Definition of a stock exchange
A stock exchange provides a liquid, open market for buying selling shares, debentures and warrants of publicly owned companies. The Colombo Stock Exchange (CSE) was established under the companies act No.17 of 1982 and licensed by the Securities and Exchange Commission of
What is a share?
A share represents your ownership in a company. As a part owner you are investing in the future growth of the company.
Distribution by the Company (Bonus Issues)
The company will offer a specified number of free shares to existing share holders at a ratio decided by the Directors of the Company
Liquidity
Shares quoted on a stock market are generally liquid, therefore they can be easily sold and converted to cash
Higher Returns
With very low interest rates offered by most commercial banks in SL, the stock market is seen as a very attractive source for investment which offers investors higher returns specially medium to long term
Collateral
Most banks accept share portfolios as a guarantee against loan facilities
How to get started
To start investing in the stock market you must first open a Central Depository System (CDS) Account thru your Trading company. Opening a CDS account is done free of charge. Once the account is opened you could start trading in the Primary or Secondary markets
Primary Market
In the primary market shares could be subscribed directly from the issuer (Company), who extends an invitation to the public by publishing a document known as the “Offer Document” or the “Prospectus”
Secondary Market
A market in which an investor could either buy or sell shares from or to another investor, subsequent to the original issuance in the primary market.
Is investing in the stock market risky?
There is an element of risk. However you can minimize and manage risk through diversifying strategy
1.Your portfolio can be a mix of equity and debt instruments (i.e. in shares and government corporate debt instruments
2.In the share market you can invest in several sectors. Thereby in an instance when one sector underperform and another very well, you can offset your losses in one sector from the gains you made in the other
3.Within a sector you can invest in several companies. thereby if one company does not do well, your entire investment returns do not suffer as other companies in that sector may perform well
Types of Securities (Shares) Traded at the CSE
1. Ordinary Share (N)
2. Non-Voting Shares (X)
3. Preference Shares (P)
4. Warrants (W)
Benefits of investing in Equity
Capital Gains
This is where the selling price of the share exceeds the purchase price. Capital gains are free of Tax
Dividends
This is when a company decides to payout a portion of its earnings to the shareholders. Some companies declare interim dividends during the company’s financial year
Rights Issue
This is where the company extends an invitation to existing shareholders to purchase the respective company’s shares at specified and discounted rate. This offer is usually in proportion to the number of shares already owned by the investor
