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Define Your Objective Before Buying Stocks
People invest in the share market for different purposes. If someone is not clear about his/her purpose, the strategy followed can be wrong and the benefits not satisfactory, or there s/he may even incur a loss. So, define your objectives first and then start playing with the market. Some possible objectives would be to maximise dividend income, to maximise capital gain in the short run, to maximise total gain and to minimise risk. A proper setting of objectives helps you identify the category of shares that help to accomplish the set objectives. If we observe stock market regularly, we find various patterns of movement in different stocks. Thus setting clearly defined objectives will help to gain from such movements.
The Bank of Kathmandu (BoK) Limited and International Leasing and Finance Company (ILFC) Limited both paid 10 percent cash dividend to the shareholders for the fiscal year 2003/04. The shares of BoK are currently trading in a range of Rs. 450-Rs. 460 and the shares of ILFC are trading in a range of Rs.120-Rs. 130. Investors who want to maximise their dividend income would do better by investing in ILFC than in BOK. With the same amount of investment one can purchase more shares at a less amount of commission in the ILFC as compared to BoK. For example, if you have Rs 10,000 as investment, then you can purchase 21 BoK shares or 76 ILFC shares. If we expect the same dividend rate in the coming year from each of the companies as in the last year, then we can earn Rs. 210 from BOK or Rs 760 from ILFC. There are many such examples of finance companies and insurance companies with low priced stock but paying equal dividend rate as a high priced stock.
But for those investors who want to maximise their return by capital gain in the short run, it is better to avoid investing in shares of finance and insurance companies because their share price is found to fluctuate less as compared to the banks. In case of stocks that do not fluctuate much, it will be difficult to cover the transaction costs. Capturing a capital gain in a short run requires a selection of highly fluctuating companies or newly listed companies. The present examples of such companies are BoK, Lumbini Bank Ltd. (LBL), Machhapuchhre Bank Ltd. (MBL), Nepal Bangladesh Bank Ltd. (NBBL) and Nepal Credit and Commerce Bank Ltd. (NCCBL).
On March 1, the share price of BoK was Rs. 391 and it reached Rs. 460 on April 25. Similarly, the share price of NBB on March 1 was Rs. 237 and it reached Rs.319 on April 21. Then it turned bearish again. Similar examples can be found in the LBL, MBL, KBL etc. These price changes can provide a handsome capital gain to the investors but it further requires a regular collection of information and regular contact with brokers.
Similarly, the shares of newly listed banks are found to fluctuate more compared to old banks. For example, the market price of NCC bank stayed in a range of Rs.118-Rs. 135 for more than a month after its listing and turned bearish after reaching Rs 155 on 19 April. Similar example can be found in case of Lumbini bank. Its price reached Rs 225 and fell down to Rs 199, and again turned bullish to reach Rs. 223.
The next fundamental objective of buying securities is for the purpose of borrowing. Investors can borrow money by using the shares as collateral. Banks and finance companies provide loans up to 50 percent of the market price of the shares. To borrow in this way, you should have those securities that promise more certain return as well as growth. Such stocks are those of Standard Chartered Bank Nepal Ltd., Nabil Bank Ltd., Bishal Bazaar Company Ltd., Uniliver Nepal Ltd. and Nepal Investment Bank Ltd. Therefore, it is better to buy these high priced stocks if you intend to borrow by pledging them. Such borrowing can be used to buy more stocks and the selection of such stock will again depend on the purpose for which you want to buy them.
If the objective is to minimise the risk, investors require selecting stocks that remain less fluctuating in the market. For example, Bishal Bazaar Company Ltd, Himalayan Bank Ltd., Bottlers Nepal Ltd., Rastriya Beema Sansthan and Uniliver Nepal Ltd. are found to be such stocks.
- Rabindra
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