Articles

Share Market of Bangladesh

Share: In plain and simple, share is the ownership of a company. Share represents a claim on the company’s assets and earnings. As you acquire more share, your ownership stake in the company becomes greater. Whether you say shares, equity or stock, it all means the same things.

Why does a company issue share:

A company could keep the profits and earnings for the owners of the company. In order to extend market share or get bigger asset, at some point every company needs to raise money. To do so companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing share.  The first sale of share by a company is called the initial public offering (IPO).

Risk involvement in a share:

This very important factor you believe in risk when you want to invest in the share market. There is no guarantee of what percentage of capital gain you can get, where and when the share prices stops in up end or low end and how long it takes to get the profits. It is true, no company or institutue can guarantee. However you can measure the risk in various ways. That’s why it is essential to do some “Home work” on a company before you invest. The “Home Work” should be calculating earning per share (EPS), total debt, relative price strength, profit margins, volumes, industry leader and so on. You can also reduce the risk by diversifying the portfolious (selecting stocks from different industries ) and measuring the correlation between a share and market index. A less risk taker has options to invest in Bond ( fixed returns) or a company that provides dividends at the end of year.

However, investors need to measure “expected rate of returns” first and it should be high enough to compensate the investors for the perceived risk of the investment. Risk is contrary to the positive profit, but there is also bright side. Taking on greater risk demands a greater return on the investment.

How share trade:

Most shares are traded on exchange, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. Two trading floors are located in Bangladesh. DSE which is located in Dhaka, CSE is located in Chittagong . We should distinguish between the primary and secondary market. The primary market is the first phase of share where securities created before trading at the floor which is called IPO. In the secondary market, investors trade previously issued securities without the involvement of the issuing companies. The secondary market is what people are referring to when they talk about the share market.

What causes share price to change?

Share prices change everyday by market forces. By this we mean that share prices change because of supply and demand. Any single time, if more people want to buy a share than sell it, then the price moves up. Conversely, if more people want to sell a share than buy it, which is a greater supply than demand, then the price falls.

The Bulls and the Bears:

On Wall Street, the bulls and bears are in a constant struggle. A bull market is when everything in the economy is great, people are finding jobs, GDP is growing and share prices are rising. Things are just plain rosy, picking shares during a bull market is easier because every thing is going up.

Bull markets can not last forever though and sometimes they can lead to dangerous situations if shares become overvalued. If a person is optimistic, believing that shares will go up, he or she is called a bull and said to have a bullish outlook. A bear market is when the economy is bad, recession is looming and share prices are falling.

Present situation of share market

Our share market experienced a totally new kind of development in the trading. It watched both sides of a coin within two trading days.

On January 10, 2011 we saw a huge selling pressure and a record fall, 600 points in the general index of Dhaka Stock Exchange (DSE) within just 50 minutes of trading. Again next day we find the other side of the coin when almost no seller was found in case of most of the shares. At the end of the day’s trading the DGEN, actually, gained 1012 points taking into consideration the previous day’s loss. Thus we witnessed both record gain and record decline in index on January 10 and January 11 respectively. It appeared like a circus show said a market analyst.

The DGEN which was 5367 points on January 10, 2010, increased 6250 on the same date this year. But in a day’s gap market index soared to 7512. The percentage change in one year stood at 39.9 from 16.4 within two consecutive trading days.

In 2010, institutional investors especially some banks and non bank financial institutions showed their investment characteristics like general investors. Over last two years, the profit of most of the banks and financial institutions became two to three times more than that of the previous years. This profit growth was attributed to profit earned from investment in shares. Thus many banks and financial institutions concentrated on share business instead of investing in their core banking activities.

In early December 2010 when general index reached the record 8700 points, many analysts expressed their concern about the overvaluation and syndicated price hike. But that time our general investors were over inspired by the air from the market . It was seen that most regulatory decisions failed to slow down the unending market rally. Investing people became more dependent on rumors than fundamentals of the issues traded on the bourses. Insider traders turned out to be big gainers. Now it is becoming clear to us that there are many other factors that have brought the capital market on the verge of a collapse. Many of us started blaming the regulators. It is a matter of great regret that the SEC, the central bank and other shareholders are also blaming each other. This ultimately proves the lack of co – ordination among them in policy making and policy implementation.

Government steps

The Finance Minister asked the SEC to carry out an investigation to indentify the sellers who led the market towards instability and misusing the book building method.

The government has suspended the book building method for initial public offering (IPO)

Bangladesh Bank to remain soft on banks exposure to stocks stare credit rule easy.

Experts comments

Salehuddin Ahmed, a former governor of Bangladesh Bank, advised the government to remain alert as share market debacle might affect the entire financial system . Market experts said the index circuit breaker will not help curbing the volatility in the markets and restore investors confidence unless the liquidity inflow increases to support fresh buying

“It is not an effective solution. Introduction of the circuit breaker will result in fall in share prices, halting of trading and demonstrations” said Salahuddin Ahmed Khan, professor of Finance at Dhaka University.