As an energetic youth of the 21st century, I started to learn the ropes of the investment world with high optimism. Like any teenager, I started with quick Google searches about stock investing and the best strategies one could employ.
As I began to equate the things I learned online with the Nepalese stock market, also known as NEPSE, I realized that the exchange that we have at home does not really work exactly like internationally renowned financial markets.
As a beginner, the following are the five biggest disappointments you will have to encounter if you plan to enter the country’s only stock exchange, the Nepal Stock Exchange (NEPSE).
1) Day trading is not possible in NEPSE.
I created the Instagram page @nepsetrader to connect with like-minded folks and talk about the market in general. This is where investors from all phases of their journeys get together to ask questions and get basic stock market information.
On the page, I meet a few folks now and then that want to day trade in NEPSE. While some are planning to day trade in NEPSE, some just want to know whether it is actually possible. Both types are up for a big disappointment. I once met a brother from Nepal who had learned all the strategies of day trading, only to find out that NEPSE does not allow such an investment style.
Basically, a day trader buys and sells shares on the same day, oftentimes within minutes. This group of traders takes advantage of small but high probability price fluctuations to profit from a large investment.
Sadly in Nepal, day trading has not been allowed yet. Settlement of shares often takes a couple of days or more. Thus, it is impossible to buy and sell the same shares on a single day itself.
2) Short selling is not allowed in NEPSE.
Short selling is another investment style that is popular in international stock exchanges.
Before moving onto the main story, here’s what you need to know about short selling.
Certain traders in the stock market earn big by betting against a stock. This process is known as shorting. Consider that you borrow an apple betting that the apple’s value will decrease by the end of the day. You go to an apple vendor, promise him interest, and borrow 10 apples from him at the beginning of your day. You immediately sell them to someone else at the current market price of Rs. 10 each and earn a total of Rs. 100. Yes, it is really that strange. You can sell those apples without actually buying them first. You have only borrowed those apples.
At the end of the day, say the value of an apple drops down to Rs. 5 each. You then purchase 10 apples at the current value of Rs. 5 and pay Rs. 50. You then go on to return those apples to the vendor. How much money do you have left? Rs. 50, right?
The vendor got his 10 apples back. And you made money by selling them at a higher price and returning the apples to the vendor by buying at a cheaper price. Are you with me? This process of betting against a stock is known as shorting.
Short selling enables investors to profit both in rising and falling markets. However, NEPSE does not allow short selling as of now. This may be because our capital market is still small and immature, or because investors in Nepal are not educated enough to trade with complex investment vehicles and styles.
3) Nepal’s stock exchange has circuit breakers.
Another big disappointment. As I said earlier, Nepal’s stock market is still small and immature. The market capitalization of many companies trading in the exchange is still small enough for a handful of investors to manipulate them.
Thus, a stock in NEPSE can’t gain or lose more than 10% in a single trading session. After a stock gains 10%, it hits the 10% positive circuit breaker. The stock can then only trade at or lower than the 10% upper limit for that day. The same is true when a stock falls and loses 10%.
This is a frustrating situation for those educated by online mentors who trade in international stock exchanges. For me, however, this isn’t a big problem, if I have to be honest. When the market is bullish, good companies tend to gain what they can anyway, tomorrow if not today.
4) The IPO hype may not last long.
This number was minuscule a year ago. All the new investors have entered the stock market because of the IPO hype. In order to promote investment, NEPSE had made it mandatory for all companies to issue an IPO at a par value of Rs. 100. This directly meant that investors were immediately profitable after these began to trade in NEPSE at a higher price.
However, Nepal’s capital market is slowly adapting the book-building process. This will enable a company to issue its IPO at a premium (higher) price. Thus, investors must now do due research even to invest in IPOs.
Clearly, 32,72,764 people holding Demat accounts are not equipped or educated to value a company. Some Demat accounts were opened by the relatives of the old and the young demographic. This means that the IPO craze sparked by the Rs. 100 IPO price will certainly plummet in the days to come.
Have you experienced a disappointment other than these? What was your story? The comment section is for you.