Introduction
1 concept, meaning & definition of investment:
An investment involves sacrifice of current rupees for future rupees. The sacrifice takes place in present and it is certain but reward or return from the sacrifice comes in the future and it is uncertain. There are generally two types of investment real investment and financial investment. Investment on tangible assets like land, building, furniture factory etc are Real investment but financial investment is only a piece of paper which represent debt or equity commitment certificate share, debenture, Treasury bond etc are example of financial investment.
1 concept, meaning & definition of investment:
An investment involves sacrifice of current rupees for future rupees. The sacrifice takes place in present and it is certain but reward or return from the sacrifice comes in the future and it is uncertain. There are generally two types of investment real investment and financial investment. Investment on tangible assets like land, building, furniture factory etc are Real investment but financial investment is only a piece of paper which represent debt or equity commitment certificate share, debenture, Treasury bond etc are example of financial investment.
Investment is employment of fund with the aim of achieving additional income or growth in value. It is saving or putting away recources from current consumption in the hope that some benefits are occur in future.
According to F. Ambling “Investment may be defined as the purchases by an individual or institutional inventor of a financial or real assets that produce a return proportional to the risk assumed over sine future investment period.”
According to D.E. Fischer & R.J. Jordan “An investment is a commitment of funds made in the expectation of some positive rate return of return. If the investment is properly undertaken, the return commensurate with the risk that investor assumes.”
From the above definition we can conclude that the use of available funds to productive sector with taking some degree of risk for future return is investment.
Features or Elements of Investment:
Following elements are involves in investment:
Return: It is necessary features of investment. Investor may buy and sell financial assets in order to return the return known as current income & capital gains.
Risk: Every investment entitles some degree of risk. It can not separate from return.
Time: Investors get return only in course of time. There is same space between present investment & future return.
Wealth: In investor expects some additional income can be generated from his/her investment in future. He/She tries to increase value of the investment.
Investment Environment:
The investment environment refers to all internal and external factors, which have a bearing on functioning of investment decision. Main investment environment are as follows.
Securities: Securities are the piece of paper that represent the investor’s rights to certain prospectus or property and conditions under which he/she may exercise those rights. It may transformed to another investor. Common stock, bond, treasury bills are the examples of securities.
Security Market: Security Markets are the mechanisms created to facilities the exchange of financial assets. Security Markets are that place where securities are traded. It brings together buyers and sellers of securities. Mostly we can classified it into two parts (a) Money Markets & Capital Market (b) Primary Market & Secondary Market.
(a) Money Market & Capital Market: Financial assets with term to maturity of less then one year are traded is known as money market. For examples are treasury bills, certificate of deposits are traded in these types of market. Financial assets with a term to maturity of more than one year are traded is known as capital market. Security of high risk and low liquidity are traded in these types of market. For example bond issued by sunrise bank is traded in this market.
(b) Primary Market & Secondary Market: The security market where the new issues of stocks bond and other securities are traded is known as primary market. Usually underwriters are appointed to ell these securities. Security Market in which already issued stock were traded is known as Secondary Market. Once securities are issued to the public, investors may trade them among themselves in this market. Nepal stock exchange (NEPSE) is only. Secondary Market in Nepal.
Financial Intermediaries: Financial intermediaries are riddle man who stands between user and supplier of fund. Financial institutions that collect funds from small investors and savers and lend considerable sum to large borrowers. Generally corporation can obtain funds from public through the direct placement; alternatively they can obtain funds indirectly from the general public using financial intermediaries.
Investment Alternatives
Investment sector available to the inventor are the investment alternatives. There are various alternatives for investors. They are as follows:
Equity Securities: Equity securities represent ownership shares in a corporation. Equities securities are traded in organized exchanges and over the counter (OTC) Market. They are:
Common Stock: Common stock is an ownership share in a corporation.
Preferred Stock: Preferred stock usually none voting but has priority over common stock in divided and liquidation rights.
Debt Securities: Debt securities are those which interest has to pay and they have certain maturity period. Debt securities can be classified into parts. They are as follows:
Short term debt securities: It is the obligations that mature in one year or less. Short term debt securities are traded in the money market. They are as follows:
I. Negotiable Certificates of deposit: It is the certificate of deposit is issued by commercial bonus with a minimum face value of Rs. 100000.
II. Commercial Paper: Commercial Paper is a promissory negotiable nets issued by larder, well-known corporation.
III. Banker’s Acceptances: It is issued by importers to secure trade credit from exporters. The accepting bank guarantees payment by borrower.
IV. Treasury bill: Treasury bills is an obligations issued by government, sold at discount from face value.
Long Term Debt Securities: Long term debt securities have a maturity period of more than one year. Long term debt securities period fixed income an investment.
I. Government Securities: Government securities are the fixed income securities issued by the government. These securities are among the safest of all investment, as the government is unlikely to default an interest and principal repayment. Treasury notes, treasury bonds & saving bonds are the examples of government long term securities.
