As we follow the stock market, one of the first things that we notice is the NEPSE index. But what is an index? Indices (plural of index) are tools that provide insights into the performance and trends of the stock market. In the context of Nepal with its growing capital market, these indices offer you a snapshot of how different sectors and the overall market are performing. Now, there are many forms or types of indices in Nepal. It can range from a widely recognized NEPSE index, which tracks the performance of all listed companies, to sector-specific indices that highlight trends in industries. That said, these sector-specific indices are known as sub-indices. The question here is -what are these types of indices in Nepal? In this article, we discuss these various types of indices in Nepal. In addition, we also take a brief look into the various types of sub-indices as well.
Types of Indices in Nepal
NEPSE is undoubtedly one of the most familiar indices for us. However, besides NEPSE, there are a few other types of indices in Nepal that provide valuable insights for investors. The various types of indices along with NEPSE are:
● NEPSE Index
● Sensitive Index
● Float Index
● Sensitive Float Index
● Sub-Indices
Following are the details regarding the indices that we mentioned here.
1. NEPSE Index
NEPSE index is the primary and the most widely recognized and one of the oldest indexes in Nepal’s stock market. It represents the overall performance of the Nepal Stock Exchange by tracking the price movement of all the companies listed on the exchange. NEPSE Index is a market capitalization-weighted index. What this means is that on this index, companies with larger market capitalizations have a greater impact on the movement. NEPSE index serves as a broad indicator of market sentiment and is sometimes used as a benchmark for measuring the performance of individual portfolios or mutual funds in Nepal.
The formula for calculating the NEPSE index is:
NEPSE Index= (Total market capitalizations/base market capitalization) x 100
When calculating total market capitalization, the total number of listed shares is multiplied by the current market price. However, this can give an inaccurate result because it includes promoter shares, which aren’t usually traded. The price used for the calculation is based on ordinary shares, not considering that promoter shares have different trading dynamics. Therefore, it may not portray the correct market behaviour in some cases.
2. Sensitive Index
Unlike NEPSE, which focuses on the overall performance of the stock exchange, this index focuses on the performance of blue-chip companies listed on the NEPSE. For those wondering what a “blue-chip company” is, they are well-established, financially strong, and reputable companies with a long history of stable performance and reliable returns. Therefore, the sensitive index only includes the “A” class companies based on specific criteria set by NEPSE. The specific criteria required to become “A” class companies to be considered for the sensitive index in Nepal include:
- Paid-up capital of NPR 1 billion (1 Arba).
- Securities must have been listed for at least three years.
- Must have been profitable and distributed dividends in the last three consecutive years.
- Rated as average or above average by a Credit rating agency.
- Have financial statements that comply with the formats/standards specified by regulators.
- Annual General Meeting (AGM) must have been conducted within six months of the fiscal year-end.
Because of these reasons, a sensitive index provides a narrower view of the market by highlighting the performance of these top-tier companies. You can use this index to test the health of the most significant and financially strong companies in Nepal.
3. Float Index
In the share market, “float” refers to the number of shares available for trading or the number of shares that are free to trade without any restriction. Knowing the float status helps you understand the actual number of shares available in the market.
In Nepal, the float index is a specific type of index that reflects NEPSE’s performance by considering only the shares that are freely tradable. Unlike the NEPSE index which includes all listed shares, the float index excludes shares that aren’t publicly traded, such as those held by promoters, the government, or board members. This index is useful for understanding market liquidity and the shares that are readily available for buying and selling.
In Nepal, companies have both promoter and public shares listed on NEPSE. Promoter shares are rarely traded, and many investors hold onto their public shares for a long time, which reduces the number of shares actively traded. Since NEPSE doesn’t yet have a method to measure the float of public shares, the float index uses the total number of ordinary shares of all listed companies to calculate its value.
4. Sensitive Float Index
Now that you know what both float and sensitive index are, the combination of these two should be rather easy to guess. The sensitive float index tracks the performance of “A” class companies like a sensitive index. However, it is only their freely tradeable shares. This index combines the principles of both the sensitive and float indexes. It provides a view of how the most influential and financially strong companies are performing while considering only the shares that are available for public trading.
