Professional Documents
Culture Documents
INVESTING IN SHARES
A BASIC GUIDE
If you need any further information to get started, please contact the
Market Development Division of the Colombo Stock Exchange:
Table of Contents
About the Colombo Stock Exchange
03
Primer
07
09
12
15
19
25
Call
Fax
Email
Web
:
:
:
Disclaimer
This booklet has been prepared by the CSE in good faith, solely for educational
purposes. Thus, the information contained herein is general in nature and should
not be treated as legal advice, tax advice, investment advice or recommendations
to buy or sell shares. The reader should seek independent professional advice with
regard to legal, tax and investment matters.
Whilst reasonable efforts have been made to include accurate and up-to-date
information in the booklet, the CSE does not make any warranties or representations regarding the accuracy, adequacy, reliability and completeness of the
information.
Therefore, the CSE and its employees disclaim all liability for any loss suffered
(directly or indirectly) by any person acting in reliance upon the information
contained herein.
Listing Platforms
Equity securities of a public company can be listed on either the Main or Diri Savi Board of the CSE. The Main Board
consists of companies which have a larger capital base while medium to small companies and start-up companies are listed
on the Diri Savi Board.
Price Indices
The CSE calculates two main Price Indices, namely, the All Share Price Index (ASPI) and the Milanka Price Index (MPI). Price
indices are also calculated for each of the 20 business sectors. Total Return Indices (TRI) are calculated to track the market
performance on a Total Returns basis. The TRI exceeds the scope of existing price indices (ASPI, MPI) and incorporates
returns from dividends into its computation. CSE publishes TRI based on the ASPI, MPI and the 20 Sector Price Indices.
Data Dissemination
Live market information is presently being disseminated through stockbrokers, information vendors, CSE branches, print
and electronic media. International financial press such as Reuters, Telekurs and Bloomberg also provide daily online
trading information to investors worldwide.
The CSE website www.cse.lk provides access to a comprehensive array of real time market information, order book
information and includes charts and graphs of market and company performance to help existing and potential investors
make informed investment decisions.
The website is designed to function as the primary communication channel of the CSE and most information on the website
is downloadable in Excel, CSV and XTML formats. The CSE website also facilitates fast access to individual listed company
profiles, as well as links to Online Trading platforms offered by Stockbroker firms.
A dedicated website for the CDS - www.cds.lk is also accessible by the general public.
Market Highlights
New Phase of Growth in 2010
The Sri Lankan equity market moved into a new phase of growth after the end of the three decade long war, in 2009. The CSE
was ranked the second best performing market in the world by Bloomberg that year.
Performance of Indices
(Jan 2008 - March 2012)
Index Values
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
1,000
ASPI
MPI
Performance in 2011
After significant growth in two consecutive years 2009 and 2010, the equity market moved towards a more stable status in
2011.
The benchmark All Share Price Index (ASPI) recorded its highest level on 14th February 2011 and closed the year at 6,074.4
points recording a negative YoY growth of 8.5%. The Milanka Price Index (MPI) which follows the growth of 25 selected
companies, recorded a negative growth of 25.9% during 2011 closing the year at 5,229.2.
The table below shows the records achieved during the years 2011 and 2010 as reflected by the ASPI and MPI and various
indicators of market size, value and volume growth such as market capitalization, turnover and number of transactions
executed.
Records Achieved*
Description
Level Reached
Date
Highest ASPI
7,811.8
Highest MPI
7,829.1
Rs. 570.3 Bn
2010
Rs. 2,396.3 Mn
2010
4.58 Mn
2011
49,921
Rs. 2,600.6 Bn
*Records achieved up to last practicable date to publication of this document which is 30th April 2012
Committed to Growth
The CSEs strong commitment to Sri Lankas development activities has been the basis of its growth and evolvement as a
conduit for resources of savers and investors. As at the date of publication the CSE is home to 279 listed companies.
