The Liquidity Problem — NEPSE’s Most Critical Structural Characteristic

First published 21 Aug 2026 · Last verified 29 Aug 2026

A market is only as useful as its ability to let you exit. Without liquidity, a price is merely an opinion.

Of all the structural realities that an investor in the Nepal Stock Exchange must internalize, none is more fundamental, more consequential, or more systematically underappreciated than the problem of liquidity. Newcomers to NEPSE often approach the market through the lens of valuation — searching for underpriced shares, comparing price-to-earnings ratios, studying dividend histories. This instinct is not wrong, but it is incomplete. In a market where liquidity is deep and reliable, valuation dominates the conversation. In a market like NEPSE, where liquidity is thin, unpredictable, and structurally constrained, liquidity itself becomes the primary variable that determines whether your investment thesis can ever be executed in practice.

This chapter is devoted entirely to understanding that problem. We will examine what liquidity means in the context of NEPSE, how thin it actually is when you look at the data, why it is structurally thin and likely to remain so, and what practical consequences follow for every investor who participates in this market. The lessons here are not peripheral concerns to be noted in passing — they are foundational principles that should inform the architecture of every portfolio, the sizing of every position, and the construction of every exit plan.

Lesson 11.1 — Why Liquidity Risk Is the Foundation of All NEPSE Investment Decisions

Defining Liquidity in the Context of an Emerging Frontier Market

Liquidity, at its most essential, refers to the ability to convert an asset into cash quickly, at a price close to its last quoted price, and in a quantity that meets your needs. This definition contains three distinct dimensions that are often conflated: speed, price impact, and depth. A liquid market offers all three simultaneously — you can sell large quantities quickly without meaningfully moving the price. An illiquid market fails on one or more of these dimensions, and the consequences of that failure can range from inconvenient to catastrophic depending on the investor's circumstances.

In the world of developed equity markets — the NYSE, the London Stock Exchange, the Tokyo Stock Exchange — liquidity is so abundant that most retail investors never encounter its limits. The market for Apple shares, for instance, turns over billions of dollars in a single trading session. An investor holding a few thousand dollars' worth of Apple can exit within seconds at a price within a fraction of a percent of the midpoint. Liquidity is essentially free and ubiquitous. The same investor, trained in this environment and then deploying capital in NEPSE, carries assumptions that are not just imprecise in the Nepali context — they are dangerously wrong.

NEPSE is classified as a frontier market, a category that sits below emerging markets in the international classification hierarchy. Frontier markets are characterised by limited market infrastructure, nascent regulatory frameworks, restricted foreign participation, and crucially, thin trading volumes. Among these characteristics, thin volume is not merely a symptom but a cause — it creates a self-reinforcing dynamic in which low liquidity discourages institutional participation, the absence of institutions keeps volume low, and low volume perpetuates illiquidity. Breaking this cycle requires deliberate policy intervention and structural reform, neither of which has occurred at sufficient scale in Nepal to date.

Three Forms of Liquidity Risk Unique to NEPSE

Investors in NEPSE face three distinct forms of liquidity risk, each operating through a different mechanism but each ultimately capable of the same result: the inability to execute a desired transaction at a reasonable price or within a reasonable time frame.

The first is what we might call market-wide liquidity risk — the risk that the entire market enters a period of dramatically reduced trading volume, making it difficult or impossible to exit any position regardless of which stock you hold. This occurs in NEPSE with a regularity that would be alarming by the standards of developed markets. Fiscal year transitions, periods of political uncertainty, post-bonus season lulls, and sentiment-driven panics have all produced extended periods in which daily market turnover drops to levels where even modest-sized positions cannot be liquidated without severely impacting price. During the bear market of 2021 to 2022, for instance, trading volume on many sessions fell to levels where the entire market was turning over less than NPR 500 million per day — a figure so low that even mid-sized retail investors holding positions worth NPR 5 to 10 million would need to accept substantial price concessions to exit.

The second form is stock-specific liquidity risk — the risk that the particular shares you hold happen to be among the least actively traded in an already thin market. NEPSE lists hundreds of companies across multiple sectors, and their trading activity is not evenly distributed. The top ten most actively traded stocks often account for fifty percent or more of daily market turnover. At the other extreme are dozens of companies that may trade on fewer than half the available trading sessions in a month, and when they do trade, the volume is measured in hundreds or even tens of shares. An investor who buys into one of these illiquid counters, attracted perhaps by a compelling valuation or a generous dividend, may find that the entry was easy to execute but the exit is functionally impossible at any rational price.

