Introduction to Nepal Stock Market:– The stock market in Nepal is very small compared to other neighboring countries. Capital plays a vital role in a country’s economic development. As a capital-run country, Nepal must do everything possible to mobilize available capital effectively. Securities are financial assets. Therefore, the market exists to bring together buyers and sellers of securities.
The capital market is the mechanism designed to facilitate the exchange of financial assets by collecting orders from securities buyers and sellers. The stock market has been a global phenomenon in today’s world, regardless of the size of a particular region.
The stock market is the place where the buying and selling of securities take place in an organized way. The parties involved in the stock market are investors, intermediaries, and specialists. The security market offers the mobility of dispersed savings.
Retail investors with a limited capital fund could also participate in the process of industrial development of the country through their investment in securities. The stock market is the main constituent of the capital market.
Although some analysts (Irwin Friend, etc.) believe that the stock market in developing countries is casinos that have a little positive impact on economic growth, recent evidence suggests that stock markets give a big boost to economic development (Levine, 1996: 7).
The stock market is the axis on which economic development fluctuates; It means that the stock market is the cornerstone of any economic development. The stock market in developed countries has become an integral part of the economy (Brennan, 1995: 11) and its role in developing countries is increasing day by day. In the securities market, the securities of listed companies are traded through an organized brokerage firm (Douglas, 1991).
In the last decade and a half, the financial sector in Nepal has grown significantly. It is said that despite a history of nearly half a century of development efforts under various national plans, awareness-raising efforts to develop the financial sector started rather late in Nepal.
The history of the capital market started from the period of Rana’s prime minister, Juddha Shamsher. It formed a holding company, that is Biratnagar Jute Mills, within the framework of a joint financing agreement with an Indian jute processing industry in 1936 (1933 B) as the country’s first modern industry.
Subsequently, several mills of rice, cotton, sugar, and others were created to mobilize the capital of the economy for industrial development. In 1937 (1994 B.S), Nepal Bank Limited was founded as a commercial bank. In the same year, the first individual act was issued, which was a favorable step to promote the capital market in Nepal.
But the Rana family did not like public participation in the ownership structure of the industries and all company shares went to Rana families, the expansion of the capital market to the desired level was estimated. In 1950 (2007B.S) democracy was established, the interim government was very committed to identifying measures to recognize sick industries and paid little attention to start developing the stock market.
The stock market development process in the country really began in 1976 when the government established the Securities Exchange Center to supply and develop the stock market.
However, only a visible impact on the development of the financial sector was observed when the government changed its restrictive policy and opened the financial sector closed so far to the private sector and foreign participation in the establishment of banks.
With the adoption of the policy of privatization and economic liberalization, the process receives a greater boost and the financial institution in Nepal has grown at a faster pace, especially in quantitative terms. The value exchange center was established with the aim of facilitating and promoting the growth of capital markets.
Before its conversion into the stock exchange of Nepal, it was only a capital market. The main objective of SEBON is to promote and protect the interests of investors through the regulation of the stock market, to monitor and control the entire capital market, the sale and distribution of securities and the purchase, sale or exchange of titles.
SEBON was created with the aim of contributing to the development of capital markets by making transactions inequitable, healthy, efficient and responsible securities. Considering that, its main functions are to provide licenses for the businessman of the stock exchange and monitor and monitor the activities carried out by NEPSE to find out whether they are in compliance with the law or not.
Despite this, the Nepalese stock market is still underdeveloped and there are many shortcomings in the Nepalese stock market. Therefore, this study is conducted in the Nepal stock market in order to discover its growth potential, its main problems, and prospects through the use of secondary and primary data.
The development of the capital market in general and the stock market, in particular, is important for the development of the country. Capital market institutions help mobilize excess units into deficit units for productive investments. While it mobilizes the dispersed resources, channels them into the productive sector.
It is an effective tool to expand the country’s production capacities. Due to the lack of information and limited knowledge, investors are manipulated or exploited by financial institutions or other market intermediaries, such as the extent to which investment in common stocks is intolerably dangerous.
The attitude and perception of investors play a vital role in the rational decision that is influenced by knowledge and access to the data required for analysis. Most Nepalese investors invest their funds in unique securities due to the lesser knowledge of the risk/return behavior of the securities.
The development of the stock market in Nepal is both challenging and difficult. The problem likes a lack of professionalism in brokers, independent buyers and sellers, well-trained workforce; Delay in stock management, there are rational investors in the Nepal stock market. Due to the embryonic nature, the Nepal stock exchange is not effective enough to assess the price of the shares. At the moment there are no open private investment companies (mutual fund).
