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The world has now run depending on the industrial system, we are studying
the opening of a new era known as the industrial revolution. It relates poles
apart of the world; make able the flawless stream of information revolution.
The satellite is the main theme song of this revolution and e-commerce
known as electronic commerce is its energy. To fight with the same category
of organization it must deal effectively with global competition and keep
pace with the modern financial system. The modern communication known
as Internet plays the basic function in transforming information from
organization to organization in the new era. In the present world developing
countries are now getting closer in share market; the enormous probability in
the sector of share market of stock trading from the theme of overseas
investors may be excavated if the market takes electronic trading methods. If
the information can transfer time to time to overseas investors it will help to
focus of this paper on e-trading and with special emphasis on e-broking. By
taking all kind of modern technology we can improve our e-commerce, e-
trading as well as our capital market.
The capital market is a market for securities, where companies and government
can raise long term funds. It is a market in which money is lent for periods
longer ten year. The capital market includes the stock market and the bond
market Capital market is the group of interrelated markets, in which capital in
financial form is lend or borrowed for medium and long term and, in cases such
as equities, for unspecified periods.
For example if you want to transfer your part of ownership of the firm to other
then you should sale the deed of ownership to someone else. In that case you
have to maintain some papers. For example a sale deed will be signed and the
deed will be registered in government registry office.
In case of stock when you buy stock/share of a certain company you will be
given a share certificate. This certificate certifies that you own that much part of
the company. And you have to register your ownership certificate with
company's register. But due to some problems with paper certificate - (such as
copied certificate, maintenance of huge paper certificates) a new system of
electronic stock is made. In this system your stock is preserved in an electronic
system rather delivering you the paper shares. And you don't need to register
your ownership. The ownership is automatically transferred to you and
preserved in an automatic system. This system is called Central Depository
Bangladesh Limited (CDBL).
Stock exchange is a organized place or arrangement where the buyer and seller
is brought together so they can buy sale their stocks/share. For example Dhaka
Stock Exchange has a electronic trading system called TESA and Chittagong
Stock Exchange has an electronic trading system called VECTOR. These two
system work as an arrangement to help buy/sale of listed securities.
The primary role of the capital market is to raise long-term funds for
governments, banks, and corporations while providing a platform for the
trading of securities. This fund rising is regulated by the performance of the
stock and bond markets within the capital market.
Bangladesh capital market is one of the smallest in Asia but the third largest
in the south Asia region. It has two full-fledged automated stock exchanges
namely - Dhaka Stock Exchange (DSE) and Chittagong Stock
Exchange(CSE). It also consists of a dedicated regulator, the Securities and
Exchange Commission (SEC), since, it implements rules and regulations,
monitors their implications to operate and develop the capita market.
Regulating the business of the Stock Exchanges or any other securities market.
Registering and regulating the business of stock-brokers, sub-brokers, share
transfer agents, merchant bankers and managers of issues, trustee of trust deeds,
registrar of an issue, underwriters, portfolio managers, investment advisers and
other intermediaries in the securities market.
SEC dominates the two capital markets of Bangladesh. One is Dhaka Stock
Exchange (DSE) and the other one is Chittagong Stock Exchange.
FUNCTION OF DSE:
Prime functions of DSE are given below:
Listing of Companies
Settlement of trading
Market Surveillance
The Chittagong Stock Exchange (CSE) began its journey in 10th October of
1995 from Chittagong City through the cry-out trading system with the
promise to create a state-of-the art bourse in the country.
MISSION:
OBJECTIVES:
Develop a research cell for analyzing status of the market and economy.
Problems Of capital market:
There are various types of anomalies and problems are situated in our capital
market. Most of them can be overcome by taking proper management. Common
problems are given below:
The market does not have adequate number of fundamentally sound scripts.
Focus should be on the privatisation of state-owned enterprises through
public offerings in the bourses. Also, valuation of equity component in a
project is not always done appropriately leading to overvaluation of sponsors
equity base and therefore higher leverage from practical point of view.
xi. Rumour:
“Rumour-driven investments are too risky.”Our capital market is totally
based on various rumors. The small investors often hamperd by these
rumors. These rumors sometimes misguided and deceived the investors.
