Benefits of investing in Colombo stock market

An investment in the Stock Market provides you different benefits to any other type of investment option.

A Stock Market investment is actually your opportunity to become a shareholder of the companies you invest in.

The return from owning shares in listed companies can be derived in two forms.

(a) Dividends (b) Capital Gains.

What does a dividend mean?

A dividend is a distribution of a part of a company's earnings to its shareholders. In other words, dividends are an investor's share of a company's profits.

However, companies are not required to pay dividends.

When the company earns profits, the board of directors can decide to either retain it to reinvest or to distribute it among its shareholders.

Dividends are the only way for investors to profit from ownership of stock without eliminating their stake in the company.

Ex-Dividend ("XD") To be entitled to a company's dividend, an investor must hold the share on the last market day before the XD date.

This date is announced by the company and it gives the meaning "without dividend".

If shares are purchased while they are ex-dividend, investors have to forego the declared dividend.

What is a Capital Gain?

The sale of a share at a higher level than the initial purchase price is called a capital gain. An unrealized capital gain is an investment that has not been sold yet but would result in a profit if sold.

There are instances where one could also make a capital loss. That is, if the market price were to fall beyond the price you purchased the share at and you sell it at that point, you would stand to make a capital loss. Capital gains are exempt of income taxes.

An example of a capital gain and a dividend If you buy 100 shares in a company at Rs. 50 each on 1st January 2009, your original investment is Rs.5000.

During the year the company declares that it will pay a dividend of Rs. 2 per share for all shareholders, thus for 100 shares you get Rs.200.

On December 31, 2009, assume that the share price has increased to Rs. 58 per share.

Therefore, your shareholding of 100 shares is now worth Rs. 5,800.00 (100 x Rs. 58=Rs. 5,800) giving you a capital gain of Rs. 800 (Rs. 5,800 - Rs. 5,000 = Rs. 800).

Your Total return is: Dividend Rs. 200.00 Capital Gain Rs. 800.00 Rs.1000.00

This works out to a 20% return for the year on your original investment of Rs. 5000.00

Apart from these benefits, shareholders are also entitled to: * participate and vote at annual general meetings and at extraordinary general meetings of the company. * use your shares as collateral against loan facilities to banks * participate in Rights issues and Share Splits declared by the company What is a Rights Issue? A security that gives existing shareholders a right to purchase new shares issued by the company at a predetermined price (usually a discounted price) in proportion to the number of shares already owned by the shareholder.

Rights are issued only for a short period of time, after which they expire.

Usually the announcement of a Rights Issue leads to an increase in the share price thereby giving the shareholder an opportunity to make a capital gain.

However, it is not a requirement for the company to price the rights at a discount.

A shareholder could also exercise the right to sell his 'rights' instead of subscribing for the 'rights'.

Capitalisation of Reserves, this is a declaration of free shares for existing shareholders.

The company does not raise capital from shareholders for these shares but they would transfer funds from their reserves to the equity fund instead.

Example: XYZ Company declares that all shareholders possessing shares of that company will get one free share for every 10 shares they hold.

Thus a person holding 100 shares at that time will hold 110 shares subsequent to the Capitalisation of Reserves.

Share Splits A Company may declare that every existing share will be split into two or more after a certain date.

Example: If a shareholder holds 100 shares and the company announces that each share will be split into two after a certain date, it will become 200 shares after the Share Split.

When I buy Shares will I always gain?

No, you may not.

Any form of investment has its own element of risk, higher the risk the return will be higher too.

Yet all individuals may not be prepared to take the same level of risk.

That is why you should select the kind of investment that best suits your needs in terms of: (1) The return it generates, (2) The risk you would like to take, (3) Liquidity meaning how quickly you want your investment to be converted back to cash.An investment in shares may give you higher returns and offers greater liquidity. After all, managing an investment is about managing the risks in it.

Courtesy CSE