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Asian University of Bangladesh
Assignment on Causes of Share Price Fall & Suggestion For Its Future Prospect
Submitted to : Dr. Md. Shamsul Islam Latifi Associate Proffesor Dept. of Economics Asian University of
Bangladesh
Submitted By : Mohammad Golam Hassan ID No. 201111475
MBA(Executive) 41st Batch
0
Asian University of Bangladesh
Date of Submission :
Letter of Presentation
I am one of The student of Exe. MBA 41st batch has prepared a report
on Causes of Share Price Fall & Suggestion For Its Future Prospect .
From our course teacher Mr. Dr. Md. Shamsul Islam Latifi as a part of
our course curriculum Managerial & Comparative Economics. I
prepare a report on this topics as per your instruction.
1
Table of Contents
2
Page No.
Letter of Presentation
3
1
Forward
3Introduction,
4
Communication Fundamentals 5
External Communication 6
Bibliography 7
4
Forward
All praise is due to almighty Allah whose boundless mercy enabled me to prepare this
Assignment “Causes of Share Price Fall & Suggestion For Its Future Prospect ”. Now
a days Share Market is a business related disciplines. Above all, communication
imparts an interpersonal communication. Such an ability is very beneficial in the
modern age where communication are employed increasingly for decision making in
various walks of life.
I express my thanks to all of those authors whose books were consulted & Internet &
by newspaper.
I express my deep gratitude to our honorable teacher Mr. Dr. Md. Shamsul Islam Latifi,
associate professor of Dept. of Economics at AUB for his several inspiration regarding
writing of this assignment.
Criticisms, correction of misprint and constructive suggestions towards the
improvement of our next Assignment will be highly appreciated and thankfully
acknowledge.
5
Introduction : In finance a share is a unit of account for various financial
instruments including stocks, mutual funds, limited partnerships, and REIT's. In British
English, the usage of the word share alone to refer solely to stocks is so common that
it almost replaces the word stock itself.
In simple Words, a share or stock is a document issued by a company, which entitles
its holder to be one of the owners of the company. A share is issued by a company or
can be purchased from the stock market.
By owning a share you can earn a portion and selling shares you get capital gain. So,
your return is the dividend plus the capital gain. However, you also run a risk of
making a capital loss if you have sold the share at a price below your buying price.
A company's stock price reflects what investors think about the stock, not necessarily
what the company is "worth." For example, companies that are growing quickly often
trade at a higher price than the company might currently be "worth." Stock prices are
also affected by all forms of company and market news. Publicly traded companies are
required to report quarterly on their financial status and earnings. Market forces and
general investor opinions can also affect share price.
How does one trade in shares ?
Every transaction in the stock exchange is carried out through licensed members
called brokers.
To trade in shares, you have to approach a broker However, since most stock
exchange brokers deal in very high volumes, they generally do not entertain small
investors. These brokers have a network of sub-brokers who provide them with
orders.The general investors should identify a sub-broker for regular trading in shares
and palce his order for purchase and sale through the sub-broker. The sub/broker will
transmit the order to his broker who will then execute it .
6
What is Share Market?
It is a market place over Internet and in floor also, where stocks are traded. Share
market consists of Stock market, Mutual fund, bonds, currency market & commodity
market etc. We have tutorial for Stocks, Mutual fund & Bonds which covers major
portion of share market. Knowledge is power. With out knowing what is share market
will make you end up with harassment when you go for investing in share market. You
must have significant knowledge and confidence before going ahead.
7
Investing in Stock Market
Investing your money in stock market can give you highest return when you manage it
properly. History proves stocks as the highest return investment. As we know higher
the return expectation higher the risk involvement, there is a very high risk of loosing
all your money in the market. Stock market is gambling and dynamic. Stock market is
also called as equity market. Since stocks are also known as equity.
You must be active enough and should have adequate knowledge with experience to
be a successful stock market investor. Off course experience and knowledge will not
come overnight, you have to assume risk and learn consistently, over a period of time
you will be
giant in stock
market.
What is Stock
Some portion of the company sold to public is called stock. If a company has 200,000
stocks out standing means the company has been divided into 200,000 units and
different people own some units. These units are called stocks.
When you purchase stocks, or equities, you become a partial owner of the business.
This entitles you to vote at the shareholders' meeting and allows you to receive any
profits that the company allocates to its owners. These profits are referred as
dividends
Price Fall In 1996:
8
The recent bubble in the share market gave rise to the fear that the “1996 was
returning”. And this has actually happened. New investors who bought shares at high
rates are now losing capital,’ said an analyst. In
1996, when the
Awami League
government was in power, the benchmark index of the DSE soared from 1,000 in June
to 3,627 on November 16 before the market crashed. The market first bubbled and
then burst. ‘The general index came down to as low as 484 points in 2000 from
3,627 in November 1996. The crash was considered the biggest share scam in the
country’s history,’ said the
analyst. It took four years for the market to gain stability after
the 1996 crash, with it beginning to
rebound in
mid-2000, he said.
When the AL-led alliance government again came to power in January 2009,
the general index of
the DSE stood
at 2,726
points. Before the latest crash began,
the general index had soared in 29 trading days from 7,522
points on October
20 to
8,918.51 points
on December 5.
