Subject: Investment Management

Subject Code: Fin 4705

Assignment on
Stock Index of Bangladesh Stock Market

Submitted by:
Fuhad Ahmed
ID- B1506025
Sec-Fin (A)

Submitted to:
Dr. Mohammad Bayezid Ali
Associate Professor
Department of Finance
Jagannath University

Date of Submission: 25-05-2018

Stock index of Bangladesh stock market (DSE and CSE)
After the independence, establishment of Dhaka Stock Exchange (formerly East Pakistan Stock
Exchange) initiated the pathway of capital market intermediaries in Bangladesh. In 1976,
formation of Investment Corporation of Bangladesh opened the door of professional portfolio
management in institutional form. Dhaka Stock Exchange (DSE), where trading is conducted by
Computerized Automated Trading System and Chittagong Stock Exchange (CSE), which is also
conducted by Computerized Automated Trading System . All exchanges are self-regulated,
private sector entities which must have their operating rules approved by the SEC. The
Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June, 1993
under the Securities and Exchange Commission Act, 1993.

The major stock exchange of Bangladesh is the Dhaka stock' exchange Ltd which started trading in
1956. It is a broker owned stock exchange and incorporated under Companies Act 1994. The
stocks are no longer paper stocks issued by listed companies. Now they are units of accounts
deposited with the Central Depository of Bangladesh Limited (CDBL). In other words, stocks
are electronic stocks and accounts are maintained by the CDBL which came into being by the
Security Depository Act 1999.
Bangladesh has another Stock Exchange named the Chittagong Stock Exchange (CSE). The CSE
came into being in 1995. The administrative and trading system are more or less same as that of
DSE. In some cases, CSE took the lead in bringing reforms and sophistication in the exchange
administration and trading system. The CSE is also under the demutualization process. When
both DSE and CSE are demutualized, there will be either one demutualized exchange in the
country or both the exchange can exist separately if SEC decide so.
 DSE Indices
There are three categories for the DSE indexes:

 DSEX: 
DSEX represent the DSE all-Share Price index for the Dhaka Stock Exchange (DSE).
Trading History
The Dhaka Stock Exchange Limited introduced DSE Broad Index (“DSEX”) as per ‘DSE
Bangladesh Index Methodology’ designed and developed by S&P Dow Jones Indices with effect
from January 28, 2013. DSEX” is the Broad Index of the Exchange (Benchmark Index) which
reflects around 97% of the total equity market capitalization.

 DS30: 
DS30 is an index where the best thirty stocks are listed. The best thirty performing stocks
information, movement, overall information is provided here.
Trading History
DSE 30 Index (“DS30”) was also introduced with DSE Broad Index (“DSEX”) as per ‘DSE
Bangladesh Index Methodology’ at the same time. DS30 constructed with 30 leading companies
which can be said as investable Index of the Exchange. “DS30” reflects around 51% of the total
equity market capitalization.

 DSES:
DSE Shariah Index (DSES) is constructed as a subset of the DSE Broad Index (DSEX) and
includes all the stocks included in the parent Index that rules- based screens for Shariah
compliance.
Trading History
The Dhaka bourse introduced the index-DSES index-that was designed and developed by S&P
Dow Jones Indices Methodology on January 19, 2014. Its target was to meet requirements of the
Islamic fund investors.
 CSE Indices
There are five categories for the CSE indexes:

 CASPI:
CASPI represents the CSE all-Share Price index for the Chittagong Stock Exchange (CSE).

Trading History
The only index the CSE has been maintaining since 10th October 1995 is a ALL SHARE PRICE
INDEX using Chained Paasche method. CSE finds the date 1 January 2000 is the best date to start
new index.

 CSE 30:
CSE 30 is an index where the best thirty stocks are listed. The best thirty performing stocks
information, movement, overall information is provided here.

Trading History
In 2000, it was introduced, which was found to be very popular in almost all the developed
exchanges worldwide at that time. After revision in the Listing & Index Committee Meeting held
on 28th Apr 2009, two layer methods are followed for selection of listed companies in the CSE-
30 Index. In the first layer method, basic criteria are considered for primary selection. On being
qualified on the basis of the Basic Criteria, the companies are required to meet further Selection
Criteria to have the final berth in CSE-30 Index.

 CSCX:
It represents the Chittagong Special Categories Index. Here all the stock except the Z category
stock are included.

Trading History
Chittagong Stock Exchange (CSE) launched a new index named CSCX (CSE Selective Categories'
Index) from 14th February 2004 to replace the earlier CSE Trade Volume Weighted Index.
 CSE-50:
CSE 50 Index is constructed in order to provide an appropriate benchmark for the capital market.
The index comprises 50 leading and active stocks to ensure coverage of a large portion of market
capitalization in CSE.

