How to Invest in Share Market of Nepal? IPO, FPO, Primary and Secondary Market in Nepal

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If you are willing to invest your money in Share Market of Nepal then it is recommended to know basics of share market. You may have been influenced by your friends’ investment and return in share market but to be true it is not as simple as it seems to be.

Many people enter into share business without basic knowledge and eventually get frustrated. They lose a good amount of cash and cannot find the way to retrieve it.  It is a bitter truth which few of them only talk about because it’s human nature to hide weaknesses.

But don’t get upset or unmotivated. It is best to prepare for the worst. If you are aware of the dangers you would be able to protect yourself.

It is also true many people have also earned a decent amount of money from share market.  You should have patience and your own evaluation methodology of a market in order to earn profit from it. Without your own evaluation skills, share market can wipe out all your money within a short period of time. So, it is better to gain some ideas before investing your money in the Nepal share market.

Capital Market

First, you should have a general understanding of a capital market.

A capital market is a market where buyers and sellers engage in the ade of financial securities like bonds and stocks. The buying and selling parties could be an organization or an individual.  Capital market makes space for the wealth to be channeled towards productive use.

But regarding Nepal in present, there is an ongoing debate whether the share or stock market is productive or not. High ranking personalities have spoken regarding this issue and have created panic among many investors.

If you follow news from unreliable sources and act according to then you will not be able to remain in peace. Your understanding about the share market would derive from your own research only. Not even Gurus are able to lead you. There is not a single Guru in the world that has been able to direct people in the right direction in share market all the time.

Capital Market consists of Primary Market and Secondary Market.

What is Primary Market?

Primary market is a market which issues new securities for companies and groups in order to get financial support to fulfill its goal. In simple term, a company sells new shares for the first time in the primary market.

For example, there is a company named Global Telecom. If the company needs financial support it issues s stocks from primary market and raises it. There are two ways for issuing securities. One is IPO and the next is FPO.

 What is an IPO?

Many of us Nepali people have heard about IPOs. From village to city, people discuss IPOs of Hydro Power Companies and Banks. IPO stands for Initial Public Offering. It means the company is publicly issuing its shares for the first time and offering people to invest in it.

Generally, in Nepal, IPO is offered to the public with the base price value of Rs 100 for a stock of a Company. If you want to buy a stock of Global Telecom in an IPO, you have to pay Rs 100 for one share. After the allotment of shares and spending specific time, you can trade the shares in the secondary market.

You buy a stock in Rs 100 and get twice or thrice or even more in return within a few years, seems great huh? It is true. If you are a small investor (I presume) and lucky enough to get shares you could earn but it is not always the same case. Before applying for an IPO, we have to study the company which we are going to invest in. ‘Research’ is what most of us lack.

Investing in an IPO requires careful research.

  • Research about the company. Who are in the managerial team? Where the company is located? What is its business modality? What is its financial condition? Can it work for a long term? etc are the questions you have to answer before investing your hard earned money.

 

  • If you study the company’s background and thought that Rs 100 is not worth a stock then don’t go for it. If you are caught by a bad market then Rs 100 could turn into Rs 50 instead of Rs 200 or Rs 300.

 

  • For your ease, you can take a little help from ICRA NEPAL as well. ICRA Nepal Limited is the credit rating agency in Nepal recognized by Securities Board of Nepal (SEBON). You can look at the rating/grading of IPOs . It employs 5 point IPO Grading scale:

 

  1. IPO Grade 1: Strong fundamentals
  2. IPO Grade 2: Above-average fundamentals
  3. IPO Grade 3: Average fundamentals
  4. IPO Grade 4: Below-average fundamentals
  5. IPO Grade 5: Poor fundamentals

 

  • If you are satisfied with your findings then you can apply for it.

What is FPO?

The full form of FPO is Follow –On Public Offering. As its name implies, it is an issue of shares by a company that has already issued an IPO and has been listed on the stock market exchange. A company can come out with fresh issues of shares or makes an offer for sale to the public. It is a method through which companies increase their capital in the capital market.

We can find companies issuing FPOs which are listed in Nepal Stock Exchange. They can offer it under the provision of Securities Registration and Issue Regulation, 2065. There are terms  for issuing FPOs like; having profit for at least 2 years within 5 years time, the annual general meeting should decide for FPO, reasons should be given for issuing FPO at the premium price.

SEBON has set criteria for pricing stocks of  FPOs. According to it, the company’s stock price should be based on capitalized earning, book value, 180 days average closing price and discounted cash flow.

Generally, the price of FPO is offered at a lower price from the closing market price. It would be profitable if you have studied the company’s profile and find scope in it.  For example, FPO of Nepal Bank Limited is fixed at Rs 280. The par value of the scrip is  Rs 100 and Rs 180 is the premium. You can decide if it would be profitable for you to apply for it.

What is Secondary Market?

Secondary Market is the market where investors trade their stocks after the company sells all the stocks on the primary market. If you have bought stocks in FPOs or IPOs (Primary market) then you can sell them in the secondary market.

Not only selling the stocks, you can buy them as well. In IPOs and FPOs you buy directly from the company but in the secondary market, you buy from other investors who are willing to sell. So, it is termed as the trade where both buying and selling takes place.

Nepal Stock Exchange is the only secondary market in Nepal. It is termed as NEPSE in short. NEPSE facilitates the transaction in its trading floor through member and market intermediaries such as brokers and insures free market.

Many people have confusion in regard to buying or selling process of shares in the secondary market.  You must be clear that you are not going to meet the investor who is willing to sell or buy shares. You do not even have to recognize the other party. And most importantly there is no provision for individuals indulging in buying or selling without broker in Nepal. The broker will do it for you.

So, you have to visit the broker office. There are more than 50 broker offices in Nepal and they are growing outside Kathmandu valley too but in limited number. Let’s hope for its coverage whole over Nepal. You need to open a trading account in broker’s office to buy or sell shares. Make sure to select broker which is convenient and easy for you to deal with.

After visiting the office, you have to give order for buying or selling and they will do according to it with the help of computer system. Then you will receive money from the broker if you are a seller or get shares if you are a buyer. You have to pay the price of shares to the broker too.

Nowadays, you don’t get share holder’s paper certificate as before. You need to create a demat account in a bank or in broker’s office. Demat account is like your bank account. You can deposit and withdraw shares. If you buy shares it is deposited and if you sell it is withdrawal. This is very convenient as you get rid of long process and paper works.

Online trading system is in the development phase in Nepal. After its use, you can give orders on your own through a computer or mobile phone. In another word, you will not have to visit your broker for trading your shares. It would obviously be easy for us. Many developed stock exchanges are using it. Let us see how it will perform in our exchange as people are eager to use it as fast as possible.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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