This article is part of a collaborative series by the Securities and Exchange Commission of Sri Lanka (SEC), CFA Society Sri Lanka and the Colombo Stock Exchange (CSE) and which aims to enhance financial literacy and empower individuals with the knowledge and tools to make informed financial decisions and build long-term financial security.

To a beginner, the stock market can seem confusing with all its advanced jargon, news, and endless data. But at its heart, it is based on a simple, fascinating idea: when you buy a share, you own a part of a company. Shares, also known as Equity or stock of a company, represent ownership in a company. When you own a share, you own a small part of the company and may be entitled to a portion of its profits (called dividends) and have voting rights in certain company decisions. The more shares you have, the bigger the share of the profits. Imagine the company as a massive pizza divided into 100 slices. Owning one slice means you hold a 1% stake, a small piece, but still a part of the whole pizza.

For a listed company, issuing shares is one of the main avenues for raising capital to build its products and services, expand or fund its operations, and invest in long term projects.

What do you get as a shareholder?

When you buy a share of a publicly listed company, you become a shareholder, also called an equity holder. This means you have the right to earn returns and have a say in major company decisions, like choosing board members or approving big changes, proportional to the number of shares owned. Usually, one share equals one vote at the company’s Annual General Meeting (AGM). Returning to the pizza analogy, the more slices you’re entitled to, the greater your influence on a company’s decisions.

However, not all shares are created equal. Ordinary Shares give you voting rights and a share of the profits, usually through dividends or capital gains. Preference Shares, on the other hand, typically offer fixed dividends and priority over ordinary shareholders, if the company is closed down—but often come with limited or no voting rights.

How does one go about owning a share?

You can purchase shares from a publicly listed company such as those listed on the Colombo Stock Exchange (CSE), in two main ways:

You can own shares in a company either through an Initial Public Offering (IPO), where the company sells shares to the public for the first time, meaning you’re buying directly from the company as it lists on the stock exchange, or through the Secondary Market. In the secondary market, shares are bought and sold between investors after the IPO, so you’re purchasing from someone who already owns them, not from the company itself.

Buying through an IPO is like getting your slice straight from the pizza parlour when it’s fresh out of the oven. Buying on the secondary market is like getting a slice from someone who already grabbed theirs; it is still tasty, but it’s a trade, not a first bite.

As a shareholder, there are mainly two ways in which you can earn returns:

Capital Gains: This is the return you earn if your investment in shares grows over time. For example, if you buy shares in a listed Sri Lankan company at LKR 50 and the price rises to LKR 120 over a couple of years, selling those shares nets you a LKR 70 profit per share. In Sri Lanka, these gains are often tax-free for retail investors on the Colombo Stock Exchange (CSE), making it a powerful way to grow your wealth.

Dividends: Some companies share part of their profits through dividends. If you own 1,000 shares and the company pays a dividend of LKR 5 per share for the year/quarter, you pocket LKR 5,000. Mature businesses, like established banks or multinational companies, often pay stable dividends, while less mature, high-growth companies, like technology startups, may reinvest profits to grow the business.

What are the risks to consider when investing in shares?

While investing in shares may offer compelling returns, it also comes with inherent risks. If a company performs badly or faces serious financial problems, the value of your shares can drop and in the worst case scenario, become worthless if the company goes bankrupt. In such situations, ordinary shareholders are the last to get paid. So, it’s important to understand the risks before investing.

Why share prices rise and fall

Share prices change based on the laws of supply and demand, how many people want to buy or sell. If more people want to buy than sell, prices go up. If more people want to sell: prices go down. But what drives those choices?

Company Performance: When a company earns strong profits, releases new products, more investors will want to buy its shares. But if the company reports poor results, investors may sell. That’s why it’s important to watch quarterly reports and news that could affect the company’s performance.

Economic Factors: Indicators like inflation, interest rates, or exchange rate can affect the whole financial market. For example, if the Central Bank of Sri Lanka (CBSL) raises interest rates making interest earning assets more attractive. As a result, investors may shift from shares to interest-earning assets like bonds and fixed deposits.

