Final Thesis

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INTRODUCTIONBoosting of nation's economic growth and solving the problem of underdeveloped economy is widely depends upon the nature of its economic infrastructure. One of the basic elements in achieving a selfreliant growth of the economy and for sustaining the desired level of economic development is an accelerated rate of investment or capital formation in the economy and the rate of investment or capital formation depends upon the efficiency of financial markets and institutions. The financial systems or markets perform this function by channeling the nation's saving into best uses. It does this by bringing together those who have surplus funds to lend and those who wish to borrow to finance their expenditures. This financial market is broadly classified as Money Market and Capital Market. Money market refers to a market where debt securities or less than one-year maturity are traded whereas capital market is the market for long-term debt and corporate stocks. The existence of an organized securities market is considered to be a pre-requisite for a modern free enterprise as well as for a mixed economy.

CHAPTER 1

1.1 Capital Market:Investment decisions are taken within the framework provided by a complex of financial institutions and intermediaries, which together comprise the capital market. Capital market means any body or individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying selling or dealing in securities. (Bhalla, 1995: 21) It is just the market for capital funds. The word capital used in this context implies a long-term commitment on the part of the lender and long-term need for the funds on the part of the borrower. Both lenders and borrowers coming together in capital market to play effective financial intermediary role in primary and secondary market through the use of various long-term capital market instruments. It has a vital role in promoting efficiency and growth. It intermediates the1

flow of funds from those who want to save a part of their income from those who want to invest in productive assets. It is the market, which provides the mechanism for channeling current savings into investment in productive facilities, that is, for allocating the countys capital resources among alternative uses. In effect, the capital market provides an economys link with the future, since current decisions regarding the allocation of capital resources are a major determining factor of tomorrows output. The capital market plays a crucial role in shaping the individual investment and portfolio decisions. Capital market consists of securities market and non-securities market. Securities markets implies mobilization of the funds through issuance of the securities like shares, bonds and debentures by corporate sector and bond, bills and debentures by government. These securities traded in the secondary market are generally negotiable and hence can be traded in the secondary markets. Non-securities market refers to the mobilization of the financial resources by the financial institutions in the form of deposits and loans. Primary and secondary markets are the two wings of the capital market. Primary market concerns with the issue of new companies stock whereas the secondary market deals with the previously issued shares. The majority of all capital market transactions occur in the secondary market. The proceeds from the sale of securities in this market do not go to the original issuer which means that it does not create new additional capital. In other words, securities are traded among the individual as well as institutional investors. The structure of capital market can be shown as follows: Chart:1.1: Structure of Capital MarketCapital Market

Non-Security MarketBank Deposit Business Venture Fixed Assets Other Sectors

Security Market

Equity Market Primary MarketSecondary Market

Debt Market

Corporate Debt Market 2 Government Debt

1.2 Prices of SecuritiesThe force of supply and demand interacts to determine a stock market price. Prices move in trends because of an imbalance between supply and demand. When the supply of a stock is greater than the demand, the trend will be down as there are more sellers than buyers. When demand exceeds supply, prices tend to rise. There are essentially two concepts to explain the movement of stock price. They are i) ii) Technical Analysis Fundamental Analysis

In technical analysis, the analysis record historical financial data in charts, study these charts in an effort to find meaningful patterns, and use these patterns to predict future prices. Some charting techniques are used to predict the movements of a single security; some are used to predict the movements of a market index; and some are used to predict both the action of individual securities and the market action. Fundamentalists forecast stock prices on the basis of economic, industry, and company statistics. The principal decision variables ultimately take the form of earnings and dividends. The fundamentalist makes a judgment of the stock's value with risk return framework based upon earnings power and the economic environment. Fundamental analysis is an essential, core skill for any investor as well as it helps to evaluate a company on the basis of its sales, earnings, dividends, products, management and other economical and industrial outlook.

1.3 Variables Affecting the Prices of SecuritiesBasically, price of securities is determined by the interaction of demand and supply of corresponding securities. There are many other reasons that cause the stock price fluctuation. Major of them can be classified as

3

political

factors,

economic

factors,

socio-cultural

factors

and

technological factors. These variables may be closely related to the internal factors of the corresponding companies like the dividend policy of the company, business volume and profitability position of the company or to the external factors like the economic condition of the nation, governments monetary policy, political environment of the country etc. For this research purpose some important variables of these classified factors are taken and analyzed on the basis of primary as well as secondary data. As a whole, these major factors (internal and external) that affect the price of the security can be presented on the following chart:

Chart 1.2 : Factors Affecting Price of Securities-Dissolve of Parliament Political Factors - Ashoj-18, 2059 Event -5 Parties Movement - Maoist Insurgency (Cease fire, Peace talk and rupture of peace talk and re-starting of war) - Sep-11, 2001 event of New York - Maoist Insurgency - World-Wide Terrorism - Sep-11 event Economic Factors - Dividend Policy and profitability of the Company - Present Economic Condition - Interest Rate and Inflation - Tax System - Nepals Entry in WTO - Government Monetary Policy - Fiscal and Monetary Policy Stock Market Price Socio-Cultural Factors -Traditional Investment Procedure of Nepalese - Social Attitude and Beliefs toward Investment - Investors Knowledge on Stock Exchange

Technological Factors - Evolving of E-transaction - Information on Web - OTC market - Traditional Way of Transaction in NSE

Out of these factors or variables the following major events or variables have been taken for analyzing as research variables:

Event of Ashwin-18, 2059 (4-Oct, 2002)4

Ceasefire on Magh 15, 2059 (29-Jan, 2003) and starting of peacetalk 5 major political parties' movement during last seven months Rupture of peace-talk and re-starting war at Bhadra-10, 2060 (August-27, 2003) Nepal's entry in World Trade Organization (WTO) at Bhadra-25, 2060 (Sep-11, 2003).

1.4 Statement of the ProblemThe number of public limited companies is increasing tremendously in response to the economic liberalization and globalization policies adopted by the Nepalese government. Such institutions are provide banking services, insurance services and participating in developmental works, manufacturing and processing and other various service sectors. Although Nepals capital markets history is short, the concept of capital market is growing rapidly within a short span of time. It is mandatory to enlist the public limited companies in Nepal Stock Exchange (NEPSE) which creates liquidity on shares of such companies issued in the primary market and provides floor for trading of shares. Up to now, there are altogether 108 such companies, which are listed in NEPSE. (SEOBNAnnual Report, 2002/03: 8) Investors purchase the stocks of the companies through the primary market (initial offering) or through the secondary market. Most of these investors are not aware of the financial strength of the companies and they do not analyze companys financial indicators before they invest their funds through secondary market NEPSE. The market price of common stock (share) does not seem to be in accordance with the financial indicators Net Worth per Share (NWPS), Earning per Share (EPS), Dividend per Share (DPS) and last year's dividend. Instead, in determination of the market price of share, there has been major influence of rumors rather than strength of the companies. The Market Price per Share (MPS) of commercial banks, especially foreign joint

5

venture Banks' has been much higher than MPS of other sectors. Moreover, the overall NEPSE is depended upon MPS of such companies. Generally, the trend is that the MPS of public quoted companies is above their book value. The market value is determined by the supply and demand functions. However, in an efficient market MPS fully reflects all the historical information publicly available. Here arises the question of efficiency of the Nepalese share market. The high movement of share prices may be the outcome of the