Getting started in shares

Potential investors may often get a bit overwhelmed because for many, the stock market is unfamiliar territory with unfamiliar language. This weekly space is dedicated to shed light on the things you need to consider when investing in shares.

Introduction

A share is simply a part ownership of a company. It represents a unit in the capital of the company. People who own one or more shares in a company are referred to as shareholders. In return for investing in the company, shareholders may receive dividends and other benefits such as the right to vote at general meetings of shareholders.

Companies issue shares to raise money through investors to finance and grow the business. Equity capital represents continuous ownership of the company and, therefore, does not need to be repaid.

Types of shares

A company can issue ordinary shares, non-voting shares and preference shares to name a few. In addition, a company can issue any type of share.

Ordinary shares. Ordinary shares are by far the most common form of equity security. Ordinary shares offer the investor the right to vote at the company's General Meetings and the entitlement to a share of dividends declared. The combination of entitlement to a share of the company's profits and control means that, ordinary shareholders are the owners of a company.

In the event the company is liquidated, shareholders will be settled after all the creditors, depositors and debt holder dues have been settled.

Non-voting ordinary shares. These shares have the same characteristics of ordinary shares, except the right to vote at the company's General Meetings.

Preference shares. These shares guarantee priority in the payment of dividends at a predetermined rate. This means that the preference shareholder has a claim on the company's earnings before an ordinary shareholder. Preference shares do not entitle the holder to any voting.

Share warrants. Listed companies also issue share warrants, which is a certificate giving the right to the holder to buy shares at a stipulated price at a future date. An investor can do buying and selling of warrants in a similar manner to buying and selling of shares.

Corporate debentures. Investing in corporate debentures is similar to lending money to the issuing company for a stipulated time period at a predetermined fixed rate of interest or floating rate of interest.

Unlike in shares, debenture holders are not entitled to a portion of profits made by the issuing company. It is mandatory for the issuing company to pay interest on debentures on each interest payment date to its debenture holders regardless of the profitability of the company. Listed debentures have a maturity period of over two years.

Secured. Debentures that are secured by some specific physical assets of the issuing company.

Unsecured. Debentures that are not secured by some specific physical assets of the issuing company.

Guaranteed. A third party guaranteed debenture where the third party guarantees to pay back the principle amount and the interest to the debenture holder in the case of issuer default.

Convertible. Debentures, which gives the debenture holder, the right to convert his or her debentures into ordinary shares on or before the maturity date.

The Colombo Stock Exchange

The Colombo Stock Exchange (CSE) operates the only stock market in Sri Lanka and is responsible for providing a transparent and regulated environment where companies and investors can come together. The CSE is licensed by the Securities and Exchange Commission of Sri Lanka (SEC) and is a mutual exchange consisting of 15 members and 21 trading members. All members and trading members are licensed by the SEC to operate as stockbrokers.

In the course of its operations, the CSE interacts with many customers and stakeholders which include issuers (such as companies, corporations and unit trusts), commercial banks, investment banks, fund managers, stockbrokers, financial advisors, market data vendors and investors.

What is a Listed Company?

A Listed Company is a company whose securities (shares or debentures) are listed and traded with the approval of the Colombo Stock Exchange.

Listing is open to a corporate body, incorporated in Sri Lanka or a company incorporated outside Sri Lanka, including statutory corporations.