Investor Sentiment: Both local and global events, like global conflicts and government decisions, can affect how people feel about the market. In smaller markets like Sri Lanka, foreign investments or large trades can cause large price movements, especially in less liquid shares (shares that are traded with reduced frequency). Long-term investors do well by ignoring short-term noise and focusing on company fundamentals and long-term growth prospects.

Avoiding common pitfalls: lessons for new investors

Getting started in the stock market is easier than ever, but sticking with it takes self-control and discipline. Many new investors lack discipline in investing and end up panicking and selling when the prices drop, relying on advice from friends or social media, or putting too much money into shares of one company. These are emotional decisions, not smart investment choices.

Some investors new and experienced buy shares without knowing what the company does or how it earns money.

A simple rule of thumb when evaluating a company, beyond the numbers, is to ask yourself a few practical questions: Do I understand how this company makes money? Would I be comfortable holding its shares for five years? Do people genuinely use or love its products? Do I trust the leadership team? And importantly, does its long-term vision align with my values and goals? These kinds of questions help shift your mindset from speculation to ownership. They force you to think critically before investing your hard-earned money.

Buying shares isn’t about following popular tips or picking familiar names. Start with the basics: review its earnings history, growth potential, and business model. Financial analysis, like the Price-to-Earnings (P/E) ratio or dividend yield, offers useful signals, but they’re just part of the story. Great investors also study the quality of companies’ leadership, industry trends, and long-term strategy. Is the company managing risks well? Does it have room to grow? Does it stand to benefit from technological developments? Here are some of the questions you might ask yourself.

The price you pay for a share matters just as much as the company you’re investing in. A share might be overvalued or undervalued depending on its performance, growth outlook, and risk factors, and figuring out the right price is often a moving target. Equity analysts regularly publish reports and recommendations on popular shares, which can help guide your decisions. The key is to stay objective: even if you believe in a company’s future, overpaying for shares could turn a good business into a bad investment.

At the end of the day, investing is a blend of analysis and conviction you need to know what you’re buying and why.

Getting started in Sri Lanka

In Sri Lanka, shares trade on the Colombo Stock Exchange (CSE). To begin, you can open a Central Depository System (CDS) account through a licensed broker. From there, you can place buy or sell orders via your broker or an online platform. Before you sign up, make sure you understand the various fees and costs that are associated with trading. Trades match electronically: if you want 1,000 shares of a company at LKR 70 and a seller agrees, the deal is done. Prices update in real-time based on market activity. Share trading is now easier than ever with the CSE mobile app, which is a great source of information and a means to track the performance of your investments.

The Securities and Exchange Commission (SEC) regulates the CSE, ensuring companies share key information and investor interests are protected. This transparency builds trust and confidence amongst investors in the market.

Beyond the Numbers

Shares aren’t just ticker symbols; they reflect part ownership in real businesses tackling real problems. Shares, as an asset class, have historically offered higher long-term returns than fixed income investments like deposits or bonds. Yet in Sri Lanka, relatively few individuals invest in shares due to a lack of familiarity, low confidence, concerns over past market manipulations, or simply not knowing how to get started.

Despite these challenges, investing in shares can be a powerful tool for long-term wealth creation, diversification, and protection against inflation. Market ups and downs are normal, and these cycles are part of the journey. And if you’re unsure where to begin or don’t have the time to manage individual shares, Unit Trusts can offer a simpler, professionally managed alternative to gain exposure to the stock market. We will explore Unit Trusts in more detail in a future article.

If you can be patient and disciplined, investing in shares is a proven path to long-term wealth creation. As the renowned investor Warren Buffett puts it, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” See yourself as an owner, not just an investor, and approach each decision with curiosity and care. The key is to start small, stay patient, and let your stake in great businesses pave the way to a stronger financial future.

by Umair Ismail, CFA