The third form is position-size liquidity risk — the risk that the size of your position, relative to the typical daily trading volume of that stock, is so large that selling it will require either accepting significant price concessions or spreading the exit over an extended period during which market conditions may deteriorate further. This form of liquidity risk is subtle and often ignored by investors who focus only on whether a stock trades at all, rather than on whether it trades in volumes sufficient to absorb their position. A stock that turns over NPR 2 million per day may appear perfectly liquid to an investor holding NPR 200,000 worth of shares, but becomes deeply illiquid to an investor holding NPR 10 million. The same stock, the same market — two entirely different liquidity experiences.

Why Liquidity Must Come Before Valuation

There is a logical priority to the questions a NEPSE investor must ask before committing capital. Valuation analysis — the estimation of a company's intrinsic worth relative to its market price — is a necessary component of investment decision-making, but it is not the first question. The first question is whether the position can be practically managed, which is fundamentally a question of liquidity.

Consider the following scenario: an investor conducts thorough analysis of a hydropower company listed on NEPSE and concludes that its shares, currently trading at NPR 280, have an intrinsic value of NPR 420. This is a compelling discount of thirty-three percent. The investor purchases shares worth NPR 5 million. Two years later, events develop as anticipated — the company completes its construction phase, begins power generation, and reports strong earnings. But the market, for reasons that have nothing to do with the company's fundamentals, is in a prolonged bear phase driven by macroeconomic concerns. Daily volume across the entire NEPSE has collapsed. The hydropower sector, structurally among the least liquid in the market, is barely trading. The investor's shares may indeed be worth NPR 420 by any reasonable measure, but they cannot be sold at that price — or any price close to it — because there are simply no buyers willing to purchase at that level in any meaningful volume. The valuation was correct. The investment thesis was correct. And yet the investment, from a practical standpoint, is temporarily or even permanently impaired.

This scenario is not hypothetical. It describes the experience of a significant portion of NEPSE's retail investor base during every cyclical downturn the market has experienced. The lesson is not that valuation is irrelevant — it is that valuation analysis conducted without a parallel and rigorous assessment of liquidity is necessarily incomplete. In NEPSE, a position that cannot be exited is not an investment. It is a forced holding, and the returns it ultimately delivers will be determined as much by the timing of market liquidity recovery as by any fundamental characteristic of the underlying company.

Lesson 11.2 — Average Daily Turnover on NEPSE: Data, Context, and Structural Reasons

The Raw Numbers

To understand NEPSE's liquidity problem concretely, we must begin with the data. The Nepal Stock Exchange's daily trading turnover — the total value of shares bought and sold on a given session — is the most direct measure of market-wide liquidity available. What the historical data reveals is sobering.

During the bull market peak of fiscal year 2020/21, NEPSE recorded its highest-ever trading activity, with average daily turnover approaching NPR 15 to 20 billion on peak days. This was an aberration produced by a unique combination of circumstances: post-pandemic monetary stimulus driving excess liquidity into equities, a surge of first-time retail investors opening demat accounts, and widespread social media-driven speculation particularly in hydropower and development bank sectors. These conditions were exceptional and temporary.

In more typical market environments, average daily turnover on NEPSE runs in the range of NPR 2 billion to NPR 6 billion, with significant variation across the trading year. During bear phases and periods of low sentiment, daily turnover frequently falls below NPR 1 billion. To put this in international context: the daily turnover of the Colombo Stock Exchange in Sri Lanka — a market of comparable size in terms of number of listed companies — typically ranges from USD 5 to 15 million, roughly NPR 660 million to NPR 2 billion, suggesting that NEPSE's liquidity, while thin by any international standard, is not extraordinarily outlying among South Asian frontier peers. What matters for NEPSE investors, however, is not the international comparison but the absolute figure, because it is the absolute figure that determines whether any given position can be practically managed.