II. Municipal Securities: It is also known as local government securities. Municipal bonds are debt obligations issued by state or local government and agencies. It is treaded in the over the center (OTC) Market.
III. Corporate Bonds: Corporate bonds are the long term debt issued by the company to raise debt capital. It is contract between issuer and investor. The borrowers aggress to make payment of interest and principal at a specified date to the holder of the bond. Bond has long term maturity period like 5 years, 10 years, 20 years etc. It is traded in organized exchanges and the OTC Market. Terms and conditions of bonds are mentioned in the bond indenture.
Hybrid Securities: Securities that have characteristics of both equity and debt are called hybrid securities. It is traded in organized exchanges and OTC Market.
Convertible period stock: The convertible features allow the investor to convert the preferred stock to a specified number of shares of common stock.
Convertible bonds: The convertible features allow the investor to convert the bond to specify to number of shares of common stock.
Derivatives Securities: Securities that derive their value from the value of an underlying assets:
Options: Provide the right to buy or sell shares of common stock of a specific corporation within a limited period of time at a designated price. For Example if you buy on equity option issued by a brokerage firm the option entitle you to buy states numbers of shares from the firm at a predetermined price within a specified period.
Warrant: A warrant is an option to purchase a specified number of shares of a common stock at a predetermined price within a predetermined time period. It is attached with bond or preferred stock.
Commodity Futures: A commodity futures is the contract that provides the holder right to sell a specified amount of an agricultural or natural resources commodity at a designated price within the specified period of time.
Financial Futures: Provide the contract holder the right to sell a specified amount of common stock index, bonds or foreign currencies at a designated price with a specified period at time.
Option on futures: Provide the right to buy or sell a specified commodity or financial futures within a limited period of time at a designated price.
Rights: Issued by a corporation to existing common share holders in connection with the sale of additional shares of common stock before they are offered to the public.
5. Real Assets: Real assets are non financial assets:
a. Previous Metals: It includes gold, silver, platinum and other metals in the form of coins or depository certificates its market is a individual dealer.
b. Real estate: It includes single and multifamily residences, undeveloped land, and commercial property. Its market is a individual brokers.
c. Collectibles: It includes diamonds, prints, fine art stamps and other categories. Its market is individual dealer.
6. International Investment:
International Investments is the investments by individuals in debt or equity securities issued by organizations outside the country of residence of the investor international investment are traded in organized exchange and OTC Market.
Multinational Corporations: Stocks and bonds issued by large corporation with significant business interest in more than one country.
Foreign Stock Traded Local Market: Stocks of large firms that have established trading for their securities on domestic as well as foreign exchanges.
American Depository Receipts: Securities issued by large banks that represent ownership of foreign securities. ADRS can represent share of stock of foreign companies as well as the debt of foreign governments.
Other Investment Alternatives:
Pension Fund: Public or private investment funds that provide retirement and other benefits to eligible employers. It is not marketable.
Mutual Funds: Investment companies that sell shares of common stock that represent and ownership interest in a portfolio of domestic and foreign securities. It is traded in OTC and direct transactions with individual funds.
Closed-end Companies: Investment companies with a fixed number of shares of common stock outstanding. That companies a take the form of a closed-end fund, unit trust, dual fund and primes and stores. It is traded in organized exchanges and OTC Market.
Investment Process:
The investment process is concerned with how an investor should make decisions about what marketable securities to invest in how extensive the investment should be made and when the investment should be made. The investment process involves five steps:
Set Investment Policy: The first step of the investment proves is to set the investment policy. It involves determining the investor’s objectives and the amount of his/her invest able wealth. Investment objectives should be stated in terms of both risk and return. This step involves the identification of the potential categories of financial assets for consideration in the ultimate portfolio. This identification will be based on the investment objectives, amount of invest able wealth and tax status of the investor.
Perform Security Analysis: The second step of the investment process to perform security analysis. Security analysis involves examining a number of individual securities or group of financial assets. The purpose for conducting such examinations in to identify those securities those currently appear to be miss-priced. There are two main approaches to security analysis. They are:
I. Technical Analysis: Technical Analysis involves the study of stock market prices in an attempt to predict future price movements for the common stock of particular firm. First, past price are examined in order to identify recurring trends or patterns in price movements. Then more recent stock prices are analyzed in order to emerging trends or patterns that are similar to past ones.
II. Fundamental Analysis: Fundamental analysis begins with the intrinsic value of any financial assets equals the present value of all cash flow that the owner of the asset accepts to receive. Once the intrinsic value of common stock of a particular firm has been determined. It is compared with security’s current market price of the common stock. If the current market price of the common stock is below the intrinsic value, a purchase is recommended otherwise vice-versa.
Portfolio Construction: Construction of portfolio involves identification of specific securities in which to invest, along with the proportion of invest able wealth to be put into each security.