During the year 2011 the CSE was a significant source of finance for these companies and helped raise a total of approximately
Rs. 47.2 Bn through Initial Public Offerings (IPO) and Rights Issues. Rs.19.2 Bn in the year 2011 is the highest amount raised
through IPOs.
Annual Turnover
Rs. Bn
700
Turnover
570.3
600
546.3
500
400
300
200
105.2
100
105.0
110.5
07
08
142.5
81.7
0
06
09
10
11
12(Q1)
40
33.8%
35
29.8%
30
25
24.6%
22.9%
22.6%
20
15
11.1%
10
5
0
05
06
07
08
09
10
11
Turnover Velocity
Market Capitalization
The listed wealth or Market Capitalization of the CSE stood
at Rs. 2,213.9 Bn as at the end of 2011 reflecting a slight
increase of 0.15% over the previous year. However, in USD
terms, the Market Capitalization of 2011 has recorded a
negative YoY growth of 2.4%.
The preservation of Market Capitalization was a challenge
faced by the exchanges in the world amongst market
downturns. For example among WFE member exchanges,
it was only five exchanges that were able to preserve their
Market Capitalizations even with new listings during 2011.
YoY Market Capitalization as a percentage of GDP which
is an indicator of the relative size of listed wealth of a
country improved from 22.6% in 2009 to 39.5% in 2010
and in 2011 it stood at 33.8%. On 31st March 2012, the
Market Capitalization stood at Rs. 2,012.87 Bn reflecting a
negative 17.0% decrease from 31st March 2011 which was
Rs. 2,425.05 Bn.
Turnover Velocity
%
50
40
34.5%
30
24.7%
20
14.8%
16.9%
18.0%
08
09
12.7%
10
0
06
07
10
11
The CSE aims at taking up this challenge by pursuing improvements in several areas including market development,
infrastructure, regulation and risk management. It is the CSEs aim to enhance competitiveness and visibility of the Sri
Lankan share market by capturing a diverse customer base of which we hope you will be a part.
Primer
Why Shares Specifically?
You may have already heard or read that over a long term, investments in shares outperform most other investments. A
properly managed equity investment portfolio that minimizes manageable risk and maximized returns, will make a good
investment vehicle to surpass inflation which is the common enemy of all the investment vehicles.
Why do companies issue shares? Equity Capital and Debt Capital busineses
Companies issue shares to raise money from investors in order to finance and grow businesses. Such finances can be
borrowed or raised by issuing shares. The company can raise funds by borrowing from a bank or by issuing bonds. These are
classed as debt capital. The money that a company raises by issuing shares to investors is called equity capital.
Unlike debt capital which is borrowed money which needs to be paid back to the party from which it is borrowed, equity
capital represents continuous ownership of the company and therefore does not need to be repaid. By becoming an owner
or shareholder of a company you assume the risk of the company not being successful. Ofcourse it is equally important to
recognise that shareholders earn a lot if a company is successful.
What are listed companies and what does going public mean?
Sometimes a company chooses to raise finances by being listed on a stock exchange and issuing shares to investors. This is
called going public. The process of being listed enables shares of a company to be traded on that countrys stock exchange.
These companies are called listed companies. They need to be in compliance with a particular Exchanges set of listing rules
which may set out requirements such as previous profit records, issued/paid up capital, minimum numbers of shareholders
and various disclosures to be made to the public, in order to be admitted to the official list.
Ordinary Shares
Ordinary shares are by far the most common form of equity security. Ordinary shares offer the investor both the right to vote
at the companys General Meetings and the entitlement to a share of dividends declared. The combination of entitlement to
a share of the companys 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.
Preference Shares
These are shares which guarantee priority in the payment of dividends at a predetermined rate. This means that the
preference shareholder has a claim on the companys earnings before an ordinary shareholder. Preference shares do not
entitle the holder to any voting rights. In the event of liquidation, preference shareholders will have priority settlement over
ordinary shareholders.