Media, broaker houses, the corrupted members of SEC and various gamblers
spreads these rumors for their immoral purpose.
At least one lakh new investors have entered the capital market in the last
two years and most of them have no clear knowledge about the market and
investment tools and techniques, said Faruq Ahmad Siddiqi, chairman of the
SEC.
Our emerging economy mostly invited the funds from all over the globe.
Market capital has shown amazing growth. Although current market price
earning ratio is higher than that of the neighboring country but it is my belief
that considering the demand for lack of avenue to invest, the capital market
of our country has a bright and attractive future and untapped sector.
Addressing the issue regarding our capital market, 'liquidity' and lack of
"instrument" would top the list of challenges that we have right now. The
major reason for the existence of the stock market is to provide liquidity of
shares and diversified instruments which helps increase market
capitalization. It also helps investors to gain more confidence and positively
impact Gross Domestic Product (GDP) of our country. Neighboring
countries such as India and Pakistan have market capitalization of more than
75% of their GDP. Comparatively, the Bangladesh capital market accounts
for a far lesser share of its GDP indicating ample scope for future
intensification in this sector. Hence, we should address the above to issues
with utmost seriousness and with a future vision.
The second part of the solution is to have more companies being listed. This
also applies to the government taking a dynamic approach in their
privatization
Henceforth, we can see that, until and unless there are structural changes
brought about in the capital market it will not grow. Artificially creating
demand by pumping in more money in the capital market will only inflate the
market temporarily before falling again. This will never solve the underlying
fundamental problems. Whereas, when you open up the capital market by
addressing its structural problems and bring in new products and regulations the
market will grow, become more dynamic as capital flow will increase thereby
increasing profitability for all. Good examples of demutualised and highly
profitable exchanges can be seen all over the world like the LSE, NASDAQ,
NYSE, EURONEXT to name just a few. These exchanges have evolved to such
an extent that now the exchange business and the financial markets are in
trillions of dollars! So Bangladesh needs to wake up, as the benefits are
enormous!
Sometimes changes take place inevitably, whether they are sought or not. The
capital market of Bangladesh is changing without much uproar. In last few
years the market has gone through some significant reforms. Almost silently.
Some reform efforts about 5 years ago by the Asian Development Bank was a
substantial endeavor. Some were initiated by the SEC and the exchanges
themselves and some were just demanded by the investors, although they are
not really formally organized in Bangladesh.
The ADB prescription was a general one. The recommendations were similar,
of not totally same, for the other countries in the region. In some countries, the
reforms are successful and distinctly visible. In others, the effects are not so
evident. In Bangladesh, the ADB reforms were not as effective as expected and
as it were observe red in other neighboring countries. Nevertheless, it is good to
see that SEC was not only busy with the implementation of ADB.
Prescription. SEC, albeit a small organization in terms of manpower and
financial resources, it managed to devise some investor friendly tools and
implemented those. In particular, the categorization of A, B and Z groups was a
wonderful one and welcomed by the general investors. The AGM defaulter
companies are on their toes to get things streamlined. Chittagong Stock
Exchange brokers are trading from 5 cities of the country. The network of
Dhaka Stock Exchange is also upgraded. There are stories of disappointment
and decision reversal, but in general, the total picture of the stock market is
much better and cleaner now, than it was ten years ago.
The most reputed business people of the country had remained aloof from the
stock market, at least collectively for a long time. On the contrary, recent ICC,
B conference on the capital market was a landmark attention of the private
sector business leaders. Stock market is necessarily private sector mechanism.
Private sector attention is therefore seen to be a spirit for fast future growths.
However, that does not mean that we already have a great market. A number of
issues have remained unattended in the capital market. In the economic world
map, Bangladesh market is yet to make a place. Many markets, smaller than
Bangladesh is displayed in the world media and attract international investors,
whereas, ups and downs of Bangladesh stock market is not news at all in the
world forums.
