07	99	0	1
08	97	0	2
09	100	3	0
10	105	5	0
11	107	2	0
12	110	3	0
13	114	4	0
14	118	4	0
	Total	291	10

We have used 14 days points for the calculation, which is the default period setting in the charting software. If you are analyzing hourly charts the default period is 14 hours, and if you are analyzing daily charts, the default period is 14 days.
The first step is to calculate ‘RS’ also called the RSI factor. RS as you can see in the formula, is the ratio of average points gained by the average points lost.
Average Points Gained = 29/14
= 2.07
Average Points Lost = 10/14
= 0.714
RS = 2.07/0.7 14
= 2.8991
Plugging in the value of RS in RSI formula,
= 100 – [100/ (1+2.8991)]
= 100 – [100/3.8991]
= 100 – 25.6469
RSI = 74.3531
As you can see RSI calculation is fairly simple. The objective of using RSI is to help the trader identify over sold and overbought price areas. Overbought implies that the positive momentum in the stock is so high that it may not be sustainable for long and hence there could be a correction. Likewise, an oversold position indicates that the negative momentum is high leading to a possible reversal.

Moving Average Convergence and Divergence (MACD):

Traders consider MACD as the grand old daddy of indicators. Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-day Exponential Moving Average (EMA) from the 12-day EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD called the "signal line," is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals. Traders may buy the security when the MACD crosses above its signal line and sell - or short - the security when the MACD crosses below the signal line. Moving Average Convergence Divergence (MACD) indicators can be interpreted in several ways, but the more common methods are crossovers, divergences, and rapid rises/falls.

MACD is calculated by subtracting the long-term EMA (26 days) from the short-term EMA (12 days). An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the period.

Bollinger Band:

Introduced by John Bollinger in the 1980s, Bollinger Bands (BB) is perhaps one of the most useful indicators used in technical analysis. BB are used to determine overbought and oversold levels, where a trader will try to sell when the price reaches the top of the band and will execute a buy when the price reaches the bottom of the band.
The BB has 3 components:
1. Middle line which is The 20 day simple moving average of the closing prices
2. An upper band – this is the +2 standard deviation of the middle line
3. A lower band – this is the -2 standard deviation of the middle line

Other Indicators:

There are numerous other technical indicators, and the list is endless. Technical indicators are good to know, but they by no means should be your main tool of analysis. The working knowledge of few basic indicators, such as the ones discussed in this lesson is sufficient.

Quick Recap:

o MACD is a trend following system
o MACD consists of a 12 Day, 26 day EMA
o MACD line is 12d EMA – 26d EMA
o Signal line is the 9 day SMA of the MACD line
o A crossover strategy can be applied between MACD Line, and the signal line
o The Bollinger band captures the volatility. It has a 20 day average, a +2 SD, and a -2 SD
o BB works well in a sideways market. In a trending market the BB’s envelope expands, and generates many false signals
o Indicators are good to know, but it should not be treated as the single source for decision making

Support & Resistance

The best way to identify the target price is to identify the support and the resistance points. The support and resistance (S&R) are specific price points on a chart which are expected to attract maximum amount of either buying or selling. The support price is a price at which one can expect more buyers than sellers. Likewise the resistance price is a price at which one can expect more sellers than buyers.

Support levels:

Support levels are essentially the points on the price chart of a particular share or an index, below which the price of the asset refuses to fall. Here’s what generally happens before a support level is achieved.
• The price of the stock is on a downtrend.
• So, the demand for the stock rises, as more buyers rush in to purchase the stock at lower prices.
• At some point, the number of buyers becomes greater than the number of sellers. In other words, the demand starts to exceed the supply.
• So, the excess demand stops the stock price from falling further, and the price of the stock turns around and starts to rise instead.

Resistance levels:

Resistance levels are the points on the price chart of a particular share or an index, above which the price of the asset refuses to rise. Here’s what generally happens before a resistance level is achieved.
• The price of the stock is on an uptrend.
• So, the demand for the stock falls, as fewer buyers are willing to purchase the stock at higher prices. However, more sellers are willing to sell their holdings for profits.
• At some point, the number of sellers becomes greater than the number of buyers. In other words, the supply starts to exceed the demand.
• So, the excess supply stops the stock price from rising further, and the price of the stock turns around and starts to fall instead.

Drawing of Support Resistance Levels:

Here is a 4 step guide to help you understand how to identify and construct the support and the resistance line.
Step 1) Load data points – If the objective is to identify short term S&R load at least 3-6 months of data points. If you want to identify long term S&R, load at least 12 – 18 months of data points.
Step 2) Identify at least 3 price action zones – A price action zone can be described as ‘sticky points’ on chart where the price has displayed at least one of the behaviors:
a. Hesitated to move up further after a brief up move
b. Hesitated to move down further after a brief down move
c. Sharp reversals at particular price point
Step 3) Align the price action zones – When you look at a 12 month chart, it is common to spot many price action zones. But the trick is to identify at least 3 price action zones that are at the same price level.
Step 4) Fit a horizontal line – Connect the three price action zones with a horizontal line. Based on where this line fits in with respect to the current market price, it either becomes a support or resistance.

Reliability of Support Resistance:

The support and resistance lines are only indicative of a possible reversal of prices. They by no means should be taken for as certain. Like anything else in technical analysis, one should weigh the possibility of an event occurring (based on patterns) in terms of probability.
Though keeping the very first rule of technical analysis in perspective i.e “History tends to repeat itself” we go with the belief that support and resistance levels will be reasonably honored.
This brings us to the end on support and resistance levels. It’s a simple enough concept that can reveal a great deal of information about the trends in which a share’s price moves.