The index, however, lost a massive 1,264 points in the last nine trading days,
with 551.77 points lost
on Sunday. The market
capitalisation, which was around Tk 3,68,00 crore on December 5, dipped
to Tk
3,44,000 crore on
9
Sunday. Former
DSE chief executive officer professor Salahuddin Ahmed
told New Age that the recent shortage of cash in the banking sector following the
Bangladesh Bank’s move created a liquidity crisis in the capital market resulting in the
market collapse. The banks and financial institutes accumulated funds by borrowing
from other banks or by selling off shares on the capital market to fulfil a BB directive to
increase their SLR and CRR. The money market virtually stopped injecting funds in
the capital market while other
institutional investors
also went for
huge selling.
Besides, salahuddin said, when the DSE index started to fall, small investors
panicked and went for bulk
selling on
the day.
Mahmud Osman Imam, who teaches finance at Dhaka University, said the volatile
money market created a panic among the investors, as a result of which they went for
bulk selling on
the day. An intense selling pressure from
the institutional investors also pushed down the market, resulting in most of the small
investors losing their investment, he added.
Economics professor Abu Ahmed of Dhaka University told
reporters that the government and the central bank should immediately take steps to
build confidence among investors by suspending directive for increasing the SLR and
the CRR for the time being. ‘It took four years to build confidence
after the 1996 crash. The government should do something so that panicked investors
do not leave the market this time.
1996 and now :
10
The bull-run that took place in 1996 has left a number of positives for the market. A lot
of investment-friendly regulatory reforms have been
implemented by the SEC. We now have stronger surveillance and
improved rules relating to public issue, rights issue, acquisition,
mergers and so on. All these fundamental developments, which were well
overdue, followed the 1996 bull-run. It was a
learning experience for Bangladesh, and the desired level of changes
was initiated by the market watchdog subsequently.
In the secondary market, surveillance is more
active and
particular than before.
These
developments, that are
widely appreciated, are actually the fundamental requirements that
are in
place today resulting from the continuous efforts of the
government and multilateral agencies.
Trading has now become automated, led by the Chittagong Stock
Exchange through the central
11
depository. In the present automated trading environment, bids/offers, depth, and
required broker 14 particulars are all recorded and can be retrieved for future
reference. The Central Depository Bangladesh
Limited (CDBL) was created in August 2000 to operate and maintain
the Central Depository
System (CDS) of Electronic Book Entry, recording and maintaining securities
accounts and registering transfers of securities; changing the
ownership without any physical movement or
endorsement of certificates and execution of transfer instruments, as well
as various other investor services
including providing a platform for the secondary market trading
of Treasury Bills and Government Bonds issued by the Bangladesh
Bank.
The stock market surveillance mechanics in place at present has no resemblance to
that of 1996.
There are strict rules and guidelines, trading circuit
breakers and international standard surveillance
to protect investor rights and ensure fair play. The disclosure requirements
and its
timing for both listed scrips and IPOs as devised by the SEC are now
more reflective of
international practices. The SEC is also adopting new
valuation methods that result in fair pricing of new issues. While there is still a lack of
credible research organisations, a few
firms like Asset and Investment Management
Services of Bangladesh Ltd. (Aims)
12
Share market investors have lost between 20 and 30 per cent of their portfolios in the
largest-ever capital market crash in the past few days, with the Dhaka Stock Exchange
losing around Tk 22,000 crore in market capitalisation, said market operators.
Small and new investors, who have just entered the market, are the most affected by
the plunge as many of the large investors have already withdrawn a significant amount
of their investment or booked profit anticipating the huge fall, they said.
‘According to my rough estimate, investors lost around 20 per cent of their portfolios in
the latest round of fall,’ Akter H Sannamat, managing
director of Prime Finance and Investment, told New Age.
‘I bought shares of Summit Power worth Tk 4 lakh at the rate of Tk 158 based on the
news that the company would be more profitable as it bagged contracts for installing
three large power plants. But the value of my shares came down to around Tk 3.40
lakh as the price of the issue came down to Tk 136 today,’ said Masudul Haque, a
small investor. He said he had borrowed the money from his father, a retired
bank official. Many of the panicky small investors have withdrawn their
investment after incurring losses. ‘I have sold my entire stocks of around Tk 9 lakh
today, counting a loss of around Tk 1.50 lakh, fearing that my portfolio might decline,’
said an investor requesting anonymity.
Jan 19th 2011 :
With AL in power this is not unexpected. They did a similar situation in 1996. Their
croonies, a group of big business houses take control of the bourse and controlling
bodies like Security Exchange Commission, Central Bank and put their men there.
Then they manipulate the market to induce a bull run in the bourses. This induces
common people partucularly unemployed educated youths alongwith common people
jumped into the market with whatever money they could manage. One may say it is
stupidity of those people but whoelse can be taken ride on so easily? Then the
powerful quarter pulled all the tools like asking the financial institutions, merchant
banks, brokers to pull the brake in the form of cut back or margins, force financial
institutions to sell shares in their possesion forcing a mismatch in the market resulting
13
in market crush.Predictably a sales rush and bonanza for the powerful syndicate to
buy shares in cheap price. Thats is not the end. After the shares are in their poseision
again the mechanism is changed for a short time so the market moves up
considerably and shares change hands to make quick buck
Why Do Stock Prices Rise and Fall?
