In recent days, the Nepali stock market has been viewed as a platform for trading and profit-making rather than a long-term investment. This trend is supported by data from CDS and Clearing Limited, which shows that investors are more focused on short-term trading. However, investing in low-cap (Low Capitalization) companies has become a risky choice for long-term investors. These companies are often subject to “pumping and dumping,” leading to potential investor losses.
The financial condition of most low cap companies is poor, making them suitable only for trading rather than long-term investment.
According to investor Subash Chandra Dhungana, “Low cap companies rise sharply and fall at the same rate. While they may be good for trading, they are unsuitable for investment.“ He stresses the importance of understanding one’s purpose before entering the market—whether for trading or investing—and choosing financially strong companies for long-term investment.
Most low cap companies listed in the market have not given significant dividends to their investors and show no signs of doing so in the future. However, these companies are highly active in terms of price volatility, making them attractive for traders seeking short-term profits. Sectors such as finance, some development banks, hydropower, and microfinance show high price fluctuations. Yet, examples abound of investors incurring substantial losses after holding such stocks for the long term or entering the market without adequate trading knowledge.
Despite their weak financial performance, low cap companies experience significant price increases during market rallies. On the other hand, high-cap companies with strong financial standings exhibit comparatively lower price growth.
Comparing High-Cap and Low cap Companies
High-cap (high capitalization) companies, despite their strong financials, exhibit lower price volatility and slower growth in stock prices. For example, Manjushree Finance, a high-cap company in the same sector, has a stable net worth per share of NPR 174 and a positive EPS of NPR 27.89. Its stock price ranges from NPR 480 to NPR 917, with current prices around NPR 635. While Manjushree is ideal for long-term investment due to its dividend-paying capability, it is less appealing to traders due to its limited price movement.
Similar trends are evident in other sectors. In the development bank sector, the high-cap Muktinath Bikas Bank has a strong financial position, with a net worth per share of NPR 154.10 and an annual EPS of NPR 16. Its 52-week price range is NPR 332.40 to NPR 482, and it currently trades around NPR 370. In contrast, the low cap Narayani Development Bank, with a negative EPS of NPR 1.85 and a net worth per share of NPR 23.88, trades much higher, with a 52-week high of NPR 1,433 and a current price of NPR 950.
In the hydropower sector, the situation is equally extreme. Locap companies like Kutheli Bukhari Small Hydropower have reached prices of around NPR 2,500 per share, while financially sound high-cap companies like Mountain Energy, Chilime, and Sahas Urja trade between NPR 450 and NPR 600. These high-cap companies have the capacity to provide regular dividends, but in terms of price growth, they lag behind low cap companies that offer no such guarantees.
Investors are advised to exit low cap stocks once a certain profit is realized or to implement stop-loss measures during a price decline. Holding onto such stocks during downturns can lead to significant losses. This pattern is not limited to finance but extends to hydropower, development banks, microfinance, and other sectors, where financially weak low cap companies outperform high-cap companies in terms of price volatility.
The stock market has evolved into a platform more suited for trading than investing. This shift is evident from recent trends where investors prioritize short-term trading over long-term value creation. While trading offers quick gains for some, investing in low-cap (low cap) companies often prove to be a risky gamble.
The Illusion of Growth
In sectors like hydropower, low cap companies like Kutheli Bukhari Small Hydropower have reached prices as high as NPR 2,500 per share, outperforming financially robust high-cap companies such as Mountain Energy and Chilime, which trade between NPR 450 and NPR 600. These high-cap companies are capable of paying regular dividends but lag behind low cap companies in terms of price growth.
Key Takeaways
For long-term investors, low cap stocks can be a trap. Their poor financial performance and lack of dividend capacity make them unreliable. On the other hand, for experienced traders who know when to enter and exit, low cap stocks offer significant opportunities for profit due to their price volatility.
Investors are advised to:
- Avoid low cap stocks for long-term investment.
- Exit low cap stocks after achieving a certain profit or use stop-loss strategies during price declines.
- Focus on high-cap companies with strong financials for stable returns.
While low cap stocks are a boon for traders, they are often a financial trap for investors. A clear understanding of market objectives and the ability to analyze financial reports can help mitigate risks and maximize returns.