The setback that drives away investors' eye from Bangladesh is primarily a high
degree of uncertainty. The fluctuation of foreign currency or share price is not a
fear. The apprehension is all about changes in regulations, future development
and lack of trust worthy services. The efforts of the exchanges and the SEC risk
will be marred if these issues are not addressed soon. Investors at home and
abroad do not know what is going to happen in Bangladesh in short or medium
run. Therefore a preparation visible roadmap can be recommended. The road
map should be chalked out by a group of academicians in economics, finance
and law and market participants under the leadership of the commission. If
required experiences from neighboring countries can be studied for a quick and
inexpensive understanding. We have to take a path which many have already
traveled.
Southeast Asia is also coming up with India leading the way. Comparing the
local market scenario with that of the rest of the region, Bangladesh is in pretty
good shape as we have most of the infrastructure in place. Our market
capitalization is relatively smaller and it currently stands at $9.3 billion, which
is just over 13 percent of GDP. Higher liquidity is skewed towards a handful of
scripts, while a stagnant situation exists for few less profitable issuers.
Debut trading of state-owned oil companies like Jamuna Oil Company Ltd and
Meghna Petroleum Limited on the local bourses in January 2008 has spurred a
lot of encouragement among investors. This initiative taken by the government
to list SOEs will increase market capitalization and improved liquidity’s is also
contemplating the introduction of the book-building method in the valuation of
IPOs in order to ensure a fair price within this year. This will encourage
companies with sound financial health to come into the market.
This correction in the market has been long overdue because there was too
much money in the stock market in too few stocks. This inflationary pressure
was finally controlled by the central bank by raising its cash reserve ratio (CRR)
and statutory liquidity ratio (SLR) thus resulting in limiting the liquidity flow
into the capital market. The inter bank call money rate (DIBOR Dhaka Inter
bank Offer Rate) went up by 189 percent. One of the main reasons for this was
that the domestic banks had too much of their money invested in the stock
market, for quick and easy profit taking and as a result caused the stock market
to rise even higher. So, to control the excess money in the capital market the
central bank took these drastic measures, as it is within their right to do so, to
control inflation.
The problems of the capital markets in Bangladesh are structural, and, actually
quite far-reaching than what meets the eye. As we all know, the capital markets
here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to,
firstly, the DSE index calculations being incorrect. Secondly, there are big
syndicates acting together to artificially influence the prices resulting in huge
profits for them at the expense of the average investors who put in their hard
earned lifetime savings. And last, but definitely not least, is the Securities and
Exchange Commission (SEC) whose total policy and regulations favors' the
syndicates which primarily consists of high net worth people and the stock
exchange members resulting in an “artificial demand driven market”. Until and
unless these fundamental issues are addressed the capital markets here will fail
to see the light of the day.
So, if we look at the issues individually like the DSE Index, the syndicates,
comprising of stock exchange members and the SEC we can find the common
link, which is the stock exchanges and the SEC.
The reasons for demutualization are many but here are a few.
The second part of the structural changes needs to be at the SEC of Bangladesh.
The fundamental issue here is: what is the regulator doing to help minimize risk
for the investors? The absolute minimum the SEC can ensure is to have risk
minimizing tools. As a first step they can introduce scrip netting facility, like
financial netting currently allowed, which could be in the form of settlement of
trades being T+0: T is for time and currently trades have a settlement period of
T+3 which means that investors buying any stock will have to wait three days
before he can sell out his position. Next, they can introduce short selling
whereby the investors has the facility to short sell if he thinks the price of stocks
would fall and then buyback. By introducing these facilities it will allow
investors to minimize risk as and increase liquidity as well. The SEC should
also have a good surveillance system in place to ensure fair play. The
introduction of equity derivatives should also most definitely be taken into
serious consideration to minimize risk, as there are no instruments to do so.
