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Invest in the Sri Lankan Stock Market: The Ultimate Guide 2020

Do you want to invest in the Sri Lankan stock market?

This is the ultimate guide to investing in the Sri Lankan share market.

This post is written for beginners as well as for experts.

You don’t have to know anything. I’m going to take you from what is a stock to how you can get started.

By the end of this post, you’re going to know everything about investing in the Colombo Stock Exchange.

Let’s get started.

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 own a part of that company.

Whether you say shares or equity, it all means the same.

Why do companies issue stock?

For a company to grow, they need more money. To find more money, they have two options.

  1. Borrow money (debt financing)
  2. Issue stocks to the public (equity financing)

Borrowing money from a bank (or a wealth management company) is expensive.

They have to pay the debt + interest each month.

The second option is to issue stocks and give a part of their ownership to the public. In exchange, the investors receive stocks (shares/equity) 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 its business while you get a share of ownership of the company.

What’s in it for the investor?

After purchasing stocks, investors are entitled to ownership to the company.

You will own a piece of every building and every manufacturing plant of the company.

But how do you make money in the Sri Lankan stock market?

There are 2 ways.

  1. Capital gains – Imagine you buy a share of Singer for Rs.100 today. After a year, the price of Singer Share increases to Rs.125. Then you can sell your share and make Rs.25 as profit. This is known as a capital gain.
  2. Dividends – Companies pay an amount from their profit quarterly or annually. This is not guaranteed but most companies pay dividends.For example, Singer would offer Rs.2 dividend annually for every share your own. If you own 1000 Singer shares, you will be Rs.2000 as dividend income. (Rs.2 x 1000 shares)

That’s how you make money in the Sri Lankan stock market.

What is the downside? How can you lose money?

Let’s say you buy a share of a company for Rs.100. If the share price appreciates (increase in value) after some time, you will have a capital gain.

But if the share price comes down to Rs.75 you will lose Rs.25 of your investment.

That’s how you lose money on the Colombo Stock Exchange.

But don’t worry. We’ll make sure you don’t lose any!

What is the stock market?

The stock market is the place where investors buy and sell stocks.

Just like there are markets for vegetables, the stock market is the market place for shares.

Sri Lankan stock market is known as the Colombo Stock Exchange.

Colombo Stock Exchange

Colombo Stock Exchange is a market where investors buy and sell shares.

If you wondered where CSE is located, it’s in the World Trade Center and it has branches in Kandy, Gampaha, Matara, Negombo and Kiribathgoda.

Colombo Stock Exchange where all the public companies have listed their stocks.

As of today (4th of April 2020) there are 290 companies with Market Capitalization of Rs. 2,748.10 Billion.

Pro tip – Every company that’s listed on the Colombo Stock Exchange is known as Public companies. You cannot buy shares of Private companies from the Colombo Stock Exchange.

Other than the Colombo Stock Exchange, there are few essential players in the Sri Lankan share market.

Security Exchange Commission (SEC)

SEC is the regulatory body of the Sri Lankan stock market.

Their job is to ensure that everything happens fairly, efficiently in a transparent manner.

They make sure that whatever happens in the Sri Lankan stock market is fully disclosed to the public.

They protect investors against fraudulent and manipulative practices. You can find out more about them here.

Central Depository System (CDS)

CDS is the accountants of the Sri Lankan share market.

They hold the stocks in custody on behalf of companies and investors. They are responsible for clearing and settling transactions in the Colombo Stock Exchange.

Even though they are a ‘depository’ system, they don’t maintain a physical stock of all the shares in Sri Lanka (because all shares are held in electronic form).

Every investor should open a CDS account to invest in the Colombo Stock Exchange. That’s where the stockbrokers come in.

Stockbrokers

Who are stockbrokers?

They are the middle party that connects buyers and sellers to facilitate transactions.

If you want to buy or sell 100 shares of Dialog PLC, you have to ask a stockbroker firm to do it on behalf of you.

Every investor needs a stockbroker in Sri Lanka.

So in a nutshell, when you want to buy stocks, you place your order via a stockbroker, and your order is sent to the order book in the CSE.

If your price matches and the transaction gets executed, the CDS will transfer the shares to your CDS account from the seller’s CDS account.

The settlement is made on a T+3 basis (Transaction Day plus three days).

How can you start investing in the Sri Lankan stock market?

The first thing you need is a CDS account.

To open a CDS account in Sri Lanka, you need a stockbroker. There’s no other way.

Currently, there are 27 stockbrokers in Sri Lanka. Read my guide on how to select a stockbroker in Sri Lanka.

