INVESTOR EDUCATION
WHY INVEST IN SHARES?
A Person Chooses to Invest with the Expectation of Future Benefits.
Investing in shares of listed companies is an attractive avenue of investment which will offer a hedge against possible loss from inflation.
Investment in listed company shares, is simple. This could be done either through the primary market or the secondary market i.e. .the initial public offering of a company or by trading in the secondary market on the Colombo Stock Exchange. Shareholders receive a claim on dividends and earnings when approved by the shareholders.
The shareholders will also have the opportunity to participate in and benefit from Rights Issues, where additional shares could be bought in proportion to what you hold at discounted prices, and also benefit from Bonus Issues, meaning the distribution of free shares(again in proportion to the numbers already held) with the prospect of increased dividend earnings.
Shares in listed companies in an active share market are liquid and marketable assets. They can be turned into cash quickly without major price changes. The investor in shares does not need to wait long periods to trade in shares held. The shares could be held until dividends are paid. They could be sold at a premium on the Stock Exchange and thus, a profit can be realised. The profit realised is often above the prevailing rate of inflation, which makes investment in shares a more reliable hedge against the most common diminisher of the value of financial assets.
CHOOSING A STOCK-BROKER
Stockbrokers or their authorised representatives, act as agents in the market to buy and sell shares on the Exchange on behalf of investors. Only Members of the licensed Stock Exchange (stockbrokers as they are generally known) or their authorised representatives, are allowed to buy and sell shares on the Exchange. While other investment advisors may offer to buy and sell shares, ultimately these transactions can only be effected through a stockbroker.
Stockbrokers act as financial advisors. Most broking firms have research departments and teams of client advisors who can make recommendations about the share market and other investments. The stockbroker will charge a brokerage fee to purchase or sell shares or other investments on behalf of a client.
| a | Providing general investment advice. |
| b | Managing investment portfolios for clients. |
| c | Giving professional/corporate advice on mergers, takeovers etc. |
| d | Stock and share trading. |
Functions of a Stockbroker include
All stockbrokers do not offer the full range of services. Some will concentrate on the work of institutional investors, such as Super-Annuation funds and life Insurance Companies, whist others offer the services connected with the buying and selling of securities.
How Shares Trade
The activities of the Share Market can be divided into two categories, primary and secondary
Primary <--------Share Market-------> Secondary
The main functions of the primary share market is to channel savings into issues of new securities, in which share capital is being raised, to finance the operations of both new and existing companies.
The Secondary Market is the place where Shares already issued to the public can be traded over and over again. The main function of such a market is to create liquidity; that is to convert Shares into money. A person who buys company shares in the first instance is issued a share certificate by the company which can be sold in the Secondary Market.
How to Place an Order
In a share market, transactions can be effected only through middlemen called brokers who have been licensed by the Securities and Exchange Commission. In order to have an orderly and transparent market, share transactions are effected by brokers on behalf of their clients.
It is the client's savings that are invested in shares and a quasi fiduciary relationship exists between broker and client. A return from this type of investment can be obtained through the purchase of Shares of companies which enjoy a stable financial position. In order to understand the financial position of a Company it is necessary to study its accounting reports and other information. The Brokers who work in the Share Market are professionally knowledgeable in these matters. In a developed financial market, this type of service can be obtained from professional share analysts also.
The Brokers are responsible for handling the paperwork involved in the transfer of Shares. Brokers charge a commission for the transactions that take place in the share market through them.
Ordering shares in the Primary Market
In order to buy new Shares being issued by a Company in the primary market, one has to fill out an application form prepared for that purpose. These application forms can be obtained from Brokers, the Issuing company, or from any branch of a commercial bank involved in the issue. In such a primary issue, the minimum number of shares that can be applied for is 100, and all applications should be for multiples of hundred, that is, the number of shares applied for should always be divisible by one hundred without a remainder. Examples are 100,300, 600, 1,000, 2,000, 2,500. Applications duly perfected and accompanied by cheques or bank drafts as stipulated therein, should be handed over to a branch of a bank engaged for that purpose, or to a Brokering company, or the company issuing shares. It is desirable, to obtain the advice of a Share broker before embarking on the investment.
In the case of the issue of new Shares having a high demand, it is possible that the number of Shares the company is issuing is subscribed to before the closing date. In such a situation, the share issue can be closed before the due date; therefore it is advisable to apply for shares within the first 5 days.
Ordering shares in the Secondary Market
A Broker may request a person placing an order to buy Shares for the first time to pay an advance amounting to a certain percentage of the value of the order. This is to enable the broker to set off any possible loss in case of default on the part of the prospective buyer. However, if there is an established business history between the buyer and the broker then the broker may not insist on an advance. Usually, in Share transactions, brokers abide by the maxim ‘ my word is my bond' while the brokers expect the buyers too to observe this rule.
After a transaction is effected in the Secondary Market, the broker confirms it by sending a contract note to the buyer. This contract note contains the name of the buyer or seller, name of the company, number of shares, price per share, brokerage commission, total value of the transaction after the brokerage commission is deducted, settlement date (the date when payment for the transaction must be settled), and the signature of a director of the broker company. The settlement period is on a rolling 5 day basis, in conformity with international standards.