Trading History
It was introduced in 2014. It was developed by India Index Services and Products Limited (IISL),
a subsidiary of the National Stock Exchange of India (NSE) and a subsidiary of NSE Strategic
Investment Corporation.

 CSE All Shariah Index

The CSE All Shariah Index – CSI Index – comprises all Shariah compliant companies listed on
the CSE. The index does not have fixed number of companies and it reviews the market on annual
basis. This index has variable number of constituents.
Trading History
It was also introduced with CSE-50 at the same time. It was also developed by India Index Services
and Products Limited (IISL). The CSE-50 Index and CSE Shariah Index helps investors to monitor
the performance of the market and Shariah compliant securities that form part of all listed
companies on the CSE other than mutual funds and corporate bonds.


 Calculation methodology
Index Calculation for DSE
The algorithm of index calculation according to IOSCO index methodology is:

Yesterday's Closing Index X Current M.Cap

Current Index = --------------------------------------------------------------
Opening M.Cap
Yesterday's Closing Index X Closing M.Cap
Closing Index = --------------------------------------------------------------
Opening M.Cap

Current M. Cap = ∑ (LTP X Total no. of indexed shares)

Closing M. Cap = ∑ (CP X Total no. of indexed shares)
Abbreviations and Acronyms
M.Cap: Market capitalization
M.Cap - Market Capitalization
DSE - Dhaka Stock Exchange
IOSCO - International Organization of Securities Exchange Commissions (IOSCO)
LTP - Last Traded Price
CP - Closing Price
Index Calculation for CSE
All the indices of the Chittagong Stock Exchange Ltd (CSE) are calculated and maintained
following Laspayers Method which was considered as the most transparent and scientific at the
time of its inception.

Free-Float Calculation Methodology:

Total Outstanding Shares XXX

Less: Shares held by Directors/sponsors XXX

Government Holdings as promoter/acquirer/

controller XXX

Strategic Stakes by Private Corporate Bodies/ XXX

Individuals (Any holding more than 5% held by

an individual/company, be considered as strategic)

Shares held by Associated Companies

(Cross holdings) XXX

Other shares under lock – in (if any) XXX XXX

Free-Float: XXX

All CSE indices will be calculated using following formula:
Free-float market capitalization of index constituents/ Base Market capitalization * Base Index
Value
 Provisions affecting stock price
Impact of Stock and Cash Dividend Declaration
The market adjusted average abnormal returns attributed solely to the dividend announcement
day is statistically insignificant for both stock and cash dividends. Thus, it is evidence that there
are no differences in the impact of cash or stock dividend as far as the announcement day is
concerned. However, the significant negative returns for equity dividend prior to the
announcement day indicate speculative nature of the investors’ behavior. As it is with the nature
of weak form efficient market to predict the returns around an upcoming event, the rumors and
hearsay dominates the market. It is also possible that the news has been leaked out earlier
resulting in the negative effect of the event. In such a case the negative returns associated prior to
the announcement justify that the speculators are in action with negative news about the
announcement. On the other hand, positive returns for stock dividends are reported after the
announcement, indicating positive attitude during the post announcement period. The positive
returns could be attributed to the lag between the announcement day and the record day. As the
record day becomes nearer, the stock indicates some positive returns, though the length of the lag
may vary for A, B or Z categories of companies as far as the DSE is concerned. Therefore, the
investors in general shows more positive attitude towards stock dividends.

As far as cash dividend is concerned, there is no significant returns exist as a result of cash
dividend declaration.

Impact of Stock Split

In December 2011, an empirical study based on the sample of 117 mandatory stock splits in it is
found that there is overall sort of an equal distribution of positive and negative excess return
pattern on both sides of the event date. Unlike some of the views presented in literature
concerning effects of stock splits in different markets around the world, the study found that
stock splits, especially when they are undertaken as per regulatory directives, are basically a
neutral event. One strong explanation for this finding can be the mandatory nature of the split
because most of the previous studies undertaken used sample data sets containing management-
decision induced stock splits.
Impact of Stock Repurchase
The purpose of a buyback is to put unused cash to use, raising the earnings per share, increasing
internal control over the company and obtaining stocks for the employees' stock option plans or
pension plans. In the context of Bangladesh, most investors consider buyback as a process to
stabilize the companies' share prices. Repurchasing shares when a company's share price is
undervalued benefits non-selling shareholders (frequently insiders) and extracts value from
shareholders who sell. There is strong evidence that companies are able to profitably repurchase
shares when the company is widely held by retail investors who are unsophisticated and more
likely to sell their shares to the company when those shares are undervalued. By contrast, when
the company is held primarily by insiders and institutional investors, who are more sophisticated,
it is harder for companies to profitably repurchase shares. Companies can also more readily
repurchase shares at a profit when the stock is liquidly traded and the companies' activity is less
likely to move the share price. When companies repurchase their own shares, they decrease the
number of outstanding stock available, which theoretically increases the stock value..