01-A Brief Introduction To The Colombo Stock Market

 

A BRIEF INTRODUCTION TO THE COLOMBO STOCK MARKET The Colombo Stock Exchange (CSE) has recently seen a period of rapid growth. The attractive returns that the stock market has offered investor has been the primary reason for this surge in activity. The stock market offers opportunity to diversify risk with the option of investing in equity and/or debt instruments. Different sectors of the economy are represented in the stock market thus providing opportunities for investors to profit by being part of the growth of sectors such as the Banking & Financial sector, land & property, manufacturing, leisure, telecommunication, power & energy etc.  As a result, for readers to have a better understand understand of a Stock Market, and of the Colombo Stock Exchange, the CSE has decided to collaborate with The Daily News News newspaper and include an article on a  weekly basis. The CSE appreciates your ideas and inquiries and would answer your questions through this column. Please write/send us your inquiries and questions to the Business Development Department, at the Colombo Stock Exchange. What is a “Stock Market”?  A stock market is a market where securities such as shares, debentures etc. issued by companies are traded. Companies, which use the mechanism mechanism of the stock stock market to raise debt debt or equity capital, commonly enter the stock market through issuing shares or debentures to the public.  A Stock Exchange provides a liquid, open market for buying and selling of shares, debentures etc. of publicly owned companies. How do you purchase shares? There are two methods to purchase shares 1. From a new issue of shares by a Company (Primary Market), 2. On the Secondary Market through a stock broker. The Primary Market: The primary market is the market for new new share or debenture issue issues. s. In the primary market, the se security curity is purchased directly from the issuer issuer (company). In a primary issue, issue, the company company offering the share/debenture publishes a document known as the the prospectus. It 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 ooff 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 shares or debentures. You can send this form directly to the compan companyy concerned or to a stockbroker with payment for the amount due. However, you should read the prospectus care carefully fully 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). 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. Most Sri Lankan companies depend on Banks to finance their expansions/developments. A company listed on the stock exchange has the added advantage of being able to raise funds at a relatively low price. This is because, funds raised from shareholders can be used for the company’s capital requirements,

Page 1

 

 without the need to make interest payments or dividend for the funds acquired, as when borrowing from other financial organizations. The Secondary Market:  A market in which an investor could either buy or sell shares or debentures of a Company from or to 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. 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. All Stockbrokers have this form readily available. The completed form will be forwarded forwarded to the CDS by th thee Stockbroker and an account will be opened in your name. Joint accounts can can also be operated. operated. There is no 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 make your NIC 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 officers in Kandy, Kurunegala 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. 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 release 100,000 shares to the market and an investor purchases 1,000 shares, then we can say that the Investor owns 1% 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 be nefits 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 236 companies listed on the CSE. The 236 companies have been divided into 20 Business Sectors and the sectors are given below:

Page 2

 

Banking, Finance and Insurance

Footwear and Textiles

Land and Property

Power & Energy

Beverage, Food and Tobacco

Healthcare

Manufacturing

Services

Chemicals and Pharmaceuticals

Hotels and Travels

Motors

Stores and Supplies

Construction and Engineering

Investment Trust

Oil Palms

Telecom

Diversified

Information Technology

Plantations

Trading

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 retail 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 the Rights issues or through the issue of new types of securities. •

•

•

•

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

  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.

What is the Colombo Stock Exchange Exchange CSE)?  CSE)?   The CSE is the organization responsible for the operation of the stock market, and being Sri Lanka’s only stock exchange, the CSE currently has 15 member firms, 5 trading members and one specialized debt trading member. The CSE is a company limited by guarantee established under the Compan Companies ies Act no. 17 of 1982 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 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   Custodian Banks   Fund Managers   SEC   Government •

•

•

•

•

•

The Colombo Stock Exchange is situated at the 4 th floor of the West Block, World Trade Centre at Echelon Square, Colombo 01. It has branches in Matara, Kandy, Kurunegala and Negombo.

Page 3

 

If you have any queries, suggestions or questions you want answered through this column, please forward them to : Daily News Stock Market Column Colombo Stock Exchange 4th Floor, West Block,  World Trade Centre, Echelon ColomboSquare, 01. Telephone: 011-2446581 Fax: 011-2445279.

Page 4