Portfolio Revision: Portfolio revision involves both realizing that the currently held portfolio is not optimal and specifying another portfolio to hold with superior risk return characteristics. The investor must balance the costs of moving to the new portfolio against the benefits of the revision.
Portfolio Performance Evaluation: It involves determination of the actual performance of a portfolio in terms of risk and return, and compares the performance with that of an appropriate “benchmark” portfolio.
Factors should be considered while making investment decision:
Numbers of investment alternatives are available to investors in the market. However, investors choose a few among them. There are various factors that investor should be considered while making investment decisions. The major factors are as follows:
Investment objective: the purpose if investment should be cleared before selecting the alternatives clear idea of investment objective facilities the investor to select appropriate securities for investment. Otherwise the security selected for investment may not match with the investment objective of investor. The investment objective varies according to time and age of investor.
Rate of Return: An investor should estimate the expected rate of return of the alternatives under consideration. Since it is a forecast, there is usually some changes of variability in the rate of return. This variability is known as risk and requires in analysis.
Risk: Risk can be defined as the variability of possible returns around the expected returns of an investment. Some investment carries more risk and some less. Time and the nature of assets investment cause the difference in risk. Investment alternatives have different types of risk associated with them; the investor mist determined which combination of alternatives matches his/her particulars risk tolerance.
Taxes: Although risk and return are primary considerations when choosing an investment, the tax laws also provide many deductions in the computation of the taxable income or after tax return.
Investment Horizon: The length of time for which the investment is done or money is invested is called Investment Horizon. The nature and types of investment alternative to be selected depends on the investment horizon. If the investment horizon is long, the investment will have to make on long term securities and if it is short, the chaise will have to make from short term securities.
Investment Strategies: To select appropriate investment alternatives an investor needs to consider strategies dealing with selecting, timing and diversification.
a. Selection: Investment selection decision involved two aspects (I) Identifying appropriate investment alternatives (II) selecting individual securities among them.
b. Timing: Investment timing refers to purchasing an asset just before it is likely to increase in value and selling the asset just before it is likely to decrease in value.
c. Diversification: Diversification the process of adding the securities in the portfolio. Investment risk can be reduced by including more than one alternative or category of asset in the portfolio.
Difference between Investment and Speculation
S.N. | Investment | Speculation |
1 | Investment is less risky. | Speculation is more risky. |
2 | Investment is typically associated with a long time horizon | Speculation is typically association with short time horizon. |
3 | Individual usually makes decision with available information. | Individual usually makes decision without specific information. |
4 | Investor is psychologically cautions and conservative. | Speculation psychologically daring and careless. |
Chapter 2
Buying and selling securities
1) Introduction
Buying and selling of securities are inherent in capital market. Investors or people are involved in buying and selling of security expecting some benefits from security market. When securities are traded many parties are likely to involved. First buyer, second, seller brokers, dealers and markets. Any investor willing to transact in capital market takes a brokerage facilities to make future benefits. In against of those facilities they claim certain commission from their customers. If the brokerage firm acts as a principal or dealer, it sells securities on mark up and purchase on mark down. Here investor should analysis what can be expected from brokerage firm. Investor open an accounts with brokerage firm should understand about different types of order specification.
Terms of order specification:
1) Name of the firm
2) Whether the order is to buy or sell the share
3) Order size
4) Types of order
5) Time period
2) Order size:
Order is an instruction supplied from investor or client to the broker in order to buy or to sell the securities. When buying and selling securities i.e. common stock the investor place an order involving either a round lot, an odd lot or both. In general round lot means that the order is 100 share or in a multiple of 100 share. Odd lot orders generally are for 1 to 99 shares. Order that are more than 100 share but are not multiple of 100 share should be viewed as a mixture of round and odd lots. Thus an order for 141 shares should be viewed as an order for one round lot and odd lots of 41 shares.
3) Time limits:
The investor must specify a time limit within which the order should be executed and attempt to fill by the brokerage firm. Type of time limit:
a) Day order: day order that expire at closing period of the day in which it was entered automatically cancelled.
b) Week order: it is expire on end of calendars week in which order was placed. The end day is generally Friday. The order must be filled within Friday otherwise it will cancelled.
c) Month order: it is valid unto the last trading day of the month .
d) Open order: it is remain in effect until they are either filled or cancelled by the investor so it is also known as good-till-cancelled (GTC) order. These orders are cancelled if the broker is unable to execute them immediately
e) Discretionary order: it allow the broker to set the specification for the order. here the broker can make buy or sell on behalf of the investor. All rights for transaction are hand overed to broker so broker can make all decision.
