Getting started in shares - Part 1 | Page 2 | Sunday Observer

Getting started in shares - Part 1

7 February, 2021

Thinking about investing? 

Investing in the stock market has always been an unfamiliar matter in the minds of those who hope to make an investment, mainly due to its volatile nature and the unfamiliar language that is widely associated with it. Potential investors seem to be quite overwhelmed and under prepared to invest in the stock market. This weekly space is dedicated to support those who wish to select the stock market as an investment.

The Colombo Stock Exchange

The Colombo Stock Exchange (CSE) is the nucleus of Sri Lanka’s capital market and is the licensed operator of the stock market. The CSE is regulated by the Securities and Exchange Commission of Sri Lanka (SEC) and was incorporated as a company limited by guarantee in 1985. 

Today CSE provides an efficient and transparent market for trading, clearing and settling equity (shares) and debt instruments. While the core stakeholder base constitutes of 30 Members and Trading Members, 283 Listed companies, a base of 800,000+ local and foreign investors and other stakeholders. The CSE continues to make a considerable effort towards further development of the capital market which would pave the way for CSE to be categorized as the bench mark exchange in the region.

What is a listed company? 

The Stock market provides the ideal platform for a company to tap into public funding. A listed company is one that has decided to use public funding to spur their next phase of expansion and done so with the approval of CSE. A company that has decided to use the capital market engine to fuel their growth could do so by issuing shares and/or debentures.

Introduction to shares 

A share is simply a part of a company and the owner of a share is essentially an owner of the company. Purchasing a share through the CSE grants an investor with the opportunity to earn through either capital gains or dividends. In addition to this an investor is also entitled to a number of other benefits such as the right to vote at the general meeting. 

A company has the option to issue different types of shares, such as ordinary voting shares, non-voting shares and preference shares to name a few. 

Ordinary Voting Shares vs Non-Voting Ordinary Shares 

Ordinary shares are the most commonly issued type of equity security. A shareholder is offered both the voting rights at the company’s general meetings and is entitled to a portion of the dividends. While non-voting ordinary shareholders possess similar characteristics to an ordinary share except for the right to vote at a general meeting.

In the event of a liquidation the payment to the voting shareholder would be considered last as they are the owners of the company and are entitled to what’s remaining after all other parties have been settled. While a non-voting shareholder would be compensated prior to a voting shareholder. 

Corporate debentures 

Investing in a corporate debenture is similar to lending money to the company which could be redeemed at a given future date.

Investors are offered a predetermined fixed rate of interest or a floating rate of interest. As per the terms of the debenture issue an interest payment will be made on a specified date and is not bound by the profitability of the company. In order for a debenture to be listed on the Exchange it should have a minimum maturity period of two years. 

Secured vs Unsecured Debentures 

A debenture that is secured by some specific physical asset/s of the issuing company is a secured debenture while an unsecured debenture is where a debenture is not secured by a physical asset/s of the issuing company. - Courtesy: The Colombo Stock Exchange.