NPR 3 billion in daily turnover sounds like a large number until you distribute it across all the listed securities, weight it by sector, and think carefully about what it means for any investor trying to build or exit a meaningful position. Spread across 200-plus listed companies, the average company sees turnover of perhaps NPR 15 million per day — and that average is heavily skewed by a handful of large, highly liquid companies. The median company sees far less. Removing the top twenty most liquid stocks from the calculation, the average daily turnover for the remaining listed companies falls to levels that make serious position-building difficult and orderly liquidation nearly impossible.

Structural Reasons for Thin Turnover

The thinness of NEPSE's daily turnover is not an accident or a temporary condition awaiting resolution. It reflects structural characteristics of the Nepali economy, financial system, and regulatory environment that are deeply rooted and slow to change.

Nepal's economy remains heavily dependent on remittances and agriculture, with a relatively small formal corporate sector. The companies listed on NEPSE are not, in the main, the commanding heights of a diversified industrial economy — they are primarily banks, finance companies, insurance companies, and hydropower developers. This sectoral concentration means that the range of businesses available to equity investors is narrow, limiting the natural investor base to those with views on the financial sector and, to a lesser extent, on power generation. The absence of listed manufacturing companies, consumer goods companies, technology companies, and service sector companies limits the appeal of NEPSE equity to certain categories of domestic and foreign investors.

Foreign investment in NEPSE shares remains subject to restrictions that have historically kept foreign portfolio investors from participating meaningfully in the market. Until relatively recently, foreign investors had no straightforward mechanism to invest in NEPSE-listed securities, and even after regulatory reforms opened limited pathways for foreign investment, the practical barriers — currency controls, custodial arrangements, repatriation provisions — kept international portfolio flows minimal. The absence of foreign institutional capital means the market lacks a category of participant that, in most emerging and frontier markets, provides both depth and discipline: foreign funds tend to be more analytically rigorous, more willing to hold through volatility, and more capable of providing the buy-side depth needed to support orderly price discovery.

Domestic institutional participation is also structurally limited. Nepal's mutual fund industry, while growing, remains small in aggregate asset terms relative to the size of the listed equity universe. Pension funds, which represent the single largest pool of long-term institutional capital in most developed markets, operate under a regulatory framework in Nepal that has historically directed their investments heavily toward government securities and fixed deposits rather than equities. Insurance companies face similar regulatory constraints. The result is that institutional demand for equities, which in more developed markets serves as a stabilising force that absorbs retail selling during downturns and provides consistent buying pressure during periods of dislocation, is largely absent from NEPSE in any scale sufficient to affect market dynamics.

What remains, after removing foreign institutions and domestic institutions, is a market that is overwhelmingly dominated by retail investors — individual Nepali citizens saving and speculating with personal capital. Retail-dominated markets are inherently more volatile and less liquid than institutionally driven markets, for reasons that are well understood in market microstructure theory. Retail investors tend to trade in smaller size, hold shorter time horizons, respond more dramatically to sentiment and news flow, and cluster their activity in well-known, widely discussed names rather than distributing capital across the market. They also tend to exit simultaneously during downturns — a behaviour pattern that converts ordinary market corrections into liquidity crises as everyone attempts to sell to a market with no institutional buyers to absorb the flow.

Lesson 11.3 — Floating Stock and Lock-In: Why Most NEPSE Shares Cannot Actually Be Traded

The Deceptive Arithmetic of Market Capitalisation

One of the most commonly misunderstood aspects of NEPSE's liquidity problem concerns the relationship between a company's total shares outstanding and the shares that are actually available for trading at any given time. These two figures can be radically different, and the gap between them goes a long way toward explaining why daily trading volumes are so much thinner than a naive reading of market capitalisation figures would suggest.

When you look at NEPSE's total market capitalisation — the aggregate value of all listed companies' shares at their current market prices — you encounter a figure in the trillions of Nepali rupees. This number, often cited in financial news coverage of the exchange, creates an impression of a substantial and liquid market. It is a misleading impression. Market capitalisation measures the theoretical value of all shares as if they could all be simultaneously bought or sold at today's price, but it reveals nothing about what fraction of those shares are actually available for trading. That fraction — the free float — is the number that matters for liquidity analysis, and in the context of NEPSE it is dramatically smaller than total shares outstanding.

