A Beginners Guide for Investors in the Nepali Capital Market

My professor for Securities Analysis and Portfolio Management class in the US, once asked me in a humorous way, “Will you be managing penny stocks in your home country someday?” A few years after this, I joined Nepal’s first operational Portfolio Management Company, beed invest. I was not managing portfolios on the first day itself, but I was pretty excited to begin something which I wanted to pursue in future.

After a few days of joining, I realized that I had a great team with the best of mentors and colleagues to get good hands on experience. The Nepali stock market, I realized is highly irrational, and fundamentals and analysis are of minimal help. The size of our secondary market was very small back when I started off; wherein a handful of investors could easily manipulate the market; which had an average daily turnover of only NPR 20-30 million.

While physical certificate management was a laborious and tedious part of portfolio management services in the past, the recent streamlining and digitization of share market operations into full-fledged dematerialized trading, brings with it efficiency that provides a key advantage for Portfolio Management Services (PMS). However, our stock market has evolved over the years with the opening of more stock brokering offices, entry of mutual funds and credit rating agencies, increase in the number of merchant bankers and entry of hydropower companies & an overwhelming participation of investors in the primary market. Today the daily average market turnover stands at NPR 600-700 million. This increasing volume has made the market more efficient and liquid, decreasing chances of share price manipulation, while the capital market today offers great opportunity for investors to diversify their investment requirements. If you have not ventured into Nepali capital market yet and want to participate and reap the benefits provided by the market, below are the key information which should help you to begin.

1. GET STARTED: OPEN A DEMAT ACCOUNT

Opening a dematerialized (DEMAT) account at one of the Depositary Participant (DP) licensed by the Central Depository System and Clearing Limited (CDSC) is a prerequisite to participate in both primary and secondary market. Most commercial banks, merchant bankers and stock brokers provide such services. If you already own some stocks in your name, then you can give your DP to dematerialize your physical share certificates into dematerialized shares. The DEMAT account is similar to a bank account which debits and credits the shares you sell or purchase. Most DP’s also provide clients with facilities to check their DEMAT account status online as well.

2. KNOW THE MARKET

To get started in the stock market, it is essential to first understand how the market functions. Securities Board of Nepal (www.sebon.gov.np); the sole regulator of capital market is a useful source for primary information. Its website provides information on various securities laws, investor education, and upcoming public issues amongst others. Similarly, the Nepal Stock Exchange (www.nepalstock.com) the sole secondary market; and its mobile based application is a great source to get hands on information. There are many other popular websites that provide constant updates about the capital market such as; Share Sansar and Mero Lagani. Furthermore daily national newspapers, websites of merchant bankers and credit rating agency – icranepal.com – also provide good information.

3. PARTICIPATE IN THE PRIMARY MARKET – APPLY IN PRIMARY OFFERINGS

One of the best opportunities to participate in the capital market is to apply for primary offers in the primary market such as; Initial Public Offering (IPO) or Further Public Offering (FPO). Most companies offer primary issues to the general public at face value of NPR 100 per stock, or at a premium based on their valuations. The risk is lower when you purchase in the primary market as you get an opportunity to buy shares at a lower cost as compared to purchasing those shares in the secondary market once they are listed. Also look out for opportunities to participate in the primary offering of mutual fund schemes which can be a beginning point.

News about primary issues generally comes out in national newspapers and are widely announced on other media platforms. Once you know the primary issues are out, you can read their prospectus to see their detail information such as; past and projected performance, & management amongst others. You can also look at their credit rating provided by a licensed credit rating agency before making the decision to invest.

4. PARTICIPATE IN THE SECONDARY MARKET– OPEN A TRADING ACCOUNT AT A STOCK BROKER OFFICE

All the stocks offered via primary market are listed in the secondary market i.e. Nepal Stock Exchange (NEPSE); currently there are 231 companies listed in the stock exchange. The secondary market provides the platform to sell the shares you hold or purchase new shares from the market. The share price of these listed companies and the value of NEPSE Index changes every day based on total demand and supply of shares in the market.

If you wish to get involved in the secondary market, you will need to open a transaction account at a stock broker’s office. There are currently 50 stock brokers licensed by NEPSE while there are a few stock broker offices outside Kathmandu. Once you open an account with a stock broker, they will provide you with a unique ID code via which all the transactions in your name will be executed.

To make a purchase or sale order you will simply have to call your stock brokers or visit their office to place order, make sure you have the shares in your DMAT account before you place a sale order to your stock broker. The stock broker charges some commission as a brokerage fee for each transaction while you have also have to pay a capital gain tax of 5% if applicable while making sales.

5. STILL CONFUSED- SEEK PROFESSIONAL HELP

If you are still confused and less confident about entering the market or you do not have time, energy and resources, do not worry as there are number of professional licensed Portfolio Management Companies such as beed invest providing you with a full range of products and services under Portfolio Management Services (PMS).  Based on your investment goals and expectations, these portfolio managers develop portfolios matching your risk appetite and invests in the capital markets on your behalf. The portfolio manager charges minimal annual and performance fees while these services offer you with the opportunity to grasp the benefits of the capital markets. Moreover, you can also handover you existing portfolio to these portfolio managers for restructuring and further management.

All in all, as the stock market is constantly evolving and getting technical, retail investors are highly advised to seek professional advice and avoid making investments on herd mentality – invest wisely!