A Deadly Phrase of the Stock Market
By Nabaraj Pokhrel
Theoretically, companies’ earnings are what affect the market price. But in practice, the Ns play their role, which is much more powerful than theory.
"Bull" or “Bear” are not dreadful words in the stock market. “This time is a different one” is much more serious, particularly when it is used to defend a wrong prediction.
Circus magicians and stock market speculators are alike in the way they swallow fire and catch the falling knife (“Falling knife” is another well-known phrase in the stock market). Stock market investors always seem to be at risk of burns and cuts. Only last month, some general investors who followed the success stories of some speculators got injured. They have to learn from that experience.
To understand their experience, let’s develop a case by using symbols - N1 for Nonsense, N2 for New, and N3 for News on which the speculations were based. Some N1 speculators drummed up their success stories comparing the prices of different companies and their upcoming investment strategies at the NEPSE premises. N2 investors jumped to get the same shares as these speculators. Following the high demand so created, the market prices of such stocks soared up and N3 carried it to the public. As a result, the greed of the general public for these seemingly lucrative shares exceeded the common sense level. The cash-rich and scrip-hungry people placed so many orders to their stock brokers that the market price of some shares went up by over 10 per cent on a single day, resulting in the imposition of circuit breaker by the stock exchange management. Sellers hid when the prices rose. That is the main reason behind the inflated and air-pocketed market price of the recent past. At such a juncture, one who does not consider other market indicators, such as Price/Earning relation, or Risk/Reward profile or ratios is trapped by the high priced shares. Now, he may realise that just comparing the share price of two companies as the N1 speculators did is meaningless. It should be noted as a good past experience and put into practice in future.
Theoretically, companies’ earnings are what affect the market price. But in practice, the Ns play their role, which is much more powerful than theory. Initially, a small public prediction lights a candle of hope the stock investment. As the N3 spreads N2’ssuccess stories, the public become part of the market with its own kind of temptation and greed (high from the level of fear). After all, it is their sentiments, attitudes and expectations that change stock prices.
On the other hand, the same Ns can play an opposite role in a fraction of time. Market price is not only reflecting the past and present value but also the probable growth that investors at large are expecting in the future. When the investors at large do not get the said attraction and profit in the same proportion as reported in the past news stories, the market slowly tends to decrease. Again N3 makes public the views of academicians and professional accountants. They do their analysis depending mostly upon mathematical calculations. The situation becomes more complicated when they mix up their analysis with global and political economic perspectives that have no clear-cut markers of where they begin and end. Such analysis is vastly different from that of the previous speculative analysis found in the get-rich-quick avenues. This causes the market go down. In this up and down process of stock prices, a few may become rich over a week but many more will be ruined.
Those who succeed during this course of action are found to be proud of their actions and the unsuccessful ones will begin to blame others for their own wrong actions and results. All this is part of the game in which the speculators provide liquidity as a social function –they buy the undervalued and sell the overvalued shares to the innocent public who are buying news and selling rumours.
Detection of such disasters in the stock market needs some sophisticated warning system. Otherwise nobody rings the evacuation alarm in time, not even the watchdog.
Thus the unskilled should let the knife bounce back. To make quick money, buy the rumours and sell the news as the speculators do. But do not act blindly. There are plenty of dangerous phrases floating around the market. Just be aware of the implication of uncertainty; never follow the advice “may-be-this, may–be-that”.
(Pokhrel is President of the Nepal Stock Brokers Association)
Stock Market’s Role in Poverty Reduction
By Rabindra Bhattarai
The stock market is considered to be an exclusive field for the wealthy and the clever. But this is not necessarily so. Policies can be formulated to use the stock market to benefit the poor and reduce poverty. For example, when a well-performing company makes an initial public offering (IPO), a portion of the shares so offered can be reserved for the poor in the same manner as it is reserved for the company's employees. The poor who get those shares will benefit from the dividend that the company distributes in the coming year and from the appreciation of the market price of the shares so provided.
