What is the Stock Market? – A beginner’s Guide

What is the Stock Market

To start with the most basic question: what is the stock market? or what is the share market? In the stock market, companies sell ownership stakes in their company to investors. In this way, they can raise money without borrowing.

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From your first job out of school, you have probably heard that saving for retirement is important. Stock investing is the most recommended method for doing so.

Seeing market swings in the headlines can make you think investing is risky. Stocks typically outperform bonds and interest-bearing bank accounts over time, despite fluctuations in stock prices from day today. Stocks are an excellent option for people who still have many decades before retirement to invest.

Investing in stocks could be a long-term strategy for managing your financial future. If you are just starting out, investing in the stock market may seem too complex or risky. Taking the time to understand the basics will help you get started.

The possibility of a higher return on your investment and the development of financial discipline are the two top reasons to invest in stocks. Investments in stocks have generated a higher rate of return in the last decade as compared with basic saving instruments like fixed deposits. By regularly investing, you develop a habit of financial discipline that encourages you to save and invest your money.

The following is a brief guide to help you in how to invest in the stock market.

Stock Market in Pakistan

When the Government of Pakistan merged the three major exchange markets of Pakistan into one market in January 2016, the Pakistan Stock Exchange (PSX) was created.

Stock exchanges in Pakistan include the Pakistan Stock Exchange, which has offices in Karachi, Islamabad, and Lahore. By September 8, 2021, PSX was classified as a Frontier Market by MSCI.

Karachi Stock Exchange, Lahore Stock Exchange, and Islamabad Stock Exchange merged on 11 January 2016 to form the Pakistan Stock Exchange. A total of 443 companies were listed on PSX in January 2021 with a market capitalization of PKR 8,736 billion (US$52 billion).

Around 220,000 retail investors and 1,886 foreign institutional investors participate in the exchanges. A total of 400 brokerage houses and 21 asset management companies are members of the PSX. Between 2009 and 2015, the Karachi Stock Exchange, one of PSX’s constituent stock exchanges, delivered an average 26% return per year. A Chinese consortium acquired PSX’s 40% strategic shares in December 2016 for US$85 million.

Tips for Investors

Choose the right investment

It is so much easier said than done to buy the right stock. Stocks that have performed well in the past are easy to see, but it is much more difficult to predict a stock’s performance in the future. The process of analyzing a company and managing the investment is a lot of work if you want to succeed if you are considering investing in individual stocks.

If you’re a beginner, stay away from individual stocks

Most people have heard someone talk about a great stock pick or a big stock win.

The key to consistently making money in individual stocks lies in knowing something that the market hasn’t already factored into its price. Every seller in the market has a buyer who is equally confident of profiting from the sale.

Set a budget for your stock investments

If you need money within five years, at least, you shouldn’t invest in the stock market.

Stocks may rise in the long run, but in the short term there’s just too much uncertainty — a fall of 20% in any given year is not uncommon. The market was plunged by more than 40% in 2020, during the COVID-19 pandemic, and recouped within a few months.

Choosing your stocks

Here are some important concepts to master before you get started with selecting and analyzing stocks:

  1. Make sure your portfolio is diverse.
  2. Don’t invest in companies you don’t understand.
  3. Before you learn how to invest, keep away from stocks with high volatility.
  4. Stay away from penny stocks.
  5. Become familiar with the basic metrics and concepts of stock analysis.

Learn how to diversify your portfolio, which means you should have different kinds of companies in your portfolio. Be careful not to diversify too much, though. Keep it simple — if you’re good at (or comfortable with) evaluating a certain type of stock, there’s nothing wrong with having a large chunk of your portfolio dedicated to one industry.

If you’re just starting out, it may seem like a great idea to buy flashy stocks with high growth (and it is) but we would recommend holding off until you gain more experience. A strong foundation for your portfolio should consist of well-established, rock-solid businesses.

You should become familiar with some of the basic ways to evaluate individual stocks if you intend to invest in them.

Prepare yourself for a downturn

A loss in an investment is the hardest thing for most investors. As a result of the fluctuating stock market, you may suffer losses from time to time. During a panic, you are apt to buy high and sell low, so you must steel yourself to handle these losses.

Your overall return shouldn’t be impacted by any single stock that you own as long as you diversify your portfolio. A stock purchase may not be your best option if that is the case. Index funds fluctuate as well, so you can’t get rid of everyone’s risk, but try to reduce it as much as possible.

It’s important to prepare for unexpected downturns, such as the one that occurred in 2020. To get attractive long-term returns, you have to ride out short-term volatility.

Since stocks do not have principal guarantees, you can lose money when you invest. If you’re looking for a guaranteed return, perhaps a high-yield CD might be better.

Most Active Stocks

Investors can gauge the liquidity of a security, the sentiment of the market about it, and whether a price increase or decrease will last by looking at the most actively traded stocks. Most activities are listed on many financial websites on a daily, monthly, and yearly basis. Volume leaders are the stocks that trade the most shares or have the highest dollar volume of shares traded during the day on the global share market. Public disclosure of new information that affects a stock’s valuation may lead to above-average trading volume. Investors are forced to make a choice between buying or selling the stock, which leads to a heavier trading volume and a strong price trend in the stock.

Some of the best stocks are:

  1. AMC Entertainment (NYSE: AMC)
  2. Apple (NASDAQ: AAPL)
  3. Virgin Galactic (NYSE: SPCE)
  4. Nio (NYSE: NIO)
  5. Ambev S.A. (NYSE: ABEV)
  6. Moderna (NASDAQ: MRNA)
  8. Bank of America (NYSE: BAC)
  9. General Electric (NYSE: GE)
  10. Ford (NYSE: F)

If you are still wondering which share to buy then above all, the best share to buy today would be the Nasdaq.

During the hours before and after the closing of the stock market, investors can trade stocks. This is known as after-hours trading when you can buy or sell stocks after the market has closed. While pre-market trading occurs just before the market opens, after-hours trading occurs after hours. Together, they make up extended-hours trading.

During weekday mornings and evenings, investors can trade stocks, but on weekends trading is not permitted. If it is on an international exchange in that time zone, that is the only exception.

Bottom Line

Investors from all walks of life can invest in the stock market. It is a life skill that must be developed through patience, time, and study, like all good things. Making your money work for you will allow you to achieve your goals and dreams.

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