The Growing Prospects of Stock Exchange

By the time it was 11 am, the spacious lobby of Opal Securities at Baluwatar was packed with investors aspiring to make a handsome return on their stock transaction. People of all ages were staring at the big-sized monitor displaying the live trading of stock at Nepal Stock Exchange (NEPSE). One could read the faces portraying mixed expressions of hope and uncertainty regarding the rise and fall of prices of the stocks they owned. Soon people were beginning transactions of purchasing and selling stocks of various companies listed with NEPSE amidst loud discussions and keen attention of observers. The above narrative depicts the scene at almost all stockbroker offices on any trading day. With changing lifestyle and awareness among people, interest in stock market is growing by the day. The country’s only stocks exchange market, NEPSE used to welcome only limited number of investors until some years back. But this has changed. Today, the number of investors, according to stockbrokers, is over 700,000 and trading of shares in the secondary market is one of the hottest topics of discussion among the general public. Nepal’s securities market came into existence in 1937 with Biratnagar Jute Mills and Nepal Bank floating their shares. A notable development in the sector, however, began only after NEPSE opened its trading floor on 13 January 1994. The incorporation of NEPSE opened avenues to investors, both large and small, to invest in various companies and participate in the secondary market. Despite apprehensions of many, the secondary market proved to be successful, with both entrepreneurs and investors showing earnest acceptance and participation in the process. Nepal’s stock exchange market came in the general people’s interest with growing business activities in the late 90s. The capital market that was crawling gained momentum after NEPSE adopted automation in trading from previous open-out-cry system in 2008. Slowly, the concept of institutional trading like mutual funds cropped up which also helped boost the market to reasonable size. Currently, people from all walks of life are engaged in stock trading directly or indirectly. With the legal provision of permitting cross-holding, the trend of institutions investing in the stock of other companies is also gaining popularity. Anjan Raj Poudel, a stock broker and Managing Director of Thrive Brokerage House, said people’s desire to earn quick money has lured many into the stock market. Besides, shares being highly liquid assets compared to similar and other fixed assets, people are comfortable investing their entire savings in the capital market. Shova Khanal, a homemaker in her mid-60s and a regular visitor at Opal Securities in Baluwatar, says she is active in stock trading since two years and has even shut down her grocery business. “It provides me a good platform to keep myself engaged in income generating activities and has kept me busy,” she shares. Surendra Pant of Dilli Bazaar even quit his bank job three years ago to make stock trading his fulltime endeavor. Pant says he utilised his knowledge of the financial sector to establish himself as a successful investor. The former banker was successful in increasing his total investment by almost ten folds to Rs 30 million from an initial investment of Rs 3 million within three years. However, every coin has two faces; capital market is no exception. Apart from a handful of success stories, the market has its dark side. Stockbroker Poudel says that the success to failure ratio in the domestic market is 70 to 30. There are numerous occasions when investors have lost their lifetime savings in one shot. Like any other business, the stocks market goes through ups and downs. Some major causes behind the fluctuation in the domestic market include politics, a company’s financial health, change in government policy or even anomalies like insider trading, misleading information or a populous speech rendered by an irresponsible political leaders or government authorities. It has been observed that the capital market of Nepal goes down with leftist political forces taking charge of government while the secondary market responds positively when democratic forces take charge of the government. When then Prime Minister Baburam Bhattarai in 2011 termed capital market as a gambling house, the market index witnessed a free fall and dropped below 200 points from a record high of 1175 points. The capital market, however, has responded positively to events like elections, introduction of automatic trading system, launch of dematerialisation of share certificates, opening of remote work stations at the locations outside the Kathmandu Valley and Nepal Rastra Bank’s decision to raise the paid up capital of the financial institutions, among others. Despite gaining some height, the capital market has yet to establish itself as a powerful macroeconomic indicator reflecting the country’s economic development. As per an NRB study report, the first major hurdle in the healthy growth of the country’s capital market involves poor management of companies and the attitude of the board of directors and intermediaries. The actors of financial markets are loosely tied together in legal provisions which are not effectively implemented. As financial institutions predominate the market, it has not been able to diversify. According to NRB’s first 10 month report of the fiscal year 2016-17, banks and financial institutions along with insurance companies accounted for 86 percent of total market capitalisation. Increasing problems noted with corporate governance, transparency and disclosure within listed companies have seriously dented the Nepali capital market.

Tips for the beginners

• Understand your risk tolerance and be sure of the capital you are going to invest.
• Make short term and long term goals.
• Avoid leverage (do not invest by taking loans from banks. It is better to invest from your surplus fund in the initial stages to minimise risk).
• Control emotions (avoid panicking fast based on market rumors, keep patience and study the market situation thoroughly before deciding purchase or sales)
• Keep knowledge of major variables that reflect the company’s financial health. Understand P/E ratio, earnings per share (EPS), return on equity (ROE), and compound annual growth rate (CAGR).
• Keep a close eye on the company of whose stocks you are planning to invest in regarding its performance of the past few years, background and promoters profile as well as some understanding of its financials.
• Diversify portfolio of stocks. It is better to invest small amount in shares of multiple organisations than investing a big chunk in stocks of a single company.
• Start with the purchase of stocks of companies which you are familiar with.
• Constantly monitor your portfolio. If you can’t review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing it.