The second part of the solution is to have more companies being listed. This
also applies to the government taking a dynamic approach in their privatization
manifesto and deregulating the economy so more of the state owned enterprises
can be brought to the market which in turn would benefit the exchequer from
more revenues. Investors would then have a wider selection of stocks to choose
from thus making the former state-owned enterprises accountable to shareholder
pressure and making them perform better.
Henceforth, we can see that, until and unless there are structural changes
brought about in the capital market it will not grow. Artificially creating
demand by pumping in more money in the capital market will only inflate the
market temporarily before falling again. This will never solve the underlying
fundamental problems. Whereas, when you open up the capital market by
addressing its structural problems and bring in new products and regulations the
market will grow, become more dynamic as capital flow will increase thereby
increasing profitability for all. Good examples of demutualised and highly
profitable exchanges can be seen all over the world like the LSE, NASDAQ,
NYSE, and EURONEXT to name just a few. These exchanges have evolved to
such an extent that now the exchange business and the financial markets are in
trillions of dollars! So Bangladesh needs to wake up, as the benefits are
enormous!
The obstacles to bond market development can be divided into three broad
categories: those around and across the market, and those inside the fixed-
income markets.
At the same time, the government has committed itself to launching financial
reforms that could help accelerate the country’s rate of growth. The main goal
of these reforms is to reduce the direct controls on the financial system, and to
deregulate and introduce a new set of market-oriented approaches to financial
sector activity. The Bangladesh National Budget for 1999–2000, for example,
earmarks funds for the creation of a central depository system (CDS) to help
streamline trading at the stock exchanges and improve authentication.
Furthermore, a proposal is under scrutiny that would amend the Trust Act to
allow provident and pensions funds to invest in the capital market. To achieve
that goal, it will be essential to ease the bad-loan situation, which is draining the
country of its monetary resources. But certain factions in Bangladesh oppose
those aims and commitments. Since no one has stepped forward to “champion
reform,” the government appears unwilling and unable to undertake the
requisite changes in due time. Because the political environment is so fragile,
laws and regulations are not being fully enforced.
Macroeconomic Situation- Bangladesh’s macro economy was fairly
strong throughout the 1990s, with growth rates averaging a respectable 5%, and
inflation averaging a modest 9%–10%. The primary fiscal deficit during the past
five years has averaged about 5.5% of GDP, which has generally been within
sustainable limits. (However, the consolidated public sector deficit, taking into
account losses incurred by state-owned enterprises, is much higher and
underscores the need for improved fiscal management, although foreign
exchange reserves have become more stable recently owing to impressive
export performance and reduced imports.) Heightened foreign investor interest
in the country’s natural gas sector has opened up tremendous possibilities.
But despite these positive elements there are some serious constraints on the
development of active corporate bond markets in Bangladesh. First, Bangladesh
is one of the poorest countries in the world, with approximately 125 million
inhabitants, of which about 60 million live below the poverty line. Although its
GNP growth rates—in the range of 4%–5% year—are attractive, they suggest
that it will take Bangladesh 25 years to double its per capita income. In order to
reduce the incidence of poverty to about 11%, as it hopes to do, Bangladesh will
have to achieve economic growth rates of 7.5% or more a year. According to
several studies (see, for example, World Bank, “Bangladesh, Key Challenges
for the Next Millennium,” April 1999), economy has the capacity to move out
of poverty with increasing speed, but that will require decisive policy actions in
several areas, not least of which is the financial market.
If the country’s positive macroeconomic trends continue into the future, the
fiscal deficit and bad-loan situation will ease up and these factors would pose
less threat to the financial market.
In sum, the non banking sector has not evolved in a way that would allow it to
play an active role in the financial system. Nor, as discussed in the section on
intermediaries, is it prepared to play an 2 the non bank section is made up of 2
stock exchanges (Dhaka and Chittagong), 170 active brokerage firms, 19 non
banking financial institutions, and 17 merchant banks.
