Stock Market, NEPSE: Past, Present and Future

The price of every product in the market principally, is fairly determined based on demand and supply at a specific time. The mechanism of price formation follows the same economic principles; demand and supply and trade off determines acceptable price of a product and service. We are pretty aware and confident that how much we spend on vegetables & everyday groceries. Micro-bus and tempo fare? And, sometime we are conscious over the taxi fare which is absolutely fair and needful. But, there are certain things that have tremendous effect in our financial life such as interest rate in our savings and loans accounts, premium on our insurance policies, prices of the stocks and other financial instruments that we might prioritize the least due to the complexity in its nature. We dream to have our safe future with couple of million rupees in our bank account, a small house to live with a little space for gardening, an expectation of handsome salary and perks for our graduated son and daughter and so on. To achieve some or all of these expectations, we should have sound financial knowledge to handle our savings and to optimize the growth prospects by managing the risk to achieve the long term financial freedom. As well as, we would transfer the knowledge to the new generation by the practice. The traditional ways of preserving wealth by keeping them in the wooden or metal boxes at home or burying them in a pot in the back yard or in the jungle, have now become completely obsolete, unproductive and socially risky methods. Creating wealth on the other hand is challenging and requires a higher level of sacrifice on current spending which is fairly difficult due to the extensive shopping alternatives available in the market.  Ironically, saving is difference between what we make as income and what we spend as expenditure. Growth, a mechanism to increase our savings in the short term and the long term, involves the risk. Theoretically, higher the risk, higher will be the return and lower the risk, lower will be the return. But, it depends on how we select the investment opportunities and how we determine the level of our risk tolerance. The level of risk tolerance is different between person to person based on education, experience, level of assets holdings, access to information, and the level of investment among others. If we would like to grow our money, there would be some relatively low risk options in the market like depositing money into the bank saving accounts, buying a stake in mutual funds, investing in land and buildings, holding precious metals and jewelries, investing in the financial instruments – stocks (IPO and secondary market), government and corporate bonds, commercial papers, personal lending, etc. Currently, urban savings is directed towards the banks and financial institutions which is the major source of capital formation in Nepal. Compared with the Western economy, the local stock exchange, Nepse, has not been able to attract more listings due to various economic and political hurdles. But, the practice of exchanging financial instruments through the organized stock exchange is a recent development in Nepal whereas the developed countries have their long history of the practice. They practiced on every ups and downs of their economy, and strengthen their stock market mechanism with the proper policies and the infrastructures which have now become a barometer to measure the strength of the economy. Past: Historical Perspectives The history of the capital market began in early 17th century with the Amsterdam Stock Exchange (1602) in The Netherlands, followed by Paris Bourse (1724) in France, Philadelphia Stock Exchange (1790) in USA, London Stock Exchange (1801) in England, Milan Stock Exchange (1808) in Italy, New York Stock Exchange (1817) in USA, Frankfurt Stock Exchange (1820) in Germany, Bolsa de Madrid (1831) in Spain, Toronto Stock Exchange (1861) in Canada, and Australian Stock Exchange (1872) in Australia which are the oldest 10 stock exchanges in the world. Whereas, Bombay Stock Exchange, a regional pioneer for South Asia was only established in 1875. With regards to the oldest share certificates, there are still 4 physical certificates exist of the company called Verenigde Oost-Indische Compagnie (VOC) which was issued in 1606. This is considered the oldest share certificates by the existence. In Nepal, Biratnagar Jute Mills Limited had issued the first share certificate in 1937. Similarly, Nepal Rastra Bank had issued the first government bond in 1964. The history of securities exchange in Nepal has started with the first amendment in Securities Exchange Act (1983) in 1993 which paved the way to establish Securities Board of Nepal (SEBON).The act also provided the way to convert Securities Exchange Centre (SEC) into Nepal Stock Exchange (NEPSE) on January 13^th, 1994. After the establishment of Nepse, banking and finance, insurance, manufacturing and service, and hydropower companies have gradually started to list their common stocks for trading. The inception of the capital market has provided abundant investment opportunities to the individuals and the institutional investors in Nepal. Now, it has become a separate industry. As a result, the investment communities are growing day by day. The depth and width are expanding for the long term development of the market within the regulatory boundary given by the regulators. Present: Current practices We have stepped forward from open outcry trading system to semi-automated trading system, which is a path to fully automated