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Money Matters

KSE-100 and your money

By Ishrat Hussain
13 January, 2025

KSE-100 has crossed the 100,000 landmark. Many experts are predicting the rising trend to continue in 2025. One stock market expert has recounted a rising trend in account opening at brokerage houses. This reflects our mindset where the rising trend of stock prices motivates small investors.

KSE-100 and your money

KSE-100 has crossed the 100,000 landmark. Many experts are predicting the rising trend to continue in 2025. One stock market expert has recounted a rising trend in account opening at brokerage houses. This reflects our mindset where the rising trend of stock prices motivates small investors.

The primary purpose of the stock market is to provide businesses with a platform to raise capital from investors. The stocks issued are traded in the stock market to provide liquidity to the stockholders. Due to the complicated relationship of the stock price with the macro-economy, performance of the relevant industry, financial condition and performance of the company itself, and simple demand and supply forces to determine prices in the stock exchange on a day-to-day basis, it is very difficult for small investors to identify stocks for investment. However, institutional investors and high net-worth individuals are well placed for the purpose due to the size of their investment and their capability to research to ensure the best deals.

It is, however, a good sign if small investors also enter the stock market. But entering the stock market for the sole reason that KSE-100 is rising, is riskier. Inadequate understanding of the risks involved may result in a loss of their lifetime savings.

In this article, we will discuss three important factors to be considered by small investors prior to making any investment in the Pakistan stock market. In our recipe, it is necessary to plan any investment for at least a five-year period. This is a pre-requisite to avoid losses and maximise returns on their hard-earned savings.

Cash in a bank account is your most important asset. Do not make any decision in haste. Your time spent finding the best stock is well spent. Let me first clarify why I have not stated ‘cash in hand’. Cash in hand is eroded by inflation. Anybody who deposited money in his/her savings account in a bank, earned profit. And here we used ‘savings account’ not ‘current account’ because banks do not pay any profit on current accounts. From a safety perspective, money in a bank account is safe from theft and also from bank failure. In other words, if any bank fails, the State Bank will ensure that your deposit amount of up to Rs1 million is returned to you. So, the safety of your money and adequate return are two purposes for keeping money in a savings account in a bank.

Now if you prefer to invest these balances in the stock market, the first of three factors is how much return you want on your money. But remember: the more return you want, the more risk you have to take. What does ‘risk’ mean here? For example, Zaid withdrew his savings of Rs50,000 from his savings deposit, which was giving him Rs4000 per year (at 8.0 per cent per year); and invested Rs50,000 in X-stock for Rs50 per stock on 1-1-2024 targeting to earn Rs8000 (in the shape of dividend and capital gain) by 31-12-2024 (16 per cent per year). But on 31-12-2024, the assumed price of X-stock declined to Rs48 per stock. And he sold all the stock for Rs48000. As a result, Zaid is left with Rs48000 on 31-12-2024 out of his savings of Rs50,000. However, his total loss is bigger. He lost Rs4000 due to a loss of opportunity to keep his saving of Rs50,000 in a bank deposit. His expected total return of Rs8000 for investment in x-Stock also not materialized. In financial terms, Rs2000 is capital loss, Rs4000 opportunity cost of investing in stock market and Rs8000 is due to zero earning in shape of dividend and capital gain.

You need to verify if the stocks in your portfolio continue to be included in the KSE-100 Index at the time of its revision. In case it has been excluded, it is necessary to review its ‘going concern’ from the directors’ reports published in the annual account of the company

Any stock gives you two types of returns. One is dividend and the other is capital gain. Actually, your investment in any stock makes you a shareholder in that company. As such, you are entitled to profit, which is paid in the shape of a dividend on a periodical basis. Capital gain or loss is a difference between your purchase price and the sale price of the same stock.

Do you know the twist in the above example? The calculation is done on a one-year basis! Even the selection of a very good stock may return such results if the investment horizon is not long term. So, an investment horizon of five years is crucial before any investment in the stock market by small investors. And even the selection of not-very-good stock may give you a windfall capital gain in the long term.

Now it is easy to plan the total required return on your investment in stock for the next five-year period. But first, evaluate how much your bank is paying on your savings account. This is not difficult, because the State Bank has already asked banks to pay at least 50 basis points below the policy rate. If the policy rate is 13 per cent, then banks are liable to pay 12.5 per cent annually on savings deposits.

To check which stocks can pay the required rate of return, you may refer to the dividend pay-out and price history of stocks included in the KSE-100 Index. This comparison will enable you to shortlist a set of stocks to be purchased.

You may check the current stock prices of the selected stocks and compare them with their price-to-book-to-book value and price-to-earnings ratio. Any stocks being traded at a price which is below their book value and price-to-earnings ratio of the three are the best stocks for investment for the next five-year period. The degree of their appropriateness, however, varies with levels of price-to-book value and price-to-earnings ratios. In case you do not find any stock meeting the criteria, it is good to wait for the best situation. If you prefer a riskier approach, you may relax this condition to acceptable levels.

Diversification is the third important objective while selecting stocks to purchase. Selecting stocks from different industries achieves the objective of diversification -- no matter how much your stock investment is. This reduces the downside risk in the stock market.

Our condition of a five-year investment horizon for small investors requires an evaluation of the ‘going concern’ of the companies whose stocks have been purchased. You need to verify if the stocks in your portfolio continue to be included in the KSE-100 Index at the time of its revision. In case it has been excluded, it is necessary to review its ‘going concern’ from the director reports published in the annual account of the company.

Following this recipe by the small investors will ensure sustainable and handsome returns on their hard-earned savings. Making a small investment every year for a five-year period will create a handsome periodical dividend and capital gain after the five-year period.


The writer is a freelance contributor. He can be reached at: ishrat.hussain@gmail.com