It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have got it, it requires ten times as much wit to keep it’ Nathan Mayer Rothschild.

Financially strangled, uncertain future, and hopelessness. These words best describe the struggling class of Pakistan. Savings only in the form of real estate, gold, and foreign currencies make sense to Pakistanis.

According to a recent 2023 Gallup survey, 61 per cent of Americans own stocks (directly or through mutual funds). Meanwhile, the International Organisation of Scientific Research Journal of Business Management found that only 0.14pc of Pakistan’s population holds a capital markets account, highlighting a stark lack of widespread financial engagement. Mass public involvement in capital markets breaks monopolies and boosts the country’s future financial prospects.

False perceptions of the stock market are pervasive. A prevalent public opinion is that the stock market is akin to a casino. The positive outcomes of your investment are based on whether it’s your lucky day. Also, you never know how the share prices will fluctuate. Is it sane to have this opinion? I dare to disagree. Sometimes, it’s just complex to predict the future price of the shares, but it’s black and white. You just need to comprehend the holistic view and make the right calls at the right time.

Overcoming false perceptions regarding the PSX can help investors make informed decisions and achieve financial growth

In Pakistan, people choose gold, real estate and foreign currencies because it’s two plus two. Another important similarity between these three is they are tangible, and stocks are virtual. This stark distinction unfolds the pattern of the investor’s approach. The tangibility bias in investment affects judgments of risk.

According to Theodore Noseworthy, Professor of Marketing and Canada Research Chair in Entrepreneurial Innovation and the Public Good at Schulich, “Tangibility signals low risk because it’s associated with a sense of permanence.” It also provides an objective sense of ownership to the investor.

So, don’t Americans have this tangibility bias as they actively invest in stocks? A good answer might be “They made a significant leap in investing psychology.” How did they make such an advancement? The human brain can change only when it is open to learning new things and adapting to them practically. Financial literacy is the first step in bringing this change.

People believe that investing in stocks is arduous. Only financial experts can take on this Herculean task. This is also nothing but an overstatement. The financial ratios they calculate are now freely accessible on many websites/apps. It’s the interpretation of these ratios that decide where and when to invest.

Before making any decisions, consider factors such as macroeconomics, company management, future prospects, etc., in addition to financial ratio analysis. Other than those who invest in gold, real estate, or foreign currencies, there exist people who keep money in their cupboards, similar to ancient times when people used to conceal treasures.

One reason people choose gold, real estate and foreign currencies over stocks is that the former are tangible and thus affect investors’ judgements of risk

The concept of ‘time value of money’ is crucial for these people to understand. The currency loses value over time. What you could buy with Rs5 in the 1970s might only make you laugh in 2023. The same is the case with other strong currencies, such as the dollar. Investing is the best option to uphold the real value of your money.

The ambiguity regarding religious validation also hinders potential investors from participating in the Pakistan Stock Exchange. As a Muslim-majority country, the public is often confused about whether it’s prohibited to invest in stocks in Islam. It is entirely allowed to invest in stocks as you are getting into a partnership.

However, you just need to be cautious about the companies whose business is prohibited by religion. For instance, a liquor business.

Besides these misconceptions, one should set one’s financial goals for investing. What they plan to get out of it. Are you saving for a trip or for sending your children abroad for higher education? Or do you have after-retirement plans? We should be clear with our ‘why’ before investing.

For instance, the pension received by government employees post-retirement is essentially the sum deducted from their own salaries, which pension funds invested. Then why not invest your own money yourself?

To sum up, overcoming false perceptions regarding the stock market can help make informed investment decisions and financial growth. You don’t need to be a financial expert to invest in stocks; you can do wonders if you’re good with two plus two.

The writer is a business graduate and an investor at the Pakistan Stock Exchange

Published in Dawn, The Business and Finance Weekly, January 15th, 2024