Nepal Stock Exchange (NEPSE) is preparing to launch a new index called the 'NEPSE-30 Index', which will be dedicated to the development, operation, and management of Nepal's secondary market. This new index is expected to bolster the overall strength and efficiency of secondary market transactions, providing investors with a reliable indicator of the performance of the top 30 performing equity stocks traded on the Nepal Stock Exchange.

Are you among those who have visited the Nepal Stock Exchange website and noticed frequent pop-ups related to NEPSE 30, but you're not quite sure about what it means?

If that's the case, we can help you understand what NEPSE 30 is and its significance. To better understand the NEPSE-30 index, it's important to first grasp the concept of an index.

What is a Stock Index?

Imagine you're a chef trying to make the perfect dish. You need to carefully select the right ingredients, cook them to perfection, and season them just right. In the same way, an index is like a recipe for a specific market or segment. It selects the right "ingredients" (i.e., stocks) based on certain criteria, cooks them up (i.e., tracks their value), and gives you a final "dish" (i.e., index value) that reflects the performance of that market or segment.

Just like how a chef's recipe can be adjusted to suit different tastes, there are many different types of indices that track different markets or segments. Some indices may focus on large companies, while others may focus on smaller ones. Some may track a specific industry, while others may track a whole market. By using indices, investors can get a better understanding of how their investments are performing compared to the broader market.

Think of it like a game of basketball. The index is like the scoreboard that keeps track of the points for both teams. When the team is doing well and scores more points, the scoreboard goes up. But when the team is not doing so well and loses points, the scoreboard goes down. Similarly, when most stocks in the market are rising, the index goes up, and when most stocks are falling, the index goes down.

Overall, understanding how indices work can help investors make better decisions when it comes to managing their portfolios. It's like having a compass that guides you through the ups and downs of the market, helping you stay on course towards your financial goals.

What does NEPSE-30 index signify?

The NEPSE-30 index is like a carefully curated playlist of the best songs from a particular genre. Just as a playlist is a collection of songs that represent the best of a genre, the NEPSE-30 index is a selection of the top 30 performing equity stocks traded on the Nepal Stock Exchange (NEPSE).

To create a great playlist, you need to carefully select the right songs based on their popularity, quality, and appeal to the target audience. Similarly, the NEPSE-30 index selects the top-performing stocks based on specific criteria, such as market capitalization, liquidity, and trading volume, to represent the overall performance of the NEPSE.

When you listen to a playlist, you get a sense of the overall vibe of the genre, and you can discover new songs that you might not have heard before. Similarly, by following the NEPSE-30 index, investors can get a better understanding of the overall health of the Nepalese stock market and discover new investment opportunities.

Just as a playlist can be updated and changed over time, the NEPSE-30 index is also reviewed periodically to ensure that it continues to reflect the best-performing stocks in the market. By staying up-to-date with the latest changes to the index, investors can make informed decisions that align with their investment goals.

What qualifies a company to be included in the NEPSE 30?

To be included in the NEPSE-30 index, a company must meet several specific criteria. Let’s explore in details:

1. Positive Earnings and Strong Financial Health: The company must have recorded positive earnings for at least three of the past five fiscal years, including the most recent year. Additionally, the company's book value must exceed its paid-up capital, which indicates that the company has a strong financial position.
2. Earnings Per Share (EPS): The latest earnings per share (EPS) must be greater than 10% of its face value and must remain higher than the inflation rate for the same year. This ensures that the company is performing well and generating profits for its shareholders.
3. Market Capitalization: Either 25% of its shares issued to the public or its free-float market capitalization must be at least 1% of the total free-float market capitalization. This ensures that the company has a significant presence in the market and is actively traded.
4. Minimum Shareholders: The company must have a minimum of 20,000 shareholders, indicating that it has a broad base of ownership and support.
5. Average Daily Turnover, Volume, and Transactions: In the last six months, the company must have maintained an average daily turnover of NPR 25 lakhs, an average daily volume of 5,000 units, and an average of 40 transactions per day. This indicates that the company is actively traded and has a strong market presence.
6. Trading Activity: The company's shares must have been traded on at least 75% of total trading days within the last six months. This ensures that the company is actively traded and has a high level of liquidity.

Overall, meeting these criteria indicates that the company is financially stable, performing well, and has a significant presence in the market. Being included in the NEPSE-30 index can provide companies with increased visibility and can be seen as a positive indicator of their financial health and performance.

What is the approach taken to calculate the NEPSE-30 Index?

The NEPSE 30 index has a unique methodology for determining its constituents' weights, and several factors are considered. Let’s explore in details

1. The NEPSE 30 index is also a value-weighted index that uses market capitalization to weight its constituents, by including free float shares traded in the market.
2. The NEPSE 30 index assigns weights to its constituents based on criteria such as free float market capitalization, EPS, turnover, volume, and number of transactions.
3. Weightage assigned to each factor in the NEPSE 30 Index:
   • Market Capitalization: 40%
   • Earnings Per Share (EPS): 30%
   • Trade Amount: 10%
   • No of Share Traded: 10%
   • Number of Transactions: 10%
4.  Classifies companies into six sectors and ranks them based on their "sectoral composite weight". The top eight companies with the highest weights in each sector, out of BFI, microfinance, insurance, hydropower, manufacturing, trading and services, are selected.
5. If more than 30 eligible companies exist, NEPSE 30 index selects higher-weighted companies and excludes lower-weighted ones while ensuring each sector is represented. If less than 30, higher-weighted companies are included, up to eight from each sector.

Base Market Capitalization:

To calculate the index, the Nepal Stock Exchange uses the base market capitalization, which is determined as the free-float market capitalization on a specific date. In this case, the date chosen is Poush 30, 2079. Free-float market capitalization is the market value of a company's outstanding shares that are available for public trading, excluding shares held by insiders, promoters, or governments. By using a specific date for the base market capitalization, the index can reflect the overall market performance relative to that point in time. This method allows for easier comparison and analysis of market trends over time.

Rebalancing:

Rebalancing of the NEPSE index is done bi-annually, on the last Friday of Bhadra and Falgun. During rebalancing, the companies in the index are evaluated based on their market capitalization, liquidity, and other factors. Companies that no longer meet the criteria for inclusion in the index are removed, while new companies meeting the criteria are added. This process helps to ensure that the index remains relevant and reflects the current state of the market.

Bottom Line

This will be one of the major developments in Nepal, the NEPSE-30 index represents a significant step towards adopting internationally recognized best practices in the Nepalese stock market. By providing investors with a reliable indicator of market performance, the index can facilitate more informed investment decisions and attract new investors to companies included in the index. The increased visibility and credibility for companies included in the NEPSE-30 can also help promote their growth and development. Overall, the launch of the NEPSE-30 index is expected to strengthen the efficiency and transparency of secondary market transactions in Nepal, contributing to the growth of the country's economy.