Stock Market

Benefits of Investing in Stock Market

1) For Better Long Term Returns

The stock market serves as a platform for investors to buy and sell stocks, with the potential to earn significant returns. Making the right investment decisions can lead to substantial gains over time. Patience is key as investors watch their money grow gradually. One of the remarkable aspects of the stock market is how stock values compound and appreciate over time, enhancing wealth accumulation for investors.

2) Higher Liquidity

Investors enjoy the convenience of buying and selling stocks seamlessly, without encountering significant hurdles. Stocks offer the flexibility of easily converting investments into cash when required. In contrast, options such as property or debt instruments often lack the same level of liquidity that stocks provide, making stocks a preferred choice for many investors seeking quick access to their funds.

3) Diversification Benefit

In the stock market, investors have access to a variety of financial instruments, including shares, bonds, mutual funds, and derivatives. These instruments cater to different risk appetites and financial goals, allowing investors to tailor their investments accordingly. By constructing a well-diversified portfolio, investors can capitalize on growth across various sectors of the economy, mitigating the impact of potential losses in individual stocks and ultimately generating profits.

4) Dividend Income

Dividends represent a share of a company’s distributable profit that is distributed to its shareholders. These dividends can take the form of cash or bonus dividends. Typically distributed after the completion of the fiscal year, dividends are directly deposited into shareholders’ accounts. Companies that offer dividends often signal their growth and financial health, providing investors with a sense of security and a stable investment platform.

5) Ownership

Investing in a company’s shares grants individuals ownership as shareholders. This ownership allows them to participate in the company’s decisions and play a significant role in its direction.

6) Transparency

SEBON regulates the stock market, ensuring a secure environment for investors by setting rules and regulations. Companies listed on NEPSE must adhere to these regulations, publishing annual reports and maintaining transparency across all aspects of their operations, which fosters investor confidence and reduces perceived risk.

Investment Methods in Stock Market

There are primarily two types of investment method in Nepal:

1. Primary Market

2. Secondary Market

Primary Market

The primary market is where stocks, bonds, and debentures are initially listed after a company goes public. In this market, securities are exchanged directly between investors and the issuing company. An example of the primary market is an Initial Public Offering (IPO), which is considered one of the most effective ways for a company to raise capital.

Key Players at Primary Market

1. Companies Issuing Securities:

Organizations raise capital by issuing new stocks, bonds, or financial instruments.

2. Investors:

In the primary market, new securities are purchased by investors, encompassing institutions such as funds and individual investors.

3. Investment Banks and Underwriters:

Facilitators aid companies in the issuance process by offering advisory services, underwriting, and marketing of securities.

Function of Primary Market

1.New Issue Offer

The primary market allows companies to issue new offerings that have not been issued in any place before. The primary market gives the company a platform where they will know how they will perform and know about the company’s viability.

2. Underwriting Services

Underwriting (UW) services are offered by major financial institutions like banks, insurance companies, and investment houses. Through underwriting, they provide a guarantee of payment in the event of damage or financial loss, assuming the financial risk associated with such guarantees. The risk may entail purchasing all unsold shares in the market.
Investors derive significant benefits from the underwriting process as the information provided by underwriting agencies can assist them in making more informed purchasing decisions.

3. New Issue Distribution

New issues are also introduced to a crucial marketing platform. This process starts with the release of a new prospectus, inviting the general public to participate in purchasing the new issue. The prospectus contains comprehensive information about the issue itself, the underwriters involved, and details about the issuing firm.

What are the sources for raising capital in the primary market?

1) Public Issue

The way to public and raise funds is through IPO(Initial Public Offering). Under IPO the company raises capital for first time by going public. The stock are listed on a stock exchange for trading purpose.

2) Right Share:

If company wants to issue additional capital then they need to issue right shrae. But first needs to be listed in stock exchange. In a rights issue, the investors have a choice of buying shares at a discount price within a specific period. It enhances the control of the existing shareholders of the company. It helps the company to raise funds without any additional costs.

3) Further Public Offering

The listed company on stock exchange will issue further public offering in order to raise fund.

4) Private Placement

Private placements involve a company offering its securities to a limited group of individuals. These securities can include bonds, stocks, or other financial instruments. Investors in private placements can be individuals, institutions, or a combination of both.

