EXECUTIVE SUMMARY The analysis of securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. In the process of economic development, stock markets play a pivotal role in channeling funds from the surplus unit to the productive (deficit) units. Stock markets provide adequate finance to the entrepreneurs. In recent years with the changing economic climate, the Government of Bangladesh has emphasized the development of stock markets in the country. Government is also trying to develop the stock markets through different policy measures, even though the
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EXECUTIVE SUMMARY
The analysis of securities and make investment decisions fall into two very broad
categories: fundamental analysis and technical analysis. Fundamental analysis involves
analyzing the characteristics of a company in order to estimate its value. Technical
analysis takes a completely different approach; it doesn't care one bit about the "value" of
a company or a commodity. Technicians (sometimes called chartists) are only interested
in the price movements in the market. Despite all the fancy and exotic tools it employs,
technical analysis really just studies supply and demand in a market in an attempt to
determine what direction, or trend, will continue in the future. In other words, technical
analysis attempts to understand the emotions in the market by studying the market itself,
as opposed to its components.
In the process of economic development, stock markets play a pivotal role in channeling
funds from the surplus unit to the productive (deficit) units. Stock markets provide
adequate finance to the entrepreneurs. In recent years with the changing economic
climate, the Government of Bangladesh has emphasized the development of stock
markets in the country. Government is also trying to develop the stock markets through
different policy measures, even though the rate of development is not up to expectation.
Thus, the situation warrants detailed examination of the stock markets of Bangladesh and
drawback in the system need to be point out. In this paper we tried to analyze the
development and growth of stock exchanges and Securities and Exchange Commission
(SEC) of Bangladesh. For evaluating the stock market performance data has been
analyzed through the various statistical measures like growth percentage, average growth,
trend equations, square of correlation coefficient & correlation matrix for Dhaka Stock
Exchange (DSE) & Chittagang Stock Exchange (CSE). The paper also briefly describes
some of the problems of Bangladesh stock market such as, inactive stockbrokers, non-
existence of market makers, kerb trading, malpractice’s of companies, non-transparency
of the deals, and poor performance of Securities and Exchange Commission (SEC) etc. In
order to overcome the problems a few suggestions are given in this paper for stable the
stock market.
INTRODUCTION
A capital market will play as a strong catalyst in the industrialization and economic
development of the country.The Dhaka Stock Exchange (DSE) is a new and emerging
stock exchange located in the capital city of Bangladesh. The Dhaka Stock Exchange has
also undergone significant changes contributing towards the development of Bangladesh
capital market. Theoretical and empirical literature has shown that the prices of shares
and other assets are an important part of the dynamics of economic activity of the
country. The development of the capital market is crucial for capital accumulation,
efficient allocation of recourses and promotion of economic growth. The capital market
acts as an intermediary between surplus units and deficit units of an economy and
facilitates savings into investments. In addition, by ensuring liquidity for the invested
funds, the capital market ensures optimum allocation of resources. Bangladesh being a
developing nation in South Asia and characterized by underinvestment and poor
infrastructure development needs presence of organized and well–functioning financial
markets that would facilitate investment in efficient and profitable ventures and promote
economic advancement. The Bangladesh’s Dhaka Stock Exchange market has witnessed
a radical transformation in the last decade. The adoption of international quality trading
and settlement mechanisms and reduction of transaction costs have made the investors,
both in domestic and foreign, more optimistic which in turn evidenced a considerable
growth in market volume and liquidity. The market feature a developed regulatory
framework, a modern market infrastructure, removal of barriers to the international
equity investment, better allocation and mobilization of domestic resources and increased
market transparency. These reforms set the stage for significant market expansion, with a
trend development in size and liquidity. New equity issues, volume and value of trading
and the number of traded companies all recorded significant progress. As a result, market
capitalization increased from 1.3764 percent to 16.2849 percent of GDP during 1990-
2009 and the turnover ratio increased from 1.6843 percent to 54.2524 percent. All these
infer better efficiency of Bangladesh’s Dhaka Stock exchange market. Despite this
transformation Dhaka Stock Exchange market (DSE) has been shown greater volatility
which has affected the informational efficiency of DSE. The Dhaka stock market has
been experiencing volatility since its inception-the indices reached the highest level in its
history in November 1996 and eventually crashed; afterwards investors lost their
confidence about the stock market. As a result, regulators reformed the market and
introduced automation transaction in 1998 and this was expected to conduct studies on
informational efficiency, particularly to investigate any improvement as a result of the
automated trading system in the market. Thus both companies and investors want capital
markets to assign fair prices to the securities being traded. In the language of corporate
finance, companies and investors want the capital markets to be efficient. Whether capital
markets are in fact efficient is a question which has been studied extensively for many
years. One school of thought believes that the financial markets are efficient. Another
school of thought believes that the financial markets are not efficient. Even within the
believers of market efficiency, three forms of efficient market hypothesis are developed.