Obviously, the idea is based on four major assumptions: first, the company concerned is a well performing one and will continue doing so; second, the poor who receive such shares are properly identified; third, the poor can manage the finance to buy those shares; and fourth the shares are offered at par value (not in premium). However, these conditions can be easily fulfilled.
For example, Nepal Telecom (NTC), a highly profitable and government-owned company, is planning to issue 15 million shares to the public. Its profit margin in the fiscal year 2004-05 was 40 per cent and return on investment (ROA) during the same period was 18 per cent. The company is paying dividends and it can be expected to do so even after the public issue. Globally, telecommunications is a business which witnesses only growth and profit. This is the business of Carlos Slim Helu, the Mexican businessman who is recently estimated to have become the second richest person on earth in a few years.
Though the new company law allows IPO at premium, the government can make a decision to issue NTC shares at face value at least in case of those shares that are reserved for the poor. Nobody expects the market price of NTC shares to go below the face value after they are listed in the stock exchange. Rather, the trend in the Nepal Stock Exchange is such that share prices of every company are quoted much higher (sometimes even as much as four times) than the face value after they are listed in the stock exchange. The same can be repeated in case of NTC shares.
There have been plenty of research on poverty in Nepal and these data can be used to identify the poor to whom these reserved shares can be distributed. One method can be to distribute these shares to those who live in a particular locality where poverty is found to be the severest, e.g. the remote villages. Local government units and NGOs can be mobilised to ensure that the non-poor are excluded from this benefit.
Banks and finance companies can provide loan to the poor to buy those shares in the IPO against the collateral of the same shares. The government can provide subsidy on the interest on such loans.
There are a number of ways to ensure repayment of such loans. In one method, the borrower can be made to use the dividend to repay the interest and principal. For example, if a share of Rs 100 par value is fully financed at 9 per cent interest and NTC pays 20 per cent (Rs. 20 per share) as cash dividend after the public issue, the Rs. 20 can be used to pay Rs. 9 as interest for the first year and the remaining Rs. 11 to repay the principal. The same will be repeated in the subsequent years. When the principal (with interest) used to finance the initial public offering (IPO) is fully repaid, then onwards the entire dividend goes to the shareholders and they start to generate income as dividend from the company.
Another way to repay such loan is by selling part of the shares. For example, if a household receives 20 shares of total face value Rs. 2,000 and the market price of the same shares becomes Rs. 200 per unit in the secondary market after listing, such poor households can be made to sell 10 shares and use the proceeds to repay the loan. This way, the loan can be repaid within two years. Then onwards, the holders of such shares can be restricted from selling such shares for some years so that they will have a steady source of income. Similarly, if the company gives bonus shares instead of dividend, the bonus shares can be sold off to repay the loan.
The same idea can be used to provide shares to the people of the locality where a company sets up its production unit. This idea is ideal for hydroelectricity companies. There is no need to explain that there is only growth in the power business (perhaps Nepal Electricity Authority is the only exception to this rule). Such companies should set aside a certain portion of their shares for the people of the locality affected by the power house, dam etc. This benefits not only those who receive the shares, but also those who promote such a company. The local people will feel they have ownership of the project and they will help in its smooth operation. If this happens, there will be no incidence of local people creating frequent trouble in the operation of such projects. Banks and finance companies can also be used in this case for financing the share purchase.
Thus, Chilime Hydropower Company, which is going to issue 2.3 million shares to the general public, can be made to set aside a certain portion of these shares for the people affected by its existing and future power projects. Similarly, if Manakamana Cable Car (P) Ltd. converts into a public limited company and allocates a certain percent of its share to the people of Manakamana VDC, it would be more economical for the company and its promoters than the direct grants it has been providing to the locality for schools, drinking water, health posts etc.
To use the stock exchange in this way for poverty alleviation, the government should play an active role. The related laws and rules may need to be amended, margin lending should be reallowed at least for this purpose, capital gain and dividend tax should be waived and an awareness campaign should be initiated.
Though the stock market is associated with high risks, this proposal can be tested after a detail analysis of the financial health of the company concerned.
