1

[Type the document title] What is a Stock Exchange

A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks In 12th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers. What are Roles of a Stock exchange Raising capital for businesses Mobilizing savings for investment Facilitating company growth Profit sharing Creating investment opportunities for small investors Government capital-raising for development projects Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could

[Type the document title]

eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. Based on the World Federation of Exchanges (WFE) these are the major stock exchanges in terms of market capitalization in the world.

Role of a Stock Exchange in the economy Stock exchanges play a vital role in the functioning of the economy by providing the backbone to a modern nation's economic infrastructure. Stock exchanges help companies raise money to expand. They also provide individuals the ability to invest in companies. Stock exchanges provide order and impose regulations for the trading of stocks. Finally, stock exchanges and all of the companies that are associated with the stock exchanges provides hundred thousands of jobs

[Type the document title] Introduction to Colombo Stock Exchange (CSE)

The CSE is a company limited by guarantee, established under the Companies Act No. 17 of 1982 and is licensed by the Securities & Exchange Commission of Sri Lanka (SEC). The CSE is a mutual exchange and has 15 full members, 6 Trading Members licensed to trade both equity and debt securities . All members are licensed by the SEC to operate as stockbrokers. All members are corporate entities and some are subsidiaries of large financial institutions. Share trading in Sri Lanka commenced in the 19th century, when British Planters needed funds to set up Tea Plantations in Sri Lanka. The Colombo Share Brokers Association commenced trading of shares in limited liability companies in 1896, involved in setting up plantations in the country. The policy making body of the CSE is the Board of Directors composed of nine members. Five directors are elected by the 15 member firms while the Minister of Finance nominates four. The CSE Board has four sub committees appointed to administer the operations of the CSE. The Exchange Secretariat, headed by the Chief Executive Officer, is responsible for the operations of the Exchange, and is accountable to the Board of Directors. The Securities and Exchange Commission of Sri Lanka (SEC) was established under the Securities Council Act No.36 of 1987(now amended as the Securities Council Act), to regulate the securities market in Sri Lanka The Exchange calculates two main Price Indices, namely, the All Share Price Index (ASPI) and the Milanka Price Index (MPI). Price indices are calculated for each of the 20 Business sectors. Total Return Indices (TRI) are also 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. 234 companies are currently listed on the CSE, representing twenty (20) business sectors

[Type the document title]

Vision of CSE To be the preferred choice for creation of wealth and value Mission of CSE Encourage issuers to raise capital through CSE Increase the number of active investors Provide facilities to trade equity, debt and derivative products Ensure balanced regulation to maintain market integrity and investor confidence.

Main functions of CSE listing companies to raise debt and equity capital, convertibles, warrants, asset securitizations, etc.; providing trading facilities for the secondary trading of all securities that are listed; providing on-line market data and other market related products; posting trade clearing, settlement, registration and depository facilities for all secondary market transactions transferring of technology to other exchanges training

[Type the document title] Brokerage Firms

To carry out trading activities in the Colombo stock exchange first step is would be to open an account in the CSE. For this purpose an investor should first go to a Brokerage firm. A stock broker would facilitate an investor to open an account in the CSE.

What is a brokerage firm?

In understanding the term Brokerage firm it is important to identify who is a broker. A brokerage is a firm that acts as an intermediary between a purchaser and a seller. More commonly, a brokerage is referred to as a brokerage firm. To broker a deal is to communicate with both the buyer and seller as to acceptable price on anything sold or purchased. A broker, a single person, or the brokerage firm completes any necessary legal paperwork, obtains the appropriate signatures, and collects money from the purchaser to give to the seller. Since the buyer and seller are employing the brokerage to complete the deal, the brokerage may collect a portion of the money obtained. In some cases, a brokerage receives money from both parties. The process which is done by the brokerage firm is also the same as the above explanation. They connect the bidders and sellers of the shares. Brokerage firms are most commonly thought of in relationship to the sale and purchase of stock shares. Fees are variable, depending on the degree to which the brokerage is involved in decisions about purchase. Some stockowners give their brokers power of attorney to make decisions about when to buy or sell stock and depend upon their brokers for researching new stock for purchase. This type of brokerage firm usually assesses a fairly large fee, and regardless of whether the owner loses or earns money, the firm is paid. Other brokerage firms are employed by people who like to do their own research and make all their own decisions about what and when to buy and sell. These firms have a tendency to charge per transaction and can be quite reasonable to employ. In the past few years, several

[Type the document title]

brokerage firms have begun stock trading on the Internet, allowing their clients access to information that will help them carefully research their decisions. These companies are not a sound economical choice for clients who do not do adequate research or cannot consistently read up on their stocks. Extensive involvement by the stockowner is necessary to hopefully make the best deals.