5) Bonus Share

Bonus issues, also known as scrip issues or capitalization issues, include the issuance of bonus shares at no additional cost to existing shareholders.

Secondary Market

The secondary market is where investors trade all shares. Once they enter the primary market, investors can buy and sell shares freely. The valuation of shares is determined by their market value.

Entities that are involved in the secondary market are:

1) Retail Investors
2) Financial Intermediaries: banking and non-banking financial institutions, insurance companies, and mutual funds.
3) Advisory services
4) Brokerage firms

Functions of Secondary Market

1) Liquidity

The secondary market offers investors a convenient platform to trade stocks, enabling them to swiftly convert their investments into cash when necessary. Through liquidity, investors can readily generate cash by selling their shares.

2) Opportunity to Invest:

Investors have the opportunity to engage in the secondary market by buying and selling shares, mutual funds, pension funds, and bonds.

3) Price Discovery:

The secondary market determines the price of a particular stock through the demand and supply of shares. This price discovery mechanism helps investors make informed decisions about their investments and reflects the overall health of the financial market.

Types of Secondary Market

1) Stock Exchange:

A stock exchange is a marketplace where investors trade securities. This platform facilitates the trading of all securities issued through IPOs. The regulatory body ensures the safety and security of investors’ money during trading by charging certain fees and commissions. An example of a stock exchange is NEPSE in Nepal.

2) Over the Counter(OTC) Market:

The OTC market is a decentralized platform where individual investors or participants conduct transactions directly. It carries higher risks since no intermediary is involved to secure investments. An example of an OTC market is the FOREX market, and derivatives markets are also typically traded OTC.

What is NEPSE?

The Nepal Stock Exchange (NEPSE) was established on January 13, 1994, and is the only stock exchange in Nepal. NEPSE provides a platform for investors to buy and sell shares of publicly traded companies. It was established under the Companies Act of 2006 and operates under the Securities Act of 2007.

Types of Banking and Financial Institution in Nepal

There are four types of banking and financial institutions in Nepal:

1. ‘A’ Class Commercial Bank
2. ‘B’ Class Development Bank
3. ‘C’ Class  Finance Companies
4. ‘D’ Class Microfinance Companies

3 Months Average Growth Rate and Dividend Growth - Commercial Bank Nepal

What is SEBON?

The Securities Board of Nepal (SEBON) is the regulator of the securities market in Nepal. Established on June 7, 1993, SEBON operates under the Securities Act of 2006. It has the authority to oversee and manage the activities of the securities markets and those involved in the securities business. SEBON regulates the issuance, purchase, sale, and exchange of securities to protect investors’ interests and to develop the capital market, thereby mobilizing necessary capital for the country’s economic development.

The Governing Board of SEBON consists of seven members, including a full-time chairman appointed by the government for a four-year term. The other members include a joint secretary from the Ministry of Finance, a joint secretary from the Ministry of Law, Justice and Parliamentary Affairs, a representative from Nepal Rastra Bank, a representative from the Institute of Chartered Accountants of Nepal, a representative from the Federation of Nepalese Chambers of Commerce and Industries, and one expert appointed by the government with expertise in securities market management, capital market development, or the financial or economic sector.

Listed Stocks in NEPSE

Source: Nepal Rastra Bank

Fundamentals Analysis

Fundamental analysis is a method used to determine the intrinsic value of a stock by evaluating its financial and economic factors. This involves analyzing financial statements, external influences, events, and industry trends.

Fundamental analysis provides investors with insights into whether they should invest by examining financial statements. It offers predictions about a stock’s future performance and potential returns, helping investors gauge how the stock might perform over time.

Fundamental analysis Includes

1. Economic analysis

• Macroeconomic indicator: This analysis considers key economic indicators such as GDP, inflation, unemployment, interest rates, and government policies.
• Industry analysis: Various industries operate distinctively, prompting attention to industry trends, regulatory environments, and the growth trajectory of individual companies.

2. Company analysis

• Financial Statement: By examining a company’s annual publication of cash flow statements, income statements, and balance sheets, investors can gain a comprehensive understanding of the company’s financial health
• Ratio and metrics: Liquidity ratios, profitability ratios, leverage ratios, and valuation ratios are indicators that assess the financial health and strength of a company.
• Management Team:  Considering the management of a company is crucial to understanding the productivity and performance they collectively bring as a team.

