Basics of Investing in Shares

Investing is becoming more and more common in Nepal. This is apparent in the IPO applications numbers received by new companies. When a tiny IPO event of three to ten lakh units of shares, attracts more than two lakh (hundred thousand) investors, it means that the awareness of the opportunity of investing in shares is growing among the Nepalese people. This trend is bound to increase further in the future, with the growing prosperity among the people combined with the "words of mouth" communication of investment knowledge to family and friends. However, there are widespread rumours, fears and market sentiments that need to be explained and understood in order to increase financial literacy of the investors. Without this education investors are more likely to become losers than gainers.

Market Fall and Rise (Bear vs Bull)

In today's share market, it is important to understand precisely what bear and bull is, and why it might not have anything alarming or serious. Bull and bear is a natural up and down in the market place that is entirely dependent upon the demand and supply of buy and sell orders. If we have more buy orders compared to sell orders the market will tend to rise (bull). In the opposite case, the market will tend to fall (bear). Bear or bull in itself is not a cause for buy and sell, but in fact, it is just the effect. While many people tend to sell shares when the price starts to decrease, the wise investors buy when the price is low. Both short term and long term investors buy when the price is low, rather than when it is high and for good reasons. If you buy an under-priced share and hold it until the price increases you'll makeup money through capital gain. However, if you buy overpriced share, i.e, when price is rising you might lose money if the prices starts dropping before you can sell it. For a wise investor, it is always a good rule to buy when the price is low.

Long-term Investment - a different skill

Likewise, if you want to invest in long term, then you look at the profile of the company you are buying. If the profile is good, you can buy the share and hold it. The stock will provide you return regularly (in most of the cases and even if it isn't, the company's reserve will be used to expand its operation and thus increase its profitability). You do not need to bother every day whether the price is increasing or decreasing. In the short term, if the price increases and you sell your shares you make up capital gain profit. However, if you aim for long term investment, you want to hold your shares for years. In the meanwhile, the shares may go up and down in the price, however, this does not affect your returns (usually cash or stock dividend) in any significant way. Therefore, it does not make any sense to worry about bear and bull.

On the contrary, you keep a close eye on the company's management team, financial performance, and overall company's situation including prospects for expansion and growth. The company which has solid team, good financial performance and growing potential will be the choice of long term investors. Such companies will provide good returns and their shares will also appreciate in price. The rule for buying and selling stocks for long term investors also depends upon this factor. If the company is good in the above metrics, then you buy or hold the shares of such company. Otherwise, you do not buy, or if you have such shares, you will sell them to minimise your loss.


Sometimes despite careful observation and analysis, some companies go bankrupt and we lose our investment. This is the reason why we need to diversify our portfolio. No matter how good a company is, for a long term investor, it is always wiser to invest in two or more companies, so that, even if one of your stock is not performing well, the return from other stocks will compensate and you'll end up getting a positive return in overall. This technique of risk minimisation is popularly known by the quote, "Do not put all your eggs in one basket".

Investment is both Art and Science

Investing in shares is not a rocket science and the investment decisions are highly subjective. Usually, investment in shares is a mixture of art and science. Art in the sense that you need to develop a portfolio of companies from different industries (like different colours). Your choice will take into account multiple factors which you will develop over time and this factor is the art of investing. Science in the sense that there are certain measures such as EPS, P/E ratio, P/BV Ratio, CAGR, growth in profits, etc which you should look at in each companies you invest to keep your portfolio profitable. In the end, it is up to you to decide how much risk to take and how much return you want to reap.