Colombo Stock Market

A brief introduction :

What is a “Stock Market”?

A Stock Market is a place where stocks, bonds, or other securities are bought and sold. The centre at which all these activities take place is known as a stock exchange.

The stock market is a vital part of the market economy. A stock exchange is a corporation or mutual organization which provides trading facilities for stock brokers and traders, to trade shares and other securities.

What is the Colombo Stock Exchange (CSE)?

The CSE is the organization responsible for the operation of the stock market. The CSE is a company limited by guarantee established under the Companies Act and licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to operate as a stock exchange in Sri Lanka and a Not-for-Profit organization. The CSE currently has 15 member firms and six trading members. The Stockbroker firms act as market intermediaries performing a number of services to investors and companies. All member firms are institutions and are subject to the regulations of the SEC, and are required to obtain a license annually.

The CSE has other stakeholders associated with the Secondary Market as stated below:

* Investors

* Listed Companies

* Commercial banks offering custody services

* Fund Managers

* SEC

* Government

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. Here is an example of how buying shares work.

If a company releases 100,000 shares to the market and an investor purchases 1,000 shares, then we can say that the Investor owns 1 percent of that said company.

If you are an Investor in a certain company, then you have the right to receive the annual report of the company you have invested in, as well as other benefits offered to shareholders such as dividends (if declared by the company) for profits the company has made and participation in Annual General Meetings.

What is a “Listed Company”?

A listed company is a public company which has listed its shares or debentures for trading on CSE. Listing is open to a corporate body, incorporated in Sri Lanka under the Companies Act No. 7 of 2007. There are currently 232 companies listed on he CSE, across 20 business sectors.

What does a company gain by Listing on the Stock Exchange?

A listing on a Stock Exchange offers several benefits for companies.

* Raising capital - The Stock Exchange provides access to a global pool of institutional and individual investors. A listing on the exchange allows a company to raise capital and use it to fund investment and growth. Even after a company is listed, it can raise capital from the market, through a Rights issues or through the issue of other securities.

* Price Discovery - A listing enables companies to discover a price for their shares.

* Low cost capital - The chief advantage of raising capital from the market is that it avoids some of the intermediation costs evident in the alternative forms of capital raising. Hence, the market provides companies with capital at a lower cost.

* Value addition - A listing on a stock exchange can add value to a company. A listing can enhance a company’s corporate stature and could advance brand awareness of company products.

Furthermore, the enhanced profile, coupled with the greater transparency, could enhance the company’s ability to borrow from traditional sources of capital. A listing can also be expected to add value to a company’s Employee Share Ownership Scheme.

How do you purchase shares?

A market can be split into two main sections: the primary and secondary market.

- the primary market is where new issues are first offered

- any subsequent trading goes on in the secondary market

The Primary Market:

The primary market is the market for new share or debenture issues and deals with the issuance of new securities.

Companies, governments or public sector institutions can obtain funding through a new share issue. The issue is an initial public offering (IPO). In the primary market, the security is purchased directly from the issuer (company).

In a primary issue, the company offering the share/debenture publishes a prospectus, which is an invitation to the general public to buy shares or debentures of that company and includes the details of the offer, the business activities of the company, its financial standing and future plans, its directors and management and for what purpose the company is raising this capital.

If you decide that a particular issue is a promising investment, you need to fill up the application form for the purchase of shares or debentures.

You can send this form directly to the company concerned or to a stockbroker with payment for the amount due. However, you should read the prospectus carefully to see whether the investment will give the returns you desire.

If necessary, consult an expert for advice. It is advisable to request that the shares be directly deposited into your account in the Central Depository Systems (CDS) of the CSE. You may do so by filling your CDS account number on the application form.

This will save you time and worry when you want to dispose of your shares and will be the best and safest way to keep custody of the shares or debentures you purchase. No fee is charged for opening a CDS account.

The Secondary Market:

A market in which an investor could trade (either buy or sell) shares or debentures of a Company with another investor, subsequent to the original issuance in the primary market, is known as the secondary market. The Colombo Stock Exchange (CSE) facilitates the function of the secondary market in Sri Lanka.

A newly issued IPO will be considered a primary market trade when the shares are first purchased by investors directly from the issue; any shares traded subsequently will be on the secondary market, between investors themselves.

In the primary market prices are often set beforehand, whereas in the secondary market only forces of supply and demand determine the price of the security.

How do I buy Shares on the Secondary Market ?

You must instruct your Stockbroker to buy shares for you. You must clearly provide him with the following particulars.

a) The names of the company you want to invest in

b) The amount of shares you desire to purchase

c) The price you are prepared to pay

When you give these instructions to your Stockbroker, he will take the necessary action to buy you those shares. Afterwards, the shares will be credited into your account in the Central Depository Systems (CDS).

How do I open a CDS account?

You must complete an account opening form of the CDS through a Stockbroker. All Stockbrokers have this form readily available.

The completed form will be forwarded to the CDS by the Stockbroker and an account will be opened in your name.

Joint accounts can also be operated. There is no payment involved to open a CDS account. To open the account you will have to give the broker a photocopy of your National Identity Card (NIC) and a utility bill and make your NIC as well as your bill, available for inspection.

The passport is also an acceptable document of identification. Trading on the stock market takes place from Monday to Friday from 9.30 a.m. to 2.30 p.m. except on Public holidays.

You could place your orders by visiting any one of the stockbroker offices or the CSE public galleries located in Colombo and other branch offices in Kandy, Kurunegala, Negombo and Matara. Alternatively, you could trade via the Internet through stockbroking firms that offer the Internet Trading facility. To use such facilities and to trade on the CSE, you should be over 18 years of age.

Courtesy: CSE