Therefore the government needs to create incentives for capital mobilization remove impediments to private sector development and provide basic legal regulatory reforms. The companies used different rules and regulation in stock market development. There is no consistency between Acts and Niyamabali. They are not matching each other.
A special institute incorporates under a special charter governs accountancy profession. These institutes regularize the profession also issues accounting standards and guidelines.All the members are required to follow mandatory, which discharge their duties. These practice helps to maintain a reasonable standardize performance by professional accountants.
Nepal Stock Market is very small in comparison with other developed stock markets. There are a few numbers of brokers, the limited number of listed companies, very few transactions and most importantly investors are unknown about the pros and cons of the stock market.
The Nepal Stock Market is almost totally captured by individual investors who buy a very little number of shares and therefore they do not bother analyzing the data and information before buying and selling the stock. The variety of securities available in the market allows each investor to select the asset that suits his risk, preferences, and beliefs. But there is a lack of different types of securities in the stock market.
Concepts related to Nepal stock market
Financial market denotes the place or mechanisms where financial instruments are traded. Financial instruments denote also paper evidence, showing the exchange of instruments between concerned parties. A financial market is a place where firms and individuals enter into contracts to sell or buy specific products, such as stocks, bond on future contracts. This market provides a meeting place for buyers and sellers where the price is determined.
A financial market is a place where the financial instruments are traded.
Financial instruments include share bond and debenture etc. The purpose of the financial market in an economy is to allocate savings efficiently during the period of time-a days, a week, a month, or a quarter to parties who use funds for investment in real assets or consumption (Van Horne, 2000: 448). It enables individuals to choose between current and future consumption. Second, it also provides the opportunity of interaction between buyers and sellers to determine the price of assets.
Third, it provides liquidity to investors. Fourth, it encourages management to comply with the existing rules and regulations. Therefore financial experts mentioned it as a brain of the entire economic system. The failure of the financial market, as a brain, obstructs the progress of the whole economy. So, financial market from savers to users of funds to facilitate the efficient allocation and growth of financing and investment in financial assets transformation to generate income to savers and users (Sherestha and Bhandari, 2007:9).
A country’s financial system may be bank dominated or market-oriented. Each of these system has different mechanisms for handling the holder’s interest and addressing corporate control issues and agency problems. Though historically countries seem to follow one of these paths for the development of its financial system, in recent years, some countries are developing their financial system through convergence between these two.
The financial system helps in the payments of goods, services and productive inputs. Similarly, it helps to manage funds efficiently and use them. The financial system consists of financial institutions, financial markets, and financial instruments.
Financial intermediaries (financial institution) are an organization that issues financial claims against themselves and uses the proceeds from this issuance to purchase primarily the financial assets of others. Financial claims simply represent the right-hand side of the balance sheet for any organization, so the key distinction between financial intermediaries and other types of organization involves what is on the left of the balance sheet. Financial intermediaries provide an indirect method for the corporation to acquire funds.
Financial institutions are said to be the bridge between the savers and users. They also collect scattered deposits and give loans to maximize their wealth. Financial institutions actively participate in the money market and the capital market, as both suppliers and demanders of funds. Financial intermediaries include saving and loan associations, savings banks, credit unions, life insurance companies, mutual funds, pension funds, etc. The financial system is an important element of the modern economy
The securities market is the place where a large number of financial securities (shares, bonds, debentures, etc.) is traded according to the prescribed rules (Investor’s Guide, 1978:11). So far as the securities market is concerned, it is an important constituent of the capital market; it has wide term embracing the buyers and sellers of securities and all the agencies and institutions that assist the all sales and resale of corporate securities (Rugh, 1965: 50).
In the Nepalese context, it is mandatory to register the portion of securities issued to the public with the security Board of Nepal (SEBON). Then the firms are eligible to issue the registered portion of securities through recognized bodies. The recognized bodies mean those who have received a certificate from SEBON to act as issuing house and security promoter to get membership from security exchange market.
Security market exists in order to bring together buyer and sellers of securities, meaning that they are mechanisms created to facilitate the exchange assets. There are many ways in which security market can be distinguished. One is primary and secondary markets.
Interestingly, the primary market itself can be subdivided into seasoned and unseasoned new issues. A seasoned new issue is providing new fund for existing security; whereas an unsecured new issue involves the initial offering of a security to the public. Unseasoned new equity issues are often referred to as initial public offerings or IPOs.
Another way of distinguishing between security markets considers the life span of financial assets. Money markets typically involve financial assets that expire in one year or less; whereas capital market typically involves financial assets with spans of greater than one year (Sharpe, Alexander, and Bailey, 2000: 9-10).
Securities market provides an effective way of raising money for commercial enterprises and at the same time provides an investment opportunity for individuals and institutions. Securities markets have both theoretical and practical perspectives.