Nevertheless, over a period of decades the stock market has had better returns than
any other investment - 8-12% depending on various factors and it's one of the most
widely studied markets on Earth.
With that kind of historical data and brain power to lean on, one should be able to
make a few valid observations. Well, here are some. You judge their validity.
What Affects Share Prices?
In the long run, there's no doubt share prices are heavily influenced by earnings. When
companies make money, consistently over long periods, investor confidence grows
and bid the price of shares up. What influences earnings and confidence?
Everything from interest rates to debt load, taxes, lawsuits, management,
technological and other social changes, and the general economy affect earnings -
both short and long term.
What Else Affects Companies?
Almost all companies borrow money and even when they don't their competitors,
suppliers and customers do. That affects how much money they have to invest in
research and new products or improving existing ones, relative to other companies in
the similar lines of business.
Sometimes even stellar managers can be threatened by social or technological
changes, unless they evolve the company to adapt. In that case, a company which
once sold light bulbs - and made good profits doing so - can become an almost
14
entirely different company in time. General Electric - the only original Dow stock that is
still part of the DJIA (Dow Jones Industrial Average) - is an excellent example.
How Do You Benefit From The Rise and Fall Of Shares?
So, what's the average investor to do? That depends on the kind of investor you want
to be. For those with the talent and time to do intense moment-by-moment research, it
is possible to do well in short-term trading. Though almost all day traders lose money.
For those, even big risk takers, who are more inclined to fundamental factors and
willing to research long-term trends - maybe take comfort in the fact that 8-12% return
over decades is as good a prediction as you need.
Behind the Scenes The Stock Market Saga :
On January 9, 2011 the benchmark index of the Dhaka Stock Exchange (DSE) suffered the
steepest ever single-day fall in the bourse's 55-year history. The DSE General Index (DGEN)
plunged by 600 points, and all indices fell nearly 8 percent in the wake of panic-sales. Breaking
the previous day's record, on January 10, DGEN shed 660 points or 9.25 percent between 11
am and 11:50 am. The capital market was shut; small investors turned vandalistic; and the
business district of Motijheel was transformed into a battlefield between protesters and law-
enforcers. Despite the measures taken by the regulatory commissions, people suffered major
financial loss and worse than that, many lost confidence in the stock market. After the big
boom in 2010, what caused the disasters witnessed during the past one and a half months? How
secure is the securities market
The recent market collapse was not a one-day event. Bangladesh stock index marked
80 percent growth in the year of 2010. The bull run, however, faced its first halt in
December 2010. On December 8 DGEN suffered the third highest single-day plunge
since 2001 losing 185.53 points or 2.12 percent. Eleven days later on December 19,
DSE suffered its biggest crash, of course up until then, as the index nosedived by 551
points or 6.72 percent at the close of a four-hour trading session. The raging bull was
finally tamed on back-to-back record plunges on January 9 and 10. The upheaval
15
continued as the DGEN, after the nosedives, took a high jump rising more than 15
percent which was the highest one-day spike ever –a rebounding record. To
understand what actually triggered the Sturm und Drang in the stock market one has
to go back to the story behind the rise of the stocks and then come to understanding
the falls.
Pre-December 8: The Expansion Epoch :
2010 was considered a boon year for investors, although a record fall in December
created massive panic among those who had put their money in stocks. There was
hardly any investor who made losses in 2010. The stock market witnessed a manifold
boom –the price index, turnover, market capitalisation and its ratio to GDP (gross
domestic product), and the number of new arrivals both in terms of issues and
investors. The Dhaka market ranked third globally in terms of performance, according
to an analysis of Lanka Bangla Securities.
Analyzing the reasons behind the upsurge, the former CEO of the DSE Professor Salahuddin
Ahmed Khan, also a teacher at the Department of Finance of Dhaka University says that the
reasons are quite simple and logical. The country had been in a stagnating position in terms of
investment for the last few years. Initially the military junta caused a halt in investment,
followed by a lack of power and gas supply that forced the government to stop new connections
to any end users.
16
The investors turn vandalistic as the DSE index declines at a record rate. PHOTO: STAR FILE
Consequently, in a country having more than 32 percent national savings and poor
state of investment, a lower rate of nominal interest rate, negative real rate of interest
rate encouraged many new investors to the market. Such new entry was also
supported by easier access to the market due to branch expansion by the brokers.
Meanwhile, financial institutions also found that, due to lack of business opportunities
they were being burdened with huge amounts of excess liquidity. The cost of bearing
the extra liquidity could not be utilised in alternative investment avenues where the
securities market ushered the path for fund deployment. During this time, as the real
investment scenario was unclear, so flows of new securities in the form of Initial Public
Offerings (IPOs) were also quite scanty. To add to the misery of the market, the
government imposed some unnecessary restrictions on the IPOs causing the flow to
slow down further. The restrictions were partially lifted by November.
17
Another problem was caused by poor monitoring and market surveillance which
resulted in abnormal price behaviour for many securities, especially for those
securities where free float shares are few or the company is very small and so an
imperfect market situation enabled the prices to rise significantly. All these factors
caused the prices of most of the listed stocks at DSE/CSE to reach an abnormally high
level.
