salam sis ...thanks for ur post...
well... ui asked a very good questions....it the most complex area of finance.. the valuation of stocks i mean shares..
li will try to use simple terms.....
stock market is a secondary market for share or stocks of the companies in the exchange.. like karachi stock exchange...
by seconday market i mean... market where general investors.. general public buy and sell shares which have been issued by the companies....
when a person buys a share of any company.. he will be share holder of the company.. tht means he is entitle to receive..a share in the profit of the company called dividends.. and his liability is limited..
this word of 'limited' u guys often see with the names of the company... it mean the liabilities are limited for shareholders.. which again means...
in case of loss or bankruptcy of the company.... the loss of the shareholders is limited to the amount invested in the company.. meaning that
.. kasay shome looga nahit ke company kottitag biya paisa bedeye...
earlier i said shareholders recieve profit share from the company if it makes any profit and management decides to give any dividend..... tht means the investors to get share of profit is also dependent on the management decision of dividend...investors automatically will not get the dividends...
there is another thing which attracts the investors to invest the share market called capital gains... which results from any positive change in the price of shares...
in simple terms.. if someone buys a share for 100 ruppees today and tomorow the price of tht particular share increases to 150 then he can sell the share and have the 50 dollar gain ...well this can also be a 50 ruppes loss in case the price goes down to 50 next day....
if dividend and capital gains are the two expected cashflows of investement in shares .. here we can develop a simple price model....
price of stock= cash flows( dividend+ expected future price)/ time value of money
sis is the basic formula for the calculating the share price ....
this simple model itsefl includes many factors which can be expanded to complex models... they r simpley mind bogglings.. i m really sick of them....
forget them.. lets talk abt the karachi stock market....
it is shallow market.. tht mean few ppl can influence it.... market expectations play a major role rather the supply and demand fundamentals and limited scrips are stocks contribute 90% of the activity in the market....like PSO,, shell major banks and nishat mills etc
if a small investor wanted to invest in the market.. i guess it is long term investment... buy good shares and sleep over it ....
there is no qucik bucks.. if u do short term trading.. i guess 80% chances u will lose money....
in most of the advance countries... mutual funds.. cater the investment needs of the small investors.. they pool the small investors money and invest in stock markets.. since they are the expert of market and they can diversify their portflolio therefore tht chance of making good returns are higher for them....
we have two funds in pakistan....ICP and NIT .... well i m not sure abt their success but i guess NIT is good
baaz likith...
plz feel free to ask questions ..... and ur suggestiions too mates
regards
