How to Invest in the Stock Exchange in Sri Lanka
The first question that you need to answer is: Do you aim to invest in shares that trade in the Colombo Stock Exchange, or, Do you prefer to invest in Shares of international companies (Like Apple or Google) trading in the major exchanges (Like the New York Stock Exchange or the London Stock Exchange?. Do not worry: the process is similar, and we will detail both options in this article. We will also present you with a list of international brokers that allow you to trade global financial assets from Sri Lanka [As some of the best options are not available to local residents].
5 Steps to follow when Investing in the Colombo Stock Exchange
We start the article by detailing the 5 most important steps that you need to follow when starting to invest in local Stocks and Shares. Although we will detail more on each step subsequently, we thought that it was a good start to summarize the key points of the process. So, here they are:
Set up your goals and the strategy that you will follow to achieve them: Define if you are a long-term investor or a trader. Your strategy should answer questions like: “Am I going to track the economy’s performance (via investing with an index-linked instrument) or am I going to pick each particular stock?”; “At what price am I going to cash in the investment?”. Your strategy shouldn’t be just a matter of buying one single share, no matter how profitable you believe it will turn, simply because that’s not a strategy.
Choose the Broker that best fits your strategy. This is a key step, if opening an account with a Broker that you end up being unsatisfied with, although you may open an account with another one, you should do it right straight from scratch, right? We display a list of the best brokers available in Sri Lanka in the following section.
Open a Trading Account with the Broker (and fund it). Most Online Brokers will ask you to upload a few documents through their App, an ID and a proof of residence. Upload them and they should take care of the rest. In 1-2 days you are ready to go. Funding options range from credit cards to bank transfers and e-wallets.
Apply your Investment Strategy. When the Broker confirms that your account is set up and you deposit cash, it’s time to apply your thoughts, investment ideas, and goals, in other words, your trading strategy.
Review your performance and calibrate the strategy as needed. You can't expect to get it right from the beginning. When investing, especially in the beginning, you will make mistakes. Learn from them, and improve your strategy. And remember: Investing is a journey that you probably do your whole life.
If instead, you are looking to invest in financial assets from international markets and stock exchanges, the process described before applies as well. In the next section, we present you with a list of trading platforms that will allow you to access these markets.
Trading International Financial Assets with Brokers available in Sri Lanka [What are the best options?]
3 Ways to Invest in Shares
There are 3 basic ways to invest in Shares, although the 3 of them are ultimately placing cash into Shares, the investment vehicle (and the level of diversification) differs.
A stock pick is when an investor concludes that a particular stock will turn into a good investment. Stock picking can be very hard because there is never an easy way to determine the price that the stock will reach in the future. Forecasting is not easy. Stock picking can be contrasted with passive investment management, where the investor buys a passively managed ETF or mutual fund. It is the way most of the investors start with, by saying things like: “I want to buy Shares of Company X”, or “I’ve heard that the price of airline X shares will increase significantly once the pandemic is over”. Stock picking is, in essence, the purest form of investing in Shares. However, it’s not the only (Nor the most recommended way).
Another way of investing in Shares is via diversified investment vehicles, for example, via mutual funds or exchange-traded funds (ETFs), which are portfolios that invest in baskets of stocks, bonds, or other assets.
Exchange Traded Funds
These baskets of stocks are usually based on an index, or a sector, such as energy. ETFs are traded on a stock exchange, just like stocks. Investors are drawn to ETFs because of their low price, tax efficiency, and trading ease. Like mutual funds, ETFs offer investors diversified exposure to a portfolio of securities, such as stocks, bonds, commodities, and real estate. ETFs are traded throughout the day at the current market price like a stock.
Investors buy and sell mutual funds directly from a mutual fund company at the current day’s closing price, also known as the NAV (Net Asset Value). As well as the ETFs, a Mutual Fund is an investment fund that invests in a basket of stocks, bonds, or other assets. One big difference is that these baskets are usually not based on an index but on the decision of the Asset Management team (Delimited by the Fund’s Strategy, which works as the Fund’s laws and rules). When acquiring units of a mutual fund, you may gain exposure to US Shares, as long as the strategy of the Fund includes investing in this asset class.
Bottomline: There are several ways to invest in Shares from the least diversified stock picking way (e.g. “Buying Shares of Company XYZ”) to the most diversified way (e.g. buying a Mutual Fund).
Frequently Asked Questions about Investing in the Stock Exchange
What is the minimum amount to invest in Shares?
The minimum amount will basically depend on the Broker that you invest with. The options that we have presented have a minimum investment amount of just a couple hundred US Dollars. It is indeed quite accessible, although for obvious reasons, your overall performance won’t be very high if you choose to go with the minimum.
Which Shares are hot right now?
We could provide you with a list, but we won’t do it. Simply because, when a share is “hot” it is probably too late to invest in it. Always remember that financial markets price the "hotness" of financial instruments almost immediately. Use your common sense, investment ideas, and follow your investment strategy. Avoid the “Which Shares are hot right now?” type articles, because they were written long after the heat was priced on the stock, hence it’s too late.
"Sorry, I’m a beginner, what are Shares?"
Basically, companies issue shares to access capital to fund their business growth. Company shares refer to an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder (if you buy the share, then you would be shareholder). The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company.
"Excuse me again, I am super beginner, what is the Stock Exchange?"
Don't worry, nobody was born with full knowledge. In short, the stock exchange is the institution that facilitates the negotiation of financial instruments. Supply of financial instruments such as stocks, bonds, currencies, and the demand for these instruments (i.e. investors) interact here.
The Stock Exchange holds daily "Trading Sessions", for which it provides the physical, technological, human and operational means that allow efficient communication between Brokers, Issuers of financial assets and Investors.
What is a stockbroker?
In stock market lingo, a broker is a firm that executes 'buy' and 'sell' orders for an investor for a fee or commission. In short, a broker is an intermediary through which you can buy and sell company stocks.
Why is important to choose the right stockbroker?
To explain why it is important to choose the right stock broker when buying stocks, let me use an analogy. Think about going to the doctor. You want to go to the best one available, however, you may not be able to afford his/her fees. So, when you need medical attention, you have to find a professional doctor, but also, one that you can afford. Now, chosing the right stockbroker is similar. There are technical differences between brokers, but the key point is that there are differences in the fees and commissions that they charge. So, if you just want to invest in a few stocks, think about which one offers the lower costs. If you requiere more sophisticated financial instruments, you should consider other details.