An inside trader in the DSE, preferring anonymity, informs that during the recession of
2009-2010, the banks in Bangladesh had a lot of idle money in reserve. “Bluntly
speaking, when the banks had huge monetary reserves, acquaintances of the bank
officials and other people as well, took bank loans to invest them in the share market.
This brought an overflow of liquidity in the market. I saw the price of a share increase
by Tk 40 in one day whereas it wouldn't have increased by Tk 3-4 in a normal market,”
he says.
Due to the opportunity of making huge profits, 1.5 million new investors were investing
in the stock market in 2010. According to Centre for Policy Dialogue's (CPD) analysis,
the total number of beneficiary owners' (BO) account holders was 3.21 million on
December 20 last year, which was 1.25 million in the same month a year before. This
number increased by 154 percent in 2010. The opening of brokerage houses at the
district level (238 brokerage houses of DSE opened 590 branches at 32 districts),
arranging a countrywide 'share mela (fair)' and introducing interest-based trading
operation, easy access to market information, were some of the factors identified by
the CPD that accelerated the flow of investors.
December 8, 2010- January 11, 2011: The Big Crunch :
The booming bubble finally burst, the bull run finally stopped; on December 8 of 2010
with the third highest plummet since 2001, the DGEN closed at 8585.88 with a loss of
185.53 points. That was just the beginning; on December 19, the DSE witnessed the
steepest till date single-day fall – 551 points or 6.72 percent to 7654.41, beating the
previous record fall of 3.32 per cent or 284.78 points, set just one week back on
18
December 12. The down slope of the index continued till January 10, 2011, with
frequent record sets and breaks. According to Professor Salahuddin Ahmed Khan,
since in a market environment, prices cannot remain very high for a prolonged period,
the downward slide was quite predictable. The rate of decline was basically due to the
nervous state of the market participants. Well, no divine order triggered the continuous
plunges in the stock market. A series of events, actually, made it quite inevitable.
On December 1, the Central Bank sent 50 teams on surprise visits to different bank
branches in Dhaka and Chittagong after it received complaints that the banks were
investing in the stock market from their reserves to make profit. Some banks were in
fact found involved in such irregularities. During that time, the daily transaction in the
share market was on an average of Tk 2000 crore and sometimes even Tk 3000 crore,
which was double compared to that of the previous year (2009).
The DSE Index grew almost 2500 point without any major price correction by
December 2010. To bring the ever increasing price of shares in the market under
control, both Bangladesh Bank (BB) and Security and Exchange Commission (SEC)
had sent different directives; Bangladesh Bank initiated the withdrawal of illegally
invested industrial loans from the market by December 31, 2010 and raised the Cash
Reserve Requirement (CRR) and statutory liquidity requirement (SLR) both to 6
percent and 19 percent respectively to safeguard the interest of the depositors.
According to Sharif Mohammad Kibria, an employee at a renowned merchant bank
this might be one of the reasons to blame for the recent fall of the market as it took
away at least 2000 crore hard cash from the money market resulting in less capacity of
investment. According to Abu Nayeem Md Anuruzzaman, another employee at the
same bank, though former SEC member Monsur Alam's two directives– netting or
adjustment facilities (Sell before buy), and en-cashing of cheques submitted by
investors against their share purchase orders– were blamed to influence the index
slide in December, they were, in fact, lawful and did not attribute to the liquid crisis.
The central bank circular issued on November 28, 2010 asked banks to adjust all
loans, amounting Tk 10 million and above, that have been diverted to areas other than
19
the purposes mentioned in the loan applications by December 15. This surely put the
banks in trouble as a lot of that money was invested in the share market. As a result,
banks started selling shares and withdrawing money from the stock market. This was
the beginning of the price-slides in December. To tackle the disaster and assure the
panicked investors the central bank extended the time limit by one month for the banks
for submission of the list of loans to January 15, 2011. The commercial banks were
instructed to adjust such loan portfolios by February 15, 2011 instead of January 15 to
ease the pressure on the money market. The securities regulator increased the margin
loan ratio from 1:1 to 1:1.5 and then to 1:2. SEC also restored normal trading of
Grameenphone (GP) and Marico, suspended the Net Asset Value (NAV) based
margin loan calculation and execution of order relating to increased margin deposit by
members of the bourses.
But that did not prevent the fall. After consecutive days of index decline, the stock
market suffered from record-breaking disasters in January. According to a DSE
insider, who preferred to remain unnamed, as it was the financial institutions' year
closing, they had to pull off money invested in the market for balance purposes and as
a result the banks were neither able to provide the 1:1.5 margin loans to the retail
investors. This event caused less investment from the retail side as well. With the
butterfly effect, the stock market headed towards a liquidity crunch. The liquidity crisis
in the money market was one of the key factors behind the continuous slide in share
prices and turnover. Like most of the market analysts, the anonymous DSE insider
blamed price-correction and price re-adjustment of the financial institution stocks,
which were over exposed in the capital market for drop in share prices. Along with the
panicked investors who started selling shares after losing confidence in the market,
the anonymous insider suspects that some syndicates created the unusual sell
pressure, which would help them to purchase shares at low rates. “You see, the way
the share prices were increasing last year, it would have become impossible to play
the game for the syndicates at such high rates. Hence they wanted to decrease the
rate and the liquidity crisis would help them to force price corrections,” he adds.
