Thursday, January 8, 2009

Colombo Stock Exchange Sri Lanka - How to Succeed as an Investor

The correct timing of entry and exit is the key to success as an investor in the Stocks. It is all about buying at the correct price and selling at the right time. But how can we identify the correct price to buy and sell? It depends on the level of price sensitive information available to you. Then we come to the decision point of - What are the factors influencing the price? Key factors are listed out below.

     Company Related Information/News

As Analysts what we have seen is that many Retail investors have very little knowledge about the stocks they purchase or trade on. This is quite risky, as at the end of the day the stock market is not a place to gamble with your hard earned money. Any investor should have a basic idea about the stock they wish to invest in and the industry it operates in. Investors can obtain such information from their respective Investment Advisors, Research Analysts, Company Annual Reports etc. (basic information sources and the basic information is a must have before entering into a stock)

Investors should always be vigilant, to stay one step ahead of the game by looking at all information sources sent out by companies in the form of news paper articles, CEO forums, Investor forums and news on corporate websites. But all information should not be taken with positive sentiments; a cautious approach should be taken and comparisons made with other stocks in the same sector, since all information may not be true or practical in economic or rather business sense. Investors should be extra cautious about market rumors regarding takeovers, mergers or even rumors about a large chunk of shares changing hands. You should think rationally and ask the question, is the stock really worth at these levels and how compatible are these acquisitions or mergers in the business sense.
     Research Paper by Analyst

Research papers published by Research/Financial Analyst on the market, economy and especially on stocks may have a significant impact on the price. As once the paper is completed and published the brokering firm publishing the report tends to buy or sell the stock, resulting in significant price movements. However it should be noted that investors should not get car ride away too much in the case of a buy recommendation and the price moves up significantly. An analyst would normally specify a price range within which the stock should be accumulated, beyond which the stock would seem less attractive based on future earnings.
     Economic News

 Investors, especially the retailers tend to pay less emphasis on the economic reports or central bank statistics published on a quarterly basis. The fact is that if the economy is growing and the market is not, means that the market is very much undervalued. On the other hand, the institutional and high net worth investors anticipate the future economic changes and benefit a great deal from actually collecting fundamentally sound stocks at extremely low prices. This would result in the stocks upward movement slowing down once the actual economic data is published.
     Political News and Sentiment

The Sri Lankan stock market is highly driven by political developments, resulting in the overall sentiment changing radically. The market activity and momentum is usually maintained by the retail investors. (Looking for quick capital gains) Therefore if there is any negative news in the political arena retailers tend to overreact causing the prices to drop and the sentiment to weaken. However, the high net worth’s and institutions tend to benefit by this artificial downfall by collecting sound stocks at a discount. Hence it’s quite advisable not to panic on political news but to stay invested or by collecting more fundamental stocks at artificially low prices.
Finally the bottom line is that investors should be well informed about the macro situation as well as the company specific information to make informed decisions and to stay ahead in this game.

Tuesday, January 6, 2009

Investing in the Stock Market. What is Unit Trust?

In this article we would be explaining means of how individuals can invest in the Stock Market indirectly via Unit Trust Funds.

The Unit Trusts also referred as Mutual Fund has a long and a successful history in many countries.
In Sri Lanka the first Unit Trust was commissioned in December 1991 followed by seventeen funds managed by five unit trust management companies over the years. These five management companies are licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to launch and manage unit trust funds.
These licensed Management Companies over time have gained market experience and performance track record in managing the unit trust funds.

The type of funds initially offered is open ended type of funds and belongs to income, balanced, growth and index categories. Investors in open ended funds can invest and withdraw on a daily basis through the management company. To facilitate the investor transactions, the management company publishes the selling and buying prices of the units based on the marked to market values of the investment portfolio.
More recently closed end funds were launched with 2 5 year maturities comprising fixed income and listed shares in their respective investment portfolios.

Pure fixed income closed end funds have lower risks compared to the higher risk share investment funds.
Unless the management company provided a redemption window in the scheme, the investors in the closed end funds need to wait until the maturity dates to get back their capital invested. Majority of these schemes pay regular dividends to the investors to generate an income during the life time of the scheme.

In September 2009, the industry launched a listed 10 year closed end fund to facilitate common investors to participate in the listed share market and to participate in the growth prospects of the stock market and the underlying companies.

Investors in this type of closed end funds can expect to receive dividends and also have the option to sell the units through the stock market intermediaries.

Moreover, the open ended schemes enable the public to open an account with a licensed management company initially with a small sum of money or with a lump sum.

Depending on the terms of each fund the minimum amount would vary between Rs. 1,000/- and Rs. 10,000/- . Once an investment account is opened, the investor can continue to save as low as Rs.1000/- on a regular basis.

