Article by Pratima Dhakal, Santosh Devkota, and Usha Adhikari
This is Part 2 of the NEPSE beginners guide series. The series is aimed to help new investors to learn the basics of investing in Nepal's capital market.
Part 1 of this series revolves around the primary market. Part 2 discusses the secondary market in detail.
We assume you are now a primary market shareholder after reading Part 1 of this series. Now the secondary market is the place to sell your primary shares (which means shares allotted from IPOs). From here you can sell your shares at market price and buy other shares. But it might not be available at NRS 100 as it was in the primary market. As the number of buyers and sellers in the secondary market is large, the market price fluctuates in proportion to demand and supply. In the secondary market, those who buy shares at a lower price and sell them at a higher price make a profit.
But before we get to the basics of the secondary market, you need to know the institutions that play a major role in facilitating the market:
It monitors and regulates every activity in the market to keep the market in a well-balanced and ethical manner. It also looks after all the formalities of new entrants, including listed companies. Any kind of company needs to get permission to distribute IPO, FPO, dividend, or anything that involves public stock owners. This is the most important institution in the Nepali stock market. It also takes the feedback from the public and the companies to make new laws and enforce them according to the necessity.
The institution set up by the government to manage everyday transactions of the stocks/shares properly is Nepal Stock Exchange Ltd. or NEPSE in short. You can only buy or sell the companies that are listed in NEPSE. Also, the price of each company’s stocks can be tracked on the website of NEPSE. The market is open from 11:00 AM to 3:00 PM (Sunday to Thursday) except on regular holidays, and we can only do trading on these days and times. The market is closed on Fridays and Saturdays.
It mainly deals with the shared management of companies listed in NEPSE. For example, when a person owns stock, the transaction between buyer and seller is accounting by CDSC. It is the owner of MeroShare, and site to check the IPO result (IPO RESULT CDSC) we talked about earlier.
Now you know about these companies briefly, you need to follow a few more steps before you enter the secondary market.
Step 1: Select a broker
The first thing to do before entering the secondary market is to choose a broker. For those, who opened a DEMAT account from the broker’s office, you already selected your broker. This step is for those, who opened their DEMAT account from the bank.
There are 50 brokers in Nepal, each having its branches in different cities of Nepal. Selecting any broker is okay. Usually, people prefer brokers that are near to their house and that is perfectly fine.
Step 2: Open TMS Account
NEPSE TRADE MANAGEMENT SYSTEM (Online TMS) is the platform where you sign up to trade (as the name suggests) i.e., buying or selling any stocks listed in NEPSE. It has been an initiative to facilitate trading in the secondary market since last July 2020. In the absence of this system, it was compulsory to place a buying and selling order by calling the broker or visiting the broker’s office.
So now you also have to open a TMS account to trade in the secondary market, for which you need to contact any broker and consult with them. They will ask you to fill up, submit and register either online or offline form according to the broker.
Once registered, they will provide you with an ID and password through your Email address, then you need to log in and change the password. You can also register yourself from the selected broker’s website (online), but since you have to upload the required documents, it is easy to get a TMS ID through a broker (offline). Similarly, the KYC form has to be filled at the same time.
Step 3: Setup a Connect IPS account to manage your payment
Nepal Clearing House Limited (NCHL) developed and operates this e-Payment System, which is licensed and regulated by the Central Bank of Nepal (NRB) as a payment system operator (PSO). Since you have to pay the bill online after doing the transaction, the Connect IPS has to be linked to the bank account (highly recommended).
You need to create your account in the Connect IPS and then insert your bank account details. Then you will receive a generated form, which you can also get it online but you have to get it printed and take it to the respective bank along with the original and photocopy of citizenship to get the account linked to Connect IPS (for a high limit transaction).
There is also a self-verification system for some banks but the limit is quite low for transection. After this, you can pay the bill for the shares you have bought from the broker. There is also a provision to deposit the sold amount directly in the bank account.
All the investors who trade in the secondary market have to pay certain capital gain taxes and commissions. Individual investors should pay 5% (the shares hold for more than one year should pay 5% and less than one year is 7.5% from 16Th July 2021) of the total profit and institutional investors should pay 10% to the government. In case of loss, you do not have to pay tax.