Quick Recap:

• Support and Resistance are price points on the chart.
• Support is a price point below the current market price that indicate buying interest.
• Resistance is a price point above the current market price that indicate selling interest.
• To identify Support and Resistance (S&R), place a horizontal line in such a way that it connects at least 3 price action zones, well spaced in time. The more number of price action zones (well spaced in time) the horizontal line connects, the stronger is Support and Resistance (S&R).
• Support and Resistance (S&R) can be used to identify targets for the trade. For a long trade, look for the immediate resistance level as target. For a short trade, look for the immediate support level as target.
• Lastly, comply with the checklist for optimal trading results.

Glossary

1. Technical analysis:

Technical analysis is a technique that is utilized to study the historical price movements of a stock or index to predict its future price movements. It primarily works on the assumption that history always repeats itself.

2. Opening price:

The opening price is the first price at which an asset is traded at the start of a trading session.

3. Highest price:

The highest price at which an asset is traded in a trading session.

4. Lowest price:

The lowest price at which an asset is traded in a trading session.

5. Closing price:

The closing price is the last price at which an asset is traded at the end of a trading session.

6. Volume:

Volume is the total number of shares traded in the market during a specified period of time. A high volume indicates greater interest in the shares and vice versa.

7.Line chart:

A line chart depicts the various price points of an asset at different points in time. These price points are connected by a single line.

8. Bar Chart:

A bar chart consists of a thin vertical central line with two horizontal lines, one on the left and one on the right. The horizontal line on the left indicates the opening price of the asset, the horizontal line on the right indicates the closing price of the asset. The lowest point in the vertical central line depicts the lowest price of the trading session, while the highest point in the vertical central line depicts the highest price of the trading session.

9. Candlestick Chart:

Quite similar to the bar chart, the candlestick chart also consists of a central vertical line. However, it uses a vertical rectangular body to depict the open and closing prices of an asset. When the body of the candle is colored in red, it indicates that the opening price is higher than the closing price. This effectively means that the price of the asset moved negatively during the trading session. When the body of the candle is coloured in green, it indicates that the opening price is lower than the closing price. This means that the price of the asset moved positively during the trading session.
Additionally, the lowest point in the vertical central line depicts the lowest price of the trading session, while the highest point in the vertical central line depicts the highest price of the trading session.

10. Single candlestick patterns:

When a pattern is generated by a single candle, it is termed as a single candlestick pattern. Single candlestick patterns usually take only one trading session into account.

11. Multiple candlestick patterns:

Patterns that are generated by multiple candlesticks are termed as multiple candlestick patterns. These patterns take multiple trading sessions into account.

12. Trend:

Trend is known as the overall price movement of an asset in a specific direction over a specified period of time.

13. Bullish trend:

Also known as an uptrend, a bullish trend occurs when an asset’s price moves upward over a specified period of time.

14. Bearish trend:

Also known as a downtrend, a bearish trend occurs when an asset’s price moves downward over a specified period of time.

15. Sideways trend:

Also known as a horizontal trend or a range-bound trend, a sideways trend occurs when an asset’s price moves within a specific range without showing any clear signs of either a bullish or bearish trend.

16. Trend reversal:

A trend reversal is said to happen when the price movement of an asset changes direction and starts moving in the opposite direction. For instance, when a bullish trend changes direction and becomes a bearish trend, a trend reversal is said to have occurred.

17. Volatility:

Volatility is the rate of change in the price of an asset over a period of time. High volatility indicates that the price of an asset is changing rapidly, whereas low volatility signifies that the price is changing slowly.

18. Support level:

The support level is the price point of an asset below which the price of the said asset refuses to fall.

19. Resistance level:

The resistance level is the price point of an asset above which the price of the said asset refuses to rise.

20. Dow Theory:

Propounded by Charles Dow, the Dow Theory is a set of six basic tenets that gives some much needed insight into the markets and the price movements therein. The following are its six basic tenets.
• The market discounts everything.
• The market has three trends.
• Market trends have three phases.
• The indices must confirm with each other.
• The trading volume must confirm with the price trends.
• Trends persist until there is a clear reversal.

Intraday Trading Guide for Beginners

Intraday trading, also called day trading, is the buying and selling of stocks and other financial instruments within the same day. In other words, intraday trading means all positions are squared-off before the market closes and there is no change in ownership of shares as a result of the trades.
People perceived day trading to be the domain of financial firms and professional traders. But this has changed today, thanks to the popularity of online trading and margin trading. Today, it’s very easy to start day trading, understand the basics of intraday trading:
Though this trading is quite risky because of market volatility, one can earn excessive profits if he/she knows the market conditions and stay alert in every passing second.