20
January 11- January 18:
On January 11, 2011, reversing the trend of the previous few days, DSE index
ascended with a record gain of 15 percent. The DGEN stood at 7,512 points at the
closing of the day's trading, recovering 1,012 of the 1,235 points lost on the preceding
two days. This magic jump was not due to any divine intervention either. A
stockbroker, again preferring to be anonymous says: “After the sharp and continuous
falls on January 10 and 11, the government unofficially prohibited the institutions,
especially the banks to sell any share. And there were few institutional buyers who
backed up the market.” On this issue, Professor Salahuddin Ahmed Khan says, “January 11,
2011 was the reversal of the previous day. On January 10, the nervous syndrome led to panic
sales. The government and especially the Prime Minister's instruction to Bangladesh Bank to
ensure that flow of funds to the market will be easier again brought back investors' confidence
for which they wanted to recap the loss they sustained in the previous days. That caused the
record level upward trends in the market.” The BB and the SEC did relax and in some cases
reverse some of their decisions in that respect. Though the unusually high buy-pressure pushed
the index high, due to the stalemate in the buy-sell, the single turnover was very low– Tk 977
crore.
21
Investors and stockbrokers cling onto the monitors as market prices fluctuate. Photo: zahedul i khan
Since the nail-biting drama, the market is still dangling through ups and downs.
Initiatives are being taken from all aspects: BB, SEC, and the Government to stabilise
the stock market but according to Professor Salahuddin Ahmed Khan this is not
happening: “I don't think the market is stabilising. As you can observe by now that the
liquidity position as well and nervousness of investors are still prevailing. It will take
sometime to overcome the current state of the market. Here the investors must also
demonstrate some degree of restraint to overcome present difficulties.” Proving his
speculations correct, the share market hit its lowest turnover in nine months on
January 18. The continuously shrinking turnover stood at only Tk 8.49 billion, the
lowest since April 15, 2010, and Tk 24.01 billion lower than the highest-ever record of
Tk 32.50 billion, set on December 5, 2010. An official from a broker house, in condition
of anonymity, says that as Bangladesh Bank has not provided any written order on
relaxing the bank loan threshold of 15 percent of their total capital to their subsidiary
companies, the banks are not yet confident in providing margin loans to investors and
22
increase client exposure. Added to this, nor institutions neither retail investors are
interested in buying shares with high PE ratios. The anonymous official complains that
the merchant banks do have the money as they had sold most of their shares months
before the slide started. They are whining about their liquid crisis just to create
pressure on the Bangladesh Bank. The have beens and the should haves
So what really went wrong? Why did the giant gas balloon, flying so high, start
leaking? The wavering policies of the regulatory commission are mostly blamed by the
investors. The regulator put in 83 directives during the period between January 17,
2010 and January 10, 2011. It changed the directives of margin loan ratio 19 times.
“The regulators of the money and capital markets in Bangladesh are opposite in
characteristics,” says Salahuddin.
The central banks all over the world are always very slow to respond. They seriously
try to look before they leap. Here in Bangladesh they are similar in characteristics.
They have been observing the financial institutions are crossing their limits for
investment in listed securities and the actions came lately. On the other hand the SEC
in Bangladesh always remains nervous. They like to feel that whatever happens to the
market, they will be held responsible. So they don't want to see the market index or
transaction go up and down at a high rate or beyond a certain level. Therefore they are
continuously imposing new policies (forgetting that policies are long term courses of
actions) and again changing/amending it in rapid succession. “In such a hectic work
environment, with such poor manpower they fail to pursue one of the universally
acceptable role of the securities market regulators, which is the role of monitoring
market behaviour in terms of ill trading (manipulations, abnormal price movements,
improper trade executions etc). Consequently, a group of market participants took
advantage of the situations,” analyses Professor Salahuddin. On what should be done
to make the market less vulnerable to drastic changes and make it more secure for
retail investors Salahuddin says, “The market base needs to be broadened. Newer
securities like derivative products, stocks, bonds etc need to be brought, more
institutional investment vehicles like pension funds, portfolio managers (not the lending
23
based merchant banks), mutual funds, unit trusts etc need to be created. The market
regulations should be done more professionally and the stock exchanges need to be
demutualizsed at the earliest possible time. However, one must realise that, the capital
market is a dynamic market and so it cannot remain stable. It will have waves moving
ups and downs.”
Game is the Name :
Oops, you lost the game! Quit or continue? When such boxes flash on one's computer
screen it might not be such a big deal for the player to stop the game that he or she
has been playing for hours; it is not even that difficult to go on with the game because
what is at stake are a few points.
Quitting or continuing is just a matter of clicking the right button of the mouse and does
not make much a difference in one's life, as he or she is not investing any resource in
the game. But when one invests, especially when it is liquid money, the question of
quitting matters quit a bit.
