Step-by-step guide to invest in stock market

27 May 2013 05:11 am

The fundamentals of world economics have shifted from commodity markets to financial markets. Hence, financial markets play a pivotal role in wealth creation, economic development and economic equality. An equity market, commonly known as a stock market, is identified as a key financial instrument that facilitates the above stated.

Relaxation of monetary policy, increased investor confidence and other satisfactory economic indicators resulted in the Colombo Stock Exchange (CSE) being identified as an ideal financial tool for wealth creation. The CSE has experienced rapid growth in the recent past. It has grown by 30 percent from July 2012 to date.

The sentiments of Sri Lankan investors are to invest in the market when the market is growing. Hence, today’s article will unfold the information required in entering the market, investing and managing one’s portfolio.

As we all know, a stock market is an organised place where securities (stocks, debt, etc.) are bought and sold. One could enter the market through the primary market or the secondary market.
The primary market is a market where new shares or debentures are issued. In this market, the security is directly purchased from the issuer (company).

The secondary market is a market in which an investor could either buy or sell securities from or to another investor, subsequent to the original issue in the primary market. This article will give out the guidelines required in entering both markets.



How do you enter
primary market?

•     Most often, first time investors come to the stock market by applying for shares at an IPO. Investors should pay attention to the business environment, management of the company, future earnings and valuation, competition, tax incentives and research/valuation reports about the company. The above information about the company can be obtained from an investment advisor and the prospectus.  
•    Thereafter, the CSE will announce the first trading day of the shares. Trading of shares will commence within 22 market days after the closing of the IPO.
•     The allotted shares would be credited to the applicant’s CDS accounts electronically.
•    The prospectus indicates the opening and closing day of the share issue. Make sure to send the application form along with the cheque/bank draft before the closing day. If an issue has more buyers than shares offered, the share issue might close on the opening day itself.
•     The prospectus must be read carefully and the application form to purchase the shares must be completed accurately and clearly. If necessary, consult an expert for advice. Remember to indicate your CDS account number, national identity card number and place your signature on the application form.
•    Companies issue the prospectus and application forms before the issue opening day (at least seven market days prior to the date of opening).
•     Newspapers, websites, radio channels and television stations give publicity to prospective issuers when a company wishes to be listed or is going to issue shares through an Initial Public Offering (IPO). The company will also conduct a marketing campaign.
•     An investor who wishes to buy shares should open a securities account in the Central Depositary System (CDS) through a stockbroking firm.
•    Select a stockbroking firm, there are 29 licenced stockbroking (including one debt trading member of the CSE) firms.
•    The duly completed client account opening forms together with the relevant supporting documents (copy of the national identity card and a billing proof) must be handed over to the stockbroking firm or the custodian bank to open a CDS account. Read and understand the context of the forms prior to submission.
•    In a share issue, the company publishes a booklet called ‘prospectus’ with information about the company, financial status, future plans and the offer. A prospectus can be obtained free of cost from a stockbroking firm, managers to the issue, the CSE, its branches and website, bankers to the issue, the company offering the shares or any other place that the company indicates.
•     Investors over 18 years of age can apply for an IPO.
•     Send this form directly to the company concerned/stockbroker firm/custodian bank/managers to the issue with payment for the amount due through a cheque or bank draft. For example, if you are applying for 100 shares and the issue price of a share is Rs.20, you have to write a cheque/draft amounting to Rs.2,000.
•     Immediately after the share issue is closed, the company will evaluate the demand for the issue and if investors have asked for more shares than the company initially planned to issue (i.e. in the event of oversubscription) the company will announce the way that they are going to distribute their shares.
•     Where an application is accepted only in part, the refund payment will be made as specified by the applicant due to oversubscription of the primary issue. For example, if you have applied for 1,000 shares at Rs.20.00 per share (total value is Rs.20,000) and due to over subscription, you might only get 600 shares. The company is required to reimburse the money for the balance 400 shares (Rs.8,000) within 10 market days of the closing date, excluding the date of closure of the allocation list.
•     If the shareholder wishes to sell his shares, he/she can contact the stockbroker and give instructions to sell these shares once the shares are listed.
•     When deciding to invest in an IPO, take into account the issue price of the share. Always compare the net asset value per share and the issue price. You can obtain it from the prospectus.

How do you buy and sell shares in secondary market?

•    You should check share prices and observe market activity regularly. You can do it by calling the stockbroker firm, going through daily newspapers, by accessing the website of the CSE or by accessing your stockbroker’s website or branches of the CSE.
•     After buying the shares, an investor can hold the shares for a desired period of time. The selling price and the decision to sell are determined by the investor.
•     After the order is executed, you will receive a bought/sold note from the stockbroker firm. This document confirms the transactions that have taken place with your approval. Bought/sold notes are dispatched by the stockbroker to the clients, before commencement of the next trading session. If you request in writing for bought/sold notes via email, you will receive them at the end of the day.
•     It is advised to analyse the performance of the company prior to investing. The relevant details could be obtained from the annual report of the specific company and the research department of the stock firm you deal with.
•     You could contact your advisor through phone, fax, email or personal visits. You could also trade by yourself through Internet trading facilities.
•    Some investors who don’t have sufficient time to follow the market prefer to let their investment advisors trade on behalf of them at their own discretion. In such an instance, they should sign a ‘discretionary account’.
•     After selecting your stockbroker firm, bear in mind to sign the client agreement. The agreement also draws the client’s attention to the risk that is involved in investing in the market.
•     You must first find yourself a stockbroker firm/custodian bank and open a CDS account through them. If you have the shares by the way of certificates you should deposit them in your CDS account.
•     Any investor can maintain one or more CDS accounts through the 29 stockbroker firms. The stockbroker firm will allocate you an investment advisor to advise you to buy/sell shares.
•    If you intend to trade on credit, you should sign a credit agreement. However, it is advised that new investors should refrain from trading on credit.
•     Make sure that you deal with only ‘certified investment advisors’. Investment advisors should obtain this qualification in order to advice investors.
•     You need to provide your stockbroker with the name of the company, price and amount of shares you want to buy/sell. Investment advisors will advise you as to what to buy/sell. Yet, the ultimate decision to buy/sell should be taken by the investor.
•    Once the order is processed, the investment advisor will inform you of the shares you were able to purchase at the price you required.
•     The buyer must make the payment for the shares bought by the third market day after purchase (T+3). Investors might have to make an advanced payment of 50 percent of the total transaction prior to the purchase of shares. The seller will receive payment for shares sold by the third trading day after the sale (T+3).
•     The CDS will forward to the account holder a monthly/quarterly statement, if such account is active. An account shall be considered as an active account if there was at least one transaction (purchase/sale/deposit/withdrawal/transfer) during the periods referred to above.
•    The investment advisor cannot buy/sell shares without your instructions. If there is a query, please contact the compliance officer of the stockbroking company immediately.

A few tips for investing

•     Bear in mind that investing in the market bears a certain amount of risk. However, the returns are usually greater compared to other financial instruments. If one makes informed  decisions based on fundamentals, he could minimize the risk involved in investing. Learn about the market prior to investing.
•    Don’t trade on excessive credit.
•     You should invest money that you do not require in the near future. Look in to long-term investments rather than short-term.

Opportunities arising from the robust growth experienced in the market could be employed effectively to the economic process only if local and foreign investors continue to invest in the market. The guidelines given above will undoubtedly facilitate the said process.