Interested in the Stock Market? – Basic Terms You Should Know – Part 02

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 is the second part of a series covering the key terms that an investor needs to be familiar with before investing in shares.

Stock Broker – Is a regulated professional agent associated to a licensed Stock Brokering Firm that executes trades to buy and sell stocks and other securities on behalf of an investor.

A regulated commission or fee is charged by the Stock Broker for each buy or sell transaction made on behalf of the client.

With effect from 15 April 2016 transaction cost applicable for transactions upto Rs. 50 Mn for both equity securities is 1.12% divided as follows;

Brokerage Fees – 0.640%
CSE Fees – 0.084%
CDS Fees – 0.024%
SEC Cess – 0.072%
Share Transaction Levy – 0.300%

Central Depository System (CDS) – functions as a specialist market intermediary and clearing house, holding the securities of publicly listed companies such as shares, to smoothly transfer ownership between buying and selling investors.

As of 2011 securities of all listed companies have been converted from physical certificates to dematerialized form or electronic paperless format. As such an investor buying and selling shares will not be given a physical share certificate, instead an equivalent number of securities in electronic form will be credited in the CDS account registered under the investors name through a Stockbroker.

When an investor trades using his CDS account, he is given a ‘bought or sold note’ at the end of the day indicating details of the transaction as a confirmation. This is not a share certificate.

In Sri Lanka the CDS is licensed by the Securities and Exchange Commission of Sri Lanka (SEC).

CDS Account – is a paperless account maintained for an investor by the CDS in order to facilitate trading through the CSE. Investors are required to open a CDS account through a preferred Stock Broker.

There are specific account opening forms for individuals (resident and non-resident) and corporates (local and foreign). In addition to the account opening forms an investor is  required to provide the following documentation.

  • Copy of National Identity Card or a copy of a valid Passport as proof of identity.
  • Three (3) months utility bills or any other accepted document with address as proof of residence.

Once the completed application along with the above documents are submitted, the newly registered CDS Account Number is sent to the investor via post.

Securities and Exchange Commission of Sri Lanka (SEC) – is the regulator of the capital market appointed by the Government to proactively promote, develop and maintain a capital market that is fair, efficient, orderly and transparent.

The SEC was established to achieve the following objectives;

  • The creation and maintenance of a market to issue and trade securities in an orderly and fair manner.
  • Protecting the interest of the investors
  • Operation of a Compensation Fund to protect investors from financial loss arising as a result of any licensed stock broker or licensed stock dealer being found incapable of meeting his contractual obligations
  • The regulation of the securities market and to ensure that professional standards are maintained in such market.

Over the years the duties, functions and the powers of the SEC has expanded and it is currently bestowed with the following responsibilities;

To grant licenses for the operation of a stock exchange, stock brokers or unit trust managers, and to ensuring its proper conduct. To grant a certificate of registration to carry on business as a market intermediary and to ensure the proper conduct of such business. To give general or specific directions to all entities under its governance, periodically.

To grant compensation to any investor who suffers pecuniary loss arising as a result of any licensed stock broker or licensed stock dealer being found incapable of meeting his contractual obligations.

To regulate the listing and issuing of securities in the licensed stock exchange, and holds the authority to suspend the listing or trading of securities for the protection of investors.

To conduct investigations into any alleged violation or contravention of the provisions of the SEC Act or any rule or regulation made there under. Advising the government of developments in the securities market, while implementing the policies and programmes of the Government with respect to the market. In addition to a multitude of regulatory and governance undertakings listed out at www.sec.gov.lk.

(Sources: www.investopedia.com / www.cse.lk / www.sec.gov.lk)