4) Types of order:
After receiving the order for buying and selling from investors, broker must have to classify the order into different types for execution. An investor can choose any one best alternative for transaction among many types of order the following types or order can be placed.
a) Market order: It is that types of order in which the broker are instructed to buy and sell the securities at best possible price available in the market at the time of order. The best possible price is the price from which investor can yield profit.
b) Limit order: limit order is an order to executed buying and selling investor when the order is placed. In other word the order specifying a price at which an investor is willing to buy or sell a security is limit order.
c) Stop order: A stop order is a special types of limit order which instructs the broker to make transaction at specified maximum price he is expecting or willing so to pay for buying and the minimum price for selling securities. Stop order ensure the security against profit in the case of buying and limit amount of loss in case of selling securities.
d) Stop limit order: a stop limit order is the combined form of stop order and limit order. it is specially design to overcome the uncertainty of the execution price associated with a stop order with stop limit order the investor specifies not one but two price a stop price and a limit price. once someone else trades the stock at a price that reaches the stop price than a limit order is created at the limit price.
Chapter:-3
Security Market
Introduction
In general term, market means where a certain buying and selling of goods $services are held. It can be a particular fixed location or anywhere. These buying and selling activates are performed directly or through an agent. Market is created through the creation of demand and supply, price cost and volume. Additionally it also creates huge amount of information that can effect on demand supply and value of goods in that market.
Security market can be defined as a mechanism for bringing together buying and sellers of financial assets in order to facilitate trading. In other words, security market is a place or places where financial assets i.e. securities are transited through the means of people engaged in it as per demand and supply finally reaching to agreement on sale, between buyers and sellers.
There are many ways to classify security markets. The classification are on the basis of nature of claim, maturity of the claim, seasonality of claim, delivery, organizational structure, trading time, negotiation and arrangement. These classifications are below:
1. Primary market and secondary market
On the basis of reasoning of claim, the security market can be categories into primary market and secondary market.
The primary market is the place where corporate house raise their securities first time. Simply the places where securities of the corporate house are issued first time is primary market. Simply the places where companies sell securities for the first time or market for newly issued securities are primary market.
Secondary market is the market place where existing or already outstanding securities are traded among investors. In other words, the market where old or second hand securities that are already issued are purchased and sale is secondary market. The investor who bought stock from primary market can sold back 10 secondary market, if he desire. Additionally, those who miss to buy the stock first time can buy it from secondary market. In context of Nepal. Nepal stock exchange is a place for transacting the issued stock, i.e. secondary market.
Difference between primary and secondary market.
Primary market | Secondary market |
First hand of first time issued securities is transacted. | Second hand already issued securities are traded. |
Fund transferred from investor to issuers. | Fund transferred from buy to seller. |
To make financial capital available for new project and capital investment. | To yield profit from selling of security. |
Less number of transaction | Large number of transaction. |
It is risky from investor, point of view | It is less risky. |
Investment bankers play a role of expert for new issuing. | Broker plays a role of trading securities. |
Less importance | More importance |
2. Money and capital market
On the basis of maturity of claim, the financial market can be classified into money market and capital market.
Money markets are the markets for short term debt securities. Treasury bills, banker’s acceptances, commercial paper, certificate of deposit etc are traded in money market. These instruments are very liquid and considered extraordinarily safe.
The capital market is the market for long term loans and equity capital. Securities which maturity period is more than one year are known as long term securities. Companies and the government can raise funds for long term investment via the capital market. The capital market includes the stock market, the bond market.
Difference between money market and capital market.
Money market | Capital market |
Finance is transacted for a period of less than 1 year. | Finance is transacted for a period greater than 1 year. |
Firms buy and sell securities in their own accounts, at their own risk i.e. it is a dealer market. | A broker receives commission to act as an agent while investor takes the risk of holding the stock i.e. it is auction market. |
Securities traded in high face value may be in lakhs. | Securities traded have fresh value of denomination of 10,100 or 1000. |
Money market instrument are highly marketable instruments. For example, bills of exchange, commercial paper, certificates of deposits, treasury bills etc. | Capital market instruments are less liquid instruments. For example, shares, debentures, bonds etc. |
Money market instruments have less default risk. | Capital market instrument have high default risk. |
3. Call and continuous Markets
On the basis of the trading time, the financial market can be categorized into call and continuous market.
Call market
In a call market trading occurs at a specified time, with a designated person determining the price at which the supply of shares to be sold equals demand for shares to be purchased. In a call markets, there are no market makers to provide liquidity on a continuous basis. Intend, liquidity is attained by holding a periodic auction where all buyers and sellers meet (through their agents) to agree upon a price at which all of the available supply will balance with the available demand.
Continuous Market
In a continuous market trading can occur anything the exchange is open. In a continuous market, specialists and dealers make a market in securities issuing quotations at which they are willing to buy (bid) and sell (asked) shares in the securities in which they trade.
4. Spot Market & Derivatives Market
Spot Market
Spot Market is one in which securities or financial services are traded for immediate delivery (usually within one or two business days). For example, if you pick up the telephone and instruct your broker to purchase Everest Bank Ltd. Shares at today’s price you expect to acquire ownership of Everest shares in a matter of minutes.