Stockbrokers' obligations to Clients include:-
| a | To obey the instructions of their clients. |
| b | To make the best deal possible for their client |
| c | To issue a contract note to their client. |
| d | To refrain from competition with their client. |
| e | To exercise due care and diligence. |
| f | To maintain separate client accounts. |
Monitoring of Investments
The SEC and the CSE have no mechanism to protect investors from losses associated with investment risks, such as changes in value of an investment resulting from market volatility on the operations of the issuer. It is necessary to exercise vigilance by yourself, spend time and ensure that you not only understand the way financial markets operate, but follow closely the operations of the company in which you have invested.
Make sure that the broker or financial advisor is acting in your best interest. The SEC Rules requires that licensed intermediaries must establish a system of adequate internal controls and supervision procedures to prevent any financial loss resulting from theft, fraud, dishonest acts, misconduct or omissions. The broker must establish proper safeguards over money or securities which are held in custody for you.
A broker must clearly establish your identity, assess your investment objectives, financial situation, and investment experience, to ensure that the advice he gives is suitable to your needs. Any recommendation should be given after an analysis of suitable alternatives. Before a trade is carried out, you should ask questions and obtain as much information as possible. Information provided must be accurate and not misleading.. All charges and fees must be disclosed.
Instructions must be stated clearly to avoid ambiguity. If the phone is used to place an order, repeat the order back to avoid any misunderstanding The date and approximate time of the conversation, the nature of the order, and the name of the person you dealt with. whether the order is in writing or verbal, should be executed promptly at the specified price or the best available market price. The price should be confirmed by writing or by phone.
Before any person can trade in the Colombo Stock Exchange, an account with the Central Depository System (CDS) must be opened. Shares that are to be traded must be lodged with the CDS . The CDS will issue a confirmation in writing.
The investment portfolio must be reviewed periodically, preferably with professional help, to establish whether repositioning is necessary. Market conditions may change dramatically and quickly and a downward swing will result in heavy losses.
The right broker or advisor must be chosen. Information must be obtained from them to select the best suited examples by asking questions, and taking time to ‘do your homework'.
| Net Brokerage Rate (Minimum of Rs.10/-) | For Consideration Up to | For Consideration More than | |
| NB | SEC Cess Rate | Rs.1 Million |
Rs.1 Million |
| SEC | CSE Fee Rate | 1.000% | 0.800% |
| CSE | CDS Fee Rate (Minimum of Rs.5/-) | 0.090% | 0.090% |
| CDS | TOTAL FEES | 0.105% | 0.105% |
| 0030% | 0.030% | ||
| 1.225% | 1.025% |
| THE PROCEDURE FOR A FOREIGNER TO INVEST IN SRI LANKA'S CAPITAL MARKET. |
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Sri Lanka has one of the most liberal capital markets in the region. The Sri Lankan Rupee is fully convertible on the current account (trade in goods and services). Foreign direct investments and portfolio investments are also freely convertible. The government has declared capital account convertibility as a longer term policy.
Foreign Investment is open to the following category of Investors
Country Funds and Regional Funds, Private Funds |
Approval must be obtained by the Ministry of Finance. This takes a few days and is usually a formality. |
1. Companies Incorporated outside Sri Lanka
2. Individuals Residing outside Sri Lanka.
3. Criteria for Approval of Country Funds
Credits to the Account
Inward Remittance
Sale Proceeds
Dividend Proceeds
Proceeds received through other Corporate Actions
Debits to the Account
Funding a Purchase
Repatriation of Sale Proceeds
Repatriation of Dividend proceeds and other proceeds received via Corporate Actions
All debits and credits should be channeled through SIERA. Any remittance from SIERA out of Sri Lanka will be permitted on producing to the commercial bank at which the respective account is held documentary evidence of the transaction giving rise to the remittance (dividend warrant, contract note).Whilst a tax clearance certificate from the Department of Inland Revenue is not required for remittances in respect of transactions related to listed companies, it is required in respect of unlisted companies confirming that all taxes attributable to the respective transactions have been duly discharged. This process is fairly routine in view of the deduction of withholding tax at source.
In September 1991, the Colombo Stock Exchange (CSE) introduced a new computerized book entry clearing and settlement system operated by the Central Depository System (Pvt.) Limited, (CDS) a wholly owned subsidiary of the CSE. As at the end of June 1992, all companies listed on the Exchange were registered in the CDS. The CDS has nominee status for all shares deposited with it. However, it does not provide nominee services such as entitlement distribution or proxy services. The CDS, instead provides a listing of beneficial shareholders to each listed company as at record date to enable the company to forward dividends, rights, bonus, annual reports and proxies directly to the beneficial shareholders or their respective custodians. Investors who wish to trade in shares should open an account with the CDS. This aspect is handled by the brokering firms and normally takes one day.
Ownership Regulation
Foreign investors are allowed to invest up to 100% of the issued capital of most of the listed companies in the Colombo Stock Exchange. The following are the exceptions.
Shipping and Plantation companies 40%.
Foreigners are permitted to hold 100% of shares in insurance companies.
Companies with restrictive provisions : These are few companies that restrict non-national participation beyond a certain limit, through a restrictive provision in their Articles of Association.
Banks :- Foreigners can hold 60% of a Bank.