CHAPTER 3

Investment Information and Securities Transactions

 # Introduction to Online Investment
 With the advancement in technology we can trade the securities by
sitting in front of computer or any electronic device.
 Online trading and investment has been growing rapidly day by day.
 Internet not only helps for trading but also provide the various
information and data required for the investment decision.
 Investor can save the time and cost from online trading.
 In terms of the Nepal, there are various online portal like
merolagani.com, nepalipaisa.com, sharesansar.com, bizmandu.com,
nepsealpha.com etc.
# Investment Tools
1) Planning : Online calculators and worksheet helps to find answers of
financial planning and investing question.
2) Screening : This tools helps to sort through huge database of stock
and mutual fund to find suitable securities.
3) Charting : This tools allows to plot the prices and performance of
stock over a specified time period.
4) Stock quotes and portfolio tracking : This tools allows the
investor to track his/her investment, to alerted whenever an changes
occurred.
# Pros and Cons of using Internet as an Investment Tool
Pros (Advantage)
 Quick Information Collection
 Low Transaction Cost
 Easy Available
 Helps for Technical Analysis
 Immediate Transaction
 Can Judge the available investment alternatives
Cons (Disadvantage)
 Possibility of False information and misguidance
 Vague Information
 Complexity
 Not available to all investors
 Easily available information disclose the secrecy
 Lack of accuracy and reliability of information.
 # Types and Source of Information
1) Economic and Current Event Information
 These Information includes past and future data related to domestic
as well as international economic and political environmental
changes.
 The source of these type of information are financial journals (The
Wall street), General news paper ( Kantipur dainik), Financial news
paper ( Karobar, Arthik Abhiyaan), Government Publication etc.
2) Company and Industry Information
 These information includes past and future data related to specific
company and industry.
 Such information can be collected from annual reports(stockholders
reports) of company, online portals, Brokerage reports, ministry of
commerce, ministry of finance etc.
3) Information on Alternative Investment Vehicles
 These information includes past and future data related to other
investment alternatives other than financial securities (stock, bond,
option) such as Real estate, commodities etc which directly affects
the decisions regarding buying and selling of financial securities.
 Such information can be collected from online, news paper, business
journals etc.
4) Price Information
 These information are related to past and current prices of
investment vehicles or specific securities which shows the price
movements of particular security.
 The source of price information are Price quotations, various websites
like nepalstock.com, sharesansar.com, nepalipaisa.com etc, general
news paper (Kantipur daily).
5) Information on Personal Investment Strategies
 These information includes recommendations, suggestions on
investment strategies (Purchase or sell actions) by relatives, friends,
coworkers etc.
# Market Averages and Index
 Index are the indicator to indicate the change in the respective value
or price between two distinct periods.
 Market index is that indicator which indicate the overall movement
of security market. It helps to measure the level of movement of
security market.
 NEPSE, DJIA, S&P 500 are some examples of market index.
 Security market index is helpful to get the answer of two major
questions :What is the market doing? What did the market do yesterday?
 Indexes are useful tool for making prediction of future market
movement.
# Major Objective of Index Computation
 To evaluate the portfolio or market performance.
 To make the right investment decision
 For future predictions of market
# Calculation of Market Index
Stock exchange uses one of the following method to compute the
market index.
1) Price weighted Index
2) Value weighted Index
3) Equally weighted Index
1) Price Weighted Index
 Under this method the sum of prices of securities included for index
computation is divided by no. of securities (Divisor) included in index.
 DJIA (Dow Jones Industry Average) and Nikkei (Japan) are the example
of Price weighted Index.
 Price weighted Index is denoted by PWI
 Change in the price of stocks with the high price has the greater
influence on the PWI rather than the total market value.
 Only one factor security price is used to calculate price index.
 Price weighted index is calculated on daily basis.
 The Price weighted Index is calculated as:
PWI or DJIA 
Sum of all Closing prices of each securities
Or,
 Prices
Divisor Divisor
 PWI is simplest method but the divisor needs to be revised or adjusted
frequently with the Stock dividend distribution and stock split in the
securities because it affects the price of securities.
 New Divisor is calculated by using following formula :
Sum of New Prices
New Divisor   Previous divisor
Sum of Old Prces
 The rate of return on price weighted index is calculated as:
PWI1  PWI 0
Rate of Return 
PWI 0
 Rate of Return on index is also called percentage change in index.
 Example of PWI
Consider the following information
Stocks Shares Price Price
(31-12-2014) (31-12-2015)

