Proposal for Thesis

1.1 General Background Proposal for Thesis

Finance companies are newly emerged institutions in Nepal. Financial sector is the dynamic part of economy and that collects unused funds and mobilizes it in needed areas that are very important for trade, industry and commerce. In Nepal, finance companies do extend intermediate credit to individual and business firm as quickly and easily as possible. They can be registered only as public limited companies as per the Finance Company Act, 1985. Finance companies are registered with the Registrar of Company, Government of Nepal and license for operation is generated by Nepal Rastra Bank.

Basically, finance companies perform a wide variety of functions depending upon the most of their specializations. They obtain most of their funds in large quantities by borrowing directly from other financial capital market. They perform to act as the main lending organization. They also provide the loan for leasing finance, housing finance and hire purchase.

During the 2040 years, there were not any financial institutions to operate the financial transaction. These financial transactions had been operating by the two commercial banks, Nepal Bank Limited and Rastriya Banijya Bank. In the following decade, finance companies were introduced to accomplish the capital market in Nepal.  Nepal Housing Development Finance Company was first finance company in Nepal, which was established on behalf of Government of Nepal.  Then after Nepal Finance and Saving Company was established on behalf of public people.  In this way, finance companies were established. 71 finance companies were listed in NEPSE till today.

Each and every managerial decision making is based on financial analysis. It covers the acquisition, utilization, control and administration of funds. Managerial finance is an exciting and dynamic area of study and its importance to the long run success of today’s business is unquestioned. Virtually, all individual and organization earns or raise money and invest money. Finance is concerned with the process of institution, market and instrument involved in the transfer of money among and between individual business organization and government. The field of finance is broad and dynamic. It directly affects the lives of every person and every organization. The finance is concerned with the conversion of capital fund to meet the financial need of business organization. Financial management leads to the decision making most skillfully. Finance has become an important branch of any economy of which share market is a leading sector. In a short period, the field of finance has developed considerably. Securities raise fund in capital market certainty help to expand the national economy (Mishra, 2002:2).

Even in least developed countries like Nepal, stock market became one of the important parts of the national economy. A security market is a place where people buy and sell financial instrument. Stock market is a financial that probably has greater glamour and is perhaps the least understood. Some observers consider it as a legalized heaven for the gambling and many investors consider stock market investing as a game in which sole purpose is picking winners.

There are different types of securities such as treasury bill, long-term government bonds, long-term corporate bond, preferred stock, common stock etc. Among these, this study concerns in common stock. So, hence first of all we have to know about the common stock and its related subject matter. Common stock holders are owner of the company. Collectively, they own the company and ultimate risk is associated with their ownership. So, the common stock is the risky security. But here the question arises that what is risk? Risk is the variability of the return. Risk can be defined as the chance that some unfavorable event will occur. It is investor wants to back higher return to invest in common stock, but their expected return may or may not be in realities. This uncertainty is the major risk for investors in stock market investment. According to J. Jordan and Donald E .Fisher, “An investment is the commitment of funds made in the expectation of some positive rate of return. If the investment is properly undertaken, the return will be commensurate with the risk the investor assumes. In simple sense, investment means sacrifice of current fund for future cash flows.” Here, future cash flows means return and future is uncertain. The return on the investment is as any change in market price of share (MPS) plus dividend and it is usually expressed in the percentage.

Generally, investors are risk averse. They always seek higher risk return for more risk as the risk premium. So, the primary problems of the investment are to identify the security which has low risk and high return. However, return cannot increase substantially; risk can be reduced by diversification of funds in different stock making a portfolio. Well diversification can eliminate the risk; which is associated with change in return in the market a whole, cannot avoid by the diversification.

1.2 Statement of the Problem

Lack of information and knowledge is a great problem faced by individual investor who are being manipulated and exploited by the financial institution and other market intermediaries to such an extent that  investing in common stock is intolerable hazardous. Investors’ attitudes and perception plays a vital role in rational decision, which is influenced by the knowledge and access to the data required for analysis.

In the beginning of the 1990 decade, profit of the finance companies was increased so that their market value per share (MPS) was also high. But at end of that decade, their profit and the MPS was decreased. Due to strict rules and regulation by Nepal Raystra bank, the scope of operation of finance companies are also limited. Hence, most of the investors realize high risk to invest in this field.

Government policy also does not create favorable and proper investment situations to encourage the investors to invest in this field. Plan and policies are not implemented for this purpose. There is no any strong commitment of the policy makers and government for increasing public investment.

Potential investors feel more risk to invest in common stock that it really has the risk. Accurate information and unbiased analysis are essential for their confidence towards the stock investment. Therefore, unavailability of a simple and clear way or techniques to analyze risk and return of individual stock and portfolio are being the major weakness of increasing stock investment and stock market as well.

The major problems of the study are:

1        How do investors get consensus about the magnitude of risk?

2        How can one make higher return through lower risk?

3        What should be the compensation for bearing risk?

4        What are the criteria that the stock they are holding will give them a favorable return?

5        How can one construct efficient portfolio?

1.3 Objective of the Study

The main objective of the study is to analyze the risk, return and other relevant variable of common stock investment of Nepalese finance companies that help in making decision about investment on securities of the companies.

The major objectives of the study are as follows:

1        To examine the risk and return on common stock of individual finance company.

2        To evaluate that the stock of selected companies are overpriced, underpriced or correctly priced.

3        To find and evaluate the optimum portfolio.

4        To provide the relevant suggestion on the basis of findings.

1.4 Significance of the Study

The main target of the study is potential investor who wants to invest in security but repeal by imagining of unreal risk. Therefore, the study is more significant for exploring and increasing of stock investment. It is not only used as partial fulfillment of TU course of Master in business studies, but it will also provide little contribution to Nepal stock market development.

1.5 Limitation of the Study

The following are the limitation of the study:

1        Data published from various sources differ from the figures published by NEPSE and respective finance companies. However, in this study annual report of relevant companies is taken in to account as the basic sources of data.

2        The study only focus on the analysis of risk and return associated with common stock investment of selected finance companies. The finding of the study in based on the performance 7 listed finance companies for the period of seven years starting from fiscal year 2003/04 to 2009/10.

3        The main objective of the study is to fulfill the partial requirement of masters in business study course TU Nepal. So, the study cannot cover all the dimension of the subject and cannot penetrate the extreme depth of it. As a research student the study will be unbiased but resource and time period is limited.

1.6 Organization of the Study

The study is divided into five chapters.

Chapter –I: Introduction

It is the introduction part of the study and includes the introduction and general backgrounds, statement of problem, objectives of the study, significance of the study, and limitation of the study.

Chapter – II: Review of Literature

The review of literature includes the review of previous research on the same field, especially from some relevant books, journals, unpublished thesis.

Chapter – III: Research Methodology

The research methodology includes the research design, data collection procedure, tools for analysis and presentation.

Chapter – IV: Data Presentation and Analysis

It is the main body of research. It includes data analysis; the risk and return of each finance companies and interpretation are also made. Industry wise comparison in terms of risk and return and portfolio of common stocks are also presented in this chapter.

Chapter – V: Summary, Conclusion and Recommendations

In this chapter, the summary, conclusion and recommendations of the study are presented

Besides these chapters, Bibliography and Appendices are presented at the end of the study.