A STUDY ON FINANCIAL INSTRUMENTS IN

NEPALESE CAPITAL MARKET AND INVESTORS

A PROJECT WORK REPORT PROPOSAL

Submitted By: Dr. DILEEP LAL Karn

Sachin Kedia
Ramswaroop Ramsagar
Multiple Campus
Janakpur
Campus Roll No.:446/073
T.U. Registration No.: 7-2-14-805-2016
BBS 4th Year

Submitted in partial fulfillment of the requirements for the degree of

Bachelor of Business Studies (BBS)

Faculty of Management
Tribhuvan University

Janakpur
2076
 1. Introduction

Financial instruments refers to the stock, bond, debenture and other financial assets those
represents the right of the holder to receive future prospective benefits under the terms and
conditions provided in the instrument(s). Financial instruments are traded in the financial market.
Investors can buy or sell securities immediately at a price that varies little from the financial
markets and facilitates the pricing discovery process. Buy and sell orders that flow from
investors’ demand and supply preferences determine the price of securities in the security
market. Since securities market is the major component of capital market it is the need of today
to address the investor’s preferences as to the financial assets those are transacted in such
markets. This study is a small attempt towards the end.
Financial market facilitates the transaction of financial assets like deposits, loan, bonds,
securities, stocks, cheques, bills etc. Financial market refers to all the activities of financial
institutions those transact on financial assets and liabilities.
Financial market is defined as place where fund supplier and fund borrowers are brought
together with the help of financial intermediaries directly or indirectly. These intermediaries
channel nation’s savings into most productive uses. Lenders or suppliers of funds exchange
money for other financial assets that tend to provide a better future return. The net effect such a
transaction is that they buy a claim against some one’s money holding at some future date. In
fact, they create loanable funds in the financial market (Hemming and Pigott, 1975:11). Financial
market is functional perspective is a rational system of collecting savings and allocating them
efficiently to the ultimate users for investment in productive assets or current consumption
(Kidwell and Peterson, 1981: 25). Likewise Mishkin (1992), Baye and Jansen (1996), Mayo
(2002) consent that financial market is the arrangement that helps to allocate resources
efficiently.
Financial market can be better understood with a full-fledged knowledge on their various types
and categories. The lines of demarcation are not clear-cut in practice. Even then for the purpose
of simplification and made it understandable, financial market is classified as Capital market,
Money market, Primary market, Secondary market and Loan and security market etc. Capital

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market is an important part of financial market. The market in which long term financial
instruments, such as equities and bonds, are raised and traded is capital market. Capital market
securities include such marketable debt securities with long term financial instruments, such as
equities and bonds, are raised and traded is capital market.
Capital market securities include such marketable debt securities with maturities of a year or
more and equity securities. Most of associated markets come under the scope of capital market.
In fact, capital market deals with longer term and relatively riskier securities. All those who
needed longer-term funds depend on capital market. Likewise, business and industries issue
shares and other securities to raise funds from capital market. In the context of Nepal, capital
market is slowly growing as well as improving. Growth of capital market ahs made it possible
for the public limited companies to raise the long term capital by issuing shares and other
industrial bonds to the investing public. On the whole, capital market is proving very significant
to enhance the country’s financial sector development. It is mainly because capital market as
much more diverse than those found in money market. Capital market is further classified into
stock market, Money lenders, and Local Businessmen etc.
Whatever may be the classification, financial instruments is the main medium through which
each of the markets discussed above deals. Securities market cannot remain aloof what kind of
securities are dealt in securities market. Speaking another way, securities market and its status
are determined by the securities that are transacted in the securities market. On the other the
depth and breadth of financial instruments are highly dominated by investors preferences. Due to
this very reason, this study attempts to identify the factors that influence investors while making
investment decision so far as the matter of investing in financial instruments is concerned. To
which securities investors give more priority, what the reasons are those mainly attract the
investors to invest in a particular security, why they prefer one security over other(s) etc. are the
issues to be addressed here in the study. Further, this study also strives to address whether or not
the Nepalese investors are compensated rightly as per the risk they bear.

