1. What Is the Stock Market?
The stock market (capital market / share market) is a platform where shares of publicly listed companies are
bought and sold. It lets companies raise capital and gives investors a chance to earn returns.
- Primary market — deals with new share issues (IPO/FPO/Rights).
- Secondary market — where already-listed shares are traded among investors (this is what NEPSE operates).
- Key participants: investors, companies, brokers, regulators, and stock exchanges.
- Instruments traded: shares, bonds, mutual funds, and more.
- A stock index like NEPSE shows the overall performance of the market.
- Prices move on supply and demand, driven by news and sentiment.
- Regulators exist to ensure fairness, transparency, and investor protection.
- Risks include price fluctuation, liquidity risk, and broader economic factors.
2. Regulatory Structure & Key Institutions
Nepal's capital market ecosystem is overseen by several institutions, each with a distinct role:
| Institution | Role | Key Responsibilities |
|---|
SEBON
Securities Board of Nepal | Primary regulator for listed companies | Approves IPOs/FPOs & rights issues; regulates disclosures & governance; monitors insider trading and investor protection |
NEPSE
Nepal Stock Exchange | Market operator (supervisory role) | Facilitates secondary trading; enforces listing rules; can suspend/delist non-compliant companies |
CDSC
Central Depository & Clearing | Securities depository & clearing agency | Maintains demat accounts; handles clearing & settlement; manages IPO/FPO allotment; provides eDIS |
NRB
Nepal Rastra Bank | Central bank | Monetary policy; regulates banks/BFIs (Class A–D); issues currency; manages forex reserves |
Insurance Board
Beema Samiti | Insurance regulator | Licenses insurers; monitors solvency & compliance; consumer protection |
ERC
Electricity Regulation Commission | Regulates hydropower companies | Tariff fixation & PPA approval; generation licensing; dispute settlement & grid connection |
3. Functions of Financial Markets
- Price determination (through buy/sell activity)
- Fund mobilization and capital formation
- Liquidity — easy conversion of securities to cash
- Risk sharing among participants
- Easy access for investors and companies
- Reduction in transaction costs
- A platform for multiple security types — bonds, derivatives, and money market instruments
4. Primary vs. Secondary Market
Primary Market
New securities are issued here — mainly through IPOs and FPOs. Investors apply, get allotted shares, and those shares then enter secondary trading.
When primary issues are active, secondary market liquidity can fall. Oversubscribed IPOs often create post-listing rallies that lift market sentiment.
Secondary Market
Shares are traded among investors after listing. NEPSE operates entirely as a secondary market — you are buying from other investors, not from the company itself.
Most price movement and technical analysis happen here — driven by trading volume, demand/supply, and market psychology.
5. IPO, FPO & Right Share
IPO — Initial Public Offering: when a company offers shares to the public for the first time to raise capital. Purpose: business expansion, debt repayment, or funding new projects.
FPO — Further Public Offering: when an already-listed company issues additional shares to the public. Purpose: to raise more capital after the IPO for further growth or operations.
Right Share: an offer to existing shareholders to buy additional shares at a discounted price, usually in proportion to their current holdings.
Example: Company A offers a 2:1 right share at Rs. 100. If you hold 200 shares, you can buy 100 new shares.
| Feature | IPO | FPO | Right Share |
|---|
| Who can apply? | Public | Public | Existing shareholders only |
| Listing status | Unlisted company | Already listed | Already listed |
| Price | Fixed / book-building | Market-based | Discounted price |
| Objective | Initial fund raising | Further fund raising | Fund from current shareholders |
6. Accounts & Requirements to Start Investing
- Bank account (with CRN number) — to hold and move money.
- TMS account (Trade Management System) — connects investors to brokers and NEPSE for online buy/sell orders.
- Demat account (e.g. Mero Share) — holds shares/securities electronically; maintained by CDSC.
- Connect IPS account — an interbank payment system for fast, low-cost fund transfers between BFIs.
- Broker account (NEPSE code) — required to actually buy and sell stocks, bonds, and mutual funds.
- Key regulators involved: SEBON, NEPSE, CDSC, NRB, Ministry of Finance, ERC, and others.