online trading system in the future. In the early days, Nepse practiced it’s trading using open outcry system, wherein the limited stock brokers (32) used to be on the floor and the Nepse employees would update the stock prices on the white boards based on what they heard from the trading floor. It was fully manual trading system, like as the trading before the invention of ticker tape in the western stock markets. The first ticker tape was developed in 1867 which allowed information to be printed in easy to read script. After two and half decades of operations, Nepse had replaced its open outcry system by semi-automated trading system. But, the exchange of physical transfer of share certificates from sellers to buyers was not replaced. It was a lengthy process of getting share certificates and also time consuming to initiate sales orders. To avoid such difficulties, Nepse has now been exercising dematerialization which is a process of converting physical shares into electronic format. Investors are now required to dematerialize their shares by opening a demat account with depository participants where the investors need to surrender the physical share certificates and in turn get electronic shares in their demat accounts. Once they have a demat account, they will get a passbook, like a bank passbook before the invention of banking software. Then, the demat account holders or the investors, are able to place their orders (buy/sell) by cutting orders/checks to their stock brokers. Here, the role of stock brokers is very crucial since they are still handling paper works and placing their orders for trading to the hundreds of investors at a same time. Due to the various constraints, they are not able to give priority to all customers equally – beginners, small, medium and big investors. Despite assuming good administrative support from the brokers, the psychological and the behavioral biases are still unavoidable which is actively influencing the stock trading. It starts from the point of placing orders on the screen to the point where the orders are being executed. This timing is considered the most valuable and precious for the investors to achieve their investment objectives. We hope our investors would get equal and quality professional services from the limited number of stock brokers (50) today and in the future. The Future: Possibilities and the challenges We are in the age of information and technology (IT). We are dealing with and learning digital practices in our daily life. The richest people in world are now from IT and innovative entrepreneurs like Microsoft and Facebook. For the new generation, it is like “sky is the limit”. The world has been changed. The changing world has brought the opportunities and challenges from various perspectives. We are floating on the rapidly changing financial waves where the technological advancement and the financial innovations radically change the characteristics of the financial industry. We named the financial crisis of 2007/08 as the most dangerous which had swiped billions of dollars from the world economy. It happened not only due to the cheap credits, subprime mortgages and real estate bubbles but also due to the financial industry’s exposure with the novel technologies. Some market participants at that time commented as - none of the primitive market mechanisms (tools) were useful, stock prices were sharply declining but no one knew how to stop them, and preserve their wealth since the market was extremely volatile. The market was behaving in a highly unpredicted and the trading volumes were massive. Why such challenges had happened? There is no exact answer for such questions but the easy availability of credits, internet based trading tools, exposure of high speed internet and algorithmic trading, advance software and trading platforms, wide availability of market information, the speed of the transformation of financial information globally, and the flow of capital from one continent to the others are some of the major reasons of 2007/08 financial crisis. The financial crisis, every now and then are extremely costly learning lessons for all the financial communities in the world. Amid the global context, the future prospect of Nepse is to adopt the online trading system which will give investors an equal and digital access to the market in the real time. Investors will be self-sufficient to make investment decisions since the market will be far riskier than the existing. The value of financial information will be precious and costly and the timing will be really important. Now, the western stock markets are handling billions of dollars of trade in a micro second and entrepreneurs are investing substantial amount of money in saving those micro seconds and speeding the financial information. If Nepse goes on the online trading platform, our local market will be exposed with the global investors (at least the NRN) and we will be quick enough in getting financial information and executing trades on our own using our personal devices – desktops, laptops and cell phones from our home and/or work. Finally, we expect our infrastructure would develop in such a way that it supports such speed trading and all the stakeholders would reap the opportunities by managing the local and global challenges. (*The author is a Gold medalist from TU for the courses of M. Phil in Management with specialization in Finance in 2012. Now, he is working as a Finance Manager in a consulting firm in New York. The opinion presented in the article is personal. You can reach to the author at su.kadariya@gmail.com)