A week passed by and here we meet with the second chapter of the “Investing in Share Market – Step by step guide”, we have already learnt about opening a CDS account and stock broker account, also we learnt about how to trade with your stock broker. We are going to concentrate on types of “Markets” and how to buy a share in the different types of markets.
Click here to read: Investing in Share Market – Step by step guide – Chapter 01
What are we talking about?
Share market investment is all about investing your money in various listed companies, an investor can buy shares in the primary market or secondary market.
Primary market is where a company willing to issue their shares to public through an Initial public offering (IPO), a company gives publicity to prospective investors when it wishes to be listed or is going to issue shares through an Initial Public Offering (IPO), at this juncture the company will publicise their share issuance through newspapers, websites, radio channels and television.
An investor can obtain relevant information pertaining to the IPO via the “prospectus” which includes information about the company, financial status, future plans and the offer.
Prospectus can be obtained free of cost from a stockbroker/ Managers to the issue/ Colombo Stock Exchange (CSE), its branches and web site/ Bankers to the issue/ company offering the shares or any other place that the company indicates. A willing investor should obtain the prospectus and application prior to the IPO date and submit the application before the cut-off date, make sure to read and understand the prospectus before applying for the IPO, remember to indicate your CDS account number, National Identity Card number and place your signature on the application form.
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Prospectus indicates the share issue opening day and the closing day. Make sure to send the application form along with the cheque/bank draft before the issue closing day. If an issue has more buyers than shares offered the share issue will be closed on the opening day itself.
Immediately after the share issue closes, 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.
The allotted shares would be credited to the applicant’s CDS account electronically. 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 oversubscription, 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 (working days) of the closing date, excluding the date of closure of allocation list.
Thereafter the CSE will announce the first trading day of the shares. Trading of shares will commence within 22 Market days (working days) after the closing of the IPO.
You can start trading the shares on the commencement of the trading day and thereafter the decision of buying and selling the shares solely depends on you.
The secondary market is not complicated as the primary market, most of us know the secondary market as the share market, where you can buy and sell shares through your stock broker. Technically speaking, the secondary market is where an investor sell and another investor buy stakes in a listed company.
Make sure to understand following before trading in the secondary market.
- Make sure that you deal with only “Certified Investment Advisors”. All investment advisors should obtain this qualification in order to advise investors.
- The investment advisor will place your order but the ultimate decision to buy/sell should be taken by the investor.
- Once the order is processed, he will inform you of the shares you were able to purchase at the price you required.
- Once the order is executed, you will receive a Bought/Sold Note from the broker. This document confirms the transactions that have taken place with your approval.
- Bought/Sold notes are dispatched by the broker to the clients, before the commencement of the next trading session.
- The buyer must make payment for shares bought by the 3rd trading day after the purchase (T+3). A first-time investor might have to make an advanced payment prior to the purchase of shares. The seller will receive payment for shares sold by the 3rd trading day after the sale (T+3)
- After buying the shares, an investor can hold the shares for a desired period of time. The selling price & the decision to sell are determined by the investor. You can obtain research reports from your stock brokers to assist you with this decision.
Remember, your stock broker will never hold the liability for your profit or lose, they will receive their broker fee irrespective of your loss or gain, therefore make sure to use your own analysis, and you should check share prices and observe market activity regularly. You can do it by calling the stockbroker, going through daily newspapers, by accessing the website of the Colombo Stock Exchange (CSE) www. cse.lk or by accessing your stock broker’s website., the investment advisor shall not buy/sell shares without your instructions. If there is a query, please contact the Compliance Officer of the stockbroking company immediately.
Share market investment is high risk associated and you should not invest all your savings or emergency funds as you may end up losing. I must quickly remind you that this is a simple guide to start investing in share market and you have to learn a lot to master the art of investing in stocks. You have to learn about different type of boards, different types of indices and different types of stocks. We will look at more advanced learning on share market investment in upcoming chapters.
Disclaimer: The information contained in this article is for informational purposes only, should not be considered as an investment advice. Always make sure to do your own research, talk to your financial advisor and/or seek independent advice where appropriate & necessary.