Once you select a stockbroker, you can visit them at their office or register online (if provided).

Minimum requirements to open a CDS account in Sri Lanka

  • Age – You need to be 18 years old to start investing in the Colombo Stock Exchange. That is a must. So if you are below that, you have no option but to wait till you’re 18!
  • Resident in Sri Lanka – You have to be a resident in Sri Lanka. For non-residents, read further.

Forms, forms, and more forms

Like in every account, there are some forms that you need to submit to become an investor.

The following are those forms and a small introduction of what they are.

All these forms will be given to you by your stockbroker.

So don’t worry too much about them.

  1. NIC copy – You need to provide a clear photocopy of your NIC or a valid passport copy. If you have lost both NIC and passport (you must be a really clumsy person) a copy of the Driving License should be submitted, together with an Affidavit (a written statement confirmed by oath or affirmation, for use as evidence in court) confirming the fact that both NIC and Passport are not available.
  2. CDS Form 1 – This is the application for Opening of Securities Account (For Individuals)
  3. CDS Form 1(A) – Declaration Form
  4. CDS Form 26 – If you want to get monthly electronic statements of your account, you need to submit this.
  5. KYC (Know Your Customer) Form – This form is given by your stockbroker to collect some more information about you. This is different from one broker to another.
  6. Internet Trading Facility Agreement – If you’re planning to trade online (more on this in a future post) you need to submit this form. Again, this is different from one broker to another.
  7. Proof of residency document – Some kind of a bill (any utility bill would do) to prove your resident address needs to be provided

Once you submit these documents to your stockbroker, they will send them to CDS (Central Depository System). You will get an email once your CDS account is created.

What if you’re not a resident in Sri Lanka?

If you’re a Non-residential Foreigner or Non-residential Sri Lankan, you still can invest in the Colombo Stock Exchange.

The following are the documents you need.

Non-residential Foreigner

If you’re a foreigner who is interested to invest in the Sri Lanka share market, you need to provide the following documents.

  1. A copy of the valid Foreign Passport for Non-nationals
  2. CDS Form 1– This is the application for Opening of Securities Account (For Individuals)
  3. CDS Form 1(A)– Declaration Form
  4. Proof of residency document as per the Rules issued by the Financial Intelligence Unit of Sri Lanka
  5. If a Non-national applicant wishes to open an account giving a local correspondence address that person should provide sufficient information regarding the correspondence address (e.g. valid residential visa)
  6. SIA (Securities Investment Account) account details with documentary proof – SIA is a special account designated for eligible investors resident outside Sri Lanka to route funds to invest in the permitted investments. Authorized dealers are permitted to open and maintain SIA in the Domestic Banking Unit of a licensed commercial bank in the name of the investor resident outside Sri Lanka, subject to the terms and conditions stipulated in the Direction given below

Non-residential Sri Lankan

If you’re a Sri Lankan who is a non-resident, you need to submit the following documents.

  1. A copy of the valid Foreign Passport for Non-nationals
  2. CDS Form 1 – This is the application for Opening of Securities Account (For Individuals)
  3. CDS Form 1(A) – Declaration Form
  4. Proof of residency document as per the Rules issued by the Financial Intelligence Unit of Sri Lanka
  5. If a Non-national applicant wishes to open an account giving a local correspondence address that person should provide sufficient information regarding the correspondence address (e.g. valid residential visa)
  6. SIA (Securities Investment Account) account details with documentary proof – SIA is a special account designated for eligible investors resident outside Sri Lanka to route funds to invest in the permitted investments. Authorized dealers are permitted to open and maintain SIA in the Domestic Banking Unit of a licensed commercial bank in the name of the investor resident outside Sri Lanka, subject to the terms and conditions stipulated in the Direction given below

If it looks complicated, trust me, it’s not.

It’s similar to opening a bank account and can be done in a jiffy.

To sum things up, all you need to do is find a stockbroker and they will assist you with all the documentation.

You don’t have to take any forms with you. Your stockbroker will provide all the forms you need.

What do you think?

Now you know everything you need to get started in the Sri Lankan stock market.

The next step is selecting a stockbroker. Read my ultimate guide on selecting a stockbroker in Sri Lanka.

Now it’s your turn

Did you learn something from this post?

Add a comment below and let me know.

If you want to start investing in Sri Lanka, we have practical workshop for you. It’s called Investing Essentials. To learn more and join the next workshop, click here.

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Nishan De Silva

Nishan is the founder of Jump.lk. He is a Blogger, YouTuber, Coach, Speaker, and Entrepreneur.

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