Education Center

Email this page to a friend | Print

Investing

INVESTING IN STOCK

All investors buy stock for the same reason: to make money. But they do their buying differently.

Individual Investors

In Pakistan, the numbers of individuals investing in the stock market has been growing rapidly with the ongoing upsurge in the Karachi Stock Exchange's benchmark index, the KSE100, which has shown tremendous growth since 2001, rising from as low as 1000 to the current 8000 level. Institutional Investors, including mutual funds and pension funds, are also becoming major players in the market. People with money in such funds have indirect stock investments, but no real role in what's bought and sold.

Institutional Investors

An institutional investor is an organization that invests its own assets or those it holds in trust for others. Typical institutional investors are investment companies (including mutual funds), pension systems, insurance companies, universities and banks. NIT, and Government-held corporations such as PIAC, etc. are examples of some of the largest institutional investors in Pakistan. Because they have so much money to invest and are committed to making a profit, institutional investors trade regularly and in enormous volume.

A buy or sell order must be 10,000 shares or more to be considered an institutional trade-a small number for a big mutual fund eager to put its investors' money to work.

Risks In Investing

Investors who buy a stock believe other people will buy as well, and that the share price is going to increase. Investing involves taking risks, but it's not like gambling on horses. A long shot can always win the race even if everyone bets the favorite. In the stock market, the betting itself influences the outcome. If lots of investors bet on PTCL stock, PTCL's price will go up. The stock becomes more valuable because investors want it. The reverse is also true: if investors sell WorldCall stock, it will fall in value. The more it falls, the more investors will sell.

Program Trading

Some of the big investors speed up the process of buying and selling stock by using program trading techniques that involve placing large orders by computer. The programs are sometimes triggered automatically, when prices hit predetermined levels.

Such sudden buying or selling can cause abrupt price changes or even dramatic shifts in the entire market. The NYSE stock market crash of 1987 occurred, at least in part, because of program trading triggered by falling prices. To combat potentially catastrophic program trades in an increasingly electronic market, trading now shuts down in a major sell-off to let things cool down. At the KSE this is done through locks and caps placed when a major price shift is witnessed (usually triggered when prices move 5% either up or down).

Buying Styles

Some individual investors look for quick profits in "hot" stocks. Called day traders or market timers, they buy stocks whose price they expect to rise dramatically in a short time. When the price goes up, they sell and buy something else. Other investors take a longer- term view, preferring to buy and hold a stock - in some cases for years -until it gains substantially in price. Institutional investors, including those using sophisticated analytical computer programs, also have buying styles that help determine how profitable their stocks have been over time and during particular phases of the economic cycle.

Email this page to a friend | Print