Promoter Lock-In and Its Scale

The single largest structural constraint on NEPSE's tradeable share supply is the promoter share lock-in system. When a company conducts an initial public offering in Nepal, its promoter shareholders — the founders, original investors, and often the government in the case of state-owned enterprises — are required to hold their shares for a defined lock-in period, during which those shares cannot be sold on the open market. The duration and conditions of these lock-in periods have varied over time as the Securities Board of Nepal has adjusted its regulations, but the fundamental effect is consistent: a significant portion of every company's total shares is simply unavailable for trading, often for years after listing.

The scale of this effect varies by company and sector, but it is not unusual for promoter shares to represent fifty to sixty percent of total shares outstanding in companies that have recently completed their IPO process. In some cases, particularly in hydropower companies and infrastructure developers that list after years of private construction-phase financing, promoter holdings can exceed seventy percent of total shares. This means that the publicly tradeable float — the shares available for ordinary investors to buy and sell — may represent only twenty to forty percent of a company's capitalisation. Applied to a market already thin by international standards, this structural reduction in tradeable supply compounds the liquidity problem substantially.

The promoter lock-in system was designed with sound intentions: to prevent founders and original investors from immediately dumping their holdings after an IPO at prices inflated by retail investor enthusiasm, thereby protecting the interest of public shareholders who buy at listing. As a governance measure, it is defensible. As a liquidity constraint, its effects are significant and unavoidable. The investor who does not account for the float reduction when assessing a company's liquidity is working with incomplete information.

Bonus Share Accumulation and the Retail Holding Mentality

Beyond promoter lock-in, NEPSE liquidity is further constrained by a behavioural pattern among retail investors that compounds the structural float problem: the tendency to hold shares indefinitely rather than actively trading them. This tendency is particularly pronounced in Nepal's investment culture, where equities are often purchased as long-term savings vehicles, with shares held through multiple business cycles and across family generations. This is not inherently irrational — patient capital that participates in long-term compounding is a sound strategy — but its aggregate effect on market liquidity is to further reduce the effective supply of shares available for active trading.

Nepal's stock market has a long tradition of rewarding shareholders through bonus shares — the distribution of additional shares in lieu of or in addition to cash dividends. While bonus shares do not represent genuine economic value creation (they dilute per-share earnings while increasing total shares outstanding), they have a powerful psychological appeal to retail investors who equate receiving more shares with tangible wealth accumulation. The result is a dynamic in which investors who might otherwise sell their holdings at attractive prices are instead motivated to hold them in anticipation of the next bonus announcement. This voluntary illiquidity — rational at the individual level, problematic at the market level — further compresses the effective float.

When you combine structural lock-in from promoter shares, the behavioural tendency toward long-term holding, and the concentration of active trading among a small subset of retail participants who are themselves sensitive to market sentiment, you arrive at a market where the genuinely active float on any given day may be a fraction of even the already-reduced public float. The market, in other words, is thinner than the numbers suggest at every level of analysis.

Lesson 11.4 — The Impact of Thin Liquidity on Price Discovery

What Price Discovery Actually Requires

Price discovery is the process by which a market's collective activity produces a price that reflects the best available estimate of an asset's true value given all publicly available information. For price discovery to function well, a market needs active participation from a diverse range of buyers and sellers with different time horizons, different information sets, different risk tolerances, and different views on value. When this diversity is present and participants can freely express their views by buying and selling, the resulting price is a reasonably reliable signal of consensus value.

When liquidity is thin, this process breaks down in predictable ways. With fewer participants active on any given day, the range of information and perspectives represented in the price-setting process narrows. A single large buyer or seller — representing perhaps five or ten percent of a session's total volume — can move a stock price by amounts that bear no relationship to any change in the company's underlying business or prospects. The price signal becomes noisy, unreliable, and potentially misleading to investors who treat quoted prices as accurate reflections of fundamental value.

Artificial Volatility and Its Consequences

One of the most practically significant consequences of thin liquidity on NEPSE is the amplification of price volatility beyond what would be justified by any legitimate new information about listed companies. In liquid markets, price discovery is a continuous, gradual process in which small buy and sell orders constantly adjust prices in response to new information. The presence of many participants means that any single order, unless extraordinarily large, has a negligible price impact. In NEPSE's thin market, the discrete arrival of even moderately sized orders can produce price movements that, in absolute percentage terms, look dramatic.

