January 2009 - Guide to CSE


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Thursday, January 15, 2009

Guide to Trading on the CSE

8:59 AM 0
Trading on the Stock Market is easy once you've understood the basics. In this tutorial we have provided information on the fundamentals of share trading to help you with those first stock transactions. Select a topic from the list below to get started. If you also want to familiarize yourself with Stock Market jargon then check out our Glossary to start speaking like a pro.

Starting Out
You can't start trading on the Colombo Stock Exchange until you enlist the services of a stockbroker. At present there are 20 brokering firms in Sri Lanka. Be selective when choosing a broker as the services provided by each firm varies.
You may wonder why you need a broker. Your broker is an important player, who will be the intermediary for all your transactions. Investment advisers in brokering firms study market trends and individual companies and are therefore equipped with the knowledge to make stock recommendations. However, do remember that a broker's suggestions are made to the best of his/her abilities based on certain assumptions and you cannot hold a broker responsible for your investment decisions.
Once you have chosen a broker, you then need to open a securities account with the Central Depository Systems (CDS) to commence trading in the share market. Your broker will help you in opening this account.

Buying and Selling Shares
Once you have chosen a broker and opened a CDS account you can start trading. When you buy and sell securities it is essential that you provide very clear instructions to your broker in order that he/she completes an accurate transaction.
You can buy shares from either the primary market or the secondary market. When giving purchase instructions to your broker you should specify the following:
The name of the company in which you wish to buy shares or debentures
The number of shares/debentures you want to purchase
The price you are prepared to pay

Similarly when selling securities, you should indicate the following:
The name of the company whose shares/debentures you wish to sell
The number of shares/debentures you wish to sell
The price at which you wish to make the sale

Completing and Settling a Transaction
Once your transaction (the purchase or sale of shares/debentures) is complete your broker will send you a contract note on the date of the execution.
Payment for share purchases should be made on or before the fifth market day after the transaction has been completed. In some instances, your broker may ask you for an advance payment. If you are selling shares, your broker will pay you by the sixth market day after the date of the sale. In the case of debentures the settlement day for both purchases and sales are the next day.

Monitoring Your Investments
Now that you have built up a portfolio you need to keep track of the performance of your investment. The CSE offers numerous methods of monitoring the movement of your securities. You could stay informed on the status of your investments either in real-time or by obtaining delayed information using any of the following options:
• Subscribe to CSE publications, which include periodic publications of delayed market information.
• Subscribe for the Market Data Services facility to monitor your securities investment portfolio online.
• Access Market Information provided on this site.
• Visit the public gallery of the CSE to watch share transactions.
• View stock movements on computers at the brokering houses.
• Obtain share price information from the daily newspapers.
• Request research reports from your broker.
• Study companies' Annual Reports and quarterly or bi-annual statements.
• Both the All Share Price Index and the Milanka Price Index indicate market trends and changes in investor sentiments.

Benefits of Share Ownership
The advantage of share investments is that there are many avenues through which financial returns can be obtained and we have listed all the benefits for you.

Capital Gains
Capital Gain is the growth in the share price. For example if you buy 100 shares in a company at Rs. 50 on 1 January 2000, and if the share price increases to Rs. 58 on 31st December 2001, your shareholding will now be worth Rs. 5800 (100 x 58), providing you with a capital gain of Rs. 800 (Rs. 5800 - Rs. 5000).

The Company you invested in will pay dividends based on their profits for the year.
Dividends are determined on the par value of the share (in most companies the par value is Rs. 10). For example if you buy 100 shares in a company, and during the year the company decides to pay a dividend of 20%. Therefore, you will receive Rs. 200 for 100 shares (Rs. 10 x 20% = Rs. 2 per share).

Rights Issues
a company may decide to offer additional stock to its shareholders giving them a preferential right to subscribe for the shares. The price of a Rights Issue is generally below the market value of a share. A shareholder can take up the rights or sell his/her rights. Usually the announcement of a Rights Issue increases the share price thereby providing the shareholder with a capital gain.

Bonus Issues
A Company may allot shares free of charge to its shareholders. Bonus Issues are provided when a company has large reserves and wishes to capitalize a part of these reserves. When a Bonus Issue is announced the price of the share usually increases.

Other Benefits
In the long-term, shares usually provide a higher return to investors in comparison to maintaining the investment in a fixed deposit at a bank.
Shares are often a good investment in an inflationary environment as the consequent increase in stock prices negates the effects of inflation.
Shares quoted on the Stock Exchange are also highly liquid, as they can be sold easily.
At present capital gains made when shares are sold are tax-free.

Risks of Share Ownership
As the future is uncertain every type of investment carries with it a degree of risk. The degree of risk differs from investment to investment. An investor cannot afford to look at the rate of return on an investment and ignore the potential of its risk.
Risk involved in investing in the stock market can be classified into two main categories:
• Unsystematic risk, arising from the uncertainty about the longer-term fundamentals, such as the growth and dividend potential of the company that has issued the stock
• Systematic risk, arising from political and economic uncertainty that give rise to market volatility

Cost of Trading Shares
The cost of trading in securities includes brokerage and fees for services. The trading cost varies with the type of instrument traded (debt vs. equity) and the total value of the transaction executed.

Making a Complaint
If you wish to make a complaint, your primary step would be to issue a complaint to the compliance officer of the company you are dealing with. In the instance that your complaint is not dealt with in a satisfactory manner, you can make a complaint to the Manager-Surveillance of the Colombo Stock Exchange using the Contact Us form or via letter/fax/email. You also have the right of appeal to the Securities and Exchange Commission of Sri Lanka. (http://www.sec.gov.lk)

Complaint Form
If you wish to make a complaint kindly fill in the Complaint form which is attached below & send it to the Divisional head mentioned in the form.

Adopted from www.cse.lk
For more info go to, www.cse.lk
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