Beginners Guide for Intraday Trading:

Many traders get mistaken on intraday trading and do it in the same way as simple trading in the stock market. However, it’s a completely different affair of managing charts within the risk parameters set. You surely need to be careful while doing intraday trading.

o Intraday trading promises high returns and thus may sound very attractive. But it also carries a higher risk compared to the delivery segment. So if you have a day job that requires your full attention for most of the trading hours, you may want to avoid intraday trading. For one, you have to watch the market and time your trades to perfection. Secondly, you need a good understanding of and time to perform technical analysis on daily charts to make the right decisions.
o You need to trade in the intraday segment using the right broker, one who offers you with research support as well as technical support. Having the right tools is crucial to maximise for intraday trades. Given the high frequency of transactions, One option you can consider is the Intraday Trade option from AZEE Securities. It allows you to execute intraday trades at with all relevant support & research.
o Be a smart one and pick stocks with due diligence. Do in-depth research, and put aside the unstable shares, likewise the most stable shares as well. These sorts of shares can bring a full stop to your career. So, be careful while choosing them.
o Stop losses are quite important. Without it, intraday trading is not possible. If you avoid trading, then also you need to have a clear plan on conditions.
o Market trends are real knowledge providers that help you grow perfectly. It's important to understand trade and market trends in a proper way to excel at it.
o Timing is of utmost importance. The profitability and movement are needed to keep within the time that you spending in the stock exchange. If you are going through proper timing, then surely you can win the race.

What is 'Value Area' And Why Does it Matter?

As an intraday trader, you want to pick the market direction early. The simplest way to do this is by identifying the 'value area' for the stocks you target to trade in. This can help you make a trade decision.

Experts call this 'The 80% rule'. Value area is the range of price where at least 70% of previous day’s trade took place. Once you have identified this area, observe where the price opens for the day. The rule states that if the price starts below the range and stays there for the first hour, then there is an 80% chance that it will rise into the area.

On the other hand, if it starts above the value area and stays there for the first hour, there is an equal chance that the price will fall into the area.

This gives us the most basic intraday trading strategy if the stock starts above and stays there, you may want to take a short position near the top of the value area. Similarly, if the stock starts below the value area and stays there for an hour, you can take a long position near the bottom of the value area. Remember, these are thumb rules. Don't consider this as a recommendation.

Quick Recap:

o Intraday trading, also called day trading, is the buying and selling of stocks within the same day.
o Intraday trading offers high returns and may sound very attractive. But it also carries a higher risk compared to the delivery trade.
o Before carrying out intraday trade one needs to ensure complete research of stocks and technical levels.
o Stop loss is the key to limit your risk before taking intraday positions.
o Market trends are also important to consider to start day trading.
o Intraday trading basic strategy is timing when you take your position.

How to Select Intraday Trading Stocks

Day trading stocks today is dynamic and exhilarating. On top of that, they are easy to buy and sell. With the world of technology, the market is readily accessible. The liquidity in markets means speculating on prices going up or down in the short term is absolutely viable.
The trading platform you use for your online trading will be a key decision. You need advanced charting & Trading Analytics to automate your trading strategy.
To succeed as an intraday trader, you need to identify the right stocks to trade in. Once you have identified a selection of stocks, you can then monitor and analyze these further to identify trends. The entry and exit strategies are dictated by the trends you observe.
First step of the process on how to choose stocks for intraday trading:

Liquid Stocks:

Liquid stocks are those that have a large volume trading through the day. The single most important criterion when choosing to trade intraday is to find stocks that are liquid. This is important for two reasons:
You can buy and sell large volumes without impacting the trend you want to benefit from.
The trades you line up have the potential to be executed quickly. As intraday trading depends on precise timing, avoiding any delay in execution is paramount to success.

Medium to High Volatility:

Intraday success depend on daily price movements. If you end up trading stocks that have a sticky price, you will not find an opportunity to trade them profitably. Therefore, you have to select stocks that experience a price movement almost every day.
You can filter the stocks based on movements either in percentage terms or the Rupee value of the stock. This filtration can typically give you different sets of stocks. As a rule of thumb, experts suggest choosing stocks that move at least 3% per day on an average.

Follows Indicators:

To succeed as an intraday trader, you must be able to correctly predict the price movement in the short term. To improve chances of success, you can choose stocks that follow the group trends and indicators closely. For example, if you want to trade stocks from the Oil sector, choose those that show a strong correlation with the PKR vs. US$ movement. For more such intraday trading indicators

Trade With the Trend:

While some traders specialize in contrarian plays, most traders prefer and recommend trading in intraday with the trend. Meaning, an intraday trader has to identify the waves of a stock market trend and then try to ride on these waves. This can be possible by conducting intraday trading time analysis.
For example, if you see that the market is rising, you can try to select stocks that offer opportunities to take long (buy) positions. In contrast, in a falling market, traders can try to spot and take short positions where possible. The bottom line is to avoid challenging the market.

Strong Stocks Vs. Weak Stocks:

Once experts identify liquid stocks that move with the trend, they then divide them into relatively strong stocks and weak stocks. Strong stocks are ones that move in the same direction as the market, but more intensely. For example, if the market rises by, say, 1%, then a strong stock tends to rise higher—say 2-3%. Weak stocks, in contrast, tend to rise/fall at a slower pace than the market. Experts usually prefer strong stocks in an uptrend and weak stocks in a downtrend to lower the potential for loss.
But remember, it’s better to avoid trading when there’s a weak or no trend in the market. After all, stock markets are not always trending. Sometimes they stall as well. When that happens, consider being patient and waiting for markets to trend again.

