The document discusses the past, present, and future of Nepal's stock market, NEPSE. It outlines that NEPSE has transitioned from an open-outcry trading system to a semi-automated system and is moving towards fully online trading. Currently, trading still involves some paper-based processes but shares are being dematerialized. The future of NEPSE is poised for online trading which will provide direct access for investors but also increase risks, requiring financial savvy. Adopting new technologies comes with challenges but also opportunities to develop infrastructure and attract global investors.

1. Stock Market, NEPSE: Past, Present and the Future
- Sudarshan Kadariya, New York
The price of every product in the market principally, is fairly determined based on
the demand and the supply at a specific time. The mechanism of price formation
follows the same economic principles; the demand and supply and the tradeoff
determine acceptable price of a product and service. We are petty aware and
confident that how much we are paying for vegetables, everyday groceries? Micro-
bus and tempo fare? And, sometime we are conscious over the taxi fare which is
absolutely fair and needful. But, there are certain things that have tremendous
effect in our financial life such as interest rate in our savings and loans accounts,
premium on our insurance policies, prices of the stocks and other financial
instruments that we might prioritize the least due to the complexity in its nature.
We dream to have our safe future with couple of million rupees in our bank
account, a small house to live with a little space for gardening, an expectation of
handsome salary and perks for our graduated son and daughter and so on. To
achieve some or all of these expectations, we should have sound financial
knowledge to handle our savings and to optimize the growth prospects by
managing the risk to achieve the long term financial freedom. As well as, we
would transfer the knowledge to the new generation by the practice.
The traditional ways of preserving wealth by keeping them in the wooden or metal
boxes at home or burying them in a pot in the back yard or in the jungle, have now
become completely obsolete, unproductive and socially risky methods. Creating
wealth on the other hand is challenging and requires a higher level of sacrifice on
current spending which is fairly difficult due to the extensive shopping alternatives
available in the market. Ironically, saving is difference between what we make as

2. income and what we spend as expenditure. Growth, a mechanism to increase our
savings in the short term and the long term, involves the risk. Theoretically, higher
the risk, higher will be the return and lower the risk, lower will be the return. But,
it depends on how we select the investment opportunities and how we determine
the level of our risk tolerance. The level of risk tolerance is different between
personto personbased on education, experience, level of assets holdings, access to
information, and the level of investment among others. If we would like to grow
our money, there would be some relatively low risk options in the market like
depositing money into the bank saving accounts, buying a stake in mutual funds,
investing in land and buildings, holding precious metals and jewelries, investing in
the financial instruments – stocks (IPO and secondary market), government and
corporate bonds, commercial papers, personal lending, etc.
Currently, urban savings is directed towards the banks and financial institutions
which is the major source of capital formation in Nepal. Compared with the
western economy, the local stock exchange, Nepse, has not been able to attract
more listings due to various economic and political hurdles. But, the practice of
exchanging financial instruments through the organized stock exchange is a recent
development in Nepal whereas the developed countries have their long history of
the practice. They practised on every ups and downs of their economy, and
strengthen their stock market mechanism with the proper policies and the
infrastructures which have now become a barometer to measure the strength of the
economy.
Past: Historical Perspectives
The history of the capital market began in early 17th century with the Amsterdam
Stock Exchange (1602) in The Netherlands, followed by Paris Bourse (1724) in

3. France,Philadelphia Stock Exchange (1790) in USA, London Stock Exchange
(1801) in England, Milan Stock Exchange (1808) in Italy, New York Stock
Exchange (1817) in USA, Frankfurt Stock Exchange (1820) in Germany, Bolsa de
Madrid (1831) in Spain, Toronto Stock Exchange (1861) in Canada, and Australian
Stock Exchange (1872) in Australia which are the oldest 10 stock exchanges in the
world. Whereas, Bombay Stock Exchange, a regional pioneer for South Asia was
only established in 1875. With regards to the oldest share certificates, there are still
4 physical certificates exist of the company called Verenigde Oost-Indische
Compagnie (VOC) which was issued in 1606. This is considered the oldest share
certificates by the existence.
In Nepal, Biratnagar Jute Mills Limited had issued the first share certificate in
1937. Similarly, Nepal Rastra Bank had issued the first government bond in 1964.
The history of securities exchange in Nepal has started with the first amendment in
Securities Exchange Act (1983) in 1993 which paved the way to establish
Securities Board of Nepal (SEBON).The act also provided the way to convert
Securities Exchange Centre (SEC) into Nepal Stock Exchange (NEPSE) on
January 13th, 1994. After the establishment of Nepse, banking and finance,
insurance, manufacturing and service, and hydropower companies have gradually
started to list their common stocks for trading.
The inception of the capital market has provided abundant investment
opportunities to the individuals and the institutional investors in Nepal. Now, it has
become a separate industry. As a result, the investment communities are growing
day by day. The depth and width are expanding for the long term development of
the market within the regulatory boundary given by the regulators.
Present: Current practices

