Financial Literacy and Capital Market in Nepal

 

Financial literacy and Capital market

Financial literacy is one of the most talked about terminology in finance lately. For a business student, everywhere we land in, we are about to heard this word. So, what does financial literacy actually means? Various experts have given myriad of answers over the years. In simple terms, it can be defined as the ability to understand and apply good financial management skill. One can be put into the bracket of financially literate, when she/he understand basic personal finance principles and terms and are able to do day to day finances successfully. This includes things like being able to make a budget (not the one the government makes) track expenditure pattern, calculate interest on savings and loans, mange credit cards etc. In simpler terms, it is about knowing how to generate, spend, invest and save money.

The distant goal of financial literacy is financial stability and financial freedom. Once we are financially literate, we can differentiate assets from liability, income from wealth etc. From our childhood, every one of us have a habit of saving in the form of piggy banks. We always do have a habit of saving. What we lack is spending those savings wisely. We always try to learn from our parents, relatives and neighbors without giving a thought that economy has changed in past 20 years. What has worked for our parents may not work for us in today’s scenario. We spend money on karate class, dance class, gym etc. but never on any financial class because we tend to think it is a waste of money. Our education system is also at fault for this illiteracy. School teaches us moral science, social science, civic sense, first aid but never teach us financial literacy.

Financial literacy is the foundation of all household economic improvement. Financial skills are of paramount importance yet, many individuals lack this basic knowledge and are unable to meet their daily expenses. It helps in making appropriate financial decisions about investing, savings, insurance, managing debts, buying a house, child education, retirement planning etc.

In this fast-pace 21^st century, for a country to gain upper hand in economy, financial revolution is a must. People are talking about agriculture revolution, industrial etc. To some extent, these sorts of revolution are good for the economy in a darker note. These revolutions are political agendas or slogans, whatever you may say of various political parties. If we have money and we don’t know to use it properly, then what’s good in having money? Therefore, before agriculture revolution and industrial revolution financial revolution should be started.

Financial education should be made compulsory in schools. Finance is broader concept but we can at least include some basics in curriculum. Schools try to shy away from this saying not enough teachers have the expertise to teach finance. This is ridiculous because finance is just math. It is about exponents. Geometry is probably more complicated and so is trigonometry. Still, they are teaching these subjects. So why not finance? Coming from a finance background, I can assure that teaching basic financial literacy is not complicated. What is worse is not only it is not taught, it isn’t really even contested anywhere in the country that I am aware of. Of course Employees Union of Securities Board of Nepal is an exception. I won’t have the privilege of sharing my financial knowledge, if not for Employees Union of Securities Board of Nepal. What you have done is exemplary and first of its kind.

Coronavirus taught us financial literacy and made us rethink our living in a moment lifestyle. There are very few people who take financial planning seriously. This pandemic hits those hard who focuses on living in the moment without having any saving account. Being prepared doesn’t mean waiting for something bad to happen. It is a rational way to secure our future in case of an unexpected crisis. Since, financial education is still lacking in the school level curriculum, we will have to self-educate. Fortunately, there are so many blogs, websites, podcasts and even become familiar with some basic financial literacy, we will slowly improve our daily financial decisions.

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, debentures etc. Generally, this market trades mostly in long-term securities. In other words, capital market can be defined as markets in which money is generally provided for periods longer than a year. Capital market are composed of primary and secondary markets. The most common capital market is stock market.

The primary market deals with the issuance of new securities and then sold to investor directly by the issuer. In this market, investors buy securities that were never traded before. This is done mostly through initial public offering but it is also done through private placement. In primary market, the trading is directly between investors and company. Investor can only buy shares, they cannot sell them. The price of share is decided by company and is fixed. Shares purchased in the primary market are sold in secondary market.

Secondary market is the place where most of the trading takes place. It is also called after market. The trading of shares in secondary market takes place between the buyer and the seller, company is not involved in transactions. The price of shares is decided by demand and supply of the shares and price keeps on fluctuating. In secondary market, no new stocks are issued, only trading of stocks is there. Anyone can purchase securities in the secondary market.

Capital market plays a pivotal role in the growth of an economy. It provides an effective source of investment in the economy. It enables the country to achieve economic growth as capital formation is promoted through the capital market. Companies can opt for diversification of business due to the capital market. It can be said that capital market is the barometer of the economy by which we can study the economic conditions of the country. It provides opportunity for general public to invest their savings in attractive securities which provide a higher return.

Capital is one of the vital resource in any economy which has unlimited need but limited supply. It is scattered among general public. Capital market is the medium by which scattered capital can be collected in the form of shares, bond and debenture and invest or various production, industries, infrastructures etc. It facilitates the movement of money. The main objective capital market is to create a market to assist companies in financial activities by raising capital needed for the investment. It enhances production and productivity in the national economy. It mobilizes funds from people for further investment which boosts up the economy ultimately. It provides interest rate return also to investors. Nowadays, banks and financial institutions made easier for investors to invest in the securities they are willing for.

Financial literacy and capital market are related to each other. Those who have low financial literacy are skeptical about capital market and less likely to invest. For the capital market to flourish, financial literacy is a must. One is highly likely to lose hard earned money in capital market if she/he possess only little financial knowledge. Financially illiterate people have a pessimistic view regarding capital market. They tend to shy away without giving a thought in what capital market might have in store for them.

Financial literacy is a journey. Capital market is a destination. Without doing the basic right, one is not expected to get desired results. Having a lot of money does not mean that everything is sorted out. Having knowledge in hoe much to spend and where to spend is what requires. For instance, one of the prominent component of Nepalese economy is remittance. Many Nepalese risk their lives in foreign countries so that their families in Nepal can afford a better life. They remit hand-earned money to their families. Predominantly, most of the familiar spend that money lavishly. They rarely think of investing or adding asset with that money. They only want to make their lifestyle better, not life. That’s where we Nepalese are missing the plot. The simple solution to this burning issue is financial literacy.

Financial literacy aids in our pursuit of investment in the capital market. Once someone has become financially literate, he/she can drive into capital market. Financially literate person can understand the basics of capital market. For a layman, it is very difficult. Financial literacy enables us to take financial decisions on our own.

Financial revolution is the way to go for the nation to bring social and economic reforms. A prosperous nation cannot be imagined if we don’t have the foundations of financial education. Financial literacy is the medium through which every individual can become economically independent. A nation’s economy is measured on the basis of how improved and sovereign the capital market of that nation is.

In a nutshell, financial literacy and capital market go hand-in-hand. Financial literacy ensures awareness about various aspects of finance. Consequently, capital market can grow by leaps and bounds in nation.

 

Name: Rajendra Bhandari

E-mail: rajendrabhandari1717@gmail.com