Prospective investors should contact a licensed Fund Management Company (FMC) as to their specific procedures for investment in the funds managed by them. Some of the companies offer switching facilities to move into other funds managed by them.

The switching facility is limited to other open ended funds.

It is important to differentiate between income and equity type of Funds.

The income funds generally pays a dividend and most or all of its money is invested in fixed income instruments such as government and corporate securities.

By nature these instruments gives interest income periodically and the Fund distributes them as dividends.
The equity balanced funds invests in both shares and fixed income securities. These investments generate income from interest, dividends and capital gains from value appreciation from the share investments.

Over a period the investor can expect both regular dividends and potential growth of capital from this fund.
Moreover equity growth funds invest mainly in growth oriented shares and the investors can expect growth in value of their capital from its share investments. Similarly the indexed funds also invest in equities that represent a specific index.

This fund also enables capital growth from its share investments as in the case of a growth fund.
Investors can take advantage from these funds by selecting one or some of these funds to build a diversified investment portfolio to suit their specific financial circumstances.

This approach is useful to build savings for unforeseen future needs for large sums of cash to pay hospital bills, childrens education and retirement needs.
If you have difficulties in identifying suitable funds you should speak to the advisors at the Fund Management Companies to clearly understand the fund parameters in your selection process.

It is also important to realize the comparative tax advantage in unit investments that corporate investors can get against other financial products available to them.

The corporate investors will be liable on interest income at a rate of 35% in the coming year of assessment.
The unit trusts investments have many advantages namely professional management backed by a research team, provides instant diversification thus reducing the risk of investments, convenient administration reducing paper work, offers higher return potential, liquidity: in open ended schemes units can be cashed at net asset related prices, transparency where investors get regular information on the fund's performance and assets held from time to time.
Further unit trusts offers choice of funds to suit your varying needs and the funds are well regulated by the Securities and Exchange Commission of Sri Lanka.

In any Unit Trust the investor's money should be transferred to the Trustee in accordance with the trust deed and Trustee keeps all money received separately for the beneficial interest of the investor.

Once this money is invested Trustees effect payment and receive necessary security and keep under their custody and this process continues until the investor withdraws the investment. Managers keep necessary liquidity to meet these payments.

In Sri Lanka all Trustee and custodian is a Bank and mandated to ensure safe keeping of investors assets in the Trust.

Moreover, Unit trusts are tax efficient and only liable to pay 10% on interest income and dividend income. Gains from sale of listed shares are exempted from this 10% but liable to pay share transaction levy at contract level as any other share investor.

The investor is exempted from tax on dividend income and the fund management company is exempted from deducting the withholding tax on dividends paid to an investor.

Moreover, the stamp duty is waived on issue of units with effect from 1st January 2007. The investors however should consult their tax advisors before their investments in units. The Unit Trust Association of Sri Lanka is an apex body of all licensed Fund management Companies in Sri Lanka.

Source: CSE and Unit Trust Association of Sri Lanka

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Thursday, January 1, 2009

Colombo Stock Market - Guide for Beginners

What is a Stock Exchange?

A Stock Exchange provides a liquid, open market for buying and selling of shares, debentures etc. of publicly owned companies. Companies, which use the mechanism of the stock market to raise debt or equity capital, commonly enter the stock market through issuing shares or debentures to the public. Sri Lanka's only stock exchange, the Colombo Stock Exchange (CSE) currently has 237 listed companies, 15 member firms, 5 trading members and one specialized debt trading member.

What is a listed company?

When a company raises funds to support its growth by selling ownership interests (shares in itself) to the investing public, those shares need to be "listed" and traded on that country's stock exchange/s. These companies need to be in compliance with an Exchange's set of listing rules such as previous profit records, issued/paid up capital etc. in order to be admitted to the official list.

What is the Colombo Stock Exchange (CSE)?

The Colombo Stock Exchange (CSE) is the organization responsible for the operation of the stock market in Sri Lanka. The CSE is a company limited by guarantee established under the Companies Act No. 17 of 1982 and licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to operate as a stock exchange in Sri Lanka.

How do you purchase shares

There are two ways to purchase shares

    * From a new issue of shares (Primary Market)

The primary market is the market for new shares or debenture issues. In the primary market, the security is purchased directly from the issuer (company). In a primary issue, the company offering the share/debenture issue publishes a document known as the prospectus. It is an invitation to the generalpublic to buy shares or debentures of that company.

    * On the Secondary Market through a stock broker.

A market in which an investor could either buy or sell shares, debentures and Government Securities from or to another investor, subsequent to the original issuance in the primary market.

Types of securities traded at the CSE

    * Shares
    * Corporate Debentures
    * Government Securities

What is Central Depository Systems (Pvt) Ltd?