7. Fees, Commissions & Taxes
Transaction Charges (buying & selling — both sides)
- Brokerage commission: 0.24%–0.36% of the transaction amount
- SEBON fee: fixed 0.015% of the transaction amount
- DP charge: Rs. 25 per company
Net Profit = Selling Price − Buying Price − Broker Commissions − SEBON Charges
Taxes
| Tax Type | Rate | Notes |
|---|
| Capital gain — held 1 year or less | 10% | On gains from shares held under a year |
| Capital gain — held more than 1 year | 7.5% | Lower rate rewards longer holding |
| Cash dividend | 5% | e.g. Rs. 1,000 dividend → Rs. 50 tax |
| Bonus share (stock dividend) | 5% of par value | e.g. 10 bonus shares @ Rs.100 par = Rs.1,000 → Rs.50 tax |
These are course-summarized figures, not live regulatory data — verify current rates with your broker or SEBON before relying on them for real decisions.
8. Circuit Breakers in NEPSE
Since Baishakh 2083 (April 2026), a single share can move at most ±15% in a day, and the whole market (NEPSE index) has two circuit breaker levels:
| Index Move | Effect |
|---|
| ±5% | 15-minute trading halt, only if it happens in the first two hours of trading |
| ±8% | Trading halted for the rest of the day |
See How Buying and Selling Works for market hours and settlement.
9. What Is Fundamental Analysis?
Fundamental analysis (FA) evaluates a company's financial health, business model, and economic environment to estimate its intrinsic (true) value.
Core belief: stock prices may swing short-term on speculation, but over the long run they follow a company's earnings, cash flow, and value creation.
Why FA matters
- Separates hype from reality (e.g., choosing stable BFIs over volatile hype stocks)
- Builds conviction to hold during dips when fundamentals are strong
- Helps identify undervalued stocks before the market catches on
- Supports long-term wealth creation through value-based investing
| Type | What It Analyzes | NEPSE Example |
|---|
| Qualitative | Business model, management quality, governance, industry strength | Examining a hydropower promoter's credibility and project quality |
| Quantitative | Financial statements, ratios, earnings trends, valuation multiples | Studying ROE, NPL, and EPS growth over 5 years |
10. Reading Financial Statements
Income Statement (Profit & Loss)
Shows a company's revenue, expenses, and profit over a period (quarterly/annually) — how much was earned, how much was spent, and how much was left. It directly drives EPS, which affects stock prices: strong earnings growth boosts confidence and valuation, while weak or fluctuating profits often trigger price corrections.
| Component | Meaning | NEPSE Example |
|---|
| Revenue / Total Income | Earnings from core operations | Bank interest income, hydro power sales |
| Operating Expenses | Cost of running the business | Branch costs, O&M; cost of hydros |
| Operating Profit (EBIT) | Profit before interest & taxes | Used to compare business models |
| Other Income | Non-core earnings | Investment gains, trading income |
| Finance Cost | Interest paid on debt | Hydro project loans, debenture interest |
| Net Profit / PAT | Final profit after all costs & taxes | Used for EPS and valuation |
Example (Nabil Bank, from the course deck): Q3 2081/82 net interest income was about Rs. 12.05 billion, total operating income about Rs. 15.30 billion, and profit for the period about Rs. 5.05 billion.
Example (SHPC, hydropower): Operating income of roughly Rs. 545 million and net profit of about Rs. 277 million in the same latest quarter, smaller and more volatile than recent prior years.
Balance Sheet
A snapshot of a company's financial position at one point in time — what it owns (assets), what it owes (liabilities), and what's left for shareholders (equity).
| Component | Meaning | NEPSE Example |
|---|
| Assets | Resources owned: cash, property, investments | Hydro plant & land; loans given by banks |
| Liabilities | Obligations: loans, payable interest, unpaid expenses | Long-term project loans in hydros |
| Shareholders' Equity | Share capital + retained earnings | Paid-up capital, reserves, bonus/rights impact |
Example (Nabil Bank): total assets grew from about Rs. 277 billion five years ago to about Rs. 612 billion in the latest quarter, funded mostly by customer deposits, with total equity around Rs. 61 billion.