Tips for Picking The Right Stocks:

 Volume traded: Look at the total number of shares being traded within a particular timeframe. This will tell you about the volumes being bought and sold. Intraday traders should pick stocks that trade in high volumes.
 Trending stock: Is there buzz around a particular stock? Such stocks could offer lucrative opportunities to day traders. They are likely to show momentum in one or the other direction, along with good trading volumes.
 Recent analysis: Look at how stocks on your shortlist have performed over the last week or two. Has the closing price been consistently positive or negative over the period? Assess the likely movement for the day before placing a buy or sell order.
 Breakout stocks: Keep an eye on the resistance and support levels of your chosen stocks. The resistance level is the price beyond which a stock is not expected to rise. Meanwhile, the support level is the price beyond which a stock is unlikely to fall. Does a stock show signs of breaking out of these levels? Capitalize on the breakout to book quick profits.
 Gainers and losers: Most brokers will highlight the top gainers and losers of the day. Track the movements of these stocks closely as you decide on your intraday positions.
 Monitor select stocks: Thousands of stocks are traded on the stock exchange. Day traders cannot possibly keep tabs on them all. That is why most traders focus their attention on a few shortlisted stocks. By researching these stocks thoroughly, the trader can grab profitable opportunities as they arise.

Quick Recap:

o Online trading platform you use for your trading will be a key decision. You need advanced charting & Trading Analytics to automate your trading strategy.
o To succeed as an intraday trader, you need to identify the right stocks to trade. Once you have identified a selection of stocks, you can then monitor and analyze these stocks further.
o Liquid stocks are those that have a large volume trading through the day are important criterion when choosing to trade intraday.
o As intraday trader, you must be able to correctly predict the price movement and to improve chances of success, you can choose stocks that follow indicators closely.
o Trending Stocks could offer lucrative opportunities to day traders, show momentum in one or the other direction, along with good trading volumes.
o The top gainers and losers of the day & track the movements of these stocks closely as you decide on your intraday positions.
o Day traders cannot trade in all the listed stocks therefore always choose select stocks by research to take positions.

Intraday Trading Tips & Strategy

Intraday traders experience higher volatility than long-term investors. However, with the right knowledge, you can make the most of your intraday trading money.
Many seek trading tips for intraday to improve their chances of success. However, we suggest opting for intraday recommendations, not trading tips for intraday. That’s because what you need is a strong intraday trading strategy, not merely tips for intraday trading.
Here are some free intraday trading tips for today for a successful intraday trading tomorrow

1. Choose Liquid Stocks:

As you know by now, intraday trading involves buying and selling a set of shares on the same day before market closing, i.e., squaring off open positions. However, for the ex-change to execute these orders there has to be enough liquidity in the market. Thus the first tip of the free intraday tips for today is to avoid stocks that may not be liquid enough. Otherwise, your squaring off order may not get executed, forcing you to take delivery in-stead.
Further, avoid investing all your trading money in a single stock. Experts recommend di-versifying your intraday positions across a handful of stocks. This can help balance your intraday trade strategy and minimize your risk.

2. Freeze the entry and exit price

Many stock investors and traders suffer from buyer’s misconception. This is when the buyer immediately has a change of mind after purchase. The buyer suddenly feels that the selection was not as good as she/he believed at the time of purchase. As a result, they may take a wrong decision once they have bought a stock. All you need to do to avoid such mistakes is to follow this tip. Decide the entry and exit price before taking a position. This ensures that you have an objective view.

3. Always set a stop-loss level

It is quite possible that the share you chose falls on the day you trade instead of rising. Therefore, it is important that you decide how low the stock can be allowed to fall before you square-off the position. This acts as a safety net and helps minimize your losses. Most experts would suggest this is the most important tip for intraday trading. Research intraday calls, which are buy and sell recommendations, and set a stop-loss level.

4. Book profit when the target is reached

The secret to successful intraday trading lies in the high leverage and margins that traders enjoy. Leverage and margins help amplify profits (as well as losses). But the trick lies in not getting greedy once that target is reached. Avoid falling into the trap, where you hope that the price will keep rising (or falling, if you short-sell). But, if there is good reason to believe that the price is likely to move in the right direction, then adjust the stop-loss accordingly. Looking around for intraday calls can be a good option before you decide to adjust the stop-loss.

5. Always close all your open positions

Another tip for today is to always close all your open positions. Many intraday traders choose to take delivery of the shares if the stock price target they set at the start of the day isn’t met. This may not be a good strategy. After all, the stocks were bought for intraday trading basis market trends and technical analysis of the stock movements. They may not be good enough for a long-term investment. So before converting to delivery look at the intraday calls and the fundamental strength of the stock.

6. Do not challenge the market

It is near impossible to predict market movements. Often, you may find that all the factors indicate towards a bullish market. Looking at these, you may expect your target stock to rise. But, the market decides to disagree and the stock price does not rise. Bottom line: Do not get married to your analysis. If the market is not supporting a stock, sell it as soon as it hits your stop-loss level. Holding on it in the hopes that the market will see sense can increase your losses. Once again, an intraday trader cannot afford to think like an investor.

7. Research your target companies thoroughly

Once you have identified a set of stocks by going through professional intraday calls, make sure to research them thoroughly. Find out when any corporate events are scheduled for. These include acquisitions, mergers, bonus issues, stock splits, and dividend payments among others. These could turn out to be as important as being up-to-date with the technical levels

8. Timing is crucial

One of the best intraday trading tips is not to take a position within the first hour of trading for the day. This is because volatility tends to be high at this hour. Many experts prefer taking an intraday position between noon and 1pm.

9. Choose the right platform

Choose the right trading platform. Intraday traders make frequent transactions and accrue small gains daily. As such, it is important for you to choose the right platform, one that allows for quick decision-making, execution, and charges minimal brokerage. At AZEE Securities, you can opt for State of the trading platform and enjoy intraday trades across sectors.

