Ups and downs in the indicators of the stock market are a regular phenomenon. The market goes up when more investors exercise for buying stocks and slips down when more investors are in the mood to sell their shares. If they quickly want to exit from the market, then they may be willing to sell their shares at a lower price. This would push the market indicators downwards. The market cannot remain still as there are a huge number of investors interacting to buy and sell their shares. They have different capacity and different mood and differ in analysis of information. These differences are the causes for the demand and supply of shares and create ups and downs in the market. If such ups and downs are occurring frequently at a high pace, the market is considered volatile and risky. 

 

Few months earlier, most of the news about the capital market reported about every new record set by the indicators. The trading volume, market capitalization, NEPSE index and average daily trading volume etc all were in increasing trend. But the same market indicators started to fall down from the starting of the month of Bhadra 2071 BS (mid August, 2014). Normally, the period of August and September is the season for the listed companies to report their earnings and declare dividends. For the current year, almost all companies have reported growth in their profit and also declared handsome dividends. Past experience of the Nepali capital market shows that these months are favourable for market growth. But the market trend in Nepal was opposite and showed a different scenario. 

 

Almost every indicator of the market has been in decreasing trend during the last three months. The number of shares traded and trading volume remained on top of decreasing trend. While analyzing the latest six months data, during the last three months, trading volume has decreased by 48 percent and average daily turnover by 42 percent in comparison with the first three months. Not only trading volume, NEPSE index with the market capitalization has also decreased by around 16 percent in the last three months. These data shows that the pace of fluctuation for the indicators of Nepali capital market is high. Can it be considered as too volatile and risky?

 

 

Investors feel more ups and downs in short term. When there is a sharp increasing or decreasing trend for a short span of time, such investors calculate their profit / loss (realized or unrealized). So, from the behavioural aspect, ups and downs are more reported and discussed. However, fluctuation in the market can be observed both in short run and long run. The trend of NEPSE index for last 12 years shows that the index value has increased by near to three times within one and half years during the bullish trends of 2007-08 and 2013-14. During 2007-08, it also reversed at a higher speed. In view of this experience, investors might worry that this time also the market may slip down in the way for long run fluctuation. But the decrease over last three months is not same as those of the previous ones and is not risky. 

 

 The standard deviation of daily NEPSE index calculated to evaluate fluctuation on index movement shows that NEPSE index movement is less volatile during the last three months in comparison with the first three months. Similarly, the change in daily index value plotted in the graph shows that the fluctuations during 2007-08 seem to be much higher than the fluctuations during 2013-14. Moreover, there are some other grounds to support that the market is more matured and less volatile in comparison with the trend of 2007-08.  

 

Increase in the number of active investors in the secondary market makes it more matured. The price formation mechanism in the market due to higher number of active investors creates more efficiency and leads to less volatility. The number of institutional investors has also increased in the markets that have more holding capacity. Such institutional investors as mutual funds, insurance companies, banks and financial institutions and other companies are more professional investors in the stock market. This leads the market towards less fluctuation. The concentration ratio calculated to find out the top 10 companies’ trading volume from the total trading volume had remained at more than 50 percent for the last few years. But this has decreased to 36 percent in FY 2013-14. This also shows that the market is more diversified this time and diversified markets are mostly less volatile. 

 

 

The current decrease in the market may be due to the confusion created by the new depository service started in the market. However, the situation will be clear in the near future and the new service may add more confidence to the investors. If operated efficiently, this new service will add tremendous liquidity in the market. Current economic environment has created some rays of hope for multi-billion dollar FDI in the hydropower sector, infra structure development and some other industries. It will help to create positive environment for investment in the secondary market. More hydropower companies as well as other companies may create better ground for proper diversification of the secondary market.  

 

Ups and downs are the cause for speculation. Speculation is the beauty of the secondary market. Without speculation, investors are not attracted towards primary market whose main responsibility is to create a pool of low-cost capital. So, it can be said that up to a certain level, ups and downs are required for a healthy market. But speedy fluctuation and high pace of ups and downs make the market more volatile and risky. Therefore, the investors should properly analyze the market and the company before making the decision. Equity investment is not a risk-free game but normally in a long span of time, the market compensates the investors fairly.