Financial Markets

A DEMAT (dematerialised) account is an electronic account held with a depository participant in which a person's shares and other securities are kept in digital form instead of paper certificates. It is needed to buy, sell and hold securities in the Nepalese capital market and makes transfer safe and quick.

(a) The stock closed at Rs 1,070 on the trading day.

(b) The volume traded was 19,040 shares of CBBL.

(c) "Diff%" is the percentage change of the closing price over the previous day's closing price:

$\text{Diff\%} = \frac{\text{Close} - \text{Prev. close}}{\text{Prev. close}} \times 100 = \frac{1070 - 1021}{1021} \times 100 = \frac{49}{1021} \times 100 \approx 4.80\%$

It means the share price rose by 4.80% compared with the previous trading day (a positive value shows a gain, a negative value a fall).

(d) Over the last 52 weeks the highest price was Rs 1,343 and the lowest price was Rs 751. The current price of Rs 1,070 lies between these two limits.

Meaning. C-ASBA (Centralised Application Supported by Blocked Amount) is the electronic system, run by CDS and Clearing Limited together with banks, for applying for IPOs, rights shares and mutual fund units. The applicant's money is only blocked, not withdrawn, in the applicant's own bank account until shares are allotted.

How it works

1. The investor needs a DEMAT account, a BOID (beneficiary owner ID) and a bank account linked to a participating bank.
2. The investor opens the C-ASBA online portal or the bank's mobile or internet banking, selects the open issue and enters the number of units and bid amount.
3. The bank blocks the required amount in the investor's account; the application is sent electronically to the issue manager.
4. After allotment, the amount for the shares allotted is deducted from the account and paid to the issuer, and the remaining amount is released.
5. The allotted shares are credited directly to the investor's DEMAT account.

Advantages

• The investor continues to earn interest on the money until allotment.
• No physical forms or visits to the collection centres are needed, which saves time and cost.
• It reduces refund delay and risk of fraud, and the process is transparent and quick.
• Applications from anywhere in the country are possible through the bank network.

(a) Treasury bill

A treasury bill is a short-term (up to one year) government security issued at a discount, so it is a money market instrument. Ordinary shares, debentures and preference shares are long-term securities traded in the capital market.

Meaning of Primary Market

The primary market is that segment of the capital market where new securities are issued and sold for the first time. It is also called the new issue market. Here, companies raise fresh capital directly from investors through public issues, rights issues, private placements, or initial public offerings (IPOs). The funds collected go directly to the issuing company for financing its business activities. The securities are sold at a price fixed by the company (or through book building), and the company receives the sale proceeds.

Meaning of Secondary Market

The secondary market is that segment of the capital market where already issued securities are bought and sold among investors. It is also called the stock exchange or after-market. Here, no new capital is raised by the company; instead, existing securities change hands from one investor to another. The company is not involved in these transactions, and the sale proceeds go to the selling investor, not to the issuing company. It provides liquidity and marketability to the securities issued in the primary market.

Three Differences between Primary Market and Secondary Market

Other differences (for reference): the primary market is mainly between the company and investors, whereas the secondary market is between investor and investor; securities in the primary market are sold at a fixed or book-built price, while in the secondary market prices are determined by demand and supply.

Stock Exchange

A stock exchange is an organised secondary market where existing securities such as shares, debentures and government bonds are bought and sold. It is a market place, physical or electronic, where brokers and dealers trade securities on behalf of investors under rules framed by the government and the exchange itself. In Nepal, the Nepal Stock Exchange (NEPSE) is the only stock exchange, established in 1993 under the Securities Exchange Act, 1983.

Functions of a Stock Exchange

1. Providing a ready market for securities (liquidity). A stock exchange creates a continuous market where investors can buy or sell securities whenever they wish. Because securities can be converted into cash easily, investors are encouraged to invest, and the market remains liquid.

2. Determining the price of securities. The prices of shares and debentures are determined by the forces of demand and supply on the floor of the exchange. Through the interaction of buyers and sellers, the exchange discovers a fair market price for each security, which reflects its real worth.

3. Mobilising savings and channelising them into productive use. By offering an attractive and safe avenue for investment, the stock exchange collects scattered savings from individuals and institutions and directs them towards productive sectors through the purchase of securities. This helps in capital formation and economic development.

4. Protecting investors and regulating trading. The exchange frames and enforces rules for the conduct of brokers and listed companies. It ensures fair dealing, punishes malpractices such as price rigging and insider trading, and thereby safeguards the interests of investors.

Other functions (any of which may also be mentioned): it acts as a barometer of the economy, provides facilities for speculation and hedging, helps in the valuation of securities, and assists in the transfer of ownership of securities.

Capital Market

Meaning: The capital market is the segment of the financial market that deals in long-term funds (medium-term and long-term securities having a maturity of more than one year). It is the market where savings of individuals and institutions are mobilised and channelised into long-term productive investment. It consists of two broad divisions:

• Primary (new issue) market — where new securities are issued for the first time by companies and governments.
• Secondary (stock exchange) market – where existing securities are bought and sold among investors.

Its main suppliers of funds are individuals, banks, insurance companies, provident funds and other financial institutions, while its users are business firms and the government.

Major Instruments of the Capital Market

1. Equity Shares (Ordinary Shares): These are the ownership securities of a company. The holder is a part-owner of the company, bears the highest risk, and receives dividend only when the company earns profit. Equity shares carry voting rights and are perpetual, i.e. repayable only at the time of winding up. They are the most widely used instrument for raising long-term capital.

2. Preference Shares: These are shares that carry a fixed rate of dividend and have a preferential right to receive dividend and to get back capital before equity shareholders. They generally do not carry voting rights. They are a hybrid instrument, combining the safety of debentures with the ownership feature of shares.

3. Debentures (Bonds): A debenture is an acknowledgement of debt issued by a company under its common seal. The holder is a creditor, not an owner. A fixed rate of interest is paid at regular intervals, and the principal is repaid on maturity. Debentures may be secured or unsecured and are suitable when the company does not want to dilute ownership.

4. Government Bonds (Development Bonds): These are long-term debt securities issued by the Government of Nepal through Nepal Rastra Bank to meet budget deficits and finance development projects. The holder receives a fixed rate of interest, usually every six months, and the principal is repaid on maturity. They are practically risk-free and are traded in the secondary market.

(Other acceptable instruments: mutual fund units, citizen savings bonds, right shares and bonus shares.)

Importance in Economic Development

1. Mobilisation of Savings into Investment: The capital market collects scattered small savings through shares, debentures and other securities and directs them into productive long-term investment. This raises the rate of capital formation, which is the base of economic growth.

2. Promotion of Industrial Growth and Employment: By supplying long-term funds, the capital market enables new companies to be floated and existing ones to expand and modernise. This increases production, generates employment and raises national income. It also provides liquidity to investors through the stock exchange, which encourages further investment.