The Dhaka Stock Exchange (as of April 1999) has 208 listed companies on the
equity side, 9 mutual funds (of which 8 are issued by the Investment
Corporation of Bangladesh, ICB), a state-owned mutual fund company, 11
debentures, and a total market capitalization of approximately US$1.1 billion,
of which equity stands for approximately US$1 billion. The Chittagong Stock
Exchange has 136 equity shares listed, 9 mutual funds, 5 debentures, and a
market capitalization of about US$825 million. Membership is open to
foreigners at the stock exchanges.
Trading is done through an automated real time system and settlement occurs on
T + 5 active and skilled leadership roles in developing and participating in an
active fixed income market.
Government securities market- The government securities market in
Bangladesh is small, does not provide much of a yield curve to support a
corporate bond market, and does not provide intermediaries with skills and a
profit base to support the corporate bond market.
At present, Bangladesh law and the government’s fiscal and monetary policy
combine to create a financial market monopoly for GSCs and NCBs, which in
turn keeps alternate financial intermediation from emerging. Bangladesh needs
a healthy nonbank financial institution (NBFI) sector to increase mobilization
and make competitive financing available in a fixed-income market. To achieve
that end, it must break the NCBs’ monopoly. Although the government is aware
of this problem and has put forward some relevant reforms, there are no real
incentives to speed up the process, maybe because of political considerations.
A second problem is that the SEC has no authority to issue rules and
regulations, and the procedure as a whole is long and drawn out. As a result, the
SEC has not proposed any regulations for the issuance of bonds or debentures.
All rule proposals must first be submitted to the Minister of Finance for
approval and then passed on for approval from Ministry of Law. Furthermore,
potential issuers have to look at various sets of regulations and follow a long
and cumbersome procedure.
Fourth, the Securities and Exchange Act of 1993 confers vast regulatory
authority on the state, and is regarded as a constraint on capital market
development. There is a board of policymakers. Three of its members are
appointed by the state, another is from the Ministry of Finance and one from the
central bank, and the chairman is appointed by the government.
Also lacking are a credit rating agency, research and information companies,
and market information on screens; market participants are referred to other
media, such as the daily financial newspaper, and thus experience a delay in
obtaining essential economic information. According to some participants, even
that information is often unreliable.
Third, companies find that issuing debt is costly, both in monetary and non
monetary terms. The interest rate distortion due to the GSCs mentioned earlier
raises the ongoing cost of borrowing, while various up-front costs amount to
about 7% of the value of the issue (these include registration costs—that is,
stamp duties—totaling about 2.5% of the issue value).
In addition, no protective laws are in effect to ensure that investors will get their
dividend and capital back. Missing are higher audit standards together with SEC
regulations on disclosure standards in prospectus along with arbitrary
institutions. Furthermore, most investors lack a trading mentality and just buy
and hold because of SLR requirements or because they do not know how to
trade. Few foreign investors are attracted to this, mainly because of the weak
disclosure by the borrowers. As for the general public, it has little understanding
of debt products, and the intermediaries are not much help because few engage
in research on markets, companies, and industries to encourage investment.
Nor do any feel motivated to become a market maker for an issue. Hence the
market is illiquid, with large spreads. At the same time, the fee structure and
pricing are high enough to allow intermediaries to make money, but because
transactions are so limited, the intermediaries seldom make money. Even if they
are able to participate, intermediaries are reluctant to take any risk in dealing.
Recent anomalies in DSE:
What crisis happened?
Stock prices at the country's main bourse -- the Dhaka Stock Exchange (DSE) --
witnessed Sunday the steepest ever single-day fall -- 551 points or 6.71 per cent.
Out of 243 issues traded Sunday, only 05 gained, 236 declined and two
remained unchanged. Banking and insurance issues were the major losers on the
day when total turnover stood at Tk. 14.90 billion, up by 17 per cent compared
to that of the last trading session.
The general index (DGEN) at the DSE has lost 2264 points or 25 per cent since
December 05 last after hitting the highest ever level-8918. The market shed 547
points within 80 minutes from the start of the day's trading on December 08.
But stock prices started regaining mysteriously as a section of investors took to
the streets and resorted to violent protests and ended the day with 105 points
lower. On December 13, Sunday, the market went through major price
correction-285 points. Stock prices at the DSE more than doubled over period
of last one year with the active participation of both institutional and general
investors.