Derivatives Market
The derivatives market is the financial market for derivatives, financial instruments, like futures contracts or options, which are derived from other forms of assets.
5. Organized stock Exchange & Over-the-Counter (OTC) Market
Organized stock Exchange
Organized stock exchanges are the physical locations where the securities are traded under some government rules and regulations. Therefore, this type of stock market is registered in the government agency. In Nepal, Nepal stock Exchange is the organized stock exchange. Here transactions of only listed companies are made.
Over-the-Counter (OTC) Market
The market where the securities of the companies not listed in the stock exchange are traded is called over-the-counter (OTC) market. Since transactions are made informally, this market is also popular stock exchange in America.
Organized market VS. OTC market
Organized Market | OTC market |
It is formal market. Price is determined by demand and supply. Therefore it is auction market. | It is informal market. Price is determined on the basis of negotiation. Therefore it is negotiated market. |
In this market, only listed securities are traded. | In this market, only unlisted securities are traded. |
Physical location and time for trading is fixed. | Physical location and time is not fixed. Anywhere can be traded. |
This market is registered in the government agency. | This market is registered in the authorized dealer, like National Association of Securities Dealer Automation Quotations (NASDAQ) in America. |
Commission is fixed | Commission is determined by negotiation. |
6. Open market & Negotiated Market
Open market
Open market is the market where institutional mechanisms created by society to make loans and trade securities in which any individual and institution can participate. For example, some corporate bonds are sold in the open market to the highest bidder and are bought and sold any number of times before mature and are paid off.
Negotiated Market
Negotiated market is the market where institutional mechanisms set up by society to make loans and trade securities in which the terms of trade are set by direct bargaining between a lender and a borrower.
7. Third Market & Fourth Market
Third Market
The third market refers to the trading of any securities that are listed on organized stock exchange in over the counter market. It is notable that trading hours in the third market is not fixed like organized stock exchange. The third market is made up of securities dealers making markets in anywhere one two a few hundred securities.
Fourth Market
The fourth market refers to those institutional investors and wealthy investors who buy and sell securities directly from each other. Thus, fourth market participants completely bypass normal dealer services. Forth market is essentially a communication network among institutional investors that trade large blocks without the aid of a brokerage house.
Major stock markets
Stock market is an organization established for buying and selling financial securities that are continuous. The stock is the trade center, which have specific trading floor, where the stocks of those companies are traded that is listed by satisfying certain specific requirement. It short we can express that a security market is an organized and regulated secondary market where trading in stock occurs in a specific geographical location.
Security market are the organized security exchange center, that provide fixed place for trading and is voluntary association that endeavor to maintain a smoothly operation of market. It is an auction market where price is set by large number of buyers and sellers with certain number of transaction held, under a predetermined rules and regulations. The major stock market can be illustrated below.
i) New York stock exchange (NYSE)
New York stock exchange (NYSE) is based in New York City, established in 1817, which is regarded as a largest market for stock trading in the world. By the end of 2000, more than 3000 companies have been listed, valued above $17 trillion. Before 1960s, the average daily volume for transaction was less than 3 million shares. But as per current data, the volume of transaction has been averaged to more than 1.3 billion shares. In today’s date, NYSE is regarded as the biggest board for listing leading companies than of other stock exchange in U.S.A. it is so, because by the end of this decade NYSE had traded 85% of total share available in U.S. listed exchanges. Whereas, approximately 5% for American stock Exchange and 10% for other regional exchange center in aggregate
ii) American stock exchange (AMEX)
American stock exchange is the second largest and important stock exchange, which list share of somewhat smaller companies of national interest out of which few are also listed in NYSE also. But in term of trading volume of dollar, AMEX is smaller than the two larger regional exchange i.e. the Midwest and the pacific. There are about 700 companies listed is AMEX and their market value is above $ 100 billion. AMEX has approximately 660 seats, out of which 325 are listed bonds.
iii) London stock Exchange (LSE)
London stock exchange is established on 1801, located in London, U.K. it is one of the largest stock exchange in the world that is well known for listing many oversees as well as U.K. companies.
The former stock exchange tower based in thread needle street/old broad street was opened by queen Elizabeth in 1972 and housed the trading floor where trades would traditionally meet to conduct business. This become largely redundant with the advent of the ‘Big Bang’ on 27th October 1986, which deregulated many of the stock exchange activates. It eliminated fixed commissions on security trades and allowed securities firms to act as brokers and dealers. It also enabled an increased use of computerized system that allowed dealing rooms to take precedence over face to face trading. Beyond 2004, LSE broken down into the ‘Main Market and Alternative Investment Market.’
iv) Bombay stock exchange (BSE)
In Asia, Bombay stock exchange is one of the eldest stock exchange markets. BSE was formally established in 1875 locating in dalal street, Mumbai. ‘Around 3500 companies with in a country are listed in BSE. As per July 2005, the market capitalization of BSE was above Rs 20 trillion. The BSE ‘Sen. Sex’ is widely used market index for the BSE. BSE is rated in 5 biggest stock exchanges in the world.
