Investment Education: Even if NEPSE increases, why does the share you buy decrease?

After seeing the news that the NEPSE index has increased, many investors expect that their portfolios should also increase. But in practice, sometimes NEPSE looks green, the trading amount in the market looks good, but the shares you bought are red. This situation is not unusual. The main reason for this is that the NEPSE index and individual company share prices are not the same thing. The NEPSE indicator shows the overall direction of the market. It presents the price movement of all listed companies as an average indicator. But the shares you buy are shares of a company. Therefore, even if the overall market is increasing, if your company's sales pressure is high, the company's news is weak, the sector's attractiveness is reduced or the investor's demand is low, that share may fall. An increase in NEPSE does not mean that all market shares have increased.

In the stock market of Nepal, various groups of companies such as banks, development banks, finance, hydropower, insurance, hotels, manufacturing, investment etc. are traded. Even looking at the daily market data, it seems that all the groups are not moving in the same direction. For example, one day a banking group may grow normally, but a hydropower, finance or hotel group may decline. Here's an easy example. Let's say that some of the big companies that played a major role in growing NEPSE have grown today. Since the market capitalization of these companies is large, their price increase can pull the NEPSE index higher. But many small or medium-sized companies may be going down on the same day. In such a situation, although NEPSE is seen to increase, the personal portfolio of many investors may decrease.

The NEPSE index is an index linked to the impact of market capitalization. That is, price changes of large companies can have a relatively greater impact on the index. So, if there is good growth in two-four big companies, the overall index may look green. But that does not mean that there is a buying pressure in all companies. This is why your small capitalization, low turnover or weak demand stocks may fall even on days when NEPSE rises. Another reason is sectoral rotation, known as “sector rotation” in market parlance. Sometimes investors focus on banking, sometimes insurance, sometimes hydropower, sometimes finance or manufacturing groups. As market money moves from one group to another, stocks in some sectors may fall even as the NEPSE index continues to rise. For example, if investors today sell hydropower and start buying banking shares, the banking group may rise, but hydropower may fall.

Company-specific news also has a big impact. If a company's profits fall, dividends are lower than expected, bad loans increase, projects are delayed, entitlements or bonuses are not met, management disputes or regulatory action are discussed, the shares of that company may fall. In such a situation, even if NEPSE grows overall, the investors of the said company may see a loss. Sometimes the stock has already gone up a lot. Investors start booking profits when a stock rises sharply in a short period of time due to market buzz, expectations or collective attraction. Even on days when NEPSE is rising when profit booking starts, that share may fall. This is considered normal market process. Price does not always move in the same direction; A correction may come after the rise.

This problem is more pronounced in stocks that are less traded. If buyers are short on a company's stock and some investors place sell orders, the price can fall quickly. In such shares, the current supply and demand situation rather than the overall direction of NEPSE determines the price. Therefore, even if NEPSE increases in a company with low liquidity, the price may remain stable or decrease. Another thing investors should understand is that the NEPSE index is like the “average temperature” of the market. Just because the body temperature is normal does not mean that there is no injury to the hand. Similarly, saying that NEPSE has increased does not prove that the company you are buying is healthy. Each company has its own financial situation, supply and demand, valuation, risk and investor confidence.

So buying shares just seeing NEPSE rise is not a safe strategy. While buying shares, one should look at the company's profitability, earnings per share, net worth, PE ratio, dividend potential, debt position, sector prospects and management credibility. Even on days when the market is green, buying a weak company at a high price can result in losses. Finally, your shares going down while NEPSE rises is not always a bad sign, but it is important to understand why. If the fundamentals of the company are good, the price is reasonable and the decline is due to temporary profit booking, then for the long-term investor that may be a normal fluctuation. But if the profit, governance or business of the company is weakening, even if NEPSE increases, the risk remains in such shares.

A rising NEPSE is an overall market signal, not a guarantee that your stock will rise. A successful investor studies not only the index, but also the company they buy, its sector, valuation and risk separately. Just because the market looks green doesn't mean all stocks are good, and just because the market looks red doesn't mean all opportunities are over.