However, SEBON has decided the broker commission and other charges have to be paid according to the transaction. For buying shares, you should have to pay 25% of the total amount of total shares that you are going to buying in advance to the broker, which is called collateral. Then the broker arranges for you to purchase up to four times the collateral amount from your TMS.
All the amount has to be paid within 2 days of purchase. Otherwise, there is a rule of fine. They can credit the purchased shares within 4 days on your DEMAT account. Similarly, when selling shares, you can sell at market price on your own. Within 2 days of selling the shares, it should have done EDIS from MeroShare and transferred to the broker’s account. Even if fail to transfer your shares through EDIS, there will be a 20% closeout penalty. They will deposit the amount of sold shares in your bank account after one week.
After entering the market, the intention becomes to invest. There are gainers and losers. Therefore, it is a stupid idea to invest without understanding the technical and fundamental facts. The market does not always have to be rising and falling (bull and bear).
So, you need to identify an excellent company and invest safely. As the market grows, the hype of weaker companies grows as well. Weak means companies that have increased prices but could not give good returns. That big investors have manipulated the prices of such non-performing companies. Companies that have high prices in the market but can’t give a return may give a big slap to new investors. Therefore, to identify the right and safe company, only by studying some of the key metrics investing can get satisfactory returns. There are many types of investors in the secondary market, which can cause unnatural changes in prices. You need to protect yourself from such traps.
The main illegal acts of unnatural fluctuations in the price of a particular company in the secondary market are the following.
1. Certain people benefit from the company by leaking highly confidential information within the company. We call this insider trading. Therefore, companies with unnaturally high prices should avoid it.
2. The group that invests the largest amount in the market buys and holds all the shares when the supply falls short of the demand. The value of the company rises, and when it reaches a certain point, it survives and makes a profit. We call this cornering. Most of the companies with a low number of shares are in the eyes of such gangs.
3. We call a business that raises the price of a company by showing that the demand is high at the last moment of market closing is ramping. As the demand seems to be high, direct investors seem to take advantage of it. Because of this, the demand of the company is likely to remain high even in the last few days.
4. Similarly, large groups of investors trade among themselves to increase prices. We call this pooling. It has done to attract investors by showing that an extensive amount of business had done.
5. The act of lowering the company’s value by making unnecessary noise is called organized runs. This also deceives the new investor.
There are also unauthorized activities, where large groups of investor that make a profit by attracting new investors to a certain company. Some actions are becoming ineffective after NEPSE went online. For example, wash sale, matching, Front running, etc.
Now let’s look at how to choose a good and strong company. Over, 200 different categories of companies had listed in NEPSE. Everyone thinks about how to choose the safest company out of those companies. If you want to invest for a long time, then you have to do fundamental analysis but if you want to make a profit in the short term, then you have to do technical analysis.
It is easy to predict price fluctuations from technical analysis. We consider this method suitable for traders. But we can select companies that can give high returns from the fundamental analysis. Whatever the market price, the higher the return of the company, the more profit can be made by an investor. We can do fundamental and technical analysis of all the companies of 13 subgroups in NEPSE. There are good and weak companies in all subgroups.
You should also analyze and select the company, with the help of quarterly and annual financial statements published by the company. We can easily access it from the website of ShareSansar, Merolagani, and related company’s website. We can also see other necessary details about the company from NEPSE’s website. The major key points of company selection are:
- Business growth and performance
- Earnings per share (EPS)
- Reserve and surplus
- Dividend distribution capacity (Supported by past dividend history
- Price-Earnings Ratio (recommended low PE ratio
- Sound and competent management, corporate governance practices
- Future prospectus
If you study the mentioned point and invest, you can enter safe and low-risk companies. We can place banks in the low-risk group in Nepal’s stock market. A new investor should enter the market through a bank. Regular returns are also available. Investing in blue-chip companies pays off.
Article by Pratima Dhakal, Santosh Devkota, and Usha Adhikari
Kathmandu University, Dhulikhel