This artificial volatility creates two distinct problems for the NEPSE investor. The first is the risk of entering a position at an artificially inflated price produced by a brief surge of buying interest that does not represent the market's genuine long-term assessment. During NEPSE bull phases, stocks frequently run up ten, fifteen, or twenty percent in a matter of days on volume that, in absolute terms, is extremely modest. An investor purchasing into such a move, believing they are participating in a genuine revaluation of the company's prospects, may in fact be simply providing exit liquidity to earlier buyers. When the thin buying interest exhausts itself, the stock drifts back — or falls sharply — to its previous range.

The second problem is the difficulty of distinguishing genuine information-driven price movements from liquidity-driven noise. When a stock rises fifteen percent on NEPSE, the investor faces a genuine epistemological challenge: has new information emerged that justifies this revaluation, or has a handful of buyers simply overwhelmed a thin order book? In liquid markets, this question is generally easier to answer because genuine information-driven moves are accompanied by sustained, high-volume buying across multiple sessions, while liquidity-driven spikes tend to reverse quickly. In NEPSE's thin market, even genuine information-driven moves look similar in structure to liquidity-driven spikes because volume is always modest and reversals are common regardless of the nature of the original catalyst.

In a thin market, price is not what the company is worth. Price is what the last buyer paid and the last seller accepted, in a transaction that may have involved only a few thousand shares. Treat it accordingly.

Bid-Ask Spreads and Their Hidden Cost

Price discovery failures in thin markets are also expressed through abnormally wide bid-ask spreads — the gap between the price at which a buyer is willing to purchase and the price at which a seller is willing to sell. In highly liquid markets, competition among market makers and the volume of activity narrows bid-ask spreads to fractions of a percent, making round-trip transaction costs almost negligible. In NEPSE, where there is no market-making infrastructure and bid-ask spreads are set entirely by the meeting of retail buy and sell orders, spreads can be meaningfully wider.

For stocks with reasonable liquidity, NEPSE spreads may represent half a percent to one percent of the stock price — not ideal, but manageable. For thinly traded stocks, particularly in the development bank, microfinance, and certain hydropower sectors, spreads can exceed three to five percent. This means that an investor who buys and immediately sells faces a transaction cost — entirely separate from brokerage fees — of that spread magnitude. For a strategy that requires multiple entries and exits, or for an investor who discovers after purchase that they need to exit quickly, these spreads compound into a significant and often underestimated drag on returns.

Lesson 11.5 — Sector-Wise Liquidity: Banking Most Liquid, Hydropower Least

The Liquidity Hierarchy Across NEPSE Sectors

NEPSE's liquidity is not uniformly distributed across its listed sectors. Different industries exhibit dramatically different trading activity profiles, and understanding this hierarchy is essential for any investor who wants to calibrate position sizes, exit strategies, and liquidity risk exposures appropriately.

At the top of the liquidity hierarchy sit Nepal's commercial banks. The banking sector is, by a significant margin, the most actively traded segment of NEPSE. Commercial bank shares account for a disproportionate share of daily trading volume relative to their weight in the overall market capitalisation. Several structural factors explain this. Commercial banks are among the oldest and most widely held listed companies in Nepal — their shares are owned by a broad base of investors who have accumulated positions over many years, creating a deep pool of potential sellers at any price level. Their businesses are relatively easy for retail investors to understand and analyse, making them accessible to the widest possible range of participants. Their regulatory environment, while complex, is consistently visible through Nepal Rastra Bank publications and guidance, creating shared information frameworks that facilitate price formation. And their bonus share and dividend histories make them perennial subjects of retail investor interest and discussion.

Below commercial banks in the liquidity hierarchy are development banks and finance companies, which see moderate trading activity. Development banks are smaller and more numerous than commercial banks, their financials are somewhat less transparent, and their businesses are more geographically concentrated — all characteristics that reduce their appeal to the broadest cross-section of investors. Finance companies are even smaller, and following the wave of consolidation and regulatory tightening that the sector experienced in the mid-2010s, several have seen their trading volumes decline substantially.

Insurance companies occupy a middle tier in the liquidity hierarchy. The mandatory insurance provisions embedded in various aspects of Nepal's economic activity — compulsory vehicle insurance, requirements for project financing — create a stable revenue base for listed insurers, and their share prices have historically responded positively to premium growth. Trading volumes are moderate and tend to be higher during periods of sector-specific news such as regulatory changes or large claim events.

