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Brief intro to Colombo Stock Market

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 Colombo Stock Exchange (CSE) is the organization responsible for the operation of the stock market in Sri Lanka.

The CSE is a company limited by guarantee, licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to operate as a stock exchange in Sri Lanka. The CSE currently has a membership of 21 Stockbroker firms licensed by the SEC to trade in debt and equity. The Stockbroker firms act as market intermediaries performing a number of services to investors and companies.

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 Ordinary shares to the market and an investor purchases 1,000 shares, then we can say that the investor owns 1% of the said company.

As an investor of a company, you have the right to receive the annual report of the said company to participate at Annual General Meetings, as well as other benefits offered to shareholders such as dividends (if declared by the company) for profits the company has made.

There are currently 231 companies listed on the CSE, across 20 business sectors.

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 can obtain funding through a new share issue, i.e. through 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.

To decide if an investment is promising, you should read the Prospectus carefully and if necessary, consult an expert for advice. Next 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. It is advisable to request that the shares be directly deposited into your account in the Central Depository System (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 safest way to keep custody of the securities 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, subsequent to the original issuance in the primary market, is known as the secondary market. The CSE facilitates this 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. The shares will be credited to your account in the Central Depository System (CDS).

How do I open a CDS account? You must complete a CDS account opening form through a Stockbroker. 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.

To open the account you will have to give the broker a photocopy of your National Identity Card (NIC)/passport and a utility bill and make the originals available for inspection. 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 trade by visiting a stockbroker office or the CSE public galleries located in Colombo and branch offices in Kandy, Kurunegala, Negombo and Matara.

Alternatively, you could trade via the internet through stockbroker firms that offer the facility.

 

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