[Type the document title] Brokerage firms in CSE

Currently there are 21 member firms that are licensed by the Securities and Exchange Commission to offer stock brokering services to Investors. The member firms are licensed by the Securities and Exchange Commission of Sri Lanka (SEC) and are subject to the rules and regulations of the CSE. Bartleet Mallory Stockbrokers (Pvt) Ltd Acuity Stockbrokers (Pvt) Ltd. John Keells Stockbrokers (Pvt) Ltd. Asha Phillip Securities Ltd. DP Global Securities (Pvt) Ltd. Somerville Stockbrokers (Pvt) Ltd. J B Securities (Pvt) Ltd. Lanka Securities (Pvt) Ltd. Asia Securities (Pvt) Ltd. Ceylinco Stockbrokers (Pvt) Ltd. Capital Trust Securities (Pvt) Ltd. S C Securities (Pvt) Ltd. CT Smith Stockbrokers (Pvt) Ltd. DNH Financial (Pvt.) Limited. NDB Stockbrokers (Pvt) Ltd.

TRADING MEMBERS Capital Alliance Securities (Pvt) Ltd. SMB Securities (Pvt) Ltd. First Guardian Equities (Pvt) Ltd. Taprobane Securities (Pvt) Ltd. Amana Securities Ltd. SKM Lanka Holdings (Pvt) Ltd

[Type the document title]

Why Brokerage firm involve in these activities? Brokering firms involve in brokering activities with the intention of mainly providing brokering services and advisory services. For this a brokerage fee is charged on the basis of a transaction Equity - with effect from 1st August 2010 Transactions up to Rs. 50 Million - 1.02% Divided as follows:

Brokerage Fees CSE Fees CDS Fees SEC Cess Share Transaction Levy

- 0.640% - 0.084% - 0.024% - 0.072% - 0.200%

Transactions over Rs. 50 Million

Divided as follows:

Minimum brokerage (floor) CSE Fees CDS Fees SEC Fees Share Transaction Levy

- 0.200% - 0.0525% - 0.0150% - 0.0450% - 0.200%

[Type the document title]

The CSE trading records will indicate the brokerage as zero for transactions over Rs. 50 Mn. The Broker Firms are expected to insert 0.2000% or a higher percentage which is negotiated with the client as the brokerage before printing the Bought/Sold Notes. In addition to the above charges the following charges can also be seen Margin interest charges This interest is charged to investors for borrowing against their brokerage account for investment purposes. Service charges These charges are for performing administrative tasks and other functions. Brokers charge fees to investors for Individual Retirement Accounts (IRAs) and for mailing stocks in certificate form.

10

[Type the document title] Activities of Brokerage firms

A brokerage firm offers a variety of brokerage services to its customers and it adopts different types of financial strategies, which help the investors to meet their financial goals. The investors are able to manage or minimize the risks associated with investment with the help of the valuable tips provided by the investment brokerage firms. Brokerage firms also function as investment advisory firms or investment consultancy firms. They offer a variety of information to their clients, which include information regarding hot stocks and bonds, market analysis and research, online buying and selling of securities, investment tools and tips and many other types of information.

Activites

Main Activities

Other Activities

Brokerage Services

Advisory Services

Providing online trading facilities

Mutual Fund Management

Repo & Re-repo activities

Deposit of Securities

Goverment Securities Management

Offerring Limited Banking services

11

[Type the document title]

Main Activities The brokers primary role is to serve as the vehicle through which you either buy or sell stock. This is to facilitate the investor to invest in CSE. This process starts from opening a CDS account on the investor behalf. Further following activities can be identified Executing orders on the investor behalf (Brokerage service) Sending monthly or annual reports Provide the investor with the documents such as IPOs and Right Issues Managing the customers accounts

Financial advisory Services For this purpose every brokerage firm has appointed a Investment Advisor where he/she will be responsible for managing the activities relating to the particular assigned investor. He/she will also provide necessary information such as hot stocks, market trends, etc, based on the researches done by the brokerage firm. Thus investor will also be able to access the research reports through the investment advisor.

Other activities These are the activities done by brokerage firms other than the major activities, those are, Providing online trading facilities This is a latest development happening in the CSE where investor is given the sole authority to execute selling and buying orders on their own. Currently 18 member firms in CSE provide this facility. Currently this facility is provided by the CDAX and Direct FN (software by Asia Securities) software.

12

[Type the document title]

Mutual Fund Management Brokers can also buy bonds, mutual funds, options, Exchange Traded Funds (ETFs), and other investments on the investor behalf. Further Brokerage firms involve in managing funds such as unit trusts EPF ETF etc

Repo & Re-repo Activities A Repurchase agreement , also known as a Repo or Sale and Repurchase Agreement , is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price will be greater than the original sale price, the difference effectively representing interest, sometimes calls the repo rate. The party who originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan while the settlement date of the forward contract is the maturity date of the loan. Currently Member firms involve these kind of activities.

Government Securities Management In addition to involving in share trading member firms may involve in secondary market of government securities such as treasury bills and treasury bonds.

13

[Type the document title]

Offering limited banking services Brokers can offer features such as interest-bearing accounts, check writing, direct deposit, and credit cards.