Enhancing your financial literacy with CSE Education Academy Understanding basics of stock market, investments, equity and debt

By Colombo Stock Exchange

Investing is an essential part of financial planning, offering opportunities for growing wealth and financial security. Whether you’re a novice or a seasoned investor, understanding the fundamentals of investments and the stock market is crucial.

What is a stock market?

The stock market is a broad term that refers to the entire system of buying and selling securities, including stocks, bonds and other financial instruments. 

A stock exchange, such as the Colombo Stock Exchange (CSE), is a regulated entity, which provides a platform via the stock market where securities can be officially traded. It serves as a formal venue where the buyers and sellers execute transactions, ensuring trades are conducted transparently and in a fair manner. 

What is an investment?

An investment involves purchasing a financial or real asset with the expectation of earning a return in the future. Financial assets can include shares, debentures issued by companies or government securities like treasury bills and bonds issued by a central bank such as the Central Bank of Sri Lanka (CBSL). Real assets encompass tangible items such as land, buildings, equipment and vehicles. Generally, investments offer higher returns compared to savings but comes with higher risks.

What does it mean to ‘invest’ in the stock market?

Investing in the stock market involves putting your disposable income into various securities with the expectation of earning returns over time. Stock prices fluctuate daily and investing in stable stocks can potentially lead to profits through capital gains or dividends declared by companies.

Where do equity and debt come in?

Equity and debt are two fundamental types of investments in the stock market. When you invest in equity, you purchase the shares of a company, becoming a part-owner. This grants you a share of the company’s profits and often the voting rights. Equity investments can lead to higher returns through capital gains and dividends but come with higher risks, due to the fluctuating stock prices. 

Investing in debt involves lending money to a company or government, typically through bonds or debentures. Debt investments do not offer ownership but provide regular interest payments and return the principal at maturity. Debt is generally considered lower risk compared to equity, offering more stable but usually lower returns.

Why should you invest in the stock market?

Investing in the stock market offers several advantages, including wealth accumulation, income generation and diversification. Stock market investments help hedge against inflation and are typically more liquid than other types of investments, meaning they can be quickly sold and converted into cash. This flexibility and liquidity give investors greater financial control, making the stock market an attractive option for those looking to grow their wealth over time.

Mastering these basics empowers informed decisions. Join us next week as we elaborate on listing platforms, price indices and more.