Trading system of Nepal stock exchange
The NEPSE has adopted an auction system for trading of securities on a trading floor. The buying and selling activates are performed as open auction market and follow “open outcry” or “open auction” principle for transacting securities, the buying broker with the highest bid will post the price and his code on the buying column, while the selling broker with the lowest offer will post the price and code number on the selling column on the quotation board. The dealer quote their bid price and ask price matches, contract between the buying and selling broker or between the brokers and dealers are concluded on the floor. The trading also can be made outside the floor also as per internal negotiation.
Trading days and hours
NEPSE makes the transaction on the fixed days and hours for two types of trading. The time schedules are
a) 
For regular trading Sunday to Thursday 11:00 Am to 1:00 p.m
For regular trading Sunday to Thursday 11:00 Am to 1:00 p.mb) For odd lot trading Monday 2 p.m to 3 p.m
For odd lot trading Monday 2 p.m to 3 p.m Friday 11 pm to 12 pmBoard lot and odd lot
The minimum number of securities that must be traded in regular trading hours in called is Board lot, which it fixed by NEPSE. NEPSE has set the size of lot of securities for trading for shares the lot size is 10 with face value of Rs 100 and the size is 100 if face value is Rs 10. The securities having face value is Rs 1000. As per NPESE rule, the securities in fraction are not traded.
The odd lot refers to the security trading below board lot. Odd lot trading can occurs only a some specified day and time that is prescribed by NEPSE.
Pricing Regulation
Since fiscal year 2060/61, NEPSE has brought out the rules for changing the price quote. As per this percentage for the fixation of opening price has been reduced from 10% to 5%. The rule has prescribed that the opening price of any day should not be more or less than 5% of the previous trading day’s closing price. Once the trading is made within this range, the price can be changed within a limit of 2% in each consecutive trading. For bond or debenture or government bond, opening price shall not be more than or less than 0.20% of the previous trading day’s closing and a 0.10% for the each consecutive trading.
Settlement
Beyond 2060/61, NEPSE has adopted a T + 3 systems which refer that settlement of transaction should be done within 3 working days before the transaction day. Settlement will be carried out on the basis of paper verses payment. Before 2060/61, the system was T + 5 settlements for bond or debenture or government bond has been T +0.
Brokerage
The range of rate of brokerage on equity transaction is 1% to 1.5 % which depends on the traded amount. The rate of brokerage commission on debenture ranges from 0.15% to 0.75% for corporate bond from 0.5% to 0.10% and for government bond is maximum to 0.20%.
Board of directors
The BOD of NEPSE consist 9 members in accordance with securities exchange act, HMG/N and different institution investor nominate 1983. The organization structure of NEPSE is below.
S.N | Name of the organization | No. of Directors | Designation |
1. | Ministry of finance | 1 | Chairman |
2. | Security Board | 2 | Director |
3. | Nepal Rasta Bank | 2 | “ |
4. | NIDC | 1 | “ |
5. | Licensed members | 2 | “ |
6. | General Member of NEPSE | 1 | “ |
9 |
Regulations of security market in Nepal
The regulation that is developed in order to develop and conduct orderly securities markets and intend to encourage investment in securities market, product investor’s interest, maintain institutional identities, maintain effectiveness of monetary policy and discourage abuses of public confidence is called the regulations of security market. This regulation operate in the kingdom and applied in the security market of Nepal since 1993 as Security Exchange Board Nepal (SEBON) is the regulatory body to regulate the Nepalese securities markets. The main objectives of SEBON are to promote and protect the interest of investors by regulating the securities of security market and also to regulate, monitor, direct, control and coordinate the entire capital market. Ministry of finance guides the SEBON to operate.
The regulatory activates include regulating capital structure, assets structures investment portfolio, securities issues and operations. The additional objectives are financial system stability, higher economic growth rate, stable price, full employment opportunities and balancing international trade. In context of Nepal, Nepal stock exchange (NEPSE) works under Security Exchange Board of Nepal (SEBON) that operates as secondary market. This security market are governed by the following acts:
· Securities Exchange Act, 1983
· Securities Exchange Regulation Act, 1993
· Investment fund Act,1996
· Financial Intermediary Act, 1998
· Membership of stock Exchange and Transaction Byelaws, 1998
· Securities listing bye laws,1196
· Issue Management Guidelines, 1997
· Securities Allotment Guidelines, 1994
· Securities Registration and issue Approval Guideline,2000
· Guidelines on business code of Ethics for securities Brokers,2001
· Bonus share Issue Guidelines,2001
Additional related Act
· Companies Act, 1997
· Insurance Act, 1992
· Commercial Bank Act, 1974
· Finance companies Act, 1986
· Foreign Exchange Act, 1962
· Foreign Investment and Technology Transfer Act, 1992
Guidelines it Investors I n Nepal
Several producers and facts need to be taken into account before buying and selling of securities. They are:
1. Placement of orders: the investors must submit written buy and sale orders to the brokers to conduct the trading of proposed securities in prescribed formats.