10. Intraday trading rules

Successful intraday trading is to follow intraday trading rules. Market experts recommend a few basic intraday rules for individuals. For beginners they generally advice new traders to refrain from buying and selling stocks when the market open in the morning. That’s because company stocks are usually volatile in the first hour of the day.
Secondly, experts feel that new traders should invest in small amounts to test the waters. In order to beat the volatility of stock markets, it is also handy to have a predetermined intraday trading strategy and stick to it.

11. Process of choosing stocks for intraday trading

Intraday traders often decide to pick stocks depending on the volume of trading. Generally, it is better to pick stocks when the volume of trading is high. That’s because if the trading volume is high, prices usually move upwards too. Volume is nothing but the number of times a company’s stock is traded at a particular time.
A stock’s resistance level is a handy indicator too. Buying a stock when it breaks its resistance levels and moves upwards is usually a good time to pick stocks.

Following the news is very important for intraday traders. In most cases, company’s stock prices rise on the back of good news. It is also handy to keep a tab on the top gainers and losers of the week. They can tell you how different stocks have been performing over a particular time period.

12. Intraday time analysis

Intraday traders frequently use daily charts to gauge how different stocks are performing on the same day. Daily charts help traders to figure out short-term stock price movements. Some of the popular daily charts used by traders include the hourly charts, 15-minute charts, five-minute charts and two-minute charts. It all depends on what time period the trader wants to analyze.

13. Booking when target price is reached

Intraday traders can usually go two ways: they either fail to close an open position when the target is unmet or they refuse to book their profits once the target is reached. However, both the strategies are fraught with risks. It is important to close your open positions before the end of the day.
However, if a trader feels that a particular stock price has potential to increase further, it is important to readjust the stop-loss option and reduce the risk factor to a certain extent.

14. Make profit through intraday trading

The Relative Strength Index (RSI) is another tool that can help evaluate which way the stock prices can move. If the RSI of a stock is above 30, it sets off a potential ‘buy’ signal as it suggests that the stock is undersold. If it is above 70, it indicates that a stock has been overbought and sets off a potential ‘sell’ signal.
Another intraday trading strategy is to look for stocks that are not in the spotlight. That’s because the price of the stock would reduce when the demand is lower. Intraday traders should go through historical data and research reports to gauge the demand for a particular stock. If you find that the demand is high, stock prices would be higher in most cases. This is when you can choose to refrain from buying that stock.

Intraday Trading Indicator & Strategies

Intraday trading decisions are usually made based on price movements. But not all traders may be equally adept at reading and interpreting these movements. This is why many intraday traders depend on some indicators to help them arrive at the right decisions.
That said remember intraday trading requires precise timing of sell/buy decisions to be profitable. As such, using too many indicators can be counter productive too as they can slow down your decision-making. Plus, many indicators present the same information with a slight variation. This makes some of the indicators redundant.

Types of Trading Indicators:

Broadly speaking, intraday trading indicators come in 6 flavours. Experts recommend following one indicator of each type for most decision-making. However, you can follow more indicators as per your convenience. These flavours are:
• Oscillators: This is a group of indicators that move up and down between an upper and lower bound. Examples of this type of indicator include: Relative Strength Indicator (RSI), Commodity Channel Index (CCI), Stochastics, and Moving Averages Convergence Divergence (MACD).
• Volume: This flavour of indicators mainly relies on trade volumes. They also combine this volume data with price data. This helps indicate the strength of a trend. Such indicators are Chalking Money Flow and On Balance Volume (OBV) among others.
• Overlays: These are indicators that are overlaid directly on the price movement and are not shown separately. These serve a variety of purpose and some traders may use multiple overlays as well. Popular examples of this type of indicators include: Bollinger Bands, Parabolic SAR, Keltner Channels, Moving Averages, and Fibonacci Extensions and Retracements.
• Breadth Indicators: These indicators show how the stock market at large is behaving. They do not directly show how a stock being monitored behaves. Examples include Trin, Ticks, Tiki and the Advance-Decline Line.
• Trend: Trend indicators help to capture gains from an asset’s momentum in a given direction. These highlight the direction in which the market is moving. They also offer hints on the strength and likely continuation of a trend. Moving Averages, RSI, and OBV are examples of trend indicators.
• Volatility: These indicators show the extent of price change over a given period. When volatility is high, price swings are expected. When volatility is low, price fluctuations are more subtle. Depending on the market condition, one could use indicators like Average True Range and Bollinger Bands.

Useful Indicators for Intraday Trading Beginner

Now that you have a basic understanding of the broad types of indicators, here’s a list of indicators that are likely to be useful for a beginner intraday trader

1. Moving Average: A Moving Average (MA) is a line showing the average closing price of a stock for a given period. As the price movements have volatility, it may not always be clear if the price movement has any long-term trend. MA isolates this trend by showing the average closing price over a period. A short-term average higher than the long-term average usually indicates that the market is bullish about the stock under consideration.

2. Bollinger Band: This is a band that shows how the price deviates on average from the moving average over a period. Traders believe that the stock price is likely to trade within this band. So if a stock is trading under the Bollinger band, traders expect it to rise and vice versa.

3. Momentum Oscillator: This indicator shows how strong the demand for a share is at a given price point. For example, if the share price is rising and approaching the weekly high, but the momentum oscillator is falling, a trader infers this to indicate that the price will soon turn as the demand for the share is falling. On the other hand, a rising momentum oscillator shows that the trend is strong and is likely to continue to hold.

