Adaptable preparation sequence: (1) Skim all six topic areas once, marking every place where two concepts share a definition border, such as rights versus bonus issues or warrants versus options. (2) For each border, write a one-line decision rule and a two-line worked example with numbers you invent. (3) Cycle through practice sets at /free-practice/certificate-in-equity-securities, redoing only classification errors, not computational slips. (4) Rebuild one full company paper case per week applying Sections 1, 2, and 5 together. Self-check rubric after each weekly case (learning milestones, not pass predictions): share count adjusted for announced capital changes (2 points); valuation method justified by company characteristics (2 points); ratio numerator and denominator correctly paired (2 points); regulatory fact assigned to the statute, the exchange, or the intermediary level (2 points); order or dealing decision consistent with the information and liquidity setting (2 points). A running total of 8+ indicates exam-ready fluency on that case type. Readiness checks before you stop revising: you can derive a theoretical ex-rights price without notes; you can state which metric changes mechanically after a bonus issue and which does not; you can route five regulatory facts to the correct body in under two minutes; you can explain why a Gordon growth model is inappropriate for a non-dividend payer without hedging. One administrative note: for registration procedures, scheduling, and any current syllabus details for the Certificate in Equity Securities, confirm directly with the credential issuer via the Securities and Exchange Commission of Sri Lanka at https://www.sec.gov.lk, since administrative specifics change and are not reproduced here.
Rights and bonus issues: why your share count goes stale mid-question
Bonus issues and rights issues both raise shares outstanding, but a bonus issue capitalizes reserves with no cash inflow while a rights issue brings new money in at a discount, so per-share metrics adjust differently after each.
A bonus issue converts reserves into share capital: share count rises, reserves fall by the same amount, and ordinary equity is unchanged, so book value per share drops mechanically and the market price adjusts proportionally. No value is created or destroyed in this simplified setting — the pie is cut into more slices. The exam trap is computing EPS or book value per share on the pre-bonus count after the event date, which inflates every per-share figure without any economic cause.
Paper scenario: Lanka Textiles PLC (hypothetical) has 10 million shares at LKR 28 and announces a 1-for-4 rights issue at LKR 20. The plausible mistake is projecting forward EPS on the old 10 million shares. The better decision: compute the theoretical ex-rights price as (4 × 28 + 20) ÷ 5 = LKR 26.40, note shares rise to 12.5 million, and divide forecast earnings by the new count. Whether EPS falls depends on what the LKR 50 million raised earns. Using stale figures overstates per-share value and any multiple built on it.
DDM or multiples: matching the valuation tool to the company's cash facts
The dividend discount model requires actual, forecastable dividends; multiples require comparable companies. Selecting the tool from the company's dividend history and comparability is the reasoning step most questions on this topic reward.
The Gordon growth model values a stream of dividends growing at a constant rate, so it collapses without a dividend policy. Two-stage versions handle a growth phase before maturity. Price-to-earnings and price-to-book sidestep dividend forecasts but import assumptions about peers and accounting quality. The selection logic, not the algebra, is where method choice matters: a stable dividend payer with predictable growth points to DDM; a cyclical or early-stage firm with thin comparables makes every method fragile and the answer should say so.
Paper scenario: a newly listed cash-rich company pays no dividend and has one comparable peer. The tempting move is applying Gordon growth after inventing a hypothetical dividend — the error, because the model's core input does not exist for this firm. The better decision in a simplified exam setting is a multiple grounded in the peer, with an explicit statement that DDM fits only dividend payers. Choosing the tool first, then sourcing inputs it actually needs, keeps the answer internally consistent and defensible.
| Method | Best fit | Key inputs | Main limitation |
|---|---|---|---|
| Gordon growth DDM | Stable dividend payer, steady growth | Next dividend, required return, growth rate | Unusable without a real dividend history |
| Two-stage DDM | Dividend payer with a distinct growth phase | Two dividend streams, terminal assumptions | Sensitive to stage-length and terminal growth choices |
| Price-to-earnings | Profitable firm with comparable peers | EPS, peer multiple | Distorted by one-off items and stale share counts |
| Price-to-book | Asset-heavy or recently capitalized firm | Ordinary equity, shares outstanding | Weak for service firms whose value is intangible |
SEC versus CSE versus intermediaries: routing each fact to the right body
Sri Lanka's Securities and Exchange Commission Act No. 19 of 2021 repealed and replaced the 1987 Act; the SEC supervises the market and its intermediaries, while the Colombo Stock Exchange operates the national exchange and its listing framework.
The SEC's history runs from the Securities and Exchange Commission Act No. 36 of 1987, amended in 1991 and 2003, through replacement by Act No. 19 of 2021. Its market overview lists the licensed population it supervises: one stock exchange, roughly 290 listed companies, stockbrokers, margin providers, investment managers, credit rating agencies, underwriters, and unit trusts. Knowing these categories lets you read a fact pattern and identify which kind of intermediary and which layer of oversight is in play.