Interview with some investors :
Take Zahir, a supervisor of an apartment complex at city's Dhanmondi, who earns
around Tk 6,000 a month for his job. As the number of his family members has just
increased, he needs some extra earning. The search for additional income and the
sight of people making a quick buck in the stock market have prompted Zahir to
borrow Tk 50,000 to invest in the burse with the hope of earning a bit more. Within 48
hours of his investment, the stock market experienced a massive fall and his invested money
has come down to almost less than half.
24
The search for additional income and the sight of people making a quick buck in the stock market have prompted many to invest. Photo: zahedul i khan
Zahir thought that his investment would be safe, and this sense of security of 'no
losses' led him to borrow the amount of money that was almost eight times his monthly
income. After the fall of the market, the profit from the investment has become a
distant dream, and to make matters worse, he is now burdened with a huge loan. Zahir
is faced with the perennial question: Quit or continue?
There are other small investors like Zahir who have invested in the stock market with
the hope of seeing the prices of the share rise and are now faced with huge losses.
Md Kamran Hasan. who has been in this business since 2007, quit his lucrative World
Bank job, with the intention of devoting all his time to the market. He has also been hit
by the recent fall in the stock market. His balance has witnessed a decline of around
Tk 19 lakh.
25
Asked why he gave up a regular job and
invested in the share market, he boldly
says, “If I have a certain amount of idle
money and if I am sceptical about
investing it in any business due to many
socio-political problems, why shouldn't I
invest in the capital market?”
Regarding the recovery of his loss, he
says that there is no way out other than
take it on the chin and wait for the time
when the price of his shares goes up to
balance his initial investment.
While Kamran has decided to remain
patient and wait for the right time to come,
his wife Afreen Ferdousi is in despair as
she has taken a loan of Tk six lakh from a bank to invest in the stock market. Now only
one and a half lakh taka is left in her account.
Md Mostofa Rashel, a service holder in a private organisation, has been investing in
the capital market since he was a student. He, however, remains safe from the hit.
“During the period of market correction there is scope for the market to fall but other
factors are also at work which ultimately makes some investors' accounts exhausted
and help others to get rich overnight and get away from the market,” Mostofa says.
He says that many investors have believed in rumours and have invested in
companies that do not have enough investment capital. “The shares of these
companies which have been bought with a high price (which is not their actual price)
can never reach the optimum level of expectation of the buyers, it is hardly surprising
that the buyers have faced loss while selling these shares,” says Mostofa, adding that
Small investors should be aware of the market and its tendency to rise and fall, as often some tittle-tattle can be responsible for the direction
of the curve of the market. Photo: zahedul i khan
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small investors should be aware of the market and its tendency to rise and fall, as
often some tittle-tattle can be responsible for the direction of the curve of the market.
Again, decisions that come from the policy makers or the regulatory body should not
come all of a sudden. The market should be analysed throughout the year.
Bangladesh Bank ought to monitor the other banks investments in the capital market
from the very beginning of the year instead of giving decisions out of the blue, adds
Mostafa, who lost half a million from his prospective profit, although his initial
investments intact.
Again Dhaka Stock Exchange (DSE) and Securities and Exchange Commission (SEC)
need to monitor the market regularly. When Kamran entered, the size of the market
was Tk 80 crore and now it boasts a market of Tk 3000 crore. The SEC still has the
same manpower as before, which is obviously insufficient, observes Kamran.
Moreover the SEC needs more technical support to conduct investigations, and it
should also have the power over the reasonable balance of the market, he continues.
In a country plagued with problems like unemployment, lack of investment plan and
whimsical investors whose only target is to gain 'a huge profit', the index of the market
gets jittery quite easily. It makes an enormous impact on the country's economy. To
make matters worse, there is an insatiable desire to earn a lot of money in a short
span of time, which always threatens to make the capital market a gambling board.
Myopic Investors and Irregular Regulators :
Amid signs of weakening through most of December, the bull run in the Dhaka stock
market came to a screeching halt on the morning of Monday January 10, when the
general index lost more than 9.25 per cent within an hour of the start of trading. This
prompted the Securities and Exchange Commission (SEC) to suspend trading for the
first time in its history. Angry investors, who had already demonstrated violently a
number of times in December, clashed with the police, thereby attracting the world's
attention. And then, on the following day, the market rebounded with the index rising
27
by 15 per cent. What happened? Why did it happen? What will happen next? What
should (have) happen(ed)?
We don't pretend to have anything more than a tentative answer to only some of these
questions. In a nutshell, by the end of 2010, Dhaka stock exchange was very much in
the bubble zone. What happened in the second week of January could have been a
bursting of that bubble. A hard landing has been avoided, at least for now. Instead of
trying to guess what will happen next, let's explore how we got here, focussing
particularly on the microeconomic aspects.
Fundamentals:
Asset prices are said to be in a bubble territory when they are unhinged from the
economic fundamentals. A few years ago, house prices in the United States and a
number of European countries reached the stratosphere, even though supply and
demand could not explain the boom. A few years earlier, stock prices of technology
companies in the US reached levels unsupported by economic fundamentals. Both
were bubbles. In both cases, the initial rise in prices could have been explained by
economic fundamentals: house prices were primed for a boom in the early part of the
last decade given low interest rates, and financial innovation allowed more people to
enter the market than was previously possible; the tech boom owed its origin to the
realisation in the mid-1990s that the internet had tremendous potential.