4. Relative Strength Indicator: RSI is one of the most popular oscillators. It tracks the last 14 periods by default and shows the strength of a price. It does so using an index that ranges between 0 and 100. If the RSI is at 70 or above, it could indicate that market is overbought. This means a price fall or a correction is due. On the other hand, if the RSI is below 30, it could indicate that the market is oversold. Traders then expect the price to start rising soon.

5. Commodity Channel Index: CCI measures the difference between the current market price of an asset and its historical average. A CCI above zero indicates the price is above the historic average. If it is below zero, the price is below the historical average. CCI can rise or fall indefinitely. So, it is used to assess if an asset has been overbought or oversold. Traders check this for individual assets by studying the historical extreme CCI readings at which a price reversal occurred

Introduction to Fundametal Analysis

Although the high return potential of equity markets attract many investors, few are prepared for the massive losses that investing in wrong stocks can bring. It is, therefore, critical to understand the companies one invests in before investing in them. One method of equity analysis that is often used is called Fundamental analysis.

Fundamental Analysis:

Fundamental analysis is a technique that is used to determine the value of an asset. It focuses on the many underlying factors that affect the company’s future aspects and its actual business. Fundamental stock analysis helps you analyze the economic and financial well-being of an entity. It helps you determine if the price of a stock is in tune with the actual value of the stock. The price, you see, is what you pay, while the value is what you get. Fundamental analysis is distinct from the other branch of equity analysis called technical analysis. There, not much attention is paid to the financial performance of the company. Investment decisions are taken based on patterns of the company’s historical share price.

Types of Fundamental Analysis:

Fundamental analysis is of two types qualitative and quantitative. In the first, you try to assess the key, quantifiable aspects of the performance of a company. In the second, you seek to develop an understanding of the important aspects that cannot be explained in numbers. Here’s a look at these two concepts:

a. Qualitative Analysis:

Qualitative analysis is not formula driven. Quality is something subjective. It has to be judged individually by each investor. Some of the answers investors seek when conducting quantitative analysis relate to a company’s industry structure, quality of management, incomes and expenses, corporate governance and assets and liabilities. Some of these have been listed below as following.
• Nature of Business
• Corporate Governance
• Quality of Earnings
• Nature of Assets & Liabilities

b. Quantitative Analysis:

This is the aspect of fundamental analysis that allows you to understand the financial performance of a company through few numerical values. You then compare them with performance data of other, similar companies as well as historical performance of the same company. This helps you ascertain how a company is performing relative to its peers and its own prior performance, in previous years.
Quantitative analysis is generally conducted using financial ratios or earnings projections. Data for such analysis are taken from the income statement and the balance sheet – the two basic financial statements of the company. A third important financial statement – the cash flow statement – is also considered

Quick Recap:

o Fundamental analysis is a technique that is used to determine the value of an asset.
o It focuses on the many underlying factors that affect the company’s future aspects and its actual business.
o Fundamental analysis helps you analyze the economic and financial well-being of an entity.
o It helps you determine if the price of a stock is in tune with the actual value of the stock.
o Price is what you pay, while value is what you get.
o Minor price fluctuations in a stock’s price may happen frequently. But a fundamentally strong company with value has a greater potential to deliver good returns in the long run.
o To figure out which company is fundamentally strong, you need fundamental analysis.
o You need not be a professional analyst to get started with fundamental analysis. You only need to learn the right techniques.
o Fundamental analysis helps you make sense of these quantitative and qualitative aspects.
o The historical price and volume movements of a company’s shares can give you a lot of information about how the company may move in the future. The technique that focuses primarily on analyzing the historical trends in the price and the trading volume of the company’s shares is known as technical analysis.
o Unlike reports and financials, technical analysis relies heavily on charts that record and reflect the movements in the price at which a company’s shares have traded in the past, and the volume of shares traded.

How to Perform Fundamental Analysis of a Stock

So far, you’ve seen how to read the financials of a company and the reports available to the public. We tried to understand what fundamental analysis means and how it is different from technical analysis. In this section, we will get down to understanding the essential components of fundamental analysis. We try to assess a company’s future prospects based on a scrutiny of its financial statements. We try to project its future earnings and based on them, estimate its value.
Equity investors, like you, like to invest in companies that they believe will achieve high earnings growth in the future. This is because high growth companies come with a higher future dividend paying potential. This, in turn, invites more investors to buy them. It ultimately leads to an appreciation of the stock price.

Introduction to Stock Valuation:

Now that we have established that the market conditions we operate under are not perfect, it is clear that Stock Analysis can generate superior returns for you compared to the market. Let’s then proceed towards the process of analyzing companies. This portion deals with the approaches to calculating the fair or intrinsic value of a stock.
Fair or intrinsic value of a stock is the price the stock should actually be trading at according to your analysis. You can compare it with its current market price to ascertain whether it is overvalued, undervalued or fairly valued. You would like to buy a stock that is undervalued, because its price should appreciate to your estimate of fair value, earning you a profit in the process. If you own a stock that you think is overvalued, you sell it. As for fairly valued stocks, you’d best leave them alone.
There are three techniques used for the valuation of shares:

• Present Value Models :

Present value models are based on the principal that since shareholders are joint-owners of the company, its future earnings belong to them. The combined value of these earnings, in terms of today’s money, should therefore be the value of these shares.
The value of money changes with time. Rs 100 will not be worth the same in ten years’ time as it is today. Similarly, the value of future income projected for a future period will be different today.
To account for this, future incomes are divided by a specific discount rate to calculate their value as of today. This is known as time value of money.