2. Statement of the problem

In Nepal, it is said that, stock market is slowly developing according to needs of the economy
although they are not sophisticated as in the market of the advanced countries. The security

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market is taking its ride on a slow pace is, of course, affected by the investors’ awareness. In this
context, it is relevant to address the investors’ preferences towards the financial instruments they
can invest in Investors are said to be the backbone of economic development. Therefore the
investors should be encouraged to make investments in security markets by creating congenial
investment environment. Government and concerned parties concerned to the financial field can
create such environment. However they must know the preferences of investors.
It is necessary to research investor’s preferences. This helps to identify how far the investors are
aware regarding the investing decision. Following are the issues that the study is going to
address:
 Do Nepalese investors perform one security to other(s)?
 What is the status of investor’s performance regarding investment in different industrial
sector?
 For what purpose Nepalese investors tend to invest?
 What are the influencing factors that attract investors to invest one or other securities?

3. Objectives of the Study

The primary objective of the study is to know the Nepalese investor awareness and there
investment in different instruments as priority basis.
The specific objective of this study can be outlined as follows:
 To study and examine the status of investors’ preferences towards the financial
instruments.
 To analyze influencing factors those attract investors to invest in or securities.
 To assess investors awareness regarding the investment decision in selecting securities.
 To explore the shortcomings of security-related organization as perceived by the
investors.
 To suggest and recommend on the basis of major findings.
 To fulfill the above mentioned specific objectives and find out the general investor’s
awareness and preferences amongst different financial instruments.

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 4. Significance of the study
The main objective of the study is to focus on the investor’s awareness, although the role of
Every investor will have not well knowledge about the real financial instruments. Financial
sector in the economic development of nation remained controversial for same time; recent
theories in finance suggest that stock markets do promote long term growth (Papaioannou &
Duke, 1993:36). Development of capital markets in any country requires political and economic
stability and growth oriented policies as pre –condition. At the first stage instruments price rise
and the investors gradually gain confidence in the capital market.
The market is dominated by individual investors and most of them are not making informed
investment decision rather driven by markets rumors. Information helps investors to decide
whether or not to invest in the instruments of certain company.
In order to complete the role of institutional investor, adequate instruments are required. The
role of institutional investor in the capital market is known to add up new instruments through
collective investment schemes, play role in stabilization of the securities prices, make rational
analysis of information and pressurize the issuer for the regular flow of credible information.
This research is very useful to all the parties like security businesspersons, market makers,
brokers, companies and investors etc. who are directly or indirectly involved in the stock market
because it provides the guidelines to the stock market and potential investors to make investment
decisions. Issuer Company may also take the advantage of the study by examining the investors’
psychology towards the investment in different financial instruments.
The investors are the sovereigns of security market so their needs and desires must be identified
so that they can rightly be rewarded for the sacrifice from their part. Academicians, research
scholars, students and policy makers may be benefited from this study as it tends to gives some
practical insights that can be very useful to turn the theoretical knowledge into practical field.

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 5. Very brief of latest available literature

A study done by Chandika Oli (2014) entitled with “Stock Market Behavior in Nepal”.

Mainly findings of this study were as follows:

Since the ratio of market capitalization to GDP very low for the periods, stock market size is not
yet sufficient to show its impact on nation’s economy. On the other, trend of turnover ratio and
value of share traded to GDP ratio show that stock market in Nepal is very small relative to its
economy, and stock market in Nepal is yet to make its presence felt in the national economy.

Nepalese stock market is highly dominated by the largest companies in terms of turnover, as the
concentration ratio is very high. Stock volatility as measured by twelve month rolling standard
deviation and stock volatility ratio give the basis to conclude the inability of Nepalese stock
market to handle risk relatively to volume of stock in Nepal. It is interesting to note that none of
these indicators viz. capitalization ratio to volatility ratio reveals a consistent trend, indicating
that the development of stock market in Nepal lacks a definite direction and is not guided by
clear cut policies and action, due to low volume of shares traded and wide fluctuations, the stock
market in Nepal has been highly illiquid and volatile. Scrutiny of difference of NEPSE due to
industrial sectors reveals that NEPSE index due to industrial sectors are significantly differ each
other. This further confirms the conclusion that Nepalese stock market is highly concentrated to
one or group of the industrial sector(s). It is the banking sector at which the market is highly
concentrated.