Every bubble has its genesis in fundamentals. So it has been with the Bangladeshi
stock market. Compared with similar economies in South and Southeast Asia,
Bangladesh has been posting remarkably stable growth since the 1990s (Chart 1).
Meanwhile, with the landslide victory by the Awami League in the December 2008
election, investors had reasons to be optimistic about the political climate in the
country – traditionally a key risk to investment.
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Bubble:
These fundamentals would have justified a
bull market. And until the second half of
2009, that's what we had. However, from
around August 2009, the market started to
get completely unhinged from the
fundamentals.
From the beginning of the decade till August
2009, the direction of short-term fluctuations
had been unpredictable, even though it
appreciated strongly over the long run.
Between August 2009 and November 2010,
share prices rose every month. The price
boom had lasted longer than 1996 (Chart
2). And with foreign participation in DSE
being less than 2 percent, the boom has
been a domestically driven one.
But how can we tell that share prices had entered the bubble territory? One way to
make that call is to look at the price-earnings ratio (P/E ratio).
One of the fundamental reasons why people hold assets is because of the stream of
earnings they provide. A low P/E ratio indicates that investors have not taken much
risk in view of past earnings: even if the price they paid seems high, the earnings have
been high enough to justify such a price. On the other hand, a high P/E ratio indicates
that investors are overtly optimistic about the future earnings of such shares, and are
therefore willing to pay a higher price.
Chart 3 compares the mean P/E ratios for selected sectors after August 2009 with
their long-run (December 2005 - August 2009) values. With the exception of the
banking sector, every industry has seen sharp rises in their P/E ratios. What
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fundamental changes in the economy could justify the rise in P/E ratios in so many
sectors to such extent?
Interestingly, the industries with the smallest numbers of publicly-traded companies
have tended to post the largest increases in P/E ratios. This suggests that the
increases in sectoral P/E ratios may have been driven by a handful of well-performing
shares. Did the future profitability of the firms concerned increase that dramatically that
quickly? Or did these prices rise on the back of word-of-mouth among myopic
investors?
Let's think through the myopic investor idea with some examples.
Suppose one had invested 100 taka in DSE in January 2002. Five years later, it would have
been worth 240 taka solely through capital gains (that is, without accounting for dividends and
brokerage fees) – an annual rate of return of 19.2 percent, significantly higher than what most
deposit schemes pay. On the other hand, the value of the investment over the course of 2002-03
was much more unpredictable. Initially it rose, and then it fell such that the 100 TK had barely
appreciated if one were to liquidate in March 2003.
30
After the bubble burst. Photo: zahedul i khan
The point we want to drive home is simple: up until August 2009, the stock market was
a tricky place for investors looking for short-term gains, but a beneficial place for
investors willing/able to invest over longer time periods.
What happened after August 2009? An unprecedented good run in which the index
appreciated every month until November 2010, with the largest percentage increases
in late 2009 and early 2010. An investment of 100 taka would have only increased in
value in this period, and not decrease once (until the very end).
Suddenly, the stock exchange became a good place for short-term gains. This in turn
attracted more short-term funds, and the volume of trade on the Dhaka bourse
increased as a result. In the meantime, the number of retail investors who typically
invest in a small number of shares went from less than 500,000 in 2006 to almost 3.5
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million today. In just the first 10 days of February 2010, nearly 125,000 such trading
accounts were opened.
Most of these retail investors have very little, if any, experience of a bear market, let
alone a crash like the 1996. Indeed, the younger investors who reacted violently on 10
January would have been in their teens during the last bubble. Moreover, unlike
institutional investors, anecdotal evidence suggests that the individual investors rely
less on analysis of the fundamentals and trade more on personal advice from brokers
or fellow investors. One can easily imagine how a small number of such investors
buying a particular share could lead to other investors jumping on the bandwagon and
bidding the price of that share through the roof.
Incidentally, one industry where the P/E ratio has fallen relative to the long run is bank.
It's possible that this shows the preponderance of large institutional investors in this
sector. Such investors are likely to rely more on fundamental analysis than short-run
herd behaviour, and are likely to enjoy superior information regarding the banking
sector and it
business models.
Regulators' irregularity:
Investors usually buy/sell shares by putting down only a fraction of the money needed
for investment, with the rest being borrowed from brokers or merchant banks. The
maximum that can be borrowed is a percentage of how much they put down. This
percentage (also called margin loans) is usually determined by the SEC.
In February 2010, with the bubble in full
swing, the SEC ruled that the maximum that
can be lent was 150 percent of the
investor's down payment. Thus, if we
wanted to buy a stock worth100 taka, we
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would only have to put down 40 taka of our own money and could borrow the other 60
taka (150 percent of 40 equaling 60). Such loans could not be given against stocks
with P/E ratio of 50 or more. This made short-term investing much easier and much
more prone to moral hazard problems, as more than half the investment could be
made with borrowed money.
By July it had become much clearer that the market was over-valued. The SEC tried to
push on the brakes, but not hard enough. It deemed that the margin loans could be a
maximum of 100 percent of the down payment. Even then, a short-term investor would
be using only half their own money for investment. Their “skin in the game” had
increased, but was it enough?