Securities markets provide value and significances to financial assets. Practically, the activities of buying and selling securities on the security markets are extremely important for the allocation of capital within economics the securities market serves as a reliable guide to the performance of companies and thereby promoting efficiency.
Holders of stocks and bonds may decide to obtain cash for their investments by selling their securities to other investors. Similarly, others in the economy have the cash to invest and are desirous of buying stocks and bonds.
The problem is to bring together the order of prospective sellers and prospective buyers so that an exchange of securities for cash may take place. An efficient system whereby investors can convert their securities into cash quickly at or near the current market price makes investors more ready to put their savings into stocks and bonds (Bradley, 1663:303).
The stock market is known as the secondary market on the other side of the market segment under the capital market. It includes all transferable securities issued previously by corporate bodies; such securities are also traded in the stock exchange.
The stock market does not include securities of a private company as they are not capable of being dealt in on stock exchange and are not marketable securities due to the restrictions on transferability. In order to take the benefit from the stock market, the corporate bodies should have listed the security in the stock exchange.
The stock market covers activities pertaining to the dealing in securities, whether good or bad, for the liquidity and marketability. Only the securities of existing companies are tradable on the stock exchange irrespective of issuer’s corporate bodies or government (Vaidya, 2000: 72).
A stock market is a market for the trading of publicly held company stock and associated financial instruments. Originally, stock markets were “open outcry”, where trading occurs on the floor of a stock exchange.
Classification of Common Stock
Common stock is often viewed as a homogeneous type of security. The majority of common stocks have similar voting, income, and liquidation rights. Nevertheless, despite the homogeneous nature of common stock, it is important to realize that the risk-return characteristics of stocks can vary significantly.
Indeed, stocks are often classified on the basis of these characteristics (Cheney and Moses, 1995: 19).
Blue –chips Stocks
Stocks of very large, firmly established corporations, such as General Motors, IBM, and Xerox, are often referred to as blue chips. These stocks are often viewed as conservative investments.
A common stock that is likely to experience above-average price appreciation is known as a growth stock. Accomplishing this may be a more difficult task than it first appears to be, however. First, the business may be successful in increasing its market share or developing new markets.
Stocks that have a long – term record of stable cash dividends are often referred to as income stocks. For example, utilities are noted for their stable cash dividends. Their stock prices, however, can be quite volatile depending on economic and market cycles.
There is no standard definition of how small a company must be to be a small stock. An NYSE traded company with a total capitalization of less than $500 million may be considered small in relation to blue-chip stocks.
Corporations have authorized, issued, outstanding and treasury stock. If a corporation decides to buy back its own stock, the acquired stock is called treasury stock that has been issued but is not outstanding. Consequently, it does not maintain voting rights and is not entitled to dividends.
A stockbroker is expected to maintain high standards of integrity, promptitude, and fairness in the conduct of his business. He is expected to exercise due to skill, diligence and comply with statutory requirements and not to indulge in manipulation and practice.
Almost all members act as commission brokers. The commission broker executes on the floor of the exchange buying and selling orders placed by his constituents to whom he renders contracts containing a charge for commission at charges not beyond the brokerage.
See Also: The Role of Broker Nepal Stock Market
A brokerage firm or stockbroker accepts investors’ orders to purchase and sell securities and is paid a commission for transmitting these orders to the appropriate exchange for execution. There are two broad types of brokerage firms-retail houses, which deal with individual investor, and wholesale houses, which deal with institutional investors. Some firms have both retail and wholesale customers.
They include most of the well-known firms like Merrill Lynch, Pierce. Fanner and Smith Inco, Prudential Bache Securities Inc. Others, such as Salomon Brothers, however, accept only institutional investors as clients.
As soon as an order is placed with a brokerage house it is relay by high-speed lines to the exchange floor. They are the members of the exchange who actually see that customer orders get executed according to instructions.
The floor brokers are officially attached to other members. Floor brokers are also the member of the stock exchange and they assist commission brokers when there are too many orders following into the market for the commission brokers to handle alone. For their assistance, they receive part of the commission paid by the customers. Floor brokers are sometimes called two-dollar brokers because for a commission (which once was $ 2 per order). They are ordinarily free-lance members of the exchange (Francis, 1992: 81).
These members trade solely for themselves and are prohibited by exchange rules from handling public orders. They hope to make money by taking advantage of perceived trading imbalances that result in temporary mispricing, thereby allowing them to “buy low and sell high”. These members are also known as registered competitive market-makers, competitive traders or registered traders.
A dealer buys securities at a price and accepts to sell them at a higher price. Dealers trade solely for themselves and are prohibited from handling public orders. Since dealers have access to the floor and can own securities in their own name, they benefit from buying at low and selling at high prices. The benefit of the dealers to the market is that their buy-and-sell actions add up to the liquidity of the securities.
