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Day Trading in Sri Lanka

Written By

Christian Harris

Written By

Christian Harris

Christian is a seasoned journalist with decades of experience. He transitioned from tech journalism to finance to follow his interest in investing. He has been trading stocks, futures, forex, and cryptocurrencies for more than 5 years, becoming an eToro Popular Investor. With hands-on expertise across various assets, he offers valuable trading insights.

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Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Fact Checked By

Michael MacKenzie

Fact Checked By

Michael MacKenzie

Michael is a writer and editor with over a decade in journalism and publishing. His niche lies in editing and fact-checking content in the financial services sector, with a focus on online brokers and trading platforms. Michael previously reported on politics and economics in the Middle East and edits books for established publishers.

» Michael MacKenzie Profile Page

Updated

Aug 14, 2024

Day trading in Sri Lanka is gaining traction as more individuals, driven by the potential for profits, seek to capitalize on short-term market movements within the country’s evolving financial landscape.

Sri Lanka’s economy, which has a GDP of approximately $74.85 billion, is recovering from the economic crisis marked by high inflation and a significant depreciation of the Sri Lankan rupee, presenting opportunities for active traders.

New to day trading in Sri Lanka? This guide will get you started.

Quick Introduction

• While the Central Bank of Sri Lanka (CBSL) plays a pivotal role in shaping the legal restrictions on trading, the Securities and Exchange Commission of Sri Lanka (SEC) regulates financial markets.
• The Colombo Stock Exchange (CSE), the country’s primary stock market, has around 295 listed companies, offering a range of opportunities for traders looking to engage in equity markets.
• Day trading profits may be subject to a 10% capital gains tax, applied by the Inland Revenue Department. Active traders may also have to pay progressive income tax, with rates ranging from 6% to 36%.

What Is Day Trading?

Day trading involves buying and selling assets like stocks, forex, bonds, or derivatives to capitalize on short-term price changes. It’s a high-risk strategy whereby you could lose any Sri Lankan Rupees you invest.

In Sri Lanka, the CSE is home to major companies like John Keells Holdings and Ceylon Tobacco Company, presenting many stock trading opportunities.

Additionally, currency pairs featuring the Sri Lankan Rupee (LKR) and commodities like iron and oil can be traded.

Is Day Trading Legal In Sri Lanka?

Yes, day trading is not just a trend; it’s a legal and regulated practice in Sri Lanka. The CSE allows for the buying and selling of stocks within the same trading day, and no specific laws prohibit this practice.

Online trading in Sri Lanka is subject to the regulations and oversight of the SEC, whose mission is to promote, develop, and maintain a capital market that is fair, efficient, orderly, and transparent.

However, the limited number of domestic brokerage options often leads Sri Lankan traders to seek services from respected ‘green-tier’ regulators, such as the FCA in the UK, ASIC in Australia, or CySEC in Europe.

Christian Harris

Author

How Is Day Trading Taxed In Sri Lanka?

For day traders in Sri Lanka, profits earned from buying and selling stocks are typically subject to Capital Gains Tax (CGT).

The CGT rate in Sri Lanka is 10% on the net capital gains. This applies to gains realized from the disposal of listed shares on the CSE if held for less than a year, which typically applies to day traders.

While capital gains from trading are taxed separately under CGT, any income earned through day trading might be considered part of your overall income, especially if trading is your primary source of income.

This could mean that your profits from online trading might be subject to additional income tax under Sri Lanka’s progressive income tax system, where rates can range from 6% to 36%, depending on your total income bracket.

Getting Started

Critical steps for successful day trading in Sri Lanka include:

1. Choose a top platform that accepts Sri Lankan traders. To safeguard your trading activities, prioritize brokers regulated by financial authorities like Sri Lanka’s SEC, the UK’s FCA, or Cyprus’ CySEC. Also consider the range of tradable instruments, such as Sri Lankan stocks and prominent commodities like gold, as well as pricing, charting platforms, and customer support.
2. Open an account. You typically need a Sri Lankan national ID and a recent utility bill to verify your account. Once approved, fund your account with Sri Lankan Rupees via wire transfers, debit cards, or even local e-wallets like Genie (if supported).
3. Start actively trading. Stock traders can invest in Sri Lankan companies listed on the CSE. In contrast, currency traders can speculate on the Sri Lankan Rupee’s value against major currencies like the US dollar (USD/LKR) and euro (EUR/LKR), though these forex assets are not widely supported at online brokers based on our evaluations.

A Trade In Action

To help you understand how short-term trading in Sri Lanka could work in practice, let’s consider a scenario with Melstacorp, a Sri Lankan-based company listed on the CSE that manages a portfolio of diverse business operations.

Event Background

Melstacorp released its earnings report. The results were significantly better than market expectations, showing a substantial revenue and earnings per share (EPS) increase.

The company’s fourth-quarter sales were LKR 43,475.02 million, compared to LKR 31,292.38 million a year ago, so I anticipated a bullish reaction from investors.

I began by analyzing Melstacorp’s historical price chart. The stock price had been consolidating in a range for the past few weeks, suggesting pent-up demand.

Trade Entry & Exit

At the market open, I placed a buy order for Melstacorp shares at 51.3, slightly above the previous day’s closing price, to ensure a timely entry. My stop-loss order was 51.1, limiting my potential loss to -0.39% ROI.

Based on technical analysis, I used a profit target of 52.4, suggesting a potential upside of 2.14% ROI—an excellent 1:5 risk/return ratio.

The stock price started to climb immediately after the market opened, surpassing my entry price. Over the day, buying pressure intensified as more investors reacted to the positive earnings report.

The stock price continued to rise, reaching my profit target by midday, securing a profit on the trade.

Bottom Line

Day trading is legal and increasingly popular in Sri Lanka. The CSE supports it, and the SEC regulates it.

You can capitalize on the country’s recovering economy but must navigate a developing regulatory landscape that includes capital requirements and reporting obligations. It’s also important to remember short-term trading is risky – you could lose your investment.

Under Sri Lanka’s progressive tax system, online trading profits may be subject to capital gains tax and potential income tax liabilities, making it essential to manage both trading strategies and tax obligations carefully.

To get started, see DayTrading.com’s selection of the best day trading platforms.

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