3. External Factors:

Political, social, technological, and environmental factors directly impact the performance of a company.

Ratio Analysis of Stock

Ratio analysis is a quantitative method used to analyze financial statements, aiming to evaluate a company’s liquidity, operational efficiency, and profitability. This analysis provides investors with comprehensive insights to identify superior investment opportunities among companies.

Types of Ratio Analysis of Company

1) Liquidity Ratios
2) Solvency Ratios
3) Profitability Ratios
4) Efficiency Ratios
5) Market Value Ratios

Liquidity Ratios

Liquidity ratios are financial metrics designed to assess a company’s capacity to settle both short- and long-term debts. They gauge a firm’s capability to cover daily operational costs and fulfill immediate financial commitments as they arise.

Common liquidity ratios include the following:

The current ratio measures a company’s ability to pay off short-term liabilities with current assets:

1)Current ratio = Current assets / Current liabilities

The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets:

2)Acid-test ratio = Current assets – Inventories / Current liabilities

The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:

3)Cash ratio = Cash and Cash equivalents / Current Liabilities

The operating cash flow ratio is a measure of the number of times a company can pay off current liabilities with the cash generated in a given period:

4)Operating cash flow ratio = Operating cash flow / Current liabilities

Leverage Ratios

Leverage ratios compare a company’s debt level, indicating the proportion of capital sourced from debt. They assess cash flow against all liabilities, not just short-term debt.

The debt ratio measures the relative amount of a company’s assets that are provided from debt:

1)Debt ratio = Total liabilities / Total assets

The debt-to-equity ratio calculates the weight of total debt and financial liabilities against shareholders’ equity:

2)Debt to equity ratio = Total liabilities / Shareholder’s equity

The interest coverage ratio shows how easily a company can pay its interest expenses:

3)Interest coverage ratio = Operating income / Interest expenses

The debt service coverage ratio reveals how easily a company can pay its debt obligations:

4)Debt service coverage ratio = Operating income / Total debt service

Profitability Ratios

Profitability ratios of a company evaluate its financial performance annually, indicating whether it’s generating substantial revenues. They gauge the company’s capacity to generate profit in relation to its sales, assets, and equity.

The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold:

1)Gross margin ratio = Gross profit / Net sales

The operating margin ratio, sometimes known as the return on sales ratio, compares the operating income of a company to its net sales to determine operating efficiency:

2)Operating margin ratio = Operating income / Net sales

The return on assets ratio measures how efficiently a company is using its assets to generate profit:

3)Return on assets ratio = Net income / Total assets

The return on equity ratio measures how efficiently a company is using its equity to generate profit:

4)Return on equity ratio = Net income / Shareholder’s equity

Efficiency Ratios

Efficiency ratios assess how efficiently assets and liabilities are utilized in the short term. They calculate the management of receivables, inventory, and the utilization of equity.

The inventory turnover ratio is expressed as the number of times an enterprise sells out of its stock of goods within a given period.

1)Inventory turnover ratio = Cost of goods sold/Average Revenue

The accounts receivable ratio evaluates the efficiency of revenue collection.

2)Accounts Receivable ratio = Net Credit Sales/ Average Accounts Receivable

The accounts payable turnover ratio represents the average number of times a company pays off its creditors during an accounting period.

3)Accounts Payable Turnover Ratio = Net Credit Purchase/Average Account Payable

Market Value Ratios

Market value ratios are employed to assess the share price of a company’s stock.

The book value per share ratio calculates the per-share value of a company based on the equity available to shareholders:

1) Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total common shares outstanding

The dividend yield ratio measures the amount of dividends attributed to shareholders relative to the market value per share:

2)Dividend yield ratio = Dividend per share / Share price

The earnings per share ratio measures the amount of net income earned for each share outstanding:

3)Earnings per share ratio = Net earnings / Total shares outstanding

The price-earnings ratio compares a company’s share price to its earnings per share:

4)Price-earnings ratio = Share price / Earnings per share

Technical Analysis

Technical Analysis involves utilizing quantitative methods to forecast the price, volume, and movement of stocks in the market. It revolves around analyzing past trends using various indicators and price actions. By employing technical analysis, investors aim to make informed decisions about when to buy or sell stocks, thus optimizing their timing in the market.