Market makers, also known as specialists, facilitate the trading of securities by maintaining inventory in particular securities. They are similar to a dealer in many ways except that they always stand ready to buy and sell securities at their bid and asked price for which they are market makers.
The market maker is any company or corporate body which deals in securities at the stock exchange in its own name or under its name on the basis of a pledge to provide liquidity to the securities, issued by HMG, as well as to the securities listed at the
Stock Exchange by concluding necessary contracts with the concerned corporate bodies or to the securities of at least three corporate bodies and not to let to occur improper instability in the prices of such securities, shall be granted membership of securities market maker.
Issue manager carries out the functions related to public issuance of securities on behalf of the issuing company. Issue managers are required to submit their annual reports including profit and loss account, balance sheet, cash flow statements, and securities trading report to SEBON within four months of the expiry of the fiscal year. In this fiscal year, eight-issue managers have submitted their reports of the fiscal year 2008/09 to SEBON.
Types of Stock Market
Securities available for the first time are offered through the primary market. The issuer may be a brand new company or one that has been in business for many years. The securities offered might be a new type for the issuer or additional amounts of security used frequently in the past.
The key is that these securities absorb new funds for the offers of the issuer (Fischer and Jordan, 2000: 9). The primary markets are media through which new financial assets issued or generated. They are the media through the demanders and suppliers of today’s funds, the creators and acceptors of financial claims meet.
In these primary markets, financial assets are created and exchanged, satisfying in the part the financial needs of demanders and suppliers of today’s fund. At present context, it is the market for direct issuances of government securities. The primary market of the country is dominated by government securities due to the existence of insignificant new issues market for industrial securities.
The secondary financial markets are that market where many outstanding assets are traded from old to new owners. The secondary market provides liquidity for financial assets making them more attractive. So, the secondary market is a place where the securities once sold are purchased and repurchase to provide liquidity to the government securities.
In Nepal, the secondary market is very thin because of limited distributors of the securities. NEPSE is established in order to promote the market used to support the market even involving itself buying and selling activities if necessary. Secondary market allows outstanding securities to be traded from old to the new owner.
The advantage of the secondary market is to provide cash and investment opportunities to the investor and to make certain assets more attractive to buyers and sellers. Secondary market comprises the stock exchange, the over- the –counter market.
The secondary market in simple, markets in which outstanding securities are traded. It is the market that creates the price allow for liquidity. If the secondary market did not exist, the investors would have no place to sell their assets. Without liquidity, many people would not invest at all. The corporations whose securities are being traded are not involved in secondary market transactions and, thus, do not receive any funds from such a sale (Brigham, 2001: 115).
In conclusion, a secondary market is a place where once securities purchased and sold to provide liquidity to the government securities and the market is operated by the securities exchange center. The trading of government securities is very thin because of limited distributors of the securities.
Securities Board of Nepal
Securities Board of Nepal was established on June 7, 1993, as an apex regulator of securities markets in Nepal. As per the Securities Act, 2006, the major objectives of SEBON are to regulate issue and trading of securities and market intermediaries, promote the market and protect investor’s rights. The duties and responsibilities of SEBON are as follows.
- Register securities and approve prospects of public companies.
- Provide license to operate stock exchanges.
- Provide licensee to operate securities business.
- Give permission to operate collective investment schemes and investment funds.
- Draft regulations, issue directives and guidelines and approve bylaws of stock exchanges.
- Take enforcement measures to ensure market integrity.
- Review reporting of the issuer and listed companies, and securities businesspersons.
- Conduct a research study and awareness program’s regarding securities market.
- Coordinate and corporate with other domestic as well as international regulators.
- Frame policies and programs relating to securities markets and advise the
- Government of Nepal.
The Governing Board of SEBON comprises of seven members representing the various government and private sectors. The seven-member board includes a full-time chairman appointed by Government of Nepal for the tenure of four years.
SEBON, in its organizational structure, has two departments, six divisions, and ten sections. Under the Corporate Finance and Administration Department, there are three divisions namely Corporate Finance and Reports Review Division, Accounts, and Administration Division and HRD and Education Division.
There are also three divisions under the Securities Market Regulation Department namely Legal and Enforcement Division, Market Regulation and Compliance Division and Market analysis and Planning Development Division. Presently, there is 42 staff (including the chairman) in SEBON.
SEBON, in performing its responsibilities, is also taking opinions of experts from Accounting and Legal Professionals as and when required. Similarly, to make prospectuses of issuer companies more informative and reliable, SEBON representations from Nepal Rastra Bank and Insurance Board in this committee as and when required.
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