Holding stocks should be considered as a long-term investment‚ motivated by future dividend payouts and there must be fair trading. If investors are bucked up by very short-term profit and/or in market manipulation‚ price volatility occurs by other than market fundamentals.
GUNA RAJ BHATTA
Warren Buffett, the most successful investor of the 20th century, commented on stock market: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” But, the reality is completely different in that the market does not close even for a day and the index never becomes stable. So, it is with Nepali share trading in recent days.
After the trading floor of Nepal Stock Exchange (NEPSE) opened on 12th February 1994, the index reached 807 points on December 18, 2013, a record high in the last 6 years, but still lower by 369 points than the historical record 1175 on 31st August 2008. The index that plunged as low as 292 on 15th June 2011, after the historical record of 2008, rose significantly by 176 per cent within 29 months. Due to this, the issue is how stock prices of Nepali companies are being determined, specifically whether NEPSE index reflects the future income streams of the securities of the companies, often termed as ‘market fundamentals’.
Generally, stock prices are to be determined by profitability condition of the individual companies, that is, present as well as future expectations of earning. However, other factors also play a dominant role, like confidence of the investors, demand and supply of shares in the market, media reporting, share brokers and their staff among others. In addition, unethical behavior especially insider trading and the influence of big investors are also observed in developing economies taking the advantage of a not well-developed capital market and weak regulators.
Theoretical analysis of share price determination becomes more relevant this year since the Nobel Prize, 2013 has been shared by three American economists — Eugene Fama, Lars Peter Hansen and Robert Shiller — for their research in stock prices. Mr. Fama showed that the stock prices prediction is very difficult in the short run as a security’s current price is set by using all expectation in the financial markets. If the market is efficient, a security’s price must fully reflect all the available information, hence, the hot market tips will not be able to earn an abnormally high return. Shiller, nevertheless, criticized the efficient market assumption as he found big changes in stock prices compared to the changes in market fundamentals. Shiller’s proof of ‘excess volatility’ is that short-run and long-run asset prices are different as it can be experienced what is true in short period may necessarily not be true over longer horizons. Even though the asset market economists received the world’s most prestigious award, there are still unanswered questions of major share market crash, for instance, Black Monday of October 19, 1987 and the crash of NASDAQ in 2001 and 2002.
A market index is a proxy measure of the economic performance that brings the confidence for additional investments. When stock price rises, selling security is beneficial for the stockholders. Higher stock prices can raise more money if a company issues new stocks. While the companies offer the share for merger or acquisitions, which is highly relevant for the Nepali banking system for now, fewer shares can make more cash. In addition, fewer bonus shares to employees can make them happy, significantly reducing the expenses on compensation. Hence, volatile share prices discourage the entire stakeholders which may hinder the business community. From long-term investment perspective, the worth of the stock is potential for growth, earning dividend among others. Though the long-term investors may not be affected by daily price changes, such a volatile price is a hint about future anticipation of market fundamentals.
Economists like Fama believe that when transactions rise, only the commission to the brokers will be very high, not the value of the share in the long run. So, most of the chances of manipulation may come from their side. Many individuals involved in the trading lack the knowledge and expertise about investing decision, when to buy and when to sell, they just follow whether other stockholders are gaining or losing, so called ‘animal spirit’ trends. Moreover, small groups of large shareholders can easily manipulate the share prices if not properly inspected. In addition, NEPSE index holds more than 75 per cent of shares only of banks and financial institutions, and also a large volume of single companies, lacking the diversity in the index. Apart from initiatives for price stabilization to be taken by government and central bank, NEPSE must be vigilant on share trading practices to assure investors a fair deal in the market.
To sum up, holding stocks should be considered as a long-term investment, motivated by future dividend payouts and there must be fair trading. If investors are bucked up by very short-term profit and/or in market manipulation, price volatility occurs by other than market fundamentals. It is necessary to assure the buyers of the stock that if the company is paying better returns or prospect is good; share prices will not drop in the future.
source:BHATTA ,GUNA RAJ (2014),"Looking at Nepali stock prices: Response to market fundamentals", The Himalayan Times,15 April 2014
LINK
GUNA RAJ BHATTA
Warren Buffett, the most successful investor of the 20th century, commented on stock market: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” But, the reality is completely different in that the market does not close even for a day and the index never becomes stable. So, it is with Nepali share trading in recent days.
