Getting the Basics Right

8/9/2019 Getting the Basics Right

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InvestingGet t in g t h e Basics Righ t

Malinga Arsakularatne, CFA

Chief Financial Officer

Hemas Holdings PLC



Overview

■ Saving versus Investing

■

Investor Life Cycle How investor requirements and preferences change over time

■ Investing in Shares

■ Stock Market and Instruments

■ Basic Guidelines for Investing

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Saving versus Investing

Saving

Objective: Protect your money

Involves virtually no risk

Return requirement is low

Examples – Bank deposits,

Short term Treasury bills

Investing

Objective: grow your money

Involvement of risk Return requirement is high

Examples – Shares, Property

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Saving

■ Impacts immediate consumption

■ May not lead to an increase in real wealth

Returns on savings are generally below inflation Reduction or no increase in purchasing power

■ Important when planning for short-term needs

To payoff a liability in one year

To purchase a house in six months

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Investing

■ Impacts immediate consumption

■ Higher growth with short-term fluctuations

Returns are expected to exceed inflation Increase in purchasing power

Need to withstand short-term volatility

■ Important when planning for long-term needs

To own a house in 5 years For children’s education in 10 years

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Investing is not Speculating

■ Some people speculate on short-term share price movements

■ Short-term speculative gains could be very high at times, but so

are the speculative losses

■ Therefore speculating is a very high risk activity compared to

investing

■ Investing involves analyzing company fundamentals and longer

term holding periods as against speculating

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Types of Investments

■ Equity investments

Listed shares

Unlisted shares

■ Bonds

Treasury bonds

Corporate bonds

■ Mutual funds Equity mutual funds

Fixed income mutual funds

■ Property

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Factors affecting your investment choice

■ Your wealth

■ Your liabilities

■

Your income■ Your expenses

■ Your age

■ Your appetite for risk

■ Your individual preferences

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Investor Life Cycle

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Age

Net Worth

Accumulation

Phase:

Long‐term:

Retirement

Children’s college

Short‐term

House

Car

Consolidation

Phase:

Long‐term:

Retirement

Short‐term

Vacations

Children’s college

Spending

Phase:

Long‐term:

Estate planning

Short‐term

Lifestyle needs

gifts

40 ‐ 45 yrs 60 ‐ 65 yrs



Accumulation Phase

■ Individuals in their early-to-middle years of their working careers

■ Small net worth; high indebtedness possible

■

Long investment horizon■ High future earnings capacity

■ High risk tolerance: willing to make relatively high-risk

investments in the hope of making high returns over time

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Consolidation Phase

■ Individuals who have passed the middle stage of their careers

■ Paid off much of their outstanding debts

■

Earnings > Expenses => Savings■ Investment horizon is still fairly long

■ Medium risk tolerance: willing to make moderately high-risk

investments, but do not want to take large risks

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Spending Phase

■ Retired individuals

■ Living expenses are covered by pension, investment income etc

■

Little or no earnings => need greater protection of capital■ Investment horizon shorter than earlier phases

■ Low risk tolerance: investments less risky than earlier phases

but need some growth for inflation protection

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Investing in Shares

■ Ownership

Shares represent ownership in a company

■ Upside Potential

Shareholders can participate in the growth of the company

■ Risk Share prices fluctuate and returns are not guaranteed

■ Long-term Horizon

Shares are essentially long-term investments

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0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

V a l u e

( R s )

Price Level ST Deposit Stock Market

Investing in Shares: Risk v Returns

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23.8% pa

8.3% pa

11.3% pa



How much should you invest in shares?

■ Investing in shares involves a certain level of risk

■ Do not invest in shares beyond your appetite for taking risk

■

You should put some money in fixed deposits and Treasury billsto meet your short-term needs

■ General Guidelines

In the accumulation phase you can afford to invest more of your

money in shares In the consolidation phase share investments should be moderate

In the spending phase your investments into shares should be low

■ However depending on your individual situation above

guidelines may vary

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Stock Market

■ A place where shares of companies are issued and traded

■

Shares can be traded through stock exchanges or over thecounter

■ Stock market can be split into two main sections

Primary market: where newly issued shares are initially offered toinvestors

Secondary market: where initially offered shares are subsequently

bought and sold

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Colombo Stock Exchange

■ The Colombo Stock Exchange (CSE) is the organization

responsible for the operation of the stock market in Sri Lanka

■ A stock exchange provides a liquid, open market for buying and

selling of shares, debentures of publicly owned companies

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Central Depository System

■ The Central Depository System (CDS) is a fully owned

subsidiary of CSE

■ The CDS carries out the following key functions

Registration of investors: through stockbroker

Deposit of securities: holding the securities in trust

Settlement of transactions

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How do you buy and sell shares?

■ For shares of companies to be bought and sold through the

stock exchange, those shares should be ‘listed’ on the stock

exchange

■ Shares can be bought and sold in the primary market from a

new issue (IPO)

Shares can be bought directly from the issuing company

Shares can be lodged in the CDS

■ Shares can be bought and sold on the secondary market

through a stockbroker

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Why do companies list on CSE?

■ To raise funds

■ To realize value

Listed shares are traded => there is a share price

■ Greater visibility, image for the company

■ Companies can be listed on one of two ‘Boards’

Main Board

Dirisavi Board

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Types of securities traded on CSE

■ Ordinary shares

Voting

Non voting

■ Preference shares

■ Warrants

■ Corporate and Government Debt

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Ordinary Shares

■ Ordinary Shares represent ownership of a company

■ Ordinary shareholders bear price volatility

■ Dividends are not guaranteed

■ In the event of liquidation ordinary shareholders’ claims will be

settled after other claims are settled

■ Ordinary Shares can be issued with and without voting rights

For a given Company, ordinary shares with voting rights wouldhave a higher price than those without voting rights

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Preference Shares

■ Preference shareholders are entitled to a pre-determined

dividend (generally based on a dividend rate) provided that the

company makes profits

■ Preference share are generally redeemable

■ Preference dividends can be cumulative

■ Preference shareholders have no voting rights

■ But they rank above ordinary shareholders With regard to dividend payments

In the event of liquidation

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Share Warrants

■ Holder of warrants has the right to purchase shares of a

company on a future date at an agreed price

■ Share warrants are issued by companies and traded on the

exchange

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Indices

■ All Share Price Index

■ Milanka Price Index

■ Total Return Indices

■ Sector Indices

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Basic Guidelines for Investing

■ Diversify

Across asset classes: shares, bonds etc

Within shares: different industries

■ Get investment advise

Stockbrokers & Analysts, Research reports

■ Consider investing through mutual funds / unit trusts

A pool of money from various parties collectively managed by a

Fund Manager, who will invest your money on behalf of you in

appropriate securities

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Basic Guidelines for Investing

■ Study company fundamentals

Industry, company strengths/weaknesses, management

■ Look at company valuations

Does the share price fully reflect the company value?

■ Don’t panic in a crisis From time to time unexpected or extreme events take place

causing the market to panic

During a crisis investors overreact – wait till the market settles

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Thank you

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Getting the Basics Right

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