• Relative Value (Multiplier) Models :

A company can also be valued relative to the value of other, similar companies. In this case, the market price of its rivals is compared with one of their fundamentals, such as sales, book value of equity and net income. The ratio is then applied to the concerned company to estimate its value. The ratios used for this purpose are called price multiples.

• Asset-Based Valuation :

In this model, the value of a company is based on the market value of its assets and liabilities. The market value of liabilities (not including equity) is subtracted from the market value of assets to arrive at the value of equity. For the model to work, most of the assets of the company should be tangible long-term assets. This model is rarely used.
Valuation helps you identify the real intrinsic value of the company. You can then use this information to determine whether the shares of the company are undervalued or overvalued.

Quick Recap

• Fundamental analysis is quite a large concept. It doesn’t just stop with interpreting and analyzing the financial statements of a company.
• Assessing the quality of a stock is only the first step. You need to see what a stock is worth, and how it fits into your portfolio.
• The goal of advanced fundamental analysis is to find out the intrinsic value of a company.
• By finding out the intrinsic value, you can determine the actual worth of a company and make an objective assessment of whether the stock of the said company is overvalued or undervalued.
• There are 3 main phases in performing company’s valuation

Inside Annual Report

When you draw up a quantitative and a qualitative analysis of a company, you have an annual report. The annual report is prepared by the management of the company itself. It is generally very lengthy, and it gets into the details of the multiple facets of a company.
We’ll try to learn how to read an annual report. The format of the annual report of a company varies from one company to the other. But while the order of contents may be different, the core subject matter of the report is usually the same across companies. Not all the information they contain is relevant to equity investors. Some of the relevant information is rather technical can only be broken down by seasoned market players. They are mentioned in the same order as the one you would find them in in an annual report.

Content in Annual Report:

Here’s what comprises an annual report.
• A letter from the chairman on the high points of business in the past year with predictions for the next year.
• The company philosophy – a section that describes the principles and ethics that govern a company's business.
• An extensive report on each section of operations within the company, describing the company's services or the products.
• Financial information that includes the profit and loss (P&L) statements, cash flow statement and a balance sheet. Depending on its income and expenses, the company will either make profits or show losses for the year. The cash flow statement, as the name suggests, reflects where the money came from and how it was utilized. It is an important financial statement as it helps one understand if the company is generating enough money from its operations to fund the costs, or if the company is constantly reliant on external funding like debt or equity. The balance sheet describes assets and liabilities and compares them to the previous year. The footnotes will also give you reveal important information, as they discuss current or pending lawsuits or government regulations that may impact the company operations.
• An auditor's letter in the annual report confirms that the information provided in the report is accurate and has been certified by independent accountants.
• The annual report also includes a section called management’s commentary. In this section, the management explains how the balance sheet and income statements have been prepared, where the funds have come from, and how they have been utilized. This is also an important section as it reflects the management’s mindset and outlook.

Understanding the Financial Statement:

Financial Statements give an account of a company’s performance during a given period. A comparison in this way brings out the strengths and weaknesses of the company and provides insight into its future. This is called financial statement analysis. There are three basic financial statements that can be found in the annual and quarterly reports of a company. They are the Income Statement, Balance Sheet and Cash Flow Statement—the three pillars of financial statement analysis. There is also a section called notes to accounts in every annual report.

Income Statement:

All the incomes and expenses of a company are recorded in the income statements. It is sometimes also called the statement of profit and loss. It starts with the company’s sales revenue for the period and keeps adjusting it for other incomes and expenses that occurred during the period. The resulting figure is the net income/profit for the year.
This is the portion of sales that is left behind after all other incomes have been added to it and all the expanses subtracted from it. It is used to pay dividend to shareholders. Whatever remains of it after the dividend has been paid is called retained earnings. It is reserved for later use in the business.

Cash Flow Statement:

All the expenses and incomes of a company are mentioned in the income statements. However, not all of these are in cash. For example, the income statement reflects the period’s sales revenue as an income but doesn’t say what portion of this was actually earned in cash and what in the form of future receivables. It is important for investors to know this configuration because non-cash figures are either only notional or are promises that cash flows will occur in the future. In both cases, they are less liquid than cash and highly uncertain. The cash flow statement removes this uncertainty by presenting the actual cash inflows and outflows of the business during a period.

Balance Sheets:

The balance sheet talks about the assets and liabilities that a company has at its disposal. Assets and liabilities are divided into fixed and current. Fixed assets and liabilities stay with the company for a long time.
Current assets and liabilities exist only for short while. Current assets include, accounts receivable, inventories, short-term securities and cash, whereas current liabilities include short-term loans and accounts payable.
Some of the assets and liabilities mentioned on the balance sheet are intangible as they do exist but not in tangible form. Another figure mentioned on the balance sheet is equity. This is the value of a business to its owners after all of its obligations have been met. Shareholder’s equity is calculated as the value of a company's assets subtracted from the value of its total liabilities. Shareholders' equity is also calculated by the sum of the amount of capital the owners invested, and the portion of the profits that the company reinvests rather than distributing as dividend.
All listed companies are required to submit the financial reports available in the public domain as per SECP regulations. Annual reports are mailed automatically to all shareholders on record. If you wish to obtain the annual report about a company in which you do not own shares, you can call its public relations (or shareholder relations) department. You may also look at the company website, or search the internet; there are several sources on the internet providing such information on public companies.