2. Points to be included in the order: the buy and sell orders the investors must consists the name of securities, its type, quantity price (i.e. fixed/maximum/minimum of as deemed appropriate by the brokers) and the validity of the order in prescribed formats. If the tenure is not specified in the orders it will be valid for 15 day only.
3. Obtaining receipts for the registration of orders: The investors must obtain receipt against the deposit of orders in which the broker members must state the date, time and registration number.
4. To obtain notification for the purchase and sale of securities: After the transactions as per orders are done the brokers must acknowledge the clients either on the same or next day in prescribed format.
5. To submit either purchase value or certificates: The investors after getting the notification from the brokers must submit total amount required, in case of purchase and certificates of securities, in case of sale within five working days from the date of transactions.
In case of sale, the concerned seller must handover to the brokers the share certificate along with the signed documents (i.e. transfer deeds, bonds deeds) and the buying investors must submit the total required amount. Both the brokers have to submit those documents to the stock exchange. It is the duty of stock exchange to cross verifies the certificate deposited with the amount deposited.
6. Commission of their brokers: The commission of his/her service ranges from 1 to 1.5 percent based on volume of trading.
7. To receive the amount or share certificate: The brokers have to submit the amount and share certificates within five working days from the date of transactions and they will be eligible to get payment and certificate on the 8thdays. On the 6th days stock exchange will do the crossing of documents and prepares bill and makes payments to the brokers on 7th day.
If both the amount and number of share and the company matched with each other the amount will be transferred to the selling broker’s account and there certificates along with document will be handover to the buying brokers.
It us their investors who have to make decision whether to send those documents to the concerned company for the name transfer or to register it as transfer for resale purpose.
8. The tenure for the blank transfer: the decision of the investor need to be executed through the broker. If the investors make decision to registered the purchase securities as blank transfer it will be wise to continue this decisions before the closure of fiscal year of before the book colure whichever is earlier.
In order to send it to the concerned company the investors must fill all the required forms, which are signed by the concerned brokers. The investor’s himself/herself cannot send that document for transfer.
9. Receiving and making payment through cheques: the investors must make payments or receive payments from brokers either by bank transfer or through cheques.
10. Trading of the shares of the same company can take place at different prices: the investors must be aware that the shares of the same company can be traded at different prices or the buying and selling price of the shares of the same company can be different from one transaction to other transactions.
If the investors are in doubt regarding the purchase and sale of their securities they can contact to the concerned authority of stock exchange with notification receipts.
11. To be careful in risks involved in securities transactions: Investing in securities is not gambling. Certain principles are there and the investors must be aware of the existing risks involved in trading and investing in securities. So before making investment decisions the investors must consult financial statements of the concerned company and price study. The speculators may create rumors in the market and if investors run after that it will be his/her fault but not of the brokers. The fun is as well as the investment decision is of investors’. So the wise investment decisions will be productive and also supportive to the market.
12. Compensation from the deposits of the brokers: Each and every broker has to submit the bank guarantee and cash deposit in stock exchange. The stock exchange will make payments if stock exchange identifies any fraud committed by brokers and also deposited amount becomes short, the investors’ himself/herself recover the balanced form the brokers.
13. My word is my bond: The services of the brokers based on the principle “My word is my bond”. The brokers should not be deviated from the principle. The investors must support the principle of the brokers. If any unseen able events take place the broker must notify the stock exchange and reverse the transactions either by buy or sale according to the nature of transactions. If the investors suffer any loss, that should be borne by the investors himself or herself.
14. Transactions based on mutual faith and trust: It is the mutual faith and trust between the brokers and investors whether to do transactions without getting certificates or among in advance. But as short sale and forward trading are not permitted once the transactions are done according to the orders the documents and amount need to be deposited in any case. But if the client is new to the brokers they can ask certain amount in advance or also can ask the share certificate along with signed and verified order in advance.
15. Investors if have any doubt can contact to the concerned authority for finding the reality: The investors if have any doubt the purchase and sale of securities, their quantity, price and any other facts related with particular transaction or transactions, can contact the concerned authority of the stock exchange and clarify the doubt at any time after the transaction is over.
16. To have knowledge about trading, settlements and clearing procedures: the investors must have through knowledge about trading, clearing and settlement procedures. If they do not have conflicts and dilemma may take place. So it is right of the investors to obtain detail information about those procedures either with the brokers or from published materials by stock exchange.