Market insiders listed the profit taking by banks at the end of their accounting
year, liquidity shortage in view of the hike in the rate of CRR (cash reserve
requirement) Statutory Liquidity Ratio (SLR) and central bank's instruction
relating to banks' exposure to stock market as major reasons for the ongoing
erosion in stock price, Reason behind this crisis. The reasons are, actually,
multi-dimensional, combination of a number of inter-related factors such as the
regulator's uncoordinated, unjustified and too frequent actions, the central
bank's steps on liquidity in the banking system, the International Monetary
Fund's (IMF) warnings on the commercial banks' over proportional exposure to
the stock market, the institutional investors' year-ending move to present a
brilliant success to their shareholders and clients and last but not least the
"rumours"....
"All the institutions that have anything to do with the stock market were
responsible for the debacle," former central banker Khondkar Ibrahim Khaled,
who led the committee, told newsmen after submitting the report to finance
minister AMA Muhith.
He added that bad decisions and failure to oversee the situation by the SEC was
largely responsible for the debacle.
Briefing the newsmen later at his office, Muhith said the inquiry report would
be made public in 10 to 12 days but initially no name of individuals would be
published as the probe committee "did not get enough time to go into the
details".
The minister, however, acknowledged that the committee named some people
after getting "some indications" about their role in creating the crisis.
"I don't want to make individuals' names public without being sure of it. If I am
convinced about the sustainability of the allegations made in the report, I will
publish it," he said.
He said the committee pointed out 15 case studies showing how the market was
"heavily manipulated" by some people who took illegal advantage using their
relations with influential quarters in the government.
"But I don't think there was any political role behind the market debacle," he
said.
The former Bangladesh Bank deputy governor and currently the chairman of the
state-owned Krishi Bank, Khaled said, said they did not find the total figure but
have identified that some money has gone to private pockets.
Bangladesh's stock market was closed for several days in December 2010 and
January 2011 for crashes that caused fund losses of millions of small investors
as the benchmark Dhaka Stock Exchange general index (DGEN) fell nearly
1,800 points. DHAKA: Bangladesh will create a $700 million mutual fund, the
country's biggest ever, in a bid to stabilize the highly volatile Dhaka stock
exchange, the head of a state-owned investment bank said Monday.
The plan is part of the government's drive to restore calm to the market, whose
sharp fall has triggered angry protests by investors in the capital Dhaka and
cities and towns across the country.
Eight state-run financial institutions will invest cash to create the planned 50
billion taka ($700 million) Bangladesh Fund, said M. Fayequzzaman, chief
executive officer of Investment Corp of Bangladesh.
"It is the largest ever mutual fund in the country's history. It is aimed at
stabilizing the country's stock exchange and boosting liquidity in the crisis-hit
market," Fayequzzaman told AFP.
The Dhaka Stock Exchange has shed more than 40 percent in the last three
months, wiping over $16 billion off the share market's capitalization since its
benchmark index hit a record high of 8,918.51 points on December 5.
Tens of thousands of small investors have been worst hit as they started buying
shares when prices were peaking.
The benchmark DGEN index was trading up 2.90 percent, or 160 points, at
5,697 points in morning trade on the back of Sunday's announcement of the
fund's creation.
Monday's gains came on top of a 1.99 percent rise in the index on Sunday, a
trading day in mainly Muslim Bangladesh.
The fund comes on top of a reform package that includes tighter regulation and
other measures announced earlier by the government to prop up the market and
boost investor confidence.
Anxious to assuage investor anger, the government has also ordered a probe
into the sharp fall.
The Dhaka Stock Exchange has been one of the best performing markets in the
world with the DGEN index climbing 400 percent between 2007 and 2010. In
2010, it soared 80 percent despite repeated warnings that the market was
overheated.
DHAKA: Shares on the Dhaka Stock Exchange soared Tuesday when the
market re-opened after a series of plunges that forced trading to be halted
repeatedly and triggered clashes between investors and police.