Cash Flow Statement — Real Money Movement
| Metric | Meaning | Signal |
|---|
| Operating Cash Flow (OCF) | Cash generated from day-to-day business | Should be consistently positive in mature companies |
| Free Cash Flow (FCF) | OCF minus CapEx | Real cash left for shareholders, debt repayment, dividends |
| Cash Flow vs. Net Profit | Compare OCF with net profit | High profit but low cash flow may signal manipulated or unsustainable earnings |
11. Valuation & Key Ratios
Valuation estimates the fair, intrinsic value of a company or its share price — answering whether the current price is justified by performance and future potential.
Example: if NABIL's market price is Rs. 320 but its intrinsic value is Rs. 400, it looks undervalued (a buy signal). If a hydro stock trades at Rs. 700 against a Rs. 400 intrinsic value, it looks overvalued (correction risk).
| Method | Basis | Used When |
|---|
| Ratio-based (EPS, PE, PBV, ROE) | Current profits & book value | Quick comparison & screening |
| Discounted Cash Flow (DCF) | Future free cash flow | In-depth, long-term valuation |
| Dividend Discount Model (DDM) | Future dividends | Stable dividend-paying stocks |
| Asset-Based Valuation | Net asset value | Investment firms, liquidation cases |
| Relative Valuation | Sector PE, PBV, etc. | Comparing against NEPSE or peer companies |
EPS — Earnings Per Share
EPS = Net Profit ÷ Outstanding Shares. Shows profit earned per share. Track EPS growth over years for consistency; after rights/bonus issues, use adjusted EPS. Higher EPS generally means stronger dividend payout capacity.
Example: a company earning Rs. 2.4 billion with 120 million shares has an EPS of Rs. 20 — stronger than a peer with the same price but only Rs. 8 EPS.
PE Ratio — Price to Earnings
PE = Market Price ÷ EPS. High PE (>30) suggests the market expects strong future growth; low PE (<10) can signal undervaluation — or risk. Compare against sector average and the stock's own historical PE; a "PE band" strategy buys near the lower range and sells near the higher one.
Example: price Rs. 300, EPS Rs. 10 → PE = 30. If the sector average PE is 15, this stock looks overpriced unless rapid growth is expected.
Book Value (BV) & Price-to-Book (PBV)
BV = (Total Assets − Liabilities) ÷ Shares — the accounting value per share if the company liquidated today. PBV = Price ÷ Book Value. PBV below 1 suggests a value pick; above 2 suggests a premium, justified only by high ROE. For banks, PBV under 1.5 often signals undervaluation.
Example: book value Rs. 220, market price Rs. 330 → PBV = 1.5 (reasonable for a premium bank). A PBV of 3.5 with low ROE, by contrast, may be overpriced.
ROE — Return on Equity
ROE = Net Profit ÷ Shareholders' Equity — how effectively a company turns shareholder funds into profit. In Nepal, ROE above 15% is generally considered healthy. High ROE with low PBV suggests a value pick; high ROE with high PE suggests a growth stock.
Example: equity Rs. 20B, net profit Rs. 3.6B → ROE = 18% (strong), versus a peer bank at only 9% (less efficient).
Combining the Tools — Strategic Matrix
| Metric Combination | Signal | Action |
|---|
| EPS rising YoY + low PE | Undervalued stock | Buy & hold |
| EPS falling + high PE | Risky overvaluation | Avoid or exit |
| PBV < 1 + ROE > 15% | Deep value | Long-term buy |
| High PE + consistent EPS | Growth story | Buy on dips |
| ROE > PE | Profitability beating valuation | Strong performer |
12. Macro-Economic Analysis — How Nepal's Economy Affects NEPSE
Inflation & Currency Risk
- High inflation reduces purchasing power and real returns from stocks
- Import-heavy companies (manufacturing, energy) suffer from NPR depreciation
- Investors shift to safer sectors (banks/insurance) during macro instability
Monetary Policy (NRB's Role)
- NRB controls liquidity via CRR, SLR, interest rates, and refinance policies
- Tight policy → less liquidity → lower demand for stocks
- Loose policy → more liquidity → bullish sentiment on NEPSE
Interest Rate Trends
- High interest rates draw money to fixed deposits → equity market outflows
- Low interest rates make equities more attractive → more market inflow
NEPSE often corrects when fixed-deposit rates cross about 11%, and rallies when they drop below about 8%.