Hydropower: Compelling Story, Structural Illiquidity

At or near the bottom of NEPSE's sector liquidity hierarchy sits hydropower — a sector that is, in many ways, structurally the most compelling long-term investment story in Nepal, and simultaneously among the most difficult to trade. The combination of a genuinely exciting fundamental narrative and deep structural illiquidity makes hydropower one of the most important case studies in NEPSE investment discipline.

The fundamental case for hydropower investment in Nepal is well understood. Nepal possesses some of the world's most significant technically and economically viable hydropower potential, estimated at over 40,000 megawatts of commercially feasible capacity. Against this enormous potential, current installed generation capacity remains a fraction of what is technically available. As Nepal gradually develops this resource — through domestic IPP developers, government projects, and international joint ventures — the companies involved stand to benefit from decade-long periods of near-guaranteed revenue from power purchase agreements with Nepal Electricity Authority. The long-term case for patient hydropower investment is legitimately attractive.

But the structural liquidity characteristics of listed hydropower companies are deeply unfavorable for active investors or anyone with a time horizon shorter than several years. Promoter lock-in provisions are particularly common and lengthy in the hydropower sector, where original project developers and financial institution lenders often hold large equity stakes that cannot be sold for extended periods. The industry's investor base tends toward long-term institutional and quasi-institutional holders — cooperatives, local communities, and project sponsors — rather than active retail traders. Trading volumes, as a result, are consistently among the lowest in the market on a per-company basis. During bear phases, many hydropower stocks may go entire weeks without executing a single trade.

This creates a stark asymmetry. Entering a hydropower position is generally possible — sellers can usually be found, particularly during bear markets when distressed holders seek to exit. Exiting a hydropower position of any meaningful size is a fundamentally different experience. An investor holding NPR 3 million in a mid-tier hydropower company may find, when they attempt to sell, that the market simply has no buyers — not at their preferred price, not at any price, on any given day. This is not a temporary inconvenience. It is the normal operating condition of that segment of the market.

The microfinance sector deserves special mention in any discussion of NEPSE liquidity. Microfinance institutions were among the fastest-growing listing categories in NEPSE during the 2015 to 2020 period, and their shares attracted significant retail interest, particularly from investors attracted to high dividend yields and bonus share distributions. However, microfinance shares are among the most thinly traded on the exchange. The sector's retail investor base tends toward long-term holding, the companies themselves are geographically dispersed and analytically opaque to most investors, and the regulatory environment for microfinance has become increasingly uncertain, further dampening active trading interest. An investor in microfinance shares should, as a baseline assumption, assume that meaningful position liquidation will require either a bull market for the sector specifically or an extended period of patient, gradual selling.

Lesson 11.6 — Practical Consequences: Why Large Positions Cannot Be Exited Quickly

The Mathematics of Exit

The practical consequences of NEPSE's thin liquidity become most vivid when you approach them through the arithmetic of position exit. Consider the question concretely: if you own shares in a company and wish to sell them, how long will it take, and at what cost?

The conventional wisdom in liquid markets suggests that a position should be liquidatable within a reasonable time frame if it does not exceed a defined percentage of average daily volume — typically five to ten percent in well-managed institutional portfolios, with some managers willing to go to twenty percent with appropriate time horizons. This rule of thumb exists because selling too large a fraction of daily volume creates price impact: your selling pressure itself depresses the price you receive, creating a negative feedback loop where larger selling leads to lower prices, which in turn invites additional selling from stop-loss triggers and panic-stricken retail holders.

Apply this arithmetic to NEPSE. Consider a reasonably active commercial bank stock that trades an average of NPR 15 million per day. An investor holding NPR 30 million worth of this stock — a substantial but not extraordinary position for a successful Nepali retail investor or small fund — faces a practical exit timeline of at least twenty trading sessions if they wish to limit their daily selling to ten percent of average volume and avoid creating significant price impact. Twenty trading sessions is a full calendar month of trading. During that month, the market can move substantially, external conditions can change, and the investor's price assumptions will be tested repeatedly. If market conditions deteriorate during that month, the last tranches of the position will be sold at progressively lower prices than the first.

For less liquid stocks — say, a mid-tier hydropower company trading NPR 2 million per day — the same NPR 30 million position implies a minimum exit timeline of one hundred and fifty sessions at the ten-percent-of-volume rule. One hundred and fifty sessions is approximately eight months of trading. For most investors, this is not a practical framework for managing risk. It is simply holding the position for an extended period while hoping conditions improve.