Quick Recap:

o The annual report is prepared by the management of the company itself. It gets into the details of the multiple facets of a company.
o In the section about the company, you can typically find a short history of the company along with the highlights of the year gone by.
o The chairman’s statement gives you information on the performance of the company in the past one year.
o Then, there are sections with the details of the board of directors and the management committee.
o Another section highlights the financial as well as non-financial performance metrics.
o The annual report also gives you an overview of the industry that the company operates in, the company’s vision and mission statements, and an outline of the company’s business model.
o In addition to this, there is a section with the report of the board of directors and a section on management discussion and analysis.

Key Ratios and Ratio Analysis

We talk about lot of key ratios and metrics. To enable us to better understand the fundamentals and the financial situation of the company. However, unlike the others, these key ratios serve two purposes.
1. They enable you to determine the value of the stock of a company.
2. They enable you to compare the stock valuation of multiple companies.
These key ratios are also known as ‘Valuation Ratios’ since they help you determine the valuation of a company. These ratios, when used right, can give you some much-needed information on whether the stock of a company is overvalued or undervalued.
Traditionally, many price multiples are used for stock-picking. However, the ones used the most commonly are price-to-earnings (PE) and price-to-book value (PB). Let’s look at these individually.

Price to Earnings (PE):

The P/E ratio is a key part of valuation ratios. It is used to establish a relationship between the current market price of a company’s stock to its earnings per share. The PE ratio is calculated by dividing the market price per share of a company with its earnings per share (EPS). EPS is the proportion of net income that can be theoretically allocated equally to each individual share. It is calculated by dividing net income by the number of shares outstanding. As such, EPS is essentially net income per share. Since current prices are a function of expected future earnings, investors prefer calculating forward PEs.
A high P/E ratio could mean that the company’s stock is overvalued, whereas a low P/E ratio could mean that a company’s stock is undervalued.

Price-to-book value (PB):

Price multiples base to make a meaningful multiple, investors use balance sheet figures as they are more stable and predictable. The figure used most commonly is the book value. As discussed in the section on the balance sheet, book value is the total value of the company’s equity. It includes the face value of its shares, retained earnings, certain reserves and comprehensive incomes that escape the income statement and go directly to the balance sheet. As in the case of EPS, book value too is converted into a per share form by dividing it by the number of outstanding shares. The current share price is then divided by this value to calculate PB. As with PE and all other price multiples, a low value for PB is considered better because it means that the investor is required to pay less per unit book value.

Types of Financial Ratios

• Profitability Ratios: These ratios seek to measure the profitability of a company based on measures like gross profit, operating profit, net profit and return on equity. Higher the profitability ratios of a company, the better it is. Commonly used profitability ratios include:
• Gross profit margin = Gross profit for the period/ sales revenue for the period
• Operating profit margin = Operating profit for the period/ sales revenue for the period
• Net profit margin = Net profit for the period/ sales revenue for the period
• Return on equity (ROE) = Net profit for the period/ average book value of equity*
• Liquidity Ratios: These ratios measure whether the company has enough short-term assets to finance its short term liabilities. Recall the discussion on working capital in the section on the income statement. These ratios seek to measure whether the company’s working capital is positive. A value in excess of one is considered to be good for these ratios. However, a very high value is also not healthy as it indicates overinvestment in working capital. Some popular liquidity ratios are:
• Current ratio = current assets/ current liabilities
• Quick ratio = (cash + short term investments + accounts receivable)/ current liabilities
• Cash ratio = (cash + short term investments)/ current liabilities
• Efficiency (activity) Ratios: These ratios comment upon the efficiency of a company’s operations. Efficiency is estimated by how quickly a company can convert its inventory into sales and use this money to repay its suppliers. This process is called the cash conversion cycle. More quickly a company is able to complete this cycle, more will be the number of cycles it will complete in a year and higher will be its revenue. To ascertain this, efficiency at every stage of the cycle – from inventory to sales, from sales to accounts receivables and from accounts receivable to payment to suppliers is measured.
As mentioned above, efficiency is measured in two ways—the length of each cycle and the number of cycles completed in the year. The ratios that estimate the first are:
• Inventory turnover = COGS/ average inventory*.
• Receivables turnover = sales revenue/ average accounts receivable*.
• Payables turnover: (COGS +opening inventory balance – closing inventory balance)/ average accounts payable*
The other category of efficiency ratios calculate the number of days it takes for each cycle to get completed. They include:
• Days of inventory on hand (DOH) = 365/ inventory turnover ratio.
• Days of sales outstanding (DSO) = 365/ receivables turnover ratio.
• Number of days of payables (DOP): 365/ payables turnover ratio.
• Risk ratios: These ratios assess the proportion of debt in the company’s capital structure and its ability to meet its periodic debt obligations. It is primarily of interest to lenders but also interest shareholders. For shareholders, high debt represents an element of risk. This is because lenders always get paid before shareholders. If the proportion of debt is too high, there are chances that whatever remains of the company’s income after meeting all other expenses will go to lenders and shareholders will get nothing in the way of dividends. Also, if the company has to wind-up, debtors will get all of what remains and nothing will go to the shareholders. Important risk ratios include:
o Debt to total capital = total debt/ (total equity + total debt)
o Debt to equity = total debt/ total equity
o Interest coverage ratio = EBIT/ interest expense for the period
o Fixed cost coverage ratio = (EBIT + periodic lease expenses)/(interest + periodic lease expenses)