Basics Of Share Market Explained
WHY DO WE INVEST IN SHARE MARKET?
To make sure we have enough funds to be prepared for the future. Simply earning and saving is not enough. Inflation – the price-rise beast – eats into the value of your money. Investing is the answer to inflation. Read more about the difference between savings and investing and how investing can help you beat the inflation monster.
To make up for the loss through inflation, we invest and earn extra. This is the investment fundament. The stock market is one such investment avenue.
So Let’s Start With Share Market Basics.
WHAT IS SHARE MARKET?
A share market is where shares are either issued or traded in.
A stock market is similar to a share market. The key difference is that a stock market helps you trade financial instruments like bonds, mutual funds, derivatives as well as shares of companies. A share market only allows trading of shares.
The key factor is the stock exchange – the basic platform that provides the facilities used to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers. Nepals's premier stock exchange is the Nepal Stock Exchange.
TYPES OF SHARE MARKET
THERE ARE TWO KINDS OF SHARE MARKETS – PRIMARY AND SECOND MARKETS.
This where a company gets registered to issue a certain amount of shares and raise money. This is also called getting listed in a stock exchange.
A company enters primary markets to raise capital. If the company is selling shares for the first time, it is called an Initial Public Offering (IPO). The company thus becomes public.
Once new securities have been sold in the primary market, these shares are traded in the secondary market. This is to offer a chance for investors to exit an investment and sell the shares. Secondary market transactions are referred to trades where one investor buys shares from another investor at the prevailing market price or at whatever price the two parties agree upon.
Normally, investors conduct such transactions using an intermediary such as a broker, who facilitates the process. Different brokers offer different plans. You can see here complete list of broker in Nepal.
HOW TO BUY SHARES ONLINE?
First, you need to open a trading account and a demat account. This trading and demat account will be linked to your savings account to facilitate smooth transfer of money and shares.
Note that demat account and trading account are different:
Demat account is used to hold your dematerialzed share online all your share subscribed from IPO and purchased through the secondary market are holded here. You can view your demat account statement and current holdings in mershare app http://meroshare.cdsc.com.np
(Remember meroshare.com is not the official website of Nepal stock never submit the information through meroshare.com and meroshare.net until Nepal stock sort out issues relating to the .com domain)
You can create a Demat account either from broker office or the bank which offers ASBA faciliaty, Individual can have a maximum of 2 Demat accounts.
To open Demat Account in Nepal You must update the KYC form and provide the following documents and must be present self to attest the documents.
Documents Required to Open Demat Account
- Citizenship Certificate
- Updated KYC (Know your customer form).
- Passport Size Photo
Here is the more detailed guide about Demat Account
Trading Account in Broker
Trading account is used to trade your share in the secondary market or you can buy a share from the secondary market. The trading account offered by a registered stockbroker, See here list of registered broker in Nepal.
How to Open Trading Account in Broker? How to open a broker account to trade share?
You can contact any of the listed registered brokers in Nepal they will guide you through the process to open the accounts. You will need the following documents to open the docuemnts:
- Demat confirmation letter from your demat account provider, in some case only providing the demat number works.
- Citizenship Certificate
- Updated KYC From (Know your customer form), you can get one from the broker office or website
- Two passport size photograph
- Must be self-present at broker office
You have two option for trading in the secondary market online or offline (maybe suspended later on after full-fledged online system is implemented)
- You have to deposit certain collateral amount (only to buy) to the stockbroker and tell them to place the buy or sales order on your behalf must of the time they take order by call also.
- Then they will place the buy or sales order for the stock
- After your order match with sales or buy order, your order will get confirmed
- You must pay the cheque/amount to the broker office.
NEPSE has started the automated online trading system from last year (2018). Now you can buy and sale the share from online medium of internet. To trade online you must update KYC to your broker and must take user id and password to login the TMS(Trading Management System) of the broker, you shall fill the form to take the online trading and sign the agreement with broker.
Most broker has online trading system enabled, some of may be remaining to go online so please be sure to confirm before creating trading account.
How to Apply for IPO in Nepal?
You can apply for IPO Initial public offering share by following medium:
- Goto the http://meroshare.cdsc.com.np
- Login with your DP, User ID and Password
- Goto MY ASBA > Current Issue
- Apply for the any of the available share offerings
(Be sure to update and connect the bank account)
Bank providing C-ASBA
You can also apply for the share ipo from the bank website offering the C-ASBA facility with your CRN number, for detailed instruction contact your bank all bank have their own way of applying share online.
