If you have read our previous posts on Investing in Sri Lankan Stock Market, now is the time to select a suitable stockbroker.
If you couldn’t read any of our previous articles and you just landed on this post, you can check out our previous articles by following these links on How to make money in Sri Lankan stock market, Basics of the Sri Lankan Share Market, How to open an account in Colombo Stock Exchange.
Now to the good stuff. Put your thinking hat on and start reading.
Who is a stockbroker?
This is one of the most common questions any beginner investor has. Who are these guys (and girls) called “stockbrokers”?
Investors like you and me cannot purchase stocks directly from Colombo Stock Exchange (CSE). We need a middleman to do that for us. That’s why they are called “brokers.” They act as the “broker” between you (investor) and the CSE (where shares are bought and sold).
These broker firms are called “stockbroker firms” and there are 27 broker firms in Sri Lanka. You can check them out by clicking this and this. They have the authority and power to trade (buy and sell) stocks on behalf of you. (The brokering firm will facilitate you to buy and sell stocks in the Colombo Stock Exchange)
Why do you need a stockbroker?
A stockbroker is a person who works for a stockbroker firm. Your stockbroker is responsible to buy and sell stocks on behalf of you. For example, if you want to buy 1000 shares from Abans Electricals PLC, all you have to do is inform your stockbroker and he will do the necessary.
Someone can’t become a stockbroker just because he or she wants to. There are certain requirements from SEC (Security Exchange Commission) that an individual needs to fulfill to become a stockbroker. There are exams, interviews, and experience in the field of stock brokering, required to obtain the license to become a stockbroker. That’s to make sure that investors like you and me are in good hands.
To start investing in CSE, first you need to find a stockbroker firm and register under them. Once you register and open an account in CDS (Central Depository System), your stockbroker firm will allocate a stockbroker for you.
How do you know if your stockbroker firm is good?
Well, you really can’t know this until you start dealing with them. Best is to get some recommendation from a person who is already investing in the stock market.
Every stockbroker firm has their own research teams. They have financial experts who continuously watch out and analyze what’s going on in the Colombo Stock Exchange. Based on their research, they recommend clients (in this case, it’s you) to buy or sell certain shares of different companies.
Can you buy stocks directly from Colombo Stock Exchange without registering with a stockbroker firm?
In most other countries, you don’t need stockbrokers. You can directly purchase stocks using online websites that are provided by their stock exchanges.
But in Sri Lanka, we don’t have that facility. So whether we like it or not, we have to go through a stockbroker firm.
How do stockbrokers make money?
If you ever wondered how stockbrokers make money, it’s simple. They make money out of you! For every transaction you do (whether you buy or sell) they charge a commission (%) from you.
So make sure to ask your stockbroker what charges and payments are involved in their firm before registering with them. Mostly it’s the following fees that are defined by CSE. https://www.cse.lk/home/transactionCosts
|Transactions up to LKR 100mn – 1.12%|
|Share Transaction Levy||0.300%|
|Total transaction cost||1.120%|
Here’s an example. If you buy/sell shares worth of Rs.1000, you will pay a transaction fee of Rs.11.20.
Can you buy and sell stocks without getting help from your stockbroker?
Yes. Some stockbroker firms give you access to their online platform, where you can place your buy/sell order directly through their trading platform. That’s one thing you need to consider when selecting a stockbroker firm. If you are confident that you can make your own investment decisions, I would recommend selecting a stockbroker firm that offers online facilities. You can check out the stockbrokers who provide online access by clicking this link.
So what’s next?
Now is the time to select a stockbroker firm. You don’t have to register with the first stockbroker firm you visit. Check out few firms. Inquire about the additional benefits they provide apart from the usual buying and selling. If you want to trade at the ease of your home, make sure you register with a firm who provides online trading facilities. I hear that some broker firms have minimum investments to provide additional benefits like online trading so be mindful of them.
After all, you’re investing your money. Even if the stockbroker is bound to make decisions based on your interest, they will not be responsible for any losses. We are all human and humans make errors. This applies to stockbrokers too. Don’t take their advice blindly without questioning them. The best thing for any investor is to do your own research and make wise decisions.
If this sounds a bit scary, don’t worry. Investing is not rocket science. After all, like any skill, investing can also be learned. It doesn’t matter if you don’t have any idea about stock investing. All you need is some common sense and a hunger to learn. Read our next post in this series on How to buy your first stock in Sri Lanka.
Now go and start investing
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