The Illusion of Entry-Exit Symmetry

One of the most psychologically damaging illusions in NEPSE investing is the assumption that because you were able to enter a position, you will be able to exit it under comparable conditions. This assumption of symmetry is intuitive but incorrect in thin markets, and understanding why it fails is important for any serious investor.

Entry into a NEPSE position typically occurs during a period of market interest in the stock or sector — perhaps during a bull phase, or following a positive development that has attracted buying attention. During such periods, the order book has active sellers and the investor can accumulate shares over multiple sessions without extraordinary difficulty, provided they are patient and do not insist on immediate execution. The market's momentum, in some sense, works in the entrant's favour: rising prices attract more buyers, volume is above average, and the cost of building a position is relatively modest.

Exit, however, tends to be attempted under exactly opposite conditions. Investors typically need to liquidate — or want to liquidate — when market conditions have deteriorated, sentiment has shifted, or a specific negative development has emerged. These are precisely the conditions under which thin-market illiquidity is most acute. As prices decline, sellers multiply and buyers retreat. The order book fills with sell orders and empties of buy orders. Volume can fall sharply even as the number of investors wanting to sell increases. The investor who entered gradually and comfortably during a period of positive momentum discovers that exiting during a period of negative momentum is a fundamentally different and far more costly exercise.

This asymmetry is not unique to NEPSE — it exists in all markets to some degree — but in NEPSE it is severely amplified by the structural thinness of the market and the absence of institutional buyers who might otherwise step in to provide buy-side depth during selloffs. The NEPSE investor must, therefore, build exit plans before they are needed, design positions with liquidity constraints explicitly in mind, and resist the cognitive bias that treats the ease of entry as evidence of future ease of exit.

Practical Position Sizing Principles

Given the practical constraints of NEPSE liquidity, prudent position sizing requires that every investment decision be accompanied by an explicit assessment of exit feasibility. This means calculating, for any contemplated position, the number of trading sessions that would be required to liquidate it under a conservative assumption about daily volume participation — say, the ability to sell ten percent of average daily volume per session without creating significant price impact.

A position that requires more than thirty to forty trading sessions to exit under normal market conditions should be considered illiquid for practical purposes, and the investor should ask whether their investment horizon and risk tolerance are genuinely compatible with holding that position through the range of scenarios that could develop over that time frame. If the honest answer is no — if there is any scenario under which the investor might need or want to exit within a shorter time frame — then the position is too large, the stock is too illiquid, or both.

Diversification across liquidity tiers is also a practical necessity in NEPSE portfolio construction. A portfolio composed entirely of illiquid small-cap hydropower and microfinance companies may offer attractive valuations, but it is a portfolio that cannot be managed dynamically — that cannot respond to new information by reducing exposures, that cannot be liquidated in response to changing personal financial circumstances, and that is dependent entirely on market-wide liquidity recovery for any meaningful exit. Balancing such holdings with positions in more liquid commercial bank shares or other high-volume counters provides the portfolio with the flexibility to respond to circumstances as they evolve.

Lesson 11.7 — Liquidity Cycles in NEPSE: What Drives Volume Spikes and Droughts

The Seasonal and Cyclical Patterns

NEPSE's trading volume is not static — it moves through recognizable cycles driven by a combination of seasonal patterns, monetary conditions, regulatory events, and broader sentiment dynamics. Understanding these cycles is useful because it allows the disciplined investor to anticipate periods of enhanced liquidity, which are the appropriate times to make large purchases or sales, and periods of suppressed liquidity, during which position adjustments should be minimised or suspended.

The most consistent seasonal pattern in NEPSE volume relates to Nepal's fiscal year, which runs from mid-July to mid-July. The months of Falgun through Jestha (approximately February through June in the Gregorian calendar) tend to coincide with elevated trading activity driven in part by the publication of annual reports, dividend and bonus share announcements, and the deployment of profits and bonuses accumulated during the prior fiscal year. Investors who have received bonus shares from prior year holdings often become more active traders during this period, either selling bonus shares to fund personal expenses or reinvesting dividends into new positions. Volume tends to be above average during this window.