Hundreds of riot police were stationed outside the stock exchange building as
the DGEN Index gained 479.5 points or 7.57 percent to 6,806.84.
Thousands of investors have pelted police with rocks and vandalised cars in
recent weeks, demanding the resignation of the head of the central bank and the
finance minister.
The DGEN index has shed 30 percent from a historic high of 8,918.51 on
December 5, and in the face of mounting public anger the government has
admitted "mistakes" by regulators and ordered a probe into the dive.
However, the market has soared 400 percent since the start of 2007 and rose
more than 80 percent last year.
An electronic circuit breaker, which automatically halts trading and which many
experts blamed for triggering panic among retail investors, has been
discontinued, finance minister A.M.A. Muhith said Sunday.
"There are no sellers in the market, which is taking the market to abnormal
heights. I think manipulators are at it again. They are just fooling us," said
Fazlur Rahman Shuvo, one small investor.
Conditions for a crash have been building for some time, experts say, as the
number of retail investors nearly doubled over the past 15 months to 3.3
million, lured by the record gains.
What Went Wrong With The Dhaka Stock
Exchange?
There are financial markets located throughout the world. Some are larger than
others and represent more of the global economy. However, many countries that
have lagged behind the rest of the world economically have their own emerging
markets. In Bangladesh, this is the case with their primary securities market
being the Dhaka stock exchange. This market has recently seen a bubble
collapse similar to the one experienced by US markets in 2009 and 2010. This
has left many people wondering what went wrong with the Dhaka stock
exchange.
The Growth of Dhaka Stock Exchange in Last Few
Years
From 2003 to March 2010, this market has experienced steady growth in market
capitalization and share prices. On the surface, this looks like a positive factor.
To a certain extent, this is true. The market fundamentals have remained solid
with steady growth until February of 2010. Then, the market began to
experience a sudden surge in stock prices and market capitalization that was not
supported by the fundamentals.
Turnover, total stock sales per day has also seen an incredible increase. In 2003,
total turnover was only Tk 140 million. In February of 2010, this figure had
increased ten thousand percent to Tk 13.2 billion.
The Crash of Dhaka Stock Exchange
What caused the crash in this market? A sharp increase on the demand side
unsupported by fundamental analysis of the stocks being traded lead to
incredibly exaggerated prices being paid for stocks that had an actual value of
less than half the price per share.
A large number of foreign investors entering the market for the purpose of
taking as much profit as possible contributed a great deal to this problem. It was
magnified when these foreign investors began selling off shares to take their
profits and pull their money out of the market.
In the end, domestic mutual fund managers and foreign investors began to fear a
market correction looming in the future and sold off as many shares as possible
in order to hold their assets as cash until this correction took place.
All of the stocks showed extremely high P/E ratios. While a high ratio can be
an indicator of healthy economic growth, Ratios reaching extremely high levels
should have been a warning sign that stock prices were becoming exaggerated
beyond reason.
A Lesson for Investors in Other Emerging
Markets
There are several emerging markets scattered around the world. Most of these
are experiencing positive growth, indicating that the economies of these
countries are improving.
The primary lesson investors in these markets should learn from the Dhaka
example is that allowing emotions to rule one's decisions can create a falsely
inflated market price for shares that are unsupported by the value of the
companies they represent.
Investors must step back and examine the fundamentals behind the stock values
and assure themselves that they are getting an actual value for their money. The
P/E ratio is an excellent example of a method of calculating actual value of
stocks. Ratios of 1 or more can indicate a company experiencing positive
economic growth. However, if these ratios rise beyond a certain amount, this
can be a warning sign that demand has become exaggerated and that share
prices are being pushed unrealistically high.
As with all major financial markets, the Dhaka stock exchange will recover
from the recent crash. This may not help the vast number of investors who lost
huge amounts of money when the market corrected itself. However, it serves as
an example to traders in other emerging markets of what can happen when
emotions rule the day rather than fundamental study and wise investment
choices.