Run test indicates cyclical variation in stock prices over the 12-year periods. It is, perhaps, due to
the inconsistent price movement in Nepalese stock market. Observing the pattern of variation the
price for closing date of coming year may happen to be positive if the same trend continues. The
analysis of run test further confirms the results that there are wider fluctuations of average stock
price in stock market.

Nepalese stock market cannot handle large volume of tracings with less price swings. As there
are very week positive relationship is observed in Nepalese stock market between volatility and
value of shares traded. Numbers of listed companies have been found to have greater impact

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upon NEPSE index than value of stock traded and number of stock traded. However NEPSE
index is also positively influenced by number of stock traded and value of stock traded.

NEPSE index remains unaffected by the advent of cultural event like Dashain. However it is
affected by the political events as the results of two different political events suggested so. On
the other way NEPSE index carries the political information but fails to carry the cultural
information. On the basis of findings she recommends the following:

Turnover ratio, value traded ratio to volatility and concentration indicates the illiquidity and high
risk in equity investment. To correct this problem acquisition and dissemination of information
relating to stock market component is a must.

The country should initiate the policies to reduce cost of mobilization of savings and to facilitate
the investments as there is positive impact of total savings on NEPSE index Investors should be
provided with wider variety of securities to meet their risk return preferences so that, unlike in
present situation majority of the nation’s population participate actively in buying and selling of
securities that causes the stock market to be developed and nation’s economy, in turn, will be
spur

6. Methodology

This chapter presents all the necessary steps to be followed throughout this research work
in order to achieve and accomplish the objective of the study. Research methodology
discussed in this chapter helps to guide the research study providing different issues and
aspects. It systematically solves the various sequential steps to adopt by a researcher in
studying problem with the objectives in view. This chapter is to outline the nature and
sources of data, sample selection & classification of variables, techniques and steps
adopted in interpreting and analyzing the data. It also focuses on how to collect required
data, what is the population and sample, and what techniques to be adopted to analyze
and interpret etc.

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6.1 Research Design
“A research design is the arrangement of conditions for collection and analysis of data in
a manner that aims to combine relevance to the research purpose with economy in
procedure” (Wolf, H.K. & Panta P.R., 2002:78).
Current research applies analytical and descriptive techniques to evaluate and analyze the
investor’s preferences toward financial instruments. Therefore, current research is both
analytical and descriptive. It is analytical in the sense that it uses different analytical tools
to analyze the investor’s preferences toward financial instruments similarly it is
descriptive in the sense that it clarifies different aspects of investor’s preferences toward
financial instruments. As per the nature of the research primary data have been
extensively used.
6.2 Source of Data and Collection Procedure
Mainly needed primary data and information are gathered through questionnaire. Direct
interview and mail questionnaire method of collection data are employed to collect
primary data. Needed secondary data that support the study have been collected through
the various published and unpublished sources?
6.3 Population and Sample
All the investors those who invest in financial securities in Nepal constitute population.
Total population of Nepalese investors is divided into two parts namely individual and
institutional investor. The detail sample plan is based on stratified and purposive
sampling. The samples of this study are as follows:

There are total 150 respondents. Out of them, first half of the respondents i.e. 120
respondents are individual investors who were met in the securities trading offices
(brokerage firms), who were gathered there for the purpose of collecting information
regarding different securities and some primary data was collected through telephone and
email. Another half of the respondents are institutional investors, (see appendix; 2). This

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classification has been made for the purpose of analyzing the difference in the investor’s
opinion with respect to major aspect of investors’ preferences towards financial
instruments.
6.4 Data Analysis
The median is the middlemost or most central item in the set of numbers. In other words,
the median is a single value which divides the total number of observations into two
equal parts such that 50 % of items lie below median value. It is used to show the
importance of respondents towards the events. If respondents opine their response from
one extreme to another extreme (i.e. “satisfied very much’ to ‘dissatisfied very much’ ),
the median can be used to identify their importance ( Pradhan, 2003:74).
The median is the middle value of the given distribution. Median is defined as 'the value
of the variable which divides the group into two equal parts, one part comprising of all
the values greater than and the other part comprising of all valuless less than median.'
Thus, the median divides the whole distribution into lower 50% and upper 50% of the
values.

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