Tax Benefits
In Sri Lanka there are no taxes on capital gains arising from shares which are traded on the CSE. No withholding tax or
stamp duties are charged on share trading transactions which are conducted through the ATS.
Please note however that a withholding tax of 10% is charged on dividend income. In addition please note that a 0.3% share
transaction levy is payable on the value of all secondary market transactions conducted through the ATS.
Conservative risk profile: Aims for capital protection - Takes very low risk
Your primary investment objective is to preserve your capital or the principal amount you invested. You want to earn
a predictable flow of income from your assets. This means you find it more reassuring to invest in products with fixed
maturities and predetermined returns. Capital growth or growing your wealth is of secondary importance. You are willing
to take only limited risks with your assets usually over a short term investment horizon.
Defensive or Moderate risk profile: Aims for gradual capital growth - Takes low risk
Your principal investment aim is to gain a relatively stable and regular income. You are willing to take a moderate level of
risk with the assets you invest in. You aim at generating a gradual increase in your wealth in the long term. The defensive
portfolio consists mainly of diversified fixed income securities, with a small portion in shares.
10
11
Income shares
As the name suggests these shares provide steady income streams for investors. These shares historically have paid regular
dividend payments as compared to others. In buying these shares important considerations are, the tax applicable on the
dividend, as well as the cost of the shares in comparison to the net dividend paid.
Value shares
Investors tend to think of value shares as bargains as they appear inexpensive relative to the earning ability of the company
and other fundamental factors. Value shares tend to have low Price to Earning ratios and high Dividend Yields. Long term
investors prefer these shares which they often hold over long time periods, until the true value of the share begins to
emerge in the form of dividends or increasing share price.
Growth shares
Issued by companies that have strong growth potential relative to the general economy and their industries. These shares
may pay low dividends or none at all. Investors of growth shares give up income today (in the form of dividends) for
returns in the future, in the form of growing sales and profits (ie. a rising share price and hence capital gains).
12
Cyclical shares
These shares are issued by companies which are sensitive to business cycles and whose performance is closely tied to
general economic trends. Prices of cyclical shares can be volatile as they follow the market expectation of how the general
economy would perform.
Defensive shares
These are shares that remain stable even under strained economic cycles. Unlike cyclical shares these are not affected
by general economic trends. Companies producing staples such as food and beverages, oil and gas, pharmaceuticals and
insurance are often regarded as defensive shares.
Selecting Shares
With the help of an advisor you can start learning how to identify the above share types. If you want to go at it alone do start
reading up or looking at CSE publications and online education banners on the CSE website. Additionally you can also use
the following to obtain information:
Stockbroker websites and publications
Newspapers and business magazines
Business programmes on TV & Radio
Websites and publications of data vendors such as Reuters, Bloomberg, Telekurs etc.
As you know, companies listed on the CSE are categorised into 20 different sectors. After having identified which type of
share and industry category you would buy into, you can go on to individual share selection.
When considering buying shares in a particular company, you must first do your research on that company. Please talk to
your adviser and/or read comprehensively the research material that can give you a good understanding of the companys
activities and its business situation.
To be wary of !
Speculative Shares
When you are exploring the market and researching for share selection, do be wary of companies which lack financial
strength or track record in earnings and dividends but appear to be focused on delivering growth fast. If a companys
publicized future growth is not supported by its fundamentals, they are high risk investments.
The shares are no longer a good fit for your investment goals and risk tolerance
This might happen because your goals have changed over time. Alternatively your planned goal may have been achieved.
This would mean that you would systematically start selling the shares that were intended to grow to the financial goal
planned.
Sometimes an investor may find that the company invested in does not appeal as a good investment anymore. It may
have changed its business plans and may not look too stable anymore or there is a lot of volatility in its price movement.
This may mean that your investment is no longer within your risk tolerance levels.