As it happens, apparently the SEC did not think so. Within four months, it squeezed
the margin limit further to 50 percent of the down payment, provoking angry reactions
from retail investors late last year. Within three weeks thereafter, it had loosened the
requirement back to 100 percent, and 5 days after that, back to 150 percent in the face
of investor ire and a market-wide liquidity crunch, as institutional investors such as
banks withdrew money from the stock market.
Even then, evidence suggests that most brokerage houses and merchant banks were
not lending up to the maximum margin, suggesting that at that point a minimum margin
requirement would have been more apt.
The SEC's actions thus seemed largely reactive to market developments, rather than
anticipatory or even contemporaneous.
The SEC was not, however, acting in a vacuum. The macroeconomic context of the
boom has been one of easy money. And the political economy of the boom has been
framed by the fact that the party presiding over the last crash is in office now.
How did these macro and political economic factors fuel the bubble? And what should
happen now? –These are the questions that have remained to be explored.
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Suggestions to improve the activities of Stock Market :
1. To introduce automated monitoring system that may control price
manipulation, malpractice’s and inside trading.
2. To introduce full computerized system for settlement of transactions.
3. To force the listed companies to publish their annual reports with actual
and proper information that can ensure the interests of investors.
4. To control and abolish kerb market form premises of stock market.
5. To take remedial action against the issues of fake certificates.
6. The composite Quotation system(CQS) should be introduced and
implemented that available the exchange specialist bid-ask quotes to the
subscribers.
7. To make arrangement to set-up merchant banks, investment banks and
floatation of more mutual funds particularly in the private sectors.
8. Banks, insurance companies and other financial institution should be
encouraged deal in share business directly.
9. The brokers should not be allowed to deal in the Scripps on their own accounts.
10. The management of DSE and CSE should be vested with professionals
and should not in any way be linked with the ownership of stock exchange and
other firms.
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Major future prospects that will change the Stock Market:
Within 3 to 6 months 8 large profitable government enterprises are going to be
listed under Direct Listing Method adding value worth another 1 billion Dollar.
The Telecom Giants in Bangladesh are finalizing their offers for IPO in the
market.
Power and energy sectors demand for capital is 5 to 10 billion dollar within
short time to meet the immediate needs of 5000 MW power demand.
A deep sea port requiring 1 billion dollar is going to start with a policy
decision that it will also be listed.
The Pharmaceutical sector and API enjoying WTO benefit is growing
sharply.
Textile sector as backward linkage to thriving export oriented garments
industries is booming.
Export oriented food processing industry needs huge capital and technical
capacity to meet the growing standards in global market for marine food, fruits
and poultry.
IT sector with our talented developers, yet to demonstrate the massive
potentials of software industry of the country.
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Future Programs for Further Development :
1. Active market of government, municipal and corporate bonds beside the
corporate bonds to create alternative investment.
2. All securities to be brought under CDS within 2 years.
3.All major infrastructure companies, specially those in power,
telecommunication and energy sector are to
be listed ensure to broaden the market depth with at least US$ 1.5 billion
market cap by 2012 having daily average turnover from current level of
average 10 to 15 million dollar to a level of 70 to 100 million dollar 2 years.
4. To strengthen merchant banks’ capacity to be more active.
5. Ensuring speedy disposal of decisions for market operation.
6. Ensuring greater degree of transparency in financial disclosure and
management structure for better corporate governance.
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Conclusion:
To expedite the market development process, it may be a good idea to decide
on certain milestones and link them to the
disbursement of Development Credit
Support of
the World
Bank The government is
making good progress in other
sectors, including
monetary management, corporatisation of
public-sector banks and others through this linkage. The missing link between
the SEC, Bangladesh Bank,
Bangladesh Telecom
Regulatory Commission and other
regulatory bodies is now getting established. Individually, they were not
serving each others' interests, and there was no effective coordination among
them, hence the
country was deprived of great initiatives. A dedicated financial market
cell
at the Ministry
of Finance
could be formed to coordinate with these regulators as well as other ministries.
In terms of creating market depth, more profitable
state-owned-enterprises should
37
be listed. The
supply of securities can be increased if the SOEs are allowed to
operate through the stock
exchanges. Floatation of SOE scrips is expected to expand the market by
couple of times.
Corporatisation of SOEs will bring in transparency as well as confidence on
the government financial system. The Bangladesh capital market still has a
long way t o
go.
The recent
measures taken
by the
transitional government have already begun to
positively impact the markets. If more investor-
friendly policy reforms were to be implemented, the capital market will
undoubtedl play a critical role in
leading Bangladesh towards being the next Asian tiger
with growth
comparable to
India, Vietnam and the other most dynamic economies
in the region.
References :
Website :
38
www.msn.com
www.google.com
www.wikipedia.com
www.scribd.com
www.globaloneness.com
www.cse.com.bd
www.dsebd.org
www.secbd.org
Book:
Fundamentals of Investments (Charls J. Corrado)
Journal :
POTENTIAL GAINS FROM EMERGING STOCK MARKET OF
BANGLADESH: FACTS & FIGURES FOR FOREIGN INVESTORS
Mazhar M. Islam, Texas A&M International University
39
