The Nepalese secondary market is very irrational compared to other countries. There is plenty of insider trading and insider information sharing with nonexistent legal consequences. But it might change in the future as the size of the market increases. People’s enthusiasm has been increasing a lot in the past few years. Hence, with the addition of new investors, the market will become more stable. And I think with some knowledge many can benefit from the stock market with minimal risk.
In this article, I want to discuss the following
- What is Hindsight Bias and How to get around it
- Insider trading In Nepalese Secondary Market
- How to fight against a rigged system
- Becoming an intelligent investor
- Buying and Selling in the Nepalese secondary Market
- How long is the settlement period
What is Hindsight Bias and How to get around it
As human beings, we have an inherent bias built into our psyche. It’s called the hindsight bias. It is also called the “I knew it all along” phenomenon. Hindsight Bias refers to the common tendency for people to perceive events that had already occurred as having been more predictable than they were before the events took place.
I see people making inferences like, “I knew the stock market would go down,” or “I knew it all along that the price of this stock would rise.” I try to be very careful when I am making any inferences about the stock market. If you want to be a good investor, the first thing you should check is if you are suffering from hindsight bias. One nifty trick I found to get around this is never to make my investment decision based on pure speculation. And yes, that involves not making an investment decision based on any speculative “insider information.”
Not making a speculative decision helps me sleep well at night. And people might say that the stock market itself is uncertain. Or that you have to speculate some of the variables before making an investment decision. And there is some truth to that. But there is speculation based on “what he said” and speculation based on “what I know”. I would say that it’s very healthy, not to make financial decisions based on “what he said.” Trust me; I have made my fair share of bad investment decisions. But every-time, I have learned something new from them. It’s a lot better to fall on your sword than someone else’s. As an investor, you must know that Bad decisions are inevitable, but it’s better to blame yourself for a decision than someone else.
Insider trading In Nepalese Secondary Market
It’s not a surprise that a few individuals manipulate the stock market in Nepal. The number of brokers in this country is quite small. And that means they can quickly form a syndicate and rig the system in their favor(which happens). The constitutional laws against insider trading and insider information sharing are not strong, and rich assholes can do it in plain sight with little to no consequences. Yes, every once in a while, SEBON gives a slap on the wrist to a few brokers and individuals. After that, business convenes as usual.
You don’t have to go very far to see evidence of insider trading in this country. Just look at the volume of stocks being traded right before the news of a big merger hits. See the volume of shares that get traded right before the trading of those stocks are halted. You can easily see the abnormal rise in the volume of stocks being traded. (e.g., During the merger of Jelbis Finance and Nepal Investment Bank)
How to fight against a rigged system
Frankly, you can never win against a rigged system, but there is a way by which you can fight against it and protect yourself at the same time. If you are a small investor, then you will be better off playing the game long term. If you don’t have the resources or the vast networks of people in high places, it is better to become a long term investor. I see my stock investments as a retirement fund. If I know, I will not beat the market, then why bother trying to do it in the first place. The stock market is not like any other sector. You cannot just win by working hard. You have to be very prudent about your decisions.
I feel like many people see the stock market as a means to make a quick profit. And for a few individuals, it is true. But consistently making quick profits is like trying to flip consecutive heads on a coin. So the only way to fight against a rigged system is not to play the game altogether. That means not trying to be a day trader. That also means putting your money in stocks that would create profit in the long run i.e., not making decisions based on pure speculation and not to make your investment decisions on how good or bad NEPSE is doing on a particular day.
Becoming an intelligent investor
Becoming an intelligent investor means to invest in a way that stops you from taking heavy losses. It means investing in companies based on their financial reports, their stability, and their intrinsic value. While following these basic principles will not ensure that you will never lose money, but this can substantially reduce the risk of losing a lot of money. Soon, I will be discussing some of my fundamental principles when it comes to investing. These are principles that I have learned through a tedious amount of research.
In the future, I will also talk about how to value a company intrinsically, which will include techniques for analyzing the financial reports of a company.
Buying and Selling in the Nepalese secondary Market
In the last post, we have already discussed how to get a DEMAT account, and a Broker ID to start trading in the secondary market. Now the next step is to evaluate a company and start investing. I know I have yet to write about how to invest in the right company. And the reason for this is, explaining the topic in detail will probably take me several months. And at first, I want to help you set up a foundation to at least start investing. A small tip to invest in the Nepalese Secondary Market is to look for a company with large market capitalization and whose market value is not too volatile(fluctuating).
Buying stocks in the secondary market
All the transactions on the secondary market will be through a listed stockbroker. For placing an order for the trade, you need to visit your broker. Fill the form with details of the name of the company, quantity of share, rate at which you want to trade, DEMAT account details, etc. and then submit that to the broker. You can also place your order for purchase and sale of share via telephone if your broker is also a licensed DP, and you have both DEMAT and trading accounts with the same broker. If willing sellers selling price and willing buyers buying price matches, then the transaction will be executed. Your stockbroker will notify you after your order has been executed. You have to make payment through cheque or deposit the money directly to the broker’s bank account.
Selling your stock in the secondary market
Buying shares in the Nepalese stock market is very straight forward. But selling a stock can be a bit tricky and time-consuming. The settlement period for stocks in Nepal is quite long. You have to first fill the form with details of the name of the company, quantity of share, rate at which you want to trade, DEMAT account details, etc. and then submit it to the broker. Be careful that you do not give the wrong information. That is because, for some stupid reason, you can sell stocks you don’t even have. In this case, you have to pay a hefty fine.
One day I accidentally sold “NABIL” stock instead of “NABILP” (which I had). There was some miscommunication, and I ended up paying a fine and lost all the profit I was about to make through the trade.
How long is the settlement period
Once you place an order for sale. The process is similar to buying a stock. If willing sellers selling price and willing buyers buying price matches, then the transaction will be executed. After that, you will receive a text from your broker to settle the stock by going into your Mero share account. After a couple of days of the sale, under the EDIS section, you will receive a prompt to settle. (You may receive the settlement prompt by the end of the day) You have to click on proceed next, and after that, the stock sale will go into further processing.
Don’t worry if you forget to settle the stock; your broker will contact you and personally ask you to settle the stock. The settlement period is about three working days. And you will receive a cheque after about five working days. The check will clear within a couple of days. So in total, the time it will take for you to receive your money will take about 7-10 working days. (This might change depending on your broker)
I know the process is slow and tedious, but SEBON is trying to make this process faster. But when will that happen. I am just as clueless as you are.
- Due to hindsight bias, it is tough for us to learn from our past mistakes
- There is a lot of insider trading in the Nepalese stock market, and you cant do a lot about it
- The only way to fight a rigged secondary market again in Nepal is to become a long term investor
- Buying and Selling of stocks in Nepal is a very tedious process
- Settlement periods are slow and will take close to a week for you to get your money after a sale