In the previous article, we have covered the NEPSE Index and its families. Now, in this article, we are going to cover the NEPSE 30 index, its calculation method, how stocks are included in NEPSE 30 index, and many more.
What is NEPSE 30 Index?
At present, there are 13 sub-indices in NEPSE along with the sensitive index, float index, and sensitive float index. Companies from six sectors including banks and financial institutions, microfinance, insurance, hydropower, manufacturing, and trade & services have been included in the Nepse 30 index. Each sectors will have a minimum of one company to a maximum of eight companies in the NEPSE 30 index.
NEPSE 30 index is a value-weighted index based on market capitalization, that includes free-float shares in the market. The main purpose of NEPSE 30 index is to facilitate the development, operation, and management of indices to strengthen the secondary market transactions. NEPSE 30 index will accurately reflect market transactions, index fluctuations, and assist in the operation of derivative trading instruments, portfolio management, exchange-traded fund operations, and more.
NEPSE started the testing of NEPSE 30 index from 28th July 2023 after the long preparation.
Sectorial Representation of NEPSE 30 Index: NEPSE selected the following 30 companies from different sectors in include in the NEPSE 30 Index in the preliminary phase.
- Banking – 8 Companies
- Hydropower – 5 Companies
- Insurance (Life, Non Life, Re-insurance) – 5 Companies
- Manufacturing – 2 Companies
- Microfinance – 7 Companies
- Other – 3 Companies
These companies are selected as per the criteria set by the NEPSE earlier.
How to Select Company to be in NEPSE 30 Index?
NEPSE introduced the following 6 criteria to select the NEPSE 30 Index.
- Book price per share – should be higher than the paid price per share, and the company must have gained in net profit in at least three out of the last five financial years, including the most recent one.
- Earnings Per Share (EPS) – should be 10 times of paid prince in previous financial year and must exceed the annual inflation rate of the same year.
- Free float share – The company has issued at least 25 percent of its shares to the general public, or its free-float market capitalization represents more than one percent of the total free-float market capitalization.
- Shareholders – must have minimum of 20,000 shareholders.
- Traded quantity – The average daily traded value is at least NPR 25 lakhs over the past six months, with an average of 5,000 shares traded daily and at least 40 trades conducted daily.
- Trading days – Trading has occurred on at least 75 percent of the available trading days during the last six months.
How to Calculate NEPSE 30 Index?
NEPSE has clearly mentioned the calculation method of the NEPSE 30 index.
- First, list out the companies selected based on the above criteria.
- Assign weights to each listed companies based on free-float market capitalization, last year’s EPS, transaction amount, transaction number, and transaction share, as shown in the example below.
- Classify the listed companies into six sectoral groups as banks and financial institutions, microfinance, insurance (life, non life, reinsurance), hydropower, manufacturing, and trade and services. Within each group, calculate the total weight (Sectoral Composite Weight) of the individual companies according to the method described in point 2. Select eight companies with the highest weight from each group. If there are fewer than eight organizations in a group, select all available organizations.
- If the number of companies selected according to point 3 exceeds 30, remove 30 companies based on their total weighted scores using the method from point 2. Ensure that at least one company from each group remains after the removal.
- If the number of companies selected according to point 3 is fewer than 30, select no more than eight companies from each group. Calculate the total weight of all listed companies using the method from point 2 and add the company with the highest weight to reach a total of 30 companies.
To calculate NEPSE 30 index, NEPSE will take the base market capitalization date as Poush 30th, 2079. NEPSE plans to rebalance this index annually on the last Friday of Bhadra and the last Friday of Falgun.
Check the following examples to know how NEPSE 30 index is calculated.
Why NEPSE 30 Index is so Needed in Nepal?
NEPSE 30 index is developed with the objective of tool to reflect the market transactions and fluctuations so as to help in the operation of fixed-term trading instruments of derivative nature, portfolio management, Exchange Traded Fund (ETF) operations, etc.
This Index expected to add dimension to the secondary market transactions, and investors will get more tradable tools in the future. According to the NEPSE, the calculation method of this index, which has long-term importance, and the method of selecting the listed organizations to be included in it, need to be made transparent and reliable.
Investors expect a certain percentage of profit (dividend) while investing in NEPSE, but investors who invest in the NEPSE-30 Index do not expect profit. Its profit and loss are determined based on the transaction itself.
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