Colombo Stock Exchange - Investing in Shares A Basic Guide
13
Tax implications
Consult an expert if the treatment of taxation of capital gains and dividend income of shares changes at any point
and/or you have reason to believe that the after tax returns from your shares may not meet the required target any longer.
Investors may want to sell shares if tax implications disadvantage them in any manner in view of after tax returns earned
relative to other investments.
Reinvestment opportunities
This is when you have identified a company that offers better returns than of the shares you currently hold. You can sell
less advantageous shares. It is important to consider how your new purchase will fit into the rest of your portfolio and
your strategies of investment.
Price movements
If a share price suddenly falls beyond a certain acceptable percentage, some investors consider this a sell point, in order
to eliminate the possibility of further losses. Keep in mind that you may need to have observed the price movements of
a share and have some idea of the shares volatility to see untoward falls in price. Also note that share prices can recover
after falling or vice versa, as you will observe once you have spent some time observing and trading on the market.
Overvalued shares
You may want to sell shares when they are pushed way past their true value. A share is considered overvalued if its current
price is not justified by its earnings outlook and is therefore, expected to drop in price. Overvaluation may result from an
emotional buying spurt, which inflates the stocks market price, or from deterioration in a companys financial strength.
The strategy is to sell when they are over-valued and buy them back after a market correction has dampened the price.
Availability of Shares
Shares become available for purchase by investors as detailed below:
In the primary market from a new issue of shares/Initial Public Offering (IPO)
You can buy new shares that are issued by companies which are raising equity capital through a new issue of shares (an
Initial Public Offering, commonly referred to simply as an IPO). In an IPO, the company first submits details of its business
and the proposed share issue or what is called an initial listing application to the CSE. Subsequently a prospectus which
has been approved by the CSE is lodged with the Registrar of Companies in Sri Lanka by the issuing company. Once the
prospectus is lodged and registered it can then be provided to potential investors for their consideration.
Companies typically use a combination of broking firms, licensed commercial banks and the investment bank which
advises the company on the IPO, to promote the sale of new shares and distribute the prospectus to potential investors.
The CSE website also makes available details on upcoming IPOs and provides links to respective prospectus and
application forms.
To buy shares: If you wish to buy shares in an IPO, you should first review the prospectus carefully. It gives you many
details on the company and its operations, the industry trends, the manner in which the IPO is structured and salient
details of the shares, risks attached, financial statements of the company and other disclosures which are required by law.
You will need to open a CDS account through a stockbroker / custodian bank prior to applying for the IPO.
Once you are comfortable about investing, fill out the application form specifying all requisite details including the number
of shares you wish to buy and send it to the collection points specified in the Prospectus (usually stockbrokers, the companys
main office or branches and/or branches of specified banks), before the application deadline.
To sell shares: once new shares are issued and listed on the CSE, they may trade at a market price substantially different
from the issue price (either higher or lower). This is due to supply and demand for the shares of the company. You will need
to instruct your Stockbroker to sell your shares in the secondary market. See also the sections below titled To trade on the
secondary market and Buying and Selling shares-basic steps.
15
However you must note that different shares have different liquidity levels. Some companies may have very few buyers
and/or sellers on any given trading day. Liquidity is an important consideration as it affects the price you might have to
pay and the ease in which you can sell your investment.
Internet trading
Internet trading facilities are available through select Stockbrokers. Online trading provides individual investors with
around the clock access to the trading system along with market data, company information and educational material.
It simplifies the trading process by empowering investors to secure the decision-making power and trade independently.
Before placing the order to buy or sell shares, ensure that you are able to procure the
following information:
Your CDS account number
If you are buying shares, you should make available cleared funds on or before the 3rd market day after the purchase.
If you are selling shares, you need to be aware that sales proceeds are issued by the Stockbroker as account payee cheques.
However you may also request for a cheque without crossings.
Number of shares: specify the number or, if you are buying, the maximum rupee amount you are willing to allocate
towards the purchase.