A 300 Rs 90 Rs 100
B 400 100 110
C 500 120 115

a) Calculate the Price weighted index or DJIA for each period.

here, calculation of price weighted index(PWI),
We know,
Sum of all Closing prices of each securities
PWI 
Divisor
Rs 90  Rs100  Rs120 Rs 310
PWI 0    103.33
3 3
Rs 100  Rs110  Rs115 Rs 325
PWI1    108.33
3 3
Hence the Price weighted index for 2014 and 2015 are 103.33 and 108.33.
b) Calculate rate of return for 1st period.
We know,
PWI1  PWI 0 108.33  103.33
Rate of Return    0.0484 or 4.84%
PWI 0 103.33
Hence, the rate of return for 1st period is 4.84%
c) Calculate the value of new divisor in 2nd period if Stock A had a 2 for1split
at beginning of second period.
Here, if stock goes for 2 for 1 split then,
price of stock A in 2nd period = price before split × Split ratio
= Rs 100 × ½ = Rs 50
Sum of old prices = Rs 100 + Rs 110 + Rs 115 = Rs 325
Sum of new prices = Rs 50 + Rs 110 + Rs 115 = Rs 275
Now,
Sum of New Prices
New Divisor   Previous divisor
Sum of Old Prces
Rs 275
  3  2.5384
Rs 325
Hence, the value of new divisors 2.5384
d) Calculate the rate of return for 2nd period.
We know that,
PWI 2  PWI1 108.33 - 108.33
Rate of Return for 2nd period    0%
PWI1 108.33
Where,
Sum of all Closing prices of each securities in 2nd period
PWI 2 
New Divisor
Rs 275
  108.33
2.5384

2) Value Weighted Index

 Under this method the current market value of securities included for
index computation is divided by the market value of base period and the
result is multiplied with index of base period.
 NEPSE, S&P500 are examples of Value weighted index.
 It is denoted by VWI.
 This index uses both factors Price of securities and no. share (quantity)
for calculation of index value.
 It is also called Capitalization Method.
 The following formula is used to calculate value weighted index
Total Market Value of Current Period
VWI   Base period index
Total Market Value of Base Period
 Stock Dividend and Stock split has no impact on the value weighted index
however if new right shares and new share of newly established company
is listed then base index value should be revised and the revised base
market value is computed by following equation:
Market val ue after additional listing
Revised Base Value   old base value
Market val ue before listing
 The rate of return or percentage change in index is calculated as :
VWI1  VWI 0
Rate of Return 
VWI 0
On the basis of above example:
a) Calculate the Value weighted Index for 2014 (base period),
2015 (Period 1) and 2016 (Period 2).
here we don’t need to calculate base index so let’s assume Base Index =100
We know that,
Total Market Value of Period 1
VWI 1   Base period index
Total Market Value of Base Period
100 * 300  110 * 400  115 * 500 131500
  100   103.54
90 * 300  100 * 400  120 * 500 127000
 Total Market Value of Period 2
VWI 2   Base period index
Total Market Value of Base Period
50 * 600  110 * 400  115 * 500 131500
  100   103.54
90 * 300  100 * 400  120 * 500 127000
Hence, the value weighted index for period 0, Period 1 and period 2
are 100, 103.54 and 103.54 respectively.
b) Calculate the Rate of return for 1st and 2nd Period.
We know that,
VWI 1  VWI 0 103.54  100
Rate of Return for 1st period    0.0354 or 3.54%
VWI 0 100
VWI 2  VWI 1 103.54  103.54
Rate of Return for 2st period    0 or 0%
VWI 1 103.54
Hence the rate of return for period 1 and period 2 are 3.54% and 0%
 3) Equally Weighted Index
 Under this method, equal weight is assigned to each stock for security
prices which is called Price relative, and sum of price relative is
divided by no. of securities included in computation of index and the
result is multiplied by previous index.
 This index include only prices of securities like PWI that is no. of share
(quantity) is ignored while calculating index.
 This index is denoted by EWI
 EWI is calculated by using following formula:
Sum of Price relative
EWI   Previous index
No. of stock
 Rate of return on Equally weighted index is calculated as :
EWI 1  EWI 0
Rate of Return 
EWI 0
Where,
P1 P
Price relative  or 2
P0 P1
 Stock dividend and stock split has no impact on equally weighted index.
 On the basis of above example
a) Calculate the value of equally weighted index of base
period, 1st period and 2nd period
Here, calculation of EWI
Stock P0 P1 P2 P1/P0 P2/P1
A 90 100 50 1.1111 0.5
B 100 110 110 1.1 1
C 120 115 115 0.9583 1
Total 3.1694 2.5
We know,
Sum of Price relative in period 1 3.1694
EWI 1   Previous index   100  105.65
No. of stock 3
Sum of Price relative in period 2 2.5
EWI 2   Previous index   105..65  88.041
No. of stock 3
b) Calculate the rate of return for period 1 and period 2,
We know,
EWI 1  EWI 0 105.65  100
Rate of Return for period 1    0.0565 or 5.65%
EWI 0 100
 4) Geometric Mean Index
Under this method, the product of price relatives are used for the
purpose of computation of index which is calculated as:
Geometric Mean Index (GI)  Product of price relatives  n  Previous day' s index
1