Central Depositors Systems (Pvt) Ltd is wholly owned Subsidiary of the CSE, which has taken over the functions of Clearing, Settlement and Registration from the Stock Exchange.

How do I open a CDS account?

To open a Securities Account in the CDS you should complete an Account Opening Form, which can be obtained from your stockbroker or custodian bank. There are no fees charged for opening a CDS account. Your participant organization may call for documents establishing your identity. It is possible to open and operate an account on the same day.

Every account will be identified through a unique account number and all correspondence and dealings, including trading and depository activities, will refer to this account number.

Your CDS accounts should be operated through your Participant organization, and any changes to your account will have to be forwarded through the Participant. You cannot issue instructions directly to the CDS.

What is the purpose of my CDS account?

Your CDS account enables you to participate in paperless trading on the Colombo Stock Exchange. Your account will be maintained in double-entry book-keeping format and will be updated on real time as your participant lodges your transactions at CDS.

What is the reason for holding my securities in scrip-less form?

The trading system at the Colombo Stock Exchange is fully automated and thereby the paper securities you lodge in your CDS account are translated into an electronic portfolio. When you buy securities, your account is automatically credited with the shares purchased and the corresponding seller's account is automatically debited with the same amount. Thus the entire process is automated and involves no exchange of bills or certificates.

Who is a Participant?

A participant is a central depository agent, either a stockbroker or a custodian bank, who has been authorized by CDS to open accounts in CDS on behalf of investors.

Who are stockbrokers?

Stockbrokers are registered members of an Exchange, authorized to buy and sell shares. These stockbrokers provide their services to the investing public interested in trading in shares of listed companies.

The CSE has 15 member firms and 6 trading member firms authorized to buy and sell shares

What do I deposit in a CDS account?

Shares and bonds

Must I open a CDS account?

Yes, if you intend to trade in shares, which have been selected for depositing, through the Colombo Stock Exchange.

Can I use a different broker from the one I have been using?

You may maintain multiple accounts through several Participant organisations. You can also transfer securities across accounts held with different Participants.

Will it cost me more to use CDS?

No. There is absolutely no increase in cost for the CDS accountholder.

What is the process of depositing securities?

    * Visit a participant with the certificates you want to immobilize.
    * Be sure you have already opened an account or are ready to do so.
    * You will be issued with and assisted to complete a Security Deposit Form.
    * Sign your form with the signature used when buying the shares.
    * Return the form to the participant together with the certificates you have included on the form to be deposited.
    * You will be given a receipt as evidence of your deposit.
    * The participant will forward the form and the certificate to CDS
    * CDS will forward the certificates and forms to the companyĆ¢€™s shares registrar for verification.
    * When the registrar confirms the certificates as genuine, the shares will be deposited in your account.
    * Once the shares are in your account you can trade in them.

How do you withdraw shares from CDS

You can withdraw shares from your account, using a withdrawal form that can be obtained from your broker, the CDS will facilitate the removal of shares from your account so that you may receive a scrip from the relevant company.

How does Intra- Account transfers occur?

You may also transfer part or all, of your portfolio between accounts opened through different participant firms. Once the Intra-Account transfer is completed and forwarded through the respective participant, the CDS will acknowledge by returning a duplicate of said form. Once checked for accuracy and completeness, the transfer will take effect.

The Exchange has permitted free transfers through different accounts in the CDS in order to accommodate foreign clients operating in different time zones to that of Sri Lanka on completion of the relevant form. However these transfers can only be effected before the expiry of two market days from the date of conclusion of the first transaction ( T +2); and only on condition that there would be no change in the fund settlement source indicated at the time of the first transaction as a result of the subsequent transfer

How does Inter-Account transfers occur?

Private Transfer of securities may also take place between account holders providing a valid relationship exists, prior approval of the Securities and Exchange Commission of Sri Lanka must be sought in order for such transfers to take place. However, in the instance of death of an account holder, securities may be transferred to next of kin, using the relevant CDS form without SEC approval.

What do I get to prove I have deposited securities?

    * You get the receipt of the deposit form
    * You get a monthly statement if you have a deposit or a trade that month.
    * You get a quarterly statement if you have not had a trade for three months.
    * The statements are issued directly to your address as indicated on the account opening form.

How Safe Is CDS?

CDS has taken measures to ensure the security of your shares. The company has back up facilities and procedures that would ensure business continuity in the event of anything happening either to the computer system or its usual premises. CDS has taken precautions to ensure its system is not interfered with. CDS has employed staff of high integrity and keep very high levels of confidentiality.

Colombo Stock Exchange
Level 4, West Block,
World Trade Center, Echelon Square,
Colombo 01, Sri Lanka.
Tel:+94(11)2446581 (Hunting)

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