Offline Form Submission
In some case ipo offering accept form and application offline from a designated place, which can be found in the IPO prospectus issue.
- Things to know while making investment
- Share market is risky and volatile so always remember few following things:
- Never rely on social media
- Always remain updated with financial news
- Invest in stock only after making a critical analysis of financial information of respective stocks
- Never invest in a single stock/sectors (Always diversify your investment to multiple sectors of stock such as Bank, Hydro, Microfinance, Insurance)
- Start from the IPO market always start investing in share market by applying to IPO you will get a basic idea about the stock market and trading. (IPO is somehow less volatile than a secondary market where as many stocks are trading below par value in the secondary market (so nothing can be forecasted))
- Keep some fund back up to invest while market decrase and go down
- Never sale/dispose of your stock in loss unless there is no future of the company otherwise hold your investment until it recovers your cost
- Always include the interest income that can be generated from the fund invested, in making cost analysis
These are some basic information so it is never sufficient solely so make necessary research from different areas.
WHAT ARE THE FINANCIAL INSTRUMENTS TRADED IN A STOCK MARKET?
Now that we have understood what a share market basics and investment is, let us understand the four key financial instruments that are traded:
Companies need money to undertake projects. They then pay back using the money earned through the project. One way of raising funds is through bonds. When a company borrows from the bank in exchange for regular interest payments, it is called a loan. Similarly, when a company borrows from multiple investors in exchange for timely payments of interest, it is called a bond.
For example, imagine you want to start a project that will start earning money in two years. To undertake the project, you will need an initial amount to get started. So, you acquire the requisite funds from a friend and write down a receipt of this loan saying 'I owe you Rs 1 lakh and will repay you the principal loan amount by five years, and will pay a 5% interest every year until then'. When your friend holds this receipt, it means he has just bought a bond by lending money to your company. You promise to make the 5% interest payment at the end of every year, and pay the principal amount of Rs 1 lakh at the end of the fifth year.
Thus, a bond is a means of investing money by lending to others. This is why it is called a debt instrument. When you invest in bonds, it will show the face value – the amount of money being borrowed, the coupon rate or yield – the interest rate that the borrower has to pay, the coupon or interest payments, and the deadline for paying the money back called as the maturity date. If you’re looking for a bond option that helps you save tax, you can read about tax free bonds.
The share market is another place for raising money. In exchange for the money, companies issue shares. Owning a share is akin to holding a portion of the company. These shares are then traded in the share market. Consider the previous example; your project is successful and so, you want to expand it.
Now, you sell half of your company to your brother for Rs 50,000. You put this transaction in writing – ‘my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company. He is now a shareholder. Suppose your brother immediately needs Rs 50,000. He can sell the share in the secondary market and get the money. This may be more or less than Rs 50,000. For this reason, it is considered a riskier instrument.
Shares are thus, a certificate of ownership of a corporation. Thus, as a stockholder, you share a portion of the profit the company may make as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value.
These are investment vehicles that allow you to indirectly invest in stock market or bonds. It pools money from a collection of investors, and then invests that sum in financial instruments. This is handled by a professional fund manager.
Every mutual fund scheme issues units, which have a certain value just like a share. When you invest, you thus become a unit-holder. When the instruments that the MF scheme invests in make money, as a unit-holder, you get money.
This is either through a rise in the value of the units or through the distribution of dividends – money to all unit-holders.
The value of financial instruments like shares keeps fluctuating. So, it is difficult to fix a particular price. Derivatives instruments come handy here.
These are instruments that help you trade in the future at a price that you fix today. Simply put, you enter into an agreement to either buy or sell a share or other instrument at a certain fixed price.
WHAT DOES THE SEBON DO?
Stock markets are risky. Hence, they need to be regulated to protect investors. The Security and Exchange Board of Nepal (SEBON) is mandated to oversee the secondary and primary markets in Nepal.
SEBON has the responsibility of both the development and regulation of the market. It regularly comes out with comprehensive regulatory measures aimed at ensuring that end investors benefit from safe and transparent dealings in securities.
Its basic objectives are:
- Protecting the interests of investors in stocks
- Promoting the development of the stock market
- Regulating the stock market