On the basis of above example

a) Calculate Geometric mean index for period 1 and 2,
We know,
GI 1  Product of price relatives in period 1 n  Previous day' s index
1

 100/90  110/100  115/120  3  100

1

 1.17124 3  100  105.41

1

GI 2  Product of price relatives in period 2 n  Previous day' s index

1

 50/90  110/110  115/115  3  105.41

1

 0.5 3  105.41  83.663

1

b) Calculate Rate of return

Do yourself
 Problem 3.5

a) i) Calculation of Value weighted Index,

We know,
Total Market Value of in 2016
VWI 1   Base period index
Total Market Value in 2007
1600 * 60000  4000 * 50000  3 *100000  40 * 50000
  100
100 * 60000  100 * 50000  10 *100000  100 * 50000
298300000
  100  1754.7059
17000000
Hence, the value weighted index for 2007 and 2016 are 100 (assumed)
and 1754.7059.
11) Calculation of Price weighted Index
We know,
Sum of all Closing prices of each securities in 2007 100  100  10  100
PWI 2007    77.5
Divisor 4
Sum of all Closing prices of each securities in 2016 1600  4000  3  40
PWI 2016    1410.75
Divisor 4

iii) Calculation of Equally Weighted index,

We know,
Sum of Price relative
EWI 2016   Previous index
No. of stock
 1600/100  4000/100  3/10  40/100 56.7
  100   100  1417.5
4 4
Hence, the Value weighted index for 2007 and 2016 are 100(assumed)
and 1754.7059, Price weighted index for 2007 and 2016 are 77.5 and
1410.75 similarly Equally weighted index are 100 and 1417.5
b) i) In case of issue of additional share, base value must be revised for
value weighted index and devisor must be revised for price weighted
index and no changes for equally weighted index.
(ii) In case of stock divided, value weighted index remain unchanged but
devisor must be revised for price weighted index and equally
weighted index may change with the change in price accordingly.
(iii) In case of stock split, value weighted index remain unchanged but
devisor must be revised for price weighted index and price should be
adjusted to compute equally weighted index.
(iv) In case of issue of cash dividend, all three indexes remain unaffected
(unchanged).
 # The Role of Stock Broker
 Stock broker act as intermediaries between buyer and seller of
securities.
 Brokerage firm are facilitating for the trading of securities by getting the
commission as charge from traders.
 Broker should have the certified license from stock exchange board or
commission.
# Types of Brokerage Firm
1) Floor Broker : The broker that take orders of buyers and sellers to
trade securities on the floor of stock exchange is called Floor
Broker.
2) Full Service Broker : The broker that not only executing the
investors transactions but also provide other services such as
insurance, tax planning, investment research service, trading tips etc is
called Full service Broker.
3) Premium Broker : Such types of brokers which are providing the
limited free research information and investment advise to investor is
known as Premium Broker.
4) Discount Broker : It is also called Online or Electronic Broker.
These broker provides services on the internet or by phone. The
service charge on this broker is minimum as compared to other types
of broker.
 # Types of Order
After an investor decides to trade the securities, a buyer or seller should
place an order with the broker. There are various types of order which
are explained as below:
1) Market Orders
 If the investor ask the broker to buy or sell the security at the best
price currently available in the market then it is known as Market
Orders.
 Order is executed immediately at current market price when order is
placed.
 No. of securities (share) fixed but price of securities is not fixed in