4. We have stepped forward from open outcry trading system to semi-automated
trading system, which is a path to fully automated online trading system in the
future. In the early days, Nepse practiced it’s trading using open outcry system,
wherein the limited stock brokers (32) used to be on the floor and the Nepse
employees would update the stock prices on the white boards based on what they
heard from the trading floor. It was fully manual trading system,like as the trading
before the invention of ticker tape in the western stock markets. The first ticker
tape was developed in 1867 which allowed information to be printed in easy to
read script.
After two and half decades of operations, Nepse had replaced its open outcry
system by semi-automated trading system.But, the exchange of physical transfer of
share certificates from sellers to buyers was not replaced. It was a lengthy process
of getting share certificates and also time taking to initiate sales orders. To avoid
such difficulties, Nepse has now been exercising dematerialization which is a
process of converting physical shares into electronic format. Investors are now
required to dematerialize their shares by opening a demat account with depository
participants where the investors need to surrender the physical share certificates
and in turn get electronic shares in their demat accounts. Once they have a demat
account, they will get a passbook, like a bank passbook before the invention of
banking software. Then, the demat account holders or the investors, are able to
place their orders (buy/sell) by cutting orders/checks to their stock brokers. Here,
the role of stock brokers is very crucial since they are still handling paper works
and placing their orders for trading to the hundreds of investors at a same time.
Due to the various constraints, they are not able to give priority to all customers
equally – beginners, small,medium and big investors. Despite assuming good
administrative support from the brokers, the psychological and the behavioral

5. biases are still unavoidable which is actively influencing the stock trading. It starts
from the point of placing orders on the screen to the point where the orders are
being executed. This timing is considered the most valuable and precious for the
investors to achieve their investment objectives. We hope our investors would get
equal and quality professional services from the limited number of stock brokers
(50) today and in the future.
The Future: Possibilities and the challenges
We are in the age of information and technology (IT). We are dealing with and
learning digital practices in our daily life. The richest people in world are now
from IT and innovative entrepreneurs like Microsoft and Facebook. For the new
generation, it is like “sky is the limit”.
The world has been changed. The changing world has brought the opportunities
and challenges from various perspectives. We are floating on the rapidly changing
financial waves where the technological advancement and the financial innovations
radically change the characteristics of the financial industry. We named the
financial crisis of 2007/08 as the most dangerous which had swiped billions of
dollars from the world economy. It happened not only due to the cheap credits,
subprime mortgages and real estate bubbles but also due to the financial industry’s
exposure with the novel technologies. Some market participants at that time
commented as - none of the primitive market mechanisms (tools) were useful,
stock prices were sharply declining but no one knew how to stop them, and
preserve their wealth since the market was extremely volatile. The market was
behaving in a highly unpredicted and the trading volumes were massive.
Why such challenges had happened?

6. There is no exact answer for such questions but the easy availability of credits,
internet based trading tools, exposure of high speed internet and algorithmic
trading, advance software and trading platforms, wide availability of market
information, the speed of the transformation of financial information globally, and
the flow of capital from one continent to the others are some of the major reasons
of 2007/08 financial crisis. The financial crisis, every now and then are extremely
costly learning lessons for all the financial communities in the world.
Amid the global context, the future prospect of Nepse is to adopt the online trading
system which will give investors an equal and digital access to the market in the
real time. Investors will be self sufficient to make investment decisions since the
market will be far riskier than the existing. The value of financial information will
be precious and costly and the timing will be really important. Now, the western
stock marketsare handling billions of dollars of trade in a micro second and
entrepreneurs are investing substantial amount of money in saving those micro
seconds and speeding the financial information. If Nepse goes on the online trading
platform, our local market will be exposed with the global investors (at least the
NRN) and we will be quick enough in getting financial information and executing
trades on our own using our personal devices – desktops, laptops and cell phones
from our home and/or work.
Finally, we expect our infrastructure would develop in such a way that it supports
such speed trading and all the stakeholders would reap the opportunities by
managing the local and global challenges.
(*The author is a Gold medalist from TU for the courses of M. Phil in
Management with specialization in Finance in 2012. Now, he is working as a

7. Finance Manager in a consulting firm in New York. The opinion presented in the
article is personal. You can reach to the author at su.kadariya@gmail.com)