The exam-relevant skill is classification at three levels: statutory duties under the SEC Act, exchange-level obligations such as listing requirements, and intermediary-level conduct rules for brokers and advisers. A disclosure failure by a listed company, a dealing lapse by a broker's employee, and a manipulation scheme by an outside trader sit at different levels even when the facts rhyme. When revising, label every regulatory sentence in your notes as Act, exchange rule, or intermediary obligation before you test whether you remember the content itself.
Market and limit orders: how execution choice prices itself in thin stocks
A market order buys immediate execution at whatever the book offers; a limit order caps the price but risks no fill. Liquidity decides the trade-off, and thinly traded counters widen the gap between the two outcomes.
The bid-ask spread and order book depth determine what a market order actually costs. The last traded price is history, not an executable quote; only resting orders are. Depth matters for size: a small order clears at the touch in a liquid counter, while a large one walks up the book level by level. Dividend dates add a mechanical wrinkle — cum-dividend versus ex-dividend pricing shifts the reference price on the ex-date regardless of execution method.
Paper scenario: a thinly traded counter quotes LKR 50.00 to 52.00 with the last trade at LKR 51.50, and 50,000 shares arrive as a market order. The plausible mistake is expecting a fill near LKR 51.50; the order can sweep the book upward instead. The better decision is a limit order at LKR 52.00, or splitting the order across sessions, accepting fill risk to cap price risk. In thin markets the execution method, not the displayed quote, drives realized cost — and answers should reason about both.
Pairing ratios correctly: EPS, book value, and the ROE decomposition
EPS divides earnings attributable to ordinary shareholders by weighted average shares; book value per share uses ordinary equity only; ROE decomposes into margin, asset turnover, and leverage — each pairing answers a distinct question.
The pairing discipline is the concept here. EPS pairs profit after preference dividends with the weighted average share count across the period, which is why a mid-year rights issue forces a time-weighted adjustment. Book value per share pairs period-end ordinary equity with period-end shares — no weighting, because it is a point-in-time measure. Mixing a year-end count into EPS, or weighting a point-in-time book value, produces numbers that look precise and answer the wrong question.
ROE then explains why two firms with equal EPS can deserve different valuations. Decomposed as net margin × asset turnover × financial leverage, ROE reveals whether returns come from operations or from gearing — leverage flatters ROE while adding risk the EPS figure never shows. In practice, take any listed-style income statement and balance sheet pair, compute EPS, BVPS, and the three ROE components, then check that every denominator matches its measure's time basis. That check, repeated across a handful of paper cases, is the whole skill.
Warrants, options, and structured notes: what changes the risk shape of equity
Warrants and options create contingent, leveraged equity exposure; structured products wrap derivatives inside what looks like a note, so upside may be capped while downside can extend toward the full investment.
Distinguish issuer instruments from traded ones: a warrant is issued by the company, so exercise creates new shares and dilutes existing holders; a listed option is a contract between market participants with no effect on share count. Long calls and warrants gain leverage on upside; long puts gain on downside. Payoff reasoning beats memorized pay tables — draw the expiry value against a range of share prices once per instrument and the asymmetries become visible rather than recited.
Overlay logic then composes strategies: writing a covered call collects premium but sells the stock's upside above the strike; buying a protective put pays premium to floor the downside. These are exam-standard, and the same reasoning exposes structured products — if a note offers 'enhanced yield', ask which side of which option the investor has sold. Paper exercise: for a hypothetical stock at LKR 40, compute expiry payoffs of a 44-strike covered call and a 36-strike protective put at prices of LKR 30, 40, and 50, then note in one line which strategy capped upside and which capped downside.
Insider dealing and manipulation: classifying information before any decision
The SEC framework prohibits dealing on inside information and market manipulation; the trainable skill is labelling a fact as public or non-public, material or trivial, before evaluating any dealing or disclosure choice.
Three conduct categories cover most scenarios. Insider dealing means trading, or tipping another person to trade, on non-public price-sensitive information. Market manipulation covers artificial price and volume activity, such as coordinated trades that misrepresent genuine supply and demand. Conduct rules for intermediaries add client-first duties, including not advantaging the firm or its staff ahead of client orders. All three rest on the same first step: classify the information and the intent, then reason forward.
Mini-scenario: a finance employee of a listed company learns of an unannounced acquisition and mentions it to a sibling, who buys shares. The tempting framing is that no one at the employee's firm traded, so nothing happened — the error, because tipping inside information and benefiting from it sit inside the prohibition. The better decision: say nothing until public disclosure, and route any concern to compliance. Readiness check: take five short vignettes and, in under two minutes, label each as insider dealing, tipping, manipulation, or compliant conduct, with one sentence of reasoning per label.
References and further reading
Use these references to explore the concepts and check the latest information from the relevant organizations.