Share price: at market order or limit order?
Market orders are buy or sell orders placed at the prevailing market price and are more likely to result in a trade. For limit
orders (where you set a maximum purchase price or a minimum sale price), write down the price for reference. The price
and market depth over the time period that the order is left in the market will affect the likelihood of a trade.
Duration of the order: is your order just for this trading day or, if no trade takes place, do you want your order to remain
in the order book when the market opens the next day or for a further number of days?
Brokerage rate and the total transaction cost for the order.
Buying
If you want to invest in shares of X Company, you need to:
1. Inform your Stockbroker of the name of the company, price and amount of shares you want to purchase.
2. The Stockbroker will try and match your order.
3. Once the order is processed, he will inform you of the shares you were able to purchase at the price you had requested.
Once the buying process is complete, you will:
4. Receive a Bought Note by post.
16
Selling
If you want to divest shares of X Company, you need to:
1. Inform your Stockbroker about your divestment - the name of the company, the price and the amount of shares to be
sold.
2. The Stockbroker will try to match your order.
3. If your order is not matched, he will inform you and negotiate a suitable price. Once the order is matched, it will be
processed.
If the Stockbroker sells your shares, you will:
4. Receive a Sold Note for your transaction.
In the event of any discrepancies and unauthorized transactions in your CDS statement:
Immediately lodge a complaint in writing with the Compliance Officer of your Stockbroker firm.
If the firm fails to respond to your complaint or delay responding to it, you should inform the CSE immediately.
Note that your Bought/Sold Notes will be evidence as to your approved orders against errors/omissions of transactions
made to your CDS account.
17
Important
Ensure you have provided your correct, current postal address to the Stockbroker and the CDS and that you receive all
Bought/Sold Notes and the CDS statement. If you have not received the said documents within 5 working days, please
inform your Stockbroker and make a note of your complaint.
Ensure that you have received and read through your Bought/Sold Notes, and identified dis-similarities when compared
to the notes you manage at home with regard to your transactions on the stock market and/or the CDS account statement
you have received.
Please ensure your complaints are sent to the Compliance Officer of the Stockbroker firm sooner rather than later. You,
as an investor, are responsible for your CDS account transactions. If a transaction has occurred without your permission,
please inform the required authorities immediately.
1.1200%
Brokerage Fees
0.6400%
CSE Fees
0.0840%
CDS Fees
0.0240%
SEC Cess
0.0720%
0.3000%
0.6125%
0.2000%
CSE Fees
0.0525%
CDS Fees
0.0150%
SEC Cess
0.0450%
0.3000%
Pursuant to the implementation of ATS Version 7, wherein the Board Lot size has been changed to one (01) share, the Borad
of Directors of the CSE and the SEC have approved the removal of the Minimum Brokerage Fee of Rs. 10/- and the Minimum
CDS Fee of Rs. 5/- levied on transactions.
Accordingly, the 0.64% Brokerage Fee and the CDS Fee of 0.024% will be applicable for all transactions upto 50 Mn, with
effect from 10th April 2012.
The fee of Rs. 25/- charge from Custodian Banks in respect of Custodian trades has been done away with effect from 19th
March 2012.
18
Your Stockbroker
It is important that you find a Stockbroker that you are happy with in terms of the service that you are receiving. As you
are allowed to open multiple CDS accounts, changing Stockbrokers would entail completing a new form to open a CDS
account with a new Stockbroker.
Important Notes: Change of residency of a CDS Account Holder / opening of accounts for
non-resident Sri Lankans
If an investor requests a change to his/her residential address in the CDS from Sri Lanka to another country, such
investors are required to open a new CDS account to carry out future transactions and all such purchases and sales of
shares should be operated through an SIA. This new CDS account would be classified by the CDS as a Foreign Individual
account (FI).
