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| Sunday, 13 February 2005 |
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Junior Observer |  |
| News Business Features Editorial
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Where people buy and sell shares
Every country has a stock market which is in the news, every day.You hear about it mostly when it reaches a new high or a new low. Stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do we need a stock market? Where does the stock come from to begin with, and why do peole want to buy and sell it? Here are the answers to the numerous questions you may have had about the stock market. In simple words, the stock market is known as the system for buying and selling units of ownership (called shares or stock) in a corporation or mutual fund. Now you will wonder what is meant by a share. A share is a given amount of money you deposit with a credit union to become a member. A share entitles you to certain ownership rights (such as the right to vote for members of the board of directors). A share has a stated value and pays dividends to its owners. Let's take a simple example, if you are a private citizen who owns a restaurant, and wants to sell your restaurant stock to other private citizens in the community, you might do the whole transaction by word-of-mouth, or by placing an advertisement in the newspaper. This makes selling the stock easy for you. However, it creates a problem down the line for investors who want to sell their stock in the restaurant. The seller has to go out and find a buyer, which can be hard. A "stock market" solves this problem. Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The Colombo Stock Exchange (CSE), Bombay Stock Exchange and New York Stock Exchange (NYSE) are a few such examples. In your neighbourhood, you have a "supermarket" that sells food. The reason you go to the supermarket is, because you can go to one place and buy all the different types of food that you need, in one stop - it's a lot more convenient than driving around to various outlets such as the beef stall, fish market and vegetable market. The Colombo Stock Exchange (CSE) is a supermarket for stocks. The CSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks go to do their buying and selling. The exchange makes buying and selling easy. You don't have to actually travel to Colombo to visit the Colombo Stock Exchange - you can call a stock broker who does business with the CSE, and he or she will go to the CSE on your behalf to buy or sell your stock. If the exchange did not exist, buying or selling stock would be a lot harder. You would then have to place a classified ad in the newspaper, wait for a call and haggle on a price whenever you wanted to sell stock. With an exchange in place, you can buy and sell shares instantly. The Stock Exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports and lots of other factors. Buyers and sellers take all of these factors into account. The asset value of the company acts as a floor on the share price. The price of a stock also reflects the dividend that the stock pays, the projected earnings of the company in the future and so on. Public company Any business that wants to sell shares of stocks to a number of different people, does so by turning itself into a public company and registering as a listed company at the Colombo Stock Exchange. By definition, a public company has stock that can be bought and sold, and all the owners of the public company hold shares of stock in the public company to represent their ownership. One interesting characteristic of this "virtual person" is that it has an indefinite and potentially infinite life span.There is a whole body of law that controls corporations - these laws are in place to protect the shareholders and the public. These laws control a number of things about how a corporation operates and is organized. For example, every corporation has a board of directors (if all the shares of a corporation are owned by one person, then that one person can decide that there will only be one person on the board of directors, but there is still a board). The shareholders in the company meet every year to vote on the people for the board. The board of directors makes the decisions for the company. It hires the officers, makes the company's decisions and sets the company's policies. The board of directors can be thought of as the brain of the virtual person. **** Colombo Stock Exchange
Share trading in Sri Lanka dates back to 1896 when the Colombo Brokers Association commenced the share trading in Limited Liability Companies which were involved in opening plantations in the country. The establishment of a formal Stock Exchange in 1985 and the incorporation of the Colombo Stock Exchange marked a milestone in the history of share trading in Sri Lanka.The Colombo Stock Exchange (CSE) is a company limited by guarantee, and established under the Companies Act No. 17 of 1982. The CSE took over the stock market in 1985 from the Colombo Share Brokers Association. It currently has a membership of 15 institutions, all of which are licensed to operate as stockbrokers. The CSE operates three main systems. The Central Depository System, Automated Trading System and Debt Securities. The Exchange is open for business from Monday to Friday and conducts trading from 9.30 am to 12.30 pm. The trading session is divided into three sessions; pre-open, open Auction and regular Trading. ***** Shareholders From the explanation given here, you will know that a corporation has a group of owners - the shareholders. The owners elect a board of directors to make the company's major decisions. By buying shares of stock in the corporation one can become an owner. The board of directors decides how many total shares there will be. For example, a company might have one million shares of stock. The company can either be privately held or publicly held. In a privately held company, the shares of stock are owned by a small number of people who probably all know one another. They buy and sell their shares amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange. In a publicly traded company, all the financial information about the company is public. The Securities and Exchange Commission (SEC) is in charge of collecting this information and making it available to investors. Shareholders also use a number of other indicators to determine how much a stock is worth. |
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Colombo Stock Exchange is the main Sri Lankan stock exchange with 242
listed companies representing over 20 sectors.