17. Duty and rights of the investors: It is right and duty of the investors to inform the stock exchange authority about the problems faced by him while making investment. It is his right to get the problem solved and it is also his duty to protect other investors from facing the same problems. So do not hesitate to contact concerned authority of stock exchange with any problems either with brokers or listed companies.
Chapter:- 7
Financial Analysis of common stock
Financial analysis is regarding with the performance of common stock. It involves determining the level of risk and expected rate of return of common stock. The investor or analysts should consider the different factors while making the investment decisions such as quality of securities, objectives, the degree of risk etc. financial analysis helps to investors in selection of goods securities by analyzing the common stock.
Reasons for Financial analysis:
Investors have to make correct decisions and it is possible through depth financial analysis. The basic purpose of financial analysis is to make good investment decision.
i) To get the information about the company:
Financial analysis is done to make the financial decision. Due to lake of correct and good information investors may fail. Success or failure of any companies depends much on their investment analysis and performance.
ii) To select the good security:
Investors have limited funds to invest on securities. Financial analysis helps the investors to select good securities which provide maximum return by available funds.
iii) To take the advantage of mispriced securities:
It the market price of the security is lower than the intrinsic value it is called the under price and it is better to purchase the security. Similarly if the market price of the security is higher than the intrinsic value it is called over priced and in this condition it is better to sell that security. Financial analysis helps the investor to find out whether the security is overpriced or under priced.
iv) To make sound judgment and forecasting:
In current situation there are many options or securities for investment and structure of the market being complex day by day. Without proper financial analysis the investors cannot make sound judgment and forecasting of the securities and the market. Sometimes investors fail because they are not able to make right kind of prediction in the selection of best securities.
v) To help in risk analysis:
Financial analysis helps the investors to choose those securities, which have higher return with minimum risk. Through the depth financial analysis investors can forecast the riskiness of the securities.
Methods(Tools) of financial analysis:
1. Technical Analysis:
Technical analysis is the analysis of the market forces because it uses public market data for analysis of both aggregate market stock and individual market stock. It believes that important information about future stock price movement can be obtained by studying the historical price movement of stock prices. Financial data are recorded on graph paper and data are scrutinized in search of repetitive patterns. It is a way of analyzing the past actions of the investors participating in a particular market. It is a method of evaluating securities by analyzing statistics generated by market activity, past prices and volume.
Tools of Technical Analysis
The technicians use many tools to assist them to decide whether to buy or sell a particular security. Some tools of technical analysis are described below:
1. Charts:
Technicians usually use a wide variety of charts. They generally use the following charts:-
a) Bar Charts:
On a bar chart the horizontal axis is time line and vertical axis measures a particular stock’s closing price. Each bar has a range from the day’s lowest price to the day’s highest price. A small cross on each bar signifies the day’s closing price.
b) Line Charts:
On the line charts, the axes are the same as on a bar chart. However, only closing price are presented and they are connected to each other successfully with straight lines.
c) Point & Figure Charts:
The point and figure charts are based on the average prices or closing prices of the stock. They are one aspect of explaining the price changes. The chart plot day-to-day increases and decreases in price.
2. The Moving Average:
Moving average is one of mostly used statistical techniques to analyze financial time series data. Technicians calculate a moving average price for a security and use that average as a benchmark to gauge the daily price movements of a security. It is used to tell when to buy or sell a security.
3. DOW Theory:
(a) Primary movements: These are called bull and bear markets. Bull markets are where prices move in an upward manner for several years. Bear markets on the other hand are where prices move in downward manner for several months or a few years.
(b) Secondary movements: These are up and down movement of stock prices that last for a few months and are called corrections.
(c) Daily movements/Minor trend: These are meaningless random daily fluctuations.
2. Fundamental Analysis
This approach allowed the investor to estimate the intrinsic value of stock which determine independently of the market value, earnings, dividends and other fundamentals. When detail financial information becomes available the techniques and procedures of fundamental analysis began to emerge. There are major approaches of the fundamental analysis, which are as follows:
(a) Top-down versus bottom-up forecasting: Top down analysis is related to analysis of Economy-Industry-Company-Framework. It starts with macro economic analysis of the various indicators affecting the economy. The analysis of industry consists of the study of various industrial statistics that provide information on production capacity utilization, goods and services provided. Company analysis related logical explanation and conclusion drawn from companies earning power, dividend payout ability, management capabilities etc. Since all these factors have impacts on determination of stocks price in the market. Bottom up analysis is related to analysis of Company-Industry-Economy.
(b) Probabilistic forecasting: It is based on the economy wide forecasts. It is important in determining the risks and return of a well-diversified portfolio. Various alternative economic scenarios may be forecast with their respective probability.
(c) Econometric Models: It is used to predict the levels of certain variable known as endogenous variables. Certain other variables known as exogenous variables are applied to forecast various economic implications on the value of stock.