A market is weak form efficient if the current stock prices or return series are not
predictable from past prices or return information (Fama 1991) and hence follow a
random walk. The market is semi-strong form efficient if the current security prices
reflect all publicly available information. Finally, the market is strong form efficient if
security prices reflect all private and public information. The traditional analysts strongly
believe that the stock markets are efficient because stock prices reflect the true market
value of future dividends. Thus the shareholders make decisions on which shares to add
or remove from their portfolios. The investors such as commercial banks and other
financial institutions make decisions about whether and at what price to offer finance to
companies. Financial managers make decisions in the major areas of investment,
financing and dividends. Shareholders, investors and financial managers can inform their
decisions by evaluating the financial performance of companies using information from
financial statements, financial database, the financial press, and from Internet. Ratio
analysis of financial statements can provide useful historical information on the
profitability, solvency, efficiency, and risk of individual companies. By using
performance measures such as economic profit, earning per share, net asset value per
share, and value added, company performance linked more closely with shareholders
value and shareholders wealth and attention can be directed to ways in which companies
can create more value for shareholders. But in recent years many market analysts have
started arguing for market inefficiency, at least in its weak form. They claim that the
traders are now paying more attention to information related to recent trends in return
instead of putting emphasis on the information related to future dividends. A large
number of traders are buying stocks only because past returns were very high. These
traders are often called feedback traders; believe that if the stock returns were in high in
the recent past, they are likely to be high in future. Such behaviors of traders cause stock
prices to go beyond the true values of stocks in the short run. This feedback trading
makes the market more volatile in the short-run because in the long-run the stock prices
tend to return to their true values.
BRIEF HISTORY OF STOCK MARKET IN BANGLADESH
The stock market history of Bangladesh refers back to 28 April, 1954 when the East
Pakistan Stock Exchange Association Ltd. was established. Formal trading began on the
bourse in 1956. The trading was suspended during the liberation war of Bangladesh in
1971. Operation resumed again in the 1976 with the change in government policy.
During 1976, there were only 9 listed companies with total paid up capital of Tk.0 .138
billion and market capitalization of Tk. 0 .147 billion which was 0.138 % of GDP (Khan,
1992). Since then the stock exchange continued its journey of growth. The second stock
exchange of the country, the Chittagong Stock Exchange(CSE) was established in
December 1995.In order to control operation of the stock exchanges and trading of stocks
of listed companies, the government of Bangladesh established the Securities and
Exchange Commission of Bangladesh on 8th June, 1993 under the Securities and
Exchange Commission Act, 1993 .The mission of the SEC is to protect the interests of
securities investors, develop and maintain fair, transparent and efficient securities
markets, ensure proper issuance of securities and compliance with securities laws.