market order.
2) Limit Orders
 If the investors place an order to buy or sell the securities by fixing
both Price of securities and No. of share then it is called Limit
Order. Order is executed at best price.
 Limit order may be of 2 types : Limit Buy Order and Limit Sell
Order.
 Limit buy order will be executed if the price of securities goes below
the limit price. And Limit sell order will be executed if the price of
securities goes above the limit price.
3) Stop-Loss Order
 It is also called Stop Order.
 An order which is placed for buying or selling the securities when the
securities reached the specified price.
 The specified price is called Stop price.
 Stop order works in the opposite direction of limit order.
 It is also of 2 types: Stop sell order and Stop buy order.
 In long position, if price of security falls below the stop price then Stop
sell order will be executed to stop the further loss. Similarly In short
position, if price of security goes above the stop price then Stop buy
order will be executed.
4) Stop Limit Order
 Under this order, Investor set 2 prices; one is called Stop Price (Min.
price) and another is called Limit Price (Max. price)
 It is also of 2 types: Stop limit Buy order and Stop limit sell
order.
 In Stop limit buy order, limit price is always higher than Stop price and
order will be executed if securities are currently traded in between
these two prices.
 In Stop limit sell order, limit price is always less than Stop price and
order will be executed if securities are currently traded in between
these two price.
 Problem 3.12
Given,
No. of share (N) = 100shares Limit Price = Rs 380
Current selling price = Rs 410
a) Here, if the stock price drops to Rs 390 per share two month before
cancellation of order, then limit buy order will not be executed
because price of stock is above than limit price.
b) If the stock price drops to Rs 380 per share, the limit buy order will be
executed and we have to pay Rs 38,000 to buy the security.
c) If price of stock drops to Rs 385 before cancellation of order, limit buy
order will not be executed. And if current market price is Rs 475 per
share after cancellation then we would loose the opportunity to earn
Rs 475 – Rs 385 = Rs 90 per share or Rs 9000 in total because of limit
buy order placed.
Problem 3.13
If the stock price declines to Rs205, the stop loss order to sell 50
shares will be executed because market price is less than stop price of
Rs 230. In this situation we have to face a lose of Rs 265-Rs 205 = Rs
60 or Rs 3000 in total.
If we placed stop limit order to sell at Rs 230 and stock price fall to Rs
205 then the order will not be executed because market price is less
than limit price so in this situation, we would be holding 50 shares of
Rs 205 each.
 Problem 3.15
If the price of stock drops to Rs 300 after announcement of earning
report, Stop limit order to sell at Rs 400 would not be executed because
the price of stock is less than limit price.
Again, if the price of stock bounce back to Rs 420 at the end of the day,
the Stop limit order to sell at Rs 400 per share would not be executed
because the price of share is above than stop price (i.e. Rs 415 assume)
and we would be holding 500 shares of Rs 420 each.

Problem 3.16
If the price of stock falls to Rs 500, the limit buy order will be executed
and our total assets value will be Rs 150000 ( Rs 500*300shares). If the
margin requirement is 50% then she needs to maintain Rs 75000 (50%of
Rs150000) in her margin a/c. However, if she has Rs 50000 only in her
margin a/c then she needs to deposit additional Rs 25000 (i.e. Rs75000 -
Rs50000) to buy 300 share on margin.