Investing in Colombo Stock Exchange

As most of us wondering what is happening in the Colombo bourse at the moment and few others fancying about their portfolios territory movements, there are ample of people who don’t know what CSE is all about, as I cited in the post about me I always wanted to be a tutor for those who don’t know or don’t have the luxury to know about what is happening around them on day to day basis.

There are not much excuse the educated crowd without having crisp on business language English, so this post is fully on English in turn to make the terminologies I use here to have their real meanings and of course to improve my skill in language as well.

Since this is my first post on the topic of CSE I would like to just browse through how it works, who are the stakeholders, the terminologies used, and eventually how to make use of this fantastic investment opportunity in our life too.

Stock Exchange is the intermediary between the organizations which need new capital injections and the investors who want good compensations for their hard earned money, as you all know an organization’s future depends on how well they manage their wealth and expand their entity amongst the country, compete with the competitors eventually to increase their market shares, for that they need cash inflows and always cannot relied on internally generated funds ( In Accounting term Retained earnings) so only option left is go for external funds, which is also has two ways one is debt fund and later is equity infusion, debt often referred to as Bank loans, debentures issuance etc, thus is the receiving entity has to make repayments and the interest bearings annually( if its Bank Loans) or as per  guidelines set out in agreement ( if it Debentures or other instruments), these sort of obligations cannot always taken care by an organization since they operate in volatile economic and industry place, so one less hassle free funding option is to go for public for their need for the capital, which doesn’t have the obligations to return fund providers an annual repayment or dividend in comparison to debt funds,  only one and major concern for the company is their ownership will be diverted, it can be mitigated only listing a small percentage of its ordinary voting shares on stock exchange ( for ex:- Nestlé Sri Lanka has listed only 10% of its shares on CSE)

In the view of Investors, they always want higher return for their money which is higher than risk free rate ( Government Bonds) in layman term they need compensation as well as better return for their present consumption forgone, so stock market is one of such places to get some quick money, in most cases by burning their fingers and in some cases burning others fingers,  common theory is one’s rise is depend on other one’s falls so which is evidenced in Stock market, during 2009,2010 period in political, economical, sociological or whatever term which is said to be the post war boom period, Colombo stock exchange shown some impeccable growth during this season and some shares jumped to 200 % – 300 % in their share prices, which is indeed very big money, an average smart investors would have earned 60 % - 70 % in return on his/her investments during that period, that boom has brought several new retail investors into the market in huge numbers ( During 2010 if I’m not wrong on average 6,500 CDS Stock Trading Account were opened ) and market didn’t disappoint them actually greeted them well with at least 20 – 30 % of return on each and every one’s investment, mostly return were showed in  Initial Public Offering stage (IPO first time ever a company listing in the market by issuing new shares, those shares have to be bought through the direct application made to the company and which is said to be the primary market), people who were impressed with the return started to reinvest and drew new members to the market as well, from there on wards market has started to show its negative face to the investors.

All those return, indices upward moment, hike in stock prices are not drive through the fundamentals or market activity, which were pushed notionally, in other words by some good millionaires and billionaires money rain, otherwise we cannot find any rational to see an unearth 5,000 points increase in All island share Indices (ASI) (which is the major index for analyze CSE’s performance) within the span of 2 years just 24 months, so what has actually happened did the companies performed well in their operations?, did the Sri Lankan economy grown from 4.5% to 14.5 % GDP? Answer is NO, of course companies did perform well and Sri Lankan economy grew to 8% better amongst the Asia even matched with the developed countries growth rate, but these elements will not stand as the reason for that huge 5,000 points increase,. This is the real scenario few institutional investors ( Those Millionaires & billionaires) started to buy shares from selected counters  at regular intervals so demand for those shares were high enough to push the price up so retail investors who don’t study the market, don’t do  their own home work started go beyond those share as well and started to pocket it up, at one point there were huge demands for those shares and no one is there to sell, there came the those big fishes who collected the shares earlier begun to dump their holdings again on regular basis without disturbing the equilibrium of the market  then only the price would stay with very small fluctuation, it become habit in the market again and again those big fishes did the same things and as always retail crowds went behind them, they showed them with an eye catching Rs 20 profits and end of the day flatten them with Rs 100 loss, with that scenario credit given by the broker firms also helped those institutional players to earn profit eventually on notional  initial investment ( for ex:- Mr.A got credit from its broker to buy 100 shares at Rs 10, after few days of trading he sold the share for Rs 20, so he get out the market with nearly Rs 1,000 profit after paying small proportion of interest on that loan but market didn’t see the actual cash inflow, where as retail investors didn’t have that facility and they always had to invest with their own money ).

I Personally know there are some people who made immense of wealth through stock market and equally same number of people who lost drastically, so the golden rule of investing in Sri Lankan stock exchange is get into the market on your own with very few portion of your savings being invested,  buy some blue chip ( Companies which have good earnings throughout years, the share price of which is less volatile, the market capitalization of the share, market share  it has in the market it operates etc) shares, once you welcomed to the market then you will get the urge to do research, read articles which related to the market ( I would recommend to read Daily FT paper on daily basis) and talk to the peers to get to know their personnel experiences. Don’t go beyond what others follow when it comes to stock market, try to figure out which shares to buy and when to buy at your own analysis, which analysis are very straightforward and not like robot science as others always pretend it to be that science.

As time permits will write more in this particular topic and wish not to focus more on technical and in depth analysis, but try to clear the alienation between general public and CSE. I always welcome any queries; more explanation etc on related to topic and wishes you all the best and specially those who want to be the next Warren buffet :).