In recent days my interest in the Nepalese share market is fueling and it coincides with the fact that Nepal Stock Exchange (NEPSE) is on a rise for the past few days.
My fascination towards the share market started unusually early, in pre-teens. An avid news listener on the radio from a tender age, the colossal numeric figure of NEPSE at the end of the bulletin caught my attention each time. Also, I was fortunate to have an IPO-savvy father who over the years has invested in Initial Public Offering (IPO) of many companies.
Despite my interest in the share market, I am limited by my knowledge and experience to talk about it in detail. However, I would like to walk you through some basics and history, while trying to answer the question mentioned in the title.Embed from Getty Images
Concept of stock
Just like tiny atoms constitute the makeup of any large substance, any company, public or private constitutes of tiny “money” elements which add to give it shape in the form of paid-up capital. A paid-up capital is the total amount invested in the company as its true capital.
The tiny “money” elements or stocks or shares of a public company could be traded just like any other goods in a market called share market or stock exchange. The shares of a private company could also be traded but it is done privately and not in stock exchanges.
Stocks are not just assets but are an investment as it yields return to the investor in the form of cash dividend and/or bonus shares.
History of security market in Nepal
Biratnagar Jute Mills Ltd. and Nepal Bank Ltd. were the first two companies to float shares to the public in 1937. In 1976, Securities Exchange Center Ltd. was established with the objective of facilitating and promoting the growth of capital markets and it was later converted into Nepal Stock Exchange (NEPSE) in 1993.
NEPSE is the only stock exchange in Nepal and is governed by the Securities Board of Nepal (SEBON). When a company is registered as a public company in the Office of Company Registrar, it must also apply to SEBON for a listing in NEPSE.
Primary and Secondary Markets
Investopedia describes a primary market as “a market where companies sell new stocks to the public for the first time.” IPO is a common example of the primary market. Through IPO, a company “goes public”, that is, it’s stocks could now be owned and traded by investors in the stock exchange. The main intent of a company to go public is to raise capital from the general public. However, it should be noted that a company can have only one IPO during its lifespan.
In addition to IPO, the right shares are also offered by companies in need of additional capital. However, the right shares are offered only to current shareholders through which they could buy additional shares from the company.
The secondary market is where investors trade the stocks they own with a sole profit-making objective. Unlike the primary market, in the secondary market, the stocks are bought and sold between the investor and do not involve the company whose shares are being bought or sold. For example, to buy stocks of Nabil Bank Ltd (NABIL), I deal only with another investor who owns stocks in Nabil Bank and the company is not directly involved in the transaction.
Unlike in a primary market where the stock price is fixed as in the case of IPO, the stock prices in the secondary market are derived from various factors such as financial performances of the company and governmental policies and regulations. Such is the volatile nature of the secondary market that news and hoaxes could also affect it either decreasing or increasing its value sharply.
What is in IPO for students?Embed from Getty Images
In recent years, SEBON with an intention of making share market inclusive to investors from all walks of life including to homemakers and students has reduced the minimum stocks one can apply in IPO from 50 stocks down to 10 for stocks with a face value of Rs 100.
Also, all the investors in the IPO are issued a minimum of 10 stocks. This, however, is not always true especially when the IPO of a company is oversubscribed, that is, the demand for shares from investors is way more than what is being offered in IPO.
What all of this implies is that anyone with Rs 1,000 can enter share market.
To prove the case, I would like to share my personal experience with IPO. Since the start of lockdown, some four companies had offered IPO to the general public and I had applied the minimum stock allowed, that is, 10 stocks in each of them.
One of the companies I was allotted stocks was NIC ASIA Laghubitta Bittiya Sanstha Ltd. Following a positive growth trend observed in the microfinance sector in recent times, the stock price of this company had peaked at Rs 830 merely nineteen days since its listing in NEPSE on 9th July 2020. Two weeks since the peak, as of 11th August, the stock price is at Rs 778 meaning my investment in IPO has increased by nearly 7.8 times in just over a month.
Making profit off IPO sounds easy but it has its own drawbacks.
Firstly, to sell stocks you must enter the sometimes-volatile secondary market through brokerage firms. The secondary market requires a level of technical analysis with risk-taking abilities to operate in. Else you might lose on a potential mouth-watering profit or even worse, you might have to sell your stocks at a loss fearing an even greater loss in future. However, share price in NEPSE usually tends to be over Rs 100 meaning you could walk with some profit after selling.
Secondly, investing in IPO just for the sake of selling in over a few weeks is a niche. How many IPOs do you have in a year? Most likely, under 20. With the allotment of a minimum of 10 shares in IPO to all the applications, the share market in recent times is being flooded by small investors resulting in many IPOs being oversubscribed. This makes allotment of more than 10 shares implausible with many even failing to receive the minimum quantity.
At the end…
Stock markets, all around the world could behave like a nasty sea requiring highly skilled investors navigating through in pursuit of profit. This is true in the case of a secondary market where prowess in technical analysis is a must along with risk-taking abilities. However, the primary market esp. IPOs could be considered a relatively safe entry point for someone with low capital, such as students.
Students could, with low investments in IPOs in NEPSE, yield some good returns. Even if the share price does not go as high as you had hoped for, it is always a wise option to hold on as you may be entitled to cash dividends and bonus shares at the end of book closure for a fiscal year. That however depends on the performance of a company.