We have all heard about “buying stocks” and “selling stocks.” You may have even learned about the Sri Lankan stock market in school or the university. Sometimes you hear stories of people making “killings” in the stock market and you pretend to understand what they are talking about.
Maybe you have always wanted to invest in the Sri Lankan stock market but never had the “right time” to do it. Even if you had time, you may not know the process of investing in the stock market. You may have been even frightened of the stories you hear about market crashings. Or that friend who keeps on telling you how investing in the Sri Lankan stock market involves “high risk” even though he has not invested a rupee.
If the only way you invest is by saving your income in a bank account, hate to break it to you but you will not succeed as an investor. So, we decided to educate you on what’s stock investing with a series of posts. By the time you finish reading them, you will know everything you need to know about investing in the Sri Lankan stock market. And don’t worry. You don’t have to be a financial hot shot to understand what stock investing is. We will drill down everything to basics so that even a monkey can understand what stock investing is all about!
What is a stock?
A stock is a small piece of a company. It’s a small piece of ownership to a company. If you have 1 stock from a company, you have a small claim to its assets and earnings in the future. Whether you say shares or equity, it all means the same.
Why do companies issue stock?
Now you may wonder why a company wants to hand over their ownership to stock investor like you or me. After all, do you want to give ownership of your company to an unknown person? I thought so. But for a company to grow, they need more money. To find more money, they have two options.
- Borrow money (debt financing)
- Issue stocks to the public (equity financing)
Borrowing money from a bank is costly for companies. They have to pay the debt + interest each month. This is too much hassle for companies. Then they turn into the second option.
Second option is to issue a number of stocks to the public and ask them to buy it. In exchange, the investors receive “stocks” while the company receives money.
This is different than borrowing money from a bank. When issuing stocks, the company does not have to pay back for the investor and there is no interest payment involved. So the company gets enough money to grow them while we get a share of ownership of the company.
What’s in it for the investor?
After purchasing stocks, investor is entitled for the ownership of the company. You will earn a piece of every building and every manufacturing plant of the company. But how do you actually make money? Basically there are 2 ways to monetize your investment.
- Sell your shares – You will buy shares of a company hoping that its value will increase in the future. If you buy a share for Rs.75 and after two months its price increase to Rs.100 you can sell it and get Rs.25 profit.
- Dividends – Companies pay an amount from the profit they make quarterly or annually. So for each share, you will receive some money based on the profits of the company.
What is the downside?
Let’s say you buy a share of a company for Rs.100.00. If the share price appreciates (increase in value) after sometime, you will have a capital gain. But if the share price come down to Rs.75.00 you will lose Rs.25.00 of your investment. So what if you lose money? Don’t worry. We will make sure that you know enough to make money than lose them.
What is the stock market?
Stock market is the place where all the stocks are sold and bought among investors. Like there are market places for vegetables, stock market is the market place for shares. If a hot shot economist talks about “equity market” don’t go bonkers. Stock market is also known as the equity market.
Different countries have different markets. USA has two stock markets namely New York stock exchange and Nasdaq. For us Sri Lankans, we have the “Colombo Stock Exchange.” Every Sri Lankan company that has issued stocks is listed in Colombo Stock Exchange. As of today 295 companies are listed in the stock market.
So how can I invest in the Sri Lankan stock market and make money?
This is the biggest question any beginner has. What do you actually do to invest in Sri Lankan stock market? That’s what we will be covering in the next few weeks. So keep on reading Jump.lk for more juicy knowledge. If you want to get our posts directly to your mail, add your email below and sign up. That way you will not miss a single post.
Read the next post in this series, What are the main components of Sri Lankan share market by clicking this link.
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