Course title: Investment Analysis & Portfolio

Management
Subject code : FIM 41063
Participants : BBA (Acc/Fin) ; BBA (spl)
Academic year : 2020/2021
Semester :I
Unit name : Introduction to Financial
Market
Handout : 01
Lecturer In-charge : Dr. S. Safeena M.G. Hassan

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 Learning Objectives
Understanding the concept of Market.
Define Financial Market.
Categorize Financial Market and understanding the roles of FM.
Understanding the financial market structure of Sri Lanka.
Understanding the functions of CSE.

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 INTRODUCTION TO MARKET

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 CLASSIFICATION OF FINANCIAL MARKET

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 Financial market provides three important
economic functions (Frank J. Fabozzi, 1999):

1. Financial market determines the prices of assets

traded through the interactions between buyers
and sellers.
2. Financial market provides a liquidity of the
financial assets.
3. Financial market reduces the cost of transactions
by reducing explicit costs, such as money spent
to advertise the desire to buy or to sell a
financial asset.

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 Financial markets could be classified on the bases of those
characteristics:
• Sequence of transactions for selling and buying securities.
• Term of circulation of financial assets traded in the market.
• Economic nature of securities, traded in the market.

 From the perspective of a given country. By sequence of

transactions for selling and buying securities:
• Primary market
• Secondary Market

 All securities are first traded in the primary market, and the
secondary market provides liquidity for these securities.

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The main types of financial investment vehicles are:
• Short term investment vehicle
o Certificates of deposit;
o Treasury bills;
o Commercial paper;
o Bankers’ acceptances;
o Repurchase agreements.

• Fixed-income securities;
o Long-term debt securities
o Preferred stocks.

• Common stock;
• Speculative investment vehicles;
• Other investment tools

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Why should I invest in the Stock Market?
A stock market investment is one of many potential investment vehicles in which
you can invest your disposable income and reap the returns of its growth over a
period of time. Stock prices rise and fall in value daily and investing in stable
stocks would make you a profit at the point of sale. In addition to the capital
gains in stocks you would also receive dividends declared by companies.
However, you must keep in mind that dividend payments are not mandatory and
solely depend on the decision made by the Listed Company.

Other forms of investments, when compared to the stock market, can be

reasonably illiquid, which means they cannot be immediately sold and easily
converted into cash. Investing in stocks therefore gives an investor a considerable
amount of financial control because of their flexibility and liquidity.

Investing a part of your extra money in shares, along with investments in other
asset classes, is also a great way to diversify your investments to reduce and
manage risk

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 THE FINANCIAL SYSTEM IN SRI
LANKA
Financial system, i.e. financial intermediaries and financial markets, channel
funds from those who have savings to those who have more productive uses
for them. The financial system in Sri Lanka comprises the major financial
institutions, namely the Central Bank of Sri Lanka (CBSL), Licensed
Commercial Banks (LCBs), Licensed Specialised Banks (LSBs), Licensed
Finance Companies (LFCs), Specialised Leasing Companies (SLCs), Primary
Dealers (PDs), Pension and Provident Funds, Insurance Companies, Rural
Banks, Stock Brokers, Securities Market Intermediaries, Unit Trusts and Thrift
and Credit Co-operative Societies; the major financial markets, such as the
Foreign Exchange Market, Money Market, Capital Market and the informal
financial market; and the financial infrastructure which is the legal framework
related to the financial system and the payment and settlement.

https://www.cbsl.gov.lk/en/About_the_Financial_System#:~:text=Financial%2
0Markets,-
The%20Financial%20Market&text=The%20main%20issuers%20in%20the,an
d%20pension%20and%20provident%20funds.

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 COLOMBO STOCK EXCHANGE
The Colombo stock exchange (CSE) operates as the only share market in the economy and
is responsible for providing a transparent and regulated environment where both
institutional and individual investors can operate in the capital market.

The Colombo Stock Exchange (CSE) has 289 companies representing 19 GICS industry
groups as at 31st March 2023, with a Market Capitalization of Rs. 3,903.53 Bn.

Public Companies incorporated under the Companies Act No.7 of 2007 or any other
statutory corporation, incorporated or established under the laws of Sri Lanka or established
under the laws of any other state (subject to Exchange Control approval) are eligible to seek
a listing on the Colombo Stock Exchange to raise Debt or Equity. Companies desiring to be
admitted to the official list of the Exchange and to secure a listing of their securities will be
required to comply with the relevant provisions of the above act and the Securities &
Exchange Commission Act No.36 of 1987 (as amended) and the Listing Rules of the
Exchange.
https://www.cse.lk/pages/detailed-trades/detailed-trades.component.html?page=equity

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 Stock Broker Firm
An investor is not permitted to directly transact in securities
listed on the CSE. Instead investors are required to carry out
transactions through a registered Stock Broker. Currently the
Exchange consists of 15 Members and 14 Trading Members all
of who are licensed and regulated by the Securities and
Exchange Commission of Sri Lanka to operate as
Stockbrokers. A stock broker is familiar with the formalities of
market and hence, you may depend on their judgment and
knowledge. They can help you to make the right decisions in
the market

https://www.sec.gov.lk/stockbrokers-list/

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 Purpose of Stock Market Indices
The most basic purpose is to provide a measure to understand the direction
or the movements of the market as a whole. An increase in the index
indicates a rising market and decrease indicates a falling market. Market
indices enable us to calculate market return. It represents the rate of return
earned by investing in a portfolio that impersonates the market portfolio.
Market return and risk are typically used as primary benchmarks to judge
investment performance of a portfolio. Technical analysts try to predict
future price movements by looking at the behaviour of past price trends.
Market indices also enable us to examine factors that influence aggregate
security price movements. Security analysts, portfolio managers and
academics investigate these factors that impact the performance of the
market.
Types of Stock Market Indices There are three types of stock market
indices. They are
• Price-weighted,
• Value-weighted and
• Equally weighted indices.
They differ according to the weighting scheme used in their construction.

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 Sri Lankan Stock Market Indices
All Share Price Index (ASPI) It is a value-weighted price index,
which incorporates all the voting ordinary shares listed on the CSE.
The base year is 1985, and the base value of the index is 100.
The CSE introduced the Milanka Price Index (MPI) on 4th January
1999. Like the ASPI it is also a value-weighted price index, which
incorporates only 25 selected stocks listed on the CSE. These stocks
represent the largest and the most liquid 25 stocks. The base date is
December 31, 1998, and the base index value is 1000.
https://www.investing.com/indices/sri-lanka-indices

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 THANK YOU

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