Fiscal Policy, Budget & Alternative Assets
- Sectoral budget allocation (hydro, infrastructure, agriculture) shapes stock trends
- Capital spending or tax changes affect listed-company profitability
- Higher remittance inflows → more household savings → more investment in IPOs/secondary market
- A real estate boom tends to pull money out of the stock market
- Crypto and gold/bullion trends compete with stocks for retail investment capital
13. Sectoral Analysis
NEPSE is sector-dominated — banks (BFIs), hydropower, and insurance together make up over 75% of market capitalization. Capital flows shift between sectors, and tracking this gives entry/exit signals, since company earnings are often sector- and policy-linked.
| Sector | Key Drivers | Investor Focus |
|---|
| Commercial Banks | NRB policy, interest spread, NPLs, dividend history | Consistent EPS, low PBV, ROE > 15% |
| Development Banks & Finance | Interest income, capital adequacy, merger news | Momentum, growth-oriented |
| Hydropower | Generation license, COD, PPA rates, construction delays | Project pipeline, CGR model |
| Insurance (Life/Non-Life) | Investment returns, reserve surplus, premium growth | High EPS, ROE, bonus patterns |
| MFIs (Microfinance) | Credit cap, NRB directives, credit penetration | Volatile but fast growers |
| Manufacturing/Hotels/Others | Tourism, production cost, import duty | Watchful, cyclical investing |
14. Stock Selection & Portfolio Strategy
Stock Selection Framework
| Criteria | Target Value | Why It Matters |
|---|
| Consistent EPS growth | ≥10% YoY (5 yrs.) | Signals sustainable profitability |
| ROE | ≥15% | Shows capital efficiency |
| PE Ratio | Below sector average (or justified by growth) | Valuation check |
| Debt-to-Equity | <1 (except hydros) | Financial health |
| Dividend history | 5+ years consistent | Sign of maturity & stability |
| Cash flow | Positive OCF | Confirms real earnings |
Case Study — Comparing 3 Commercial Banks (from the course deck)
| Metric | NABIL | SBL | PCBL |
|---|
| EPS | Rs. 28 | Rs. 17 | Rs. 13 |
| ROE | 18% | 12% | 11% |
| PE | 11 | 14 | 15 |
| PBV | 1.5 | 1.1 | 1.0 |
| Dividend (5Y avg.) | 35% | 25% | 20% |
Define Investment Goals
- Short-term (<1 year): IPO listing gains, technical/momentum stocks
- Mid-term (1–3 years): growing sectors with improving EPS (hydropower, MFIs)
- Long-term (>3 years): stable companies with consistent ROE & dividends (banks, insurers)
Capital Allocation Strategy
| Category | Allocation | Purpose |
|---|
| Core Holdings | 50–60% | Fundamentally strong companies held long-term |
| Growth Stocks | 20–30% | Emerging sectors with strong future EPS growth |
| Speculative | 10–15% | IPO flipping, construction-stage hydro plays |
| Cash Reserve | 5–10% | Dry powder for corrections or new IPOs |
15. Final Recap — Key Takeaways
Guiding principle: "Buy strong, hold wisely, exit smart."
| Core Concept | Key Takeaway |
|---|
| NEPSE Structure | Know the roles of SEBON, NEPSE, CDSC, and NRB |
| Financial Statements | Income = performance; Balance Sheet = strength; Cash = reality |
| Valuation | Use EPS, PE, PBV, and ROE to judge if a stock is under- or over-valued |
| Macro & Sector | Match stock picks to economic and sector cycles |
This guide is for learning only, summarized from a fundamental analysis course. It is not advice to buy or sell any share. Figures like fees and tax rates can change; check with your broker or SEBON.