Interested in the Stock Market? – Basic Terms You Should Know – Part 01

A knowledge investor is a wise investor. Awareness is the key to making positive gains through the Colombo Stock Exchange (CSE) – Stock Market in Sri Lanka, by making the correct choices, intelligent observations and by doing your investment homework. There are many reports and resources freely available to help evaluate your investment decisions.

First Capital believes that an educated investor contributes to develop the market, this article series covers the key terms that an investor needs to be familiar with before investing in shares.

Shares – are a proportionate piece of ownership of a PLC company that are issued to the public as a means of raising capital. An investor who buys a share of a company is therefore entitled to a quantity of its assets and earnings but will be the last to be settled on liquidation of the company. Shares of some companies are subcategorized as Voting and Non-Voting Shares.

Investors (shareholders) can freely buy and sell shares on the CSE through a licensed Stock Broker.

Earnings for shareholders come from the growth in share price (capital gains) and dividend payments (share of the company’s profits) both of which are subject to the performance of the company and market conditions.

Publicly Listed Companies (PLC) – Companies incorporated under the Companies Act 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 CSE to raise Debt or Equity.

Companies interested to be admitted to the official list of the CSE and to secure a listing of their securities are required to comply with the relevant provisions of the above act and the Securities & Exchange Commission Act and the Listing Rules of the CSE. This process of obtaining a listing is facilitated through an investment bank.

Additionally, the CSE regularly monitors listed companies as part of ongoing listing requirements to ensure the company abides by its listing rules (corporate governance, disclosures, financial reporting, transparency etc.). CSE also facilitates the trading (buying and selling) of the publicly held shares of the company.

As at 29 March 2016 CSE has 294 listed companies representing 20 business sectors.

Market Indices – The All Share Price Index (ASPI) and the S&P SL20 (Standard & Poor’s Sri Lanka 20) are the two main price indices used by the CSE.

The ASPI is a market capitalization weighted index where the weight of any listed company is taken as the number of shares listed in the market, while the S&P SL20 gives a measurement of the value of 20 selected stocks.

The ASPI indicates the price fluctuations of all the listed companies and covers all the traded companies during a market day.

Where,

Base values are established with average market value on year 1985. Hence, the base year becomes 1985.

This weighting system allows the price movements of larger companies to have a greater impact on the index. Such a weighting system was adopted on the assumption that the general economic situation has a greater influence on larger companies than on smaller ones.

The indices are calculated on an on-going basis during the trading session by computing the prices of stocks, with the closing values published at the end of each trading day. In addition to the above the CSE also calculates Sector Price Indices and Total Returns Indices.

Investors and financial managers use market indices as a tool to describe the market, and to compare the return on investments.

Market Capitalization – is the total Rupee (LKR) value of a company’s listed shares and is calculated on a daily basis by multiplying the current market price of one share by the total number of shares listed.

In calculating the sum of all companies listed on the CSE the market capitalization of the exchange is derived, this total market capitalization is utilized to indicate the relative size of the exchange.

The investor community and financial managers Market capitalization is used by the investment community in ranking the size of companies, as opposed to sales or total asset figures.

As at 29 March 2016 the Market Capitalization of 294 listed companies on the CSE stood at Rs. 2,591,06 Bn.

Boards – Listed companies are separated to either the Main Board or Diri Savi Board (for Equity) operated by the CSE based on listing criteria.

The Main Board consists of companies with a stated capital of not less than Rupees Five Hundred Million (Rs.500, 000,000/-) at the time of listing, net profit after tax for three (3) consecutive years immediately preceding the date of application, positive net assets as per the consolidated audited financial statements for the last two (2) financial years immediately preceding the date of application, and, a minimum public holding of 25% of the total number of shares for which the listing is sought which shall be in the hands of a minimum number of 1,000 public shareholders holding not less than 100 shares each.

The Diri Savi Board companies necessitate a stated capital of not less than Rupees Hundred Million (Rs.100, 000,000/-) at the time of listing, positive net assets as per the consolidated audited financial statements for the financial year immediately preceding the date of application, a minimum public holding of 10% of the total number of shares for which the listing is sought which shall be in the hands of a minimum number of 100 public shareholders holding not less than 100 shares each, and, an operating history of at least one (1) year immediately preceding the date of application.

Diri Savi Board companies are entitled to graduate to a Main Board listing, once such companies meet the Main Board listing criteria.

(source : www.investopedia.com / www.cse.lk)