Securities held by an investor prior to becoming a non-resident should be lodged only into an existing CDS account
opened whilst being a resident of Sri Lanka. If such an investor requires to lodge any security/ies held by him/her prior
to becoming a non-resident in the new FI account, he/she should obtain prior written approval from the Controller of
Exchange and proof of such approval should be forwarded to CDS.
19
Transfer of securities from an existing CDS account to a new FI account opened as a non -resident will only be carried out
upon the investor obtaining Exchange Control Approval. As per the Exchange Control Act, repatriation of sales proceeds
of securities in the existing CDS account is subject to Exchange Control Approval.
It will not be possible to repatriate funds arising out of corporate actions such as Dividends and Capitalisation of
Reserves, applicable to securities held in the resident account unless Exchange Control Approval is obtained.
Any Rights provisionally allotted in respect of shares in a resident account can be purchased only through a SIA and
deposited to the CDS account opened as a non-resident.
Accordingly a CDS account holder wishing to change his/her residential address from Sri
Lanka to another country needs to provide the following information to the CDS in order to
accommodate the change of address:
1. Account opening form duly signed by the account holder.
2. Proof of current residential status.
3. SIA details with documentary proof.
4. Portfolio of shares up to the time of changing the residence.
5. Copy of the passport.
6. Declaration from the account holder on adherence to Exchange Control Regulations (Form 1 C).
20
21
22
23
24
2012 (Q1)
2011
2010
81,709.9
546,255.8
570,326.8
61,434.7
486,959.4
464,733.6
20,275.2
59,296.4
105,593.2
1,361.8
2,285.6
2,396.3
2,577.5
24,543.7
18,489.2
2,350.6
23,151.6
16,684.5
226.9
1,392.1
1,804.7
550,710
4,579,352
3,355,126
532,876
4,463,404
3,225,041
17,834
115,948
130,085
2,012.9
2,213.9
2,210.5
33.8
39.5
24.7
34.5
1.3
19.2
4.3
31
10
20,275.2
59,296.4
105,593.2
30,436.2
49,776.8
92,425.5
10,114.1
68,816.0
118,760.9
20,332.1
(19,039.2)
(26,335.3)
5,420.2
6,074.4
6,635.9
(10.8)**
(8.5)
96.0
4,891.6
5,229.2
7,061.5
(6.5)**
(25.9)
83.4
14.4***
15.8
25.2
1.8***
2.0
3.0
1.9***
1.8
1.2
25
HEALTH CARE
The Lanka Hospitals Corporation PLC
DIVERSIFIED
Aitken Spence PLC
Free Lanka Capital Holdings PLC
John Keells Holdings PLC
Richard Pieris and Company PLC
The Colombo Fort Land and Building Company PLC
Vallibel One PLC
Softlogic Holdings PLC
INVESTMENT TRUSTS
Environmental Resources Investment PLC
MANUFACTURING
Ceylon Grain Elevators PLC
Piramal Glass Ceylon PLC
Royal Ceramics Lanka PLC
TRADING
Brown & Company PLC
26
Notes
27
Notes
28
If you need any further information to get started, please contact the
Market Development Division of the Colombo Stock Exchange:
Table of Contents
About the Colombo Stock Exchange
03
Primer
07
09
12
15
19
25
Call
Fax
Email
Web
:
:
:
Disclaimer
This booklet has been prepared by the CSE in good faith, solely for educational
purposes. Thus, the information contained herein is general in nature and should
not be treated as legal advice, tax advice, investment advice or recommendations
to buy or sell shares. The reader should seek independent professional advice with
regard to legal, tax and investment matters.
Whilst reasonable efforts have been made to include accurate and up-to-date
information in the booklet, the CSE does not make any warranties or representations regarding the accuracy, adequacy, reliability and completeness of the
information.
Therefore, the CSE and its employees disclaim all liability for any loss suffered
(directly or indirectly) by any person acting in reliance upon the information
contained herein.
INVESTING IN SHARES
A BASIC GUIDE