Smart investment strategies for secured portfolio management
Kathmandu. Most of the investors who invest in the secondary market of securities have been focusing on how much the NEPSE index has gone up or down. However, smart investors make investment decisions by studying the indicators of the company they are investing in rather than the overall indicator.
When the NEPSE index rises, the share price of all companies does not increase, while when the index decreases, the share price of all companies does not decrease. If you can choose a strong and good company, there are many companies whose share price will not be affected even if the NEPSE index is up or down by a big number.
To give an example that the share price of all companies may not rise even if the market rises, we have presented the fluctuations in the last one and a half months in the commercial bank group.
The fact that the share price of commercial banks has changed in the period of one and a half months from July 1 to September 11 has been examined here. The NEPSE index has increased by 63.27 points in the last one and a half months. The NEPSE index, which stood at 1394.77 points on July 21, has risen to 1458.04 points as of August 25. The group index of commercial banks has risen by 26.48 points or 2.21 percent during the review period.
However, the share price of eight commercial banks declined despite the rise in the overall index and group index of commercial banks. This shows that the share price of all companies does not increase when the overall index increases and the share price of all companies does not decrease when the index decreases.
The share prices of eight commercial banks have declined in the last one and a half months. Similarly, the share price of seven commercial banks rose by less than 2 percent while the share price of nine commercial banks rose by 3 percent to 13 percent.
The share price of Nepal Bank has increased the most during the review period by 13.23 percent. The share price of Nepal Bank, which was 257 per share on July 20, has risen by Rs 34 per share to Rs 291 per share. Nabil, Prime, Krishi Vikas, Everest, Lakshmi, NICA, NMB and Biokel are in the second to ninth position respectively.
Shares of Nepal Bangladesh Bank fell the most by 5.63 percent during the period. Similarly, Nepal Investment, Sunrise, Civil, SBI, Kumari, Prabhu and Siddhartha Bank are among the biggest losers. The share price of these banks has declined from 0.33 percent to 3.64 percent.
How to choose a good and safe company?
There are over 200 companies listed in NEPSE. It may be a little awkward for new investors to select the best stock. Here are a few ways to select the best business to invest in the secondary sector.
Shares of a business with a wide market capitalization are considered to be healthy. It is also difficult to survive in a business with large capital, which means that certain businesses have less risk.
And if you can invest by selecting a company with a strong financial position, you can take advantage of it. For this reason, the financial statements issued by the companies should be analyzed.
Investors in the stocks of companies with strong corporate governance often appear to be at less risk. Companies which have not taken any intervention from the regulatory body in the past, clean picture managers and operators are considered to be the best companies on the market.
Companies which have consistently distributed dividends and raised dividend rates for the last three or four years may be chosen. Even if the value of the stock decreases when investing in such businesses, the dividends should be given.
Similarly, companies can be selected by studying the profit, reserves, earnings per share, price-to-earnings ratio, total net worth and fluctuations in the share price.
Which company’s shares would be better to buy in commercial banks?
Investors in Nepal’s stock market have also experienced unintended losses and threats as a result of rumors and speculation without understanding the details of the companies they intend to invest in. There is always a chance to select the best and safest companies on the current market if you discover the real situation of the sector, evaluate the facts and invest in risk assessment.
Looking at the condition of the capital market in Nepal, commercial banks are the most stable and successful companies. Compared to other businesses, the bonds of commercial banks are less risky and the securities can be quickly sold and the loans can be taken with collateral. Investment decisions can be made by analyzing the basics of commercial banks, including paid-up capital, earnings, risk management and dividend distribution capacity.
Paid up capital and net profit
Paid up capital is the backbone for banks, but one should not be under the misconception that the higher the paid-up capital, the higher the bank’s net profit. We will need to look at how banks have raised profits. Banks also boosted earnings from daily banking transactions or from non-banking sales. Stock investors ought to research it.
It is necessary to know how much money the banks have received from sources such as interest income, operating income, fees, commissions, foreign exchange transactions. Some banks are steadily growing their earnings, while others are taking bad loans and are showing their net profit for the time being. Why and how the earnings of banks have increased may also be a topic of research for stock investors.
Costs of bank fund, the disparity between the interest charged by banks to depositors and the interest paid by borrowers often influences the income of banks. As per the NRB Guideline, the spread rate for commercial banks should be 4.4%.
Deposit and loan extension
The success of banks can also be calculated by looking at the state of collection and expansion of credit. It has been shown that those who are unable to increase the accumulation of deposits cannot actively grow credit and raise net profit. Investments in bank stocks, which have risen proportionately in terms of deposits and loans, are less volatile than in previous years.An increase in deposits and loans means an increase in the bank’s business. Business expansion also affects the bank’s earnings.
Earnings per share
When banks raise their earnings per share, so do the stock investors. This could be fitting for investors who are rising their earnings per share. Some banks were unable to hold their earnings per share of the balance when raising money. Banks which keep their earnings per share in balance even when raising capital are considered to be good for stock investors. These banks have the right to make standard payments
Risk management and bad credit
If the principal of the loan disbursed by the banks is not recovered within the period stipulated, those loans shall slip into non-performing loans. As a consequence of such non-performing loans, banks must assign the required amount to the risk-bearing fund.
If you have to make more provision, the profits of the banks will decline. Nepal Rastra Bank (NRB).has estimated that the percentage of non-performing loans is below 5%. Non-performing loans (NPLs) of more than 5% are usually not authorized to pay dividends as per NRB.
Similarly, at a later stage, when issuing financial statements as per NFRS, banks would have to make provisions for different risks under the charge of prosecution. Banks with higher sums under this heading and higher impairment charges often appear to lower investor returns.
Reserve funds play a major part in the growth of bank funding and risk management. The basis for calculating how powerful a bank is its cash, deposits, and reserve funds. Corporations then hold any sum in such a fund without returning all the money received from the net profit to the investors. Companies who are not permitted to pay dividends to customers keep their earnings in a savings fund and use the proceeds until dividends are permitted to be paid.
Dividends paid in previous years
Healthy firms tend to raise investment returns. Banks with decent results will pay dividends for investors to please. Banks that have ample resources and regularly offer incentive shares and cash dividends can be acceptable for investors.
The stock exchange includes both short-term and long-term buyers. The same business option approach does not fit for all of these buyers. Even how you spend in a organization makes a difference in your investment decision.
In fact, commercial banks are seen as more suited for long-term projects than short-term ones. Long-term investments may be made when commercial banks’ shares do not fluctuate when easily as other firms’.
Any commercial banks have sold debentures and bonds to finance their lending capacity. These banks will potentially offer lucrative incentive shares.
Investments in the stock market can also be made based on contributions from mutual funds. Based on their monthly financial statements, the mutual funds can also invest in the secondary market. On the premise that mutual funds invest in companies with good financial position, these companies can be chosen for investment.
A classification company
Companies may also be picked from the A-category companies by the Nepal Stock Exchange. The list of which can also be found on the NEPSE website. These businesses have been profitable for at least three years and can be confident that their net income is not negative.
Similarly, when selecting an investment firm, a firm selected by a commercial bank to provide a loan for an undertaking can also be used as a reference.
Commercial banks will typically lend to companies with financially strong and high market liquidity by selling bonds, thereby reducing the risk of investing in those companies to some degree. Such investments in the market are often one-sided in nature. It is easy to buy from this but it is not possible to identify the time of sale.