Many large companies on the Sensitive Index have a high ratio of promoter shares compared to public shares. Since promoter shares are rarely traded, this can make the index seem more stable than it is based on ordinary shares’ prices.
5. Sub-Indices
As you may guess, the sub-indices are a type of indices in Nepal that are sector-specific. These indices track the performance of companies within specific industries. It allows investors to monitor and compare the performance of different sectors, such as banking, insurance, and trading. Each of these sub-indices is calculated based on the market capitalization of the companies within that specific sector. Sub-indices are valuable tools if you are interested in sector-specific investments or want to diversify your portfolios across different sectors. Like the NEPSE index, all sub-indices are all shares index. This means the total listed shares of a given sector are used for calculating the sub-index of that sector. Also, all sub-indices are market capitalization weighted.
Sub-indices calculated currently are:
- Banking Index
- Development Bank Index
- Finance Index
- Hotels And Tourism Index
- Hydropower Index
- Life Insurance Index
- Manufacturing And Processing Index
- Microfinance Index
- Mutual Fund Index
- Non-Life Insurance Index
- Trading Index
- Investment Index
- Others Index
Conclusion
The Nepali stock market uses a variety of indices to provide investors with comprehensive insights into market performance. The NEPSE Index serves as the primary benchmark, offering a broad view of the entire market. The Sensitive Index focuses on blue-chip companies, while the Float Index considers only freely tradable shares. The Sensitive Float Index combines these concepts, tracking top-tier companies’ freely tradable shares. Additionally, sector-specific sub-indices allow for detailed analysis of individual industries.
In this blog, we discussed the various types of indices in Nepal and went into brief regarding the sub-indices. We hope you found this helpful. If you seek further insights regarding various aspects of the stock market, do check out some of our other content related to the stock market.
Moreover, if you want the best services regarding the share market and other securities, look no further than Secured Securities Ltd, one of the best stock brokers in Nepal (Broker Number 36). Thank you for reading till the end.
FAQs on Types of Indices in Nepal
What are the types of indices in Nepal?
Along with NEPSE, there are five types of indices. These indices are:
● NEPSE Index
● Sensitive Index
● Float Index
● Sensitive Float Index
● Sub-Indices.
What is an index in the context of the stock market?
An index is a tool that provides insights into the performance and trends of the stock market. It offers a snapshot of how different sectors and the overall market are performing, helping investors gauge market sentiment and make informed decisions.
What is the NEPSE Index?
The NEPSE Index is the primary and most widely recognized index in Nepal’s stock market. It represents the overall performance of the Nepal Stock Exchange by tracking the price movement of all listed companies, serving as a broad indicator of market sentiment.
What is the Sensitive Index?
The Sensitive Index focuses on the performance of blue-chip companies listed on the NEPSE. It includes only “A” class companies that meet specific criteria set by NEPSE, providing a narrower view of the market by highlighting the performance of top-tier companies.
What criteria must companies meet to be included in the Sensitive Index?
The key criteria in Nepal that companies must meet to be included in the sensitive index include the following:
● Minimum paid-up capital of Npr 2 Crore
● More than 1000 ordinary shareholders
● Minimum of three consecutive years of profitability
● Book value of share that is higher than its par values
● Publication of annual report within 6 months of completion of the fiscal year
What is the Float Index?
The Float Index is a type of index that reflects NEPSE’s performance by considering only the shares that are freely tradable. It excludes shares that aren’t publicly traded, such as those held by promoters, the government, or board members.
What is the Sensitive Float Index?
The Float Sensitive Index combines the principles of both the Sensitive Index and the Float Index. It tracks the performance of “A” class companies like the Sensitive Index but only considers their freely tradable shares.
What are the sub-indices in Nepal?
The various sub-indices in Nepal are as follows:
● Banking Index
● Development Bank Index
● Finance Index
● Hotels And Tourism Index
● Hydropower Index
● Investment Index
● Life Insurance index
● Manufacturing And Processing Index
● Microfinance Index
● Mutual Fund Index
● Non-Life Insurance index
● Trading Index
● Others Index