Conversely, the post-Dasain period (typically mid-October through December) often produces a lull in trading activity. The major festivals of the Nepali calendar — Dashain, Tihar, and Chhath — consume significant personal time and financial attention, and many retail investors reduce their market activity during and immediately following these celebrations. Volume tends to contract during this period, and with it, effective market liquidity.

Monetary Policy and its Dominant Influence

Among all the forces that drive NEPSE's liquidity cycles, monetary policy — the management of credit availability by Nepal Rastra Bank — exercises arguably the strongest and most consistent influence. The relationship between bank credit availability and NEPSE trading volume is direct and empirically visible: when credit is loose and interest rates are low, retail investors borrow to invest in equities, driving both prices and volumes higher. When credit tightens, margin calls and the rising cost of borrowing force deleveraging, producing simultaneous waves of selling and volume suppression.

Nepal Rastra Bank's credit-to-deposit ratio regulations, its interbank rate management, and its periodic directives about margin lending all have direct and significant effects on the equity market. The 2021 to 2022 bear market, which saw NEPSE index values decline by over fifty percent from peak, was substantially driven by NRB's tightening cycle, which raised lending rates, tightened credit availability, and directly constrained the margin financing that had fuelled the preceding bull phase. As investors were forced to repay margin loans, they sold shares to generate cash, creating a selling cascade in a market with insufficient buy-side depth to absorb it without severe price declines.

The investor who monitors NRB's credit policy signals — interbank rates, credit-to-core capital ratios, lending growth statistics — gains useful advance warning of potential liquidity environment shifts. These signals do not provide precise timing for market moves, but they provide directional evidence about whether the broad monetary environment is likely to support or suppress equity market activity in the coming months.

IPO Activity and its Dual Effect on Market Liquidity

Nepal's regular IPO issuance cycle has a complex and often paradoxical relationship with secondary market liquidity. On one hand, IPO activity introduces new shares into the market over time, gradually expanding the universe of tradeable securities and the potential pool of market participants. On the other hand, the IPO application process absorbs large amounts of investor cash in the short term, as applicants must submit payment with their applications and wait for allotment results before receiving refunds or shares. During periods of heavy IPO activity — when multiple large issues are in their application or allotment phase simultaneously — significant amounts of capital are temporarily immobilized in the IPO process and unavailable for secondary market trading. The result is often a short-term suppression of secondary market volume during peak IPO periods.

The introduction of C-ASBA and other electronic payment mechanisms has reduced but not eliminated this effect. Large IPOs, particularly in the banking and hydropower sectors, can still absorb hundreds of millions of rupees in application capital that would otherwise be available for secondary market activity. The alert investor tracks the IPO calendar not just for potential direct investment opportunities but as a leading indicator of near-term secondary market liquidity conditions.

Sentiment Cascades and the Role of Social Media

In the years since approximately 2015, social media — primarily Facebook and, more recently, TikTok and YouTube — has become a significant driver of NEPSE sentiment and, consequently, of liquidity cycles. This development is not unique to Nepal: social media's influence on retail investor behaviour has been documented in markets worldwide. But in a retail-dominated, institutionally shallow market like NEPSE, social media's influence is proportionally more powerful and can create more dramatic and rapid shifts in trading volume and price.

During bull phases, social media serves as an amplifier of positive sentiment. Groups and channels dedicated to NEPSE discussion proliferate, attracting new participants who may have minimal investment knowledge but are motivated by stories of rapid gains made by early participants. This dynamic accelerates the entry of new, uninformed capital into the market, driving volume and prices simultaneously higher in a self-reinforcing feedback loop. The same dynamic operates in reverse during bear phases: social media becomes a vehicle for panic, loss stories, and recrimination, accelerating the exit of marginal participants and amplifying selling pressure.

For the disciplined investor, social media's influence on NEPSE liquidity cycles offers both a warning and an opportunity. The warning is that volume spikes driven by social media enthusiasm are not evidence of genuine, sustainable liquidity improvement — they reflect the temporary mobilization of speculative retail capital that will be withdrawn when sentiment turns. The opportunity is that the entry of uninformed capital during sentiment peaks provides liquidity for long-term investors who have accumulated positions patiently to exit at favourable prices. This is an uncomfortable but practical truth: the best time to sell is when social media is most enthusiastic and new investors are most eager to buy.