After the trading floor of Nepal Stock Exchange (NEPSE) opened on 12th February 1994, the index reached 807 points on December 18, 2013, a record high in the last 6 years, but still lower by 369 points than the historical record 1175 on 31st August 2008. The index that plunged as low as 292 on 15th June 2011, after the historical record of 2008, rose significantly by 176 per cent within 29 months. Due to this, the issue is how stock prices of Nepali companies are being determined, specifically whether NEPSE index reflects the future income streams of the securities of the companies, often termed as ‘market fundamentals’.
Generally, stock prices are to be determined by profitability condition of the individual companies, that is, present as well as future expectations of earning. However, other factors also play a dominant role, like confidence of the investors, demand and supply of shares in the market, media reporting, share brokers and their staff among others. In addition, unethical behavior especially insider trading and the influence of big investors are also observed in developing economies taking the advantage of a not well-developed capital market and weak regulators.
Theoretical analysis of share price determination becomes more relevant this year since the Nobel Prize, 2013 has been shared by three American economists — Eugene Fama, Lars Peter Hansen and Robert Shiller — for their research in stock prices. Mr. Fama showed that the stock prices prediction is very difficult in the short run as a security’s current price is set by using all expectation in the financial markets. If the market is efficient, a security’s price must fully reflect all the available information, hence, the hot market tips will not be able to earn an abnormally high return. Shiller, nevertheless, criticized the efficient market assumption as he found big changes in stock prices compared to the changes in market fundamentals. Shiller’s proof of ‘excess volatility’ is that short-run and long-run asset prices are different as it can be experienced what is true in short period may necessarily not be true over longer horizons. Even though the asset market economists received the world’s most prestigious award, there are still unanswered questions of major share market crash, for instance, Black Monday of October 19, 1987 and the crash of NASDAQ in 2001 and 2002.
A market index is a proxy measure of the economic performance that brings the confidence for additional investments. When stock price rises, selling security is beneficial for the stockholders. Higher stock prices can raise more money if a company issues new stocks. While the companies offer the share for merger or acquisitions, which is highly relevant for the Nepali banking system for now, fewer shares can make more cash. In addition, fewer bonus shares to employees can make them happy, significantly reducing the expenses on compensation. Hence, volatile share prices discourage the entire stakeholders which may hinder the business community. From long-term investment perspective, the worth of the stock is potential for growth, earning dividend among others. Though the long-term investors may not be affected by daily price changes, such a volatile price is a hint about future anticipation of market fundamentals.
Economists like Fama believe that when transactions rise, only the commission to the brokers will be very high, not the value of the share in the long run. So, most of the chances of manipulation may come from their side. Many individuals involved in the trading lack the knowledge and expertise about investing decision, when to buy and when to sell, they just follow whether other stockholders are gaining or losing, so called ‘animal spirit’ trends. Moreover, small groups of large shareholders can easily manipulate the share prices if not properly inspected. In addition, NEPSE index holds more than 75 per cent of shares only of banks and financial institutions, and also a large volume of single companies, lacking the diversity in the index. Apart from initiatives for price stabilization to be taken by government and central bank, NEPSE must be vigilant on share trading practices to assure investors a fair deal in the market.
To sum up, holding stocks should be considered as a long-term investment, motivated by future dividend payouts and there must be fair trading. If investors are bucked up by very short-term profit and/or in market manipulation, price volatility occurs by other than market fundamentals. It is necessary to assure the buyers of the stock that if the company is paying better returns or prospect is good; share prices will not drop in the future.
source:BHATTA ,GUNA RAJ (2014),"Looking at Nepali stock prices: Response to market fundamentals", The Himalayan Times,15 April 2014
LINK
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