From the inception the stock market of the country was growing in a slow pace. There
was a large surge in the stock market in the summer and fall of 1996 evidenced by a
197.43%, 372.30% and 370.51% increase in the market capitalization, total annual
turnover and daily average turnover respectively in DSE and 506.63%, 210.2% and
615.15% increase in the market capitalization, total annual turnover and daily average
turnover in CSE. DSE general index grew from 832 in January 1 1996 to 3567 in
November 14, 1996 while that of CSE grew from 409.4 in 1995 to 1157.9 in 1996. The
market, however, crashed in December of 1996 and the index started to decline
significantly since then with the index assuming a value of 507.33 as of November of
1999, a cumulative decline of 83.44% from 1996 to 1999 with the annual rate of 27.82%,
and has yet to fully recover. Investors’ confidence was significantly damaged because of
excessive speculations, allegedly aggravated by widespread irregular activities. The
government of Bangladesh undertook the Capital Market Development Program
(CMDP) supported by the ADB on 20 November 1997. The CMDP aimed at (i)
strengthening market regulation and supervision, (ii) developing the stock market
infrastructure, (iii) modernizing stock market support facilities, (iv) increasing the limited
supply of securities in the market, (v) developing institutional sources of demand for
securities in the market, and (vi) improving policy coordination. The policy matrix of the
CMDP included 95 program measures. Central Depository Bangladesh Limited (CDBL)
was incorporated as a public limited company on 20th August 2000 to operate and
maintain the Central Depository System (CDS) of Electronic Book Entry, recording and
maintaining securities accounts and registering transfer 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. CDBL went live with the Electronic Treasury Bills
registry of Bangladesh Bank on 20th October, 2003 and thereafter started equity market
operations on 24th January, 2004. It was set up to facilitate the computerized delivery and
settlement of securities and eliminate to the extent possible, the paper work involved in
handling the transactions and that would ensure risk-free and cost-effective settlement.
Before establishment of CDBL, the delivery, settlement and transfer procedures were
handled manually and were plagued by lengthy delays, risks of damage, loss, forgeries,
duplication and considerable investment in time and capital. Besides, both the CSE (July
1998) and the DSE (August 1998) have automatic trading services. By having automated
trading system and a central depository in place, the credibility of the country's Stock
Exchanges in the eyes of the prospective foreign investors are expected to grow stronger
and boost investment activities in the country's stock markets. Contrastingly, foreign
portfolio investment, never more than $200 million, has virtually disappeared form the
stock market of Bangladesh.
PROBLEM STATEMENT
Stock markets are great financial institutions for economic growth provided they are
managed properly. Billions of dollars worth of capital can be raised from millions of
investors, small and large with voluntary participation. From stock market investors
can earn lots of money as well as lose lots of money. Artificially market
can move this way or that way. It is not difficult for the big investors or
the regularity authority to make market up word or down word. Legally
or ethically it is wrong but in Bangladesh it is very familiar scenario.
In Bangladesh there are many factors that are responsible for babul and crash of share
market. These reasons are market regulatory authority manipulators, childish behavior on
institutional investors, intervention of central bank, share split circuit breaker theory etc.
all this reasons are created intentionally or because of the mistake made by the regulatory
authority. Whatever because this activity, currently we have a volatile stock market.
PURPOSE OF THE STUDY
Purpose of the study is to explore, gather knowledge about certain legal and ethical issues
and to provide solutions concerning the activities of recent ups and downs of share
market in Bangladesh.
LITERATURE REVIEW
The Bangladesh capital market continued to rally handsomely in 2010 even though U.S
and European market had to recover from recession effect. The market capitalization to
GDP ratio has been increased over the year from 30% to 50%. DSE General Index
(DGEN) has gained its peak at 8,918.51 point in December 5, 2010 and the lowest value
was at 4,568.40 point.
Over the year, DGEN increased 82.78% and reached at 8,290.41 point at the end of the
year. The total market capitalization of all shares and debentures (excluding t-bills and t-
bonds) of the listed securities at the end of December, 2010 also stood higher at USD
49.4 billion, indicating a gain of 84 percent which was higher than USD 26.8 billion at
the end of December, 2009. The total turnover has increased from USD 0.13 billion to
USD .25 billion which indicates a 91% growth. Along with other factors, at least a
portion of the upward movement of the market can be explained by the inadequate
number of securities and huge fund flow in the capital market. The market was not able to
uphold its bullish position from the beginning of December, 2010.
During this time institutional investors had the tendency to realize profit from the market
and it was expected that the market would remain flat in this time. However, the actual
steep downward trend was not expected. One of the primary reasons for this abnormality
could be the Bangladesh Bank’s decision regarding CRR (Cash Reserve Ratio) and SLR
(Statutory Liquidity Ratio) in the hope of curbing the inflationary pressure. Following the
actions, call money rate has soared significantly and it rose as high as 180%, breaking the
earlier record of 150% hit on March 30, 2006. From June to November, 2010 excessive
liquidity decreased by 28% (see the table below).
Name of Stock Index Fig as on Dec 30, 09 Figure as on Dec 30, 10 Percentage (%) change