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Introduction to Capital Market of Bangladesh

Capital market plays a significant role for the proper functioning of capitalistic economy, as they channelize funds from the savers to the borrowers. The securities market allows sound listed companies to raise additional capital quickly and cheaply, as they enjoy reputation. A vibrant and liquid securities market encourages people to increase in savings by offering attractive and rewarding securities in terms of higher return, lower risk and easy option for conversion to cash. Capital markets Include Primary Market, where new securities are sold & Secondary Market, where existing securities that are issued through the primary market are traded. Primary Markets involve investment bankers, who have specialization in selling new securities. Secondary Markets consist of equity markets, bond markets and derivative markets. It is encouraging to see that the capital market of Bangladesh is growing at a slower pace and has reached at a emerging stage. After the bubble and burst of 1996, capital market has attracted a lot more attention, importance and awareness that have led to whatever infrastructure we have in the market today. This flow of experience for market further improved the awareness and knowledge level of investors as well as issuers. Investors in Bangladesh became increasingly interested in equity markets because many entrepreneurs look for requirements of fund from the equity markets for many reasons. In this connection Dhaka Stock Exchange Limited play an integral part of the industrialization of the country. The major regulators in Bangladesh capital market are Securities and Exchange Commission, stock exchanges, Registrar of Joint Stock Companies and Investment Corporation of Bangladesh. The major functions of stock market are listed below:
1. The companies can arrange their long term capital for business

2.

3.

4.

5.

expansion from market with a minimum cost. The banks are suitable only for short term and mid-term financing. The companies listed in the stock exchange come under regulation of Securities and Exchange Commission, which ensures the corporate governance of the companies. The financial statement of listed companies is quite informative and valuable than unlisted companies. The most important factor is that stock market can attract investment. People reduce their consumption and invest here to earn better in future. Stock market can finance huge fund for large projects easily. Finally, stock market is considered as the barometer of economy. An efficient stock market is the leading indicator of the economy.

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A Brief History of Capital Market Capital market of Bangladesh was in a dormant stage during the decades of sixties, seventies and early part of eighties. During that period, few companies assessed in capital market & investors were not interested or familiar in corporate securities. The origin of the Stock Market in Dhaka goes back to 1954 when a Stock Exchange was formed in Narayangonj. Then in 1958 the Stock Exchange was transferred to Dhaka. The Companies Act 1913 and the Capital issues (Continuance of Control) Act 1954 were two pieces of legislation was governing the Stock Market in the country. Later the Securities & Exchange Ordinance was promulgated in 1969. It was only in 1992, the capital market of Bangladesh started to be recognized as a source of finance for industry & business. The first international investor arrived in March 1993 soon followed by a folk of international stockbrokers. With the success of big public issues in 1994 and 1995, investors took the capital market as an alternative to money market as a source of financing. Chittagong Stock Exchange Limited, second stock exchange of Bangladesh, has started trading from 10th October 1995. It is estimated that an aggregate amount of Tk. 20 billion has been raised against public issues, right issues and private placement of shares, debentures and other securities during 1992 through 1996. After that the unprecedented market crash in 1996 has shaken the confidence of the investors and its impact is still lingering. Some major development, particularly the introduction of on-line computer trading in countrys two bourses, and also some organizational (internal) changes or reforms have taken place since then. As a result of the reforms of the capital market, the market has overcome the crisis period and in 2008 Bangladeshi Index was in sixth position around the world.

Salient Features of the Capital Market of Bangladesh

The salient features of capital market of Bangladesh are discussed below:

NUMBER OF LISTED SECURITIES : The number of listed securities in DSE is 500. Among them 231 are companies, 37 are mutual funds, 8 are debentures, 221 are Treasury Bonds and only 3 are corporate bond.

A SMALL NUMBER OF INVESTORS: The Bangladesh stock markets are characterized by a small number of investors. LOW FOREIGN INVESTMENT: The role of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in the development of capital market of Bangladesh is undeniable. However, Foreign Direct Investment (FDI) was US$ 900 million (July to Apr) and Foreign Portfolio Investment (FPI) was US$ -123 million (July to Apr).

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LOW LIQUIDITY LEVEL: The stock market in Bangladesh is characterized by a thin market having small market capitalization ratio & low level of liquidity. If a big investor takes any attempt at selling a relatively large quantity, this will cause a large decrease in prices, i.e. an erosion of capital value. INSUFFICIENT TRADABLE CAPITAL INSTRUMENTS : Illiquidity is rather intensified by the absence of varied tradable capital instruments. The Bangladeshi and foreign investors are experiencing the scarcity of diversified products in Bangladesh. The platform of this market is supply and demand mismatch. Due to the absence of diversified products, the liquidity of market is declining. LACK OF INVESTORS AWARENESS: A major portion of our population does not have proper awareness about the stock market. So, an investment culture needs to be developed in our country through training up the general investors as well as the authorized representatives. INFORMATION ASYMMETRY: The access to the information remains a major problem in the market. While a handful of institutional investors may enjoy certain benefits since they have an investment unit manned with qualified officers, nothing exists for retail investors. And, in the absence of independent research houses, retail investors primarily focus on advices given by their brokers, and rumors. This is frightening and it often leads to enormous losses for small investors who are vital for a lowincome and pre-emerging market like Bangladesh. Filtering of information among different types of investors may leave scopes for manipulation, this assumptions has been proven in 1996 at the cost of many individuals and households.

LACK OF PROFESSIONAL PORTFOLIO MANAGEMENT: We face the lack of professional portfolio management in our Capital Market.

INSIGNIFICANT INVESTMENT FROM INSTITUTIONAL INVESTORS: An estimate suggests that the ratio of institutional-to-retail investors is between 2025%. This is considered low for a developing market like ours. Institutional investors bring long-term commitment hence stability in the market. The presence of institutional investors also ensures better level of valuation due to their specialized skills. While we do have public sector as well as private sector institutional investors in the economy, proprietary investment from these institutions is not significant- other than Investment Corporation of Bangladesh that was created in 1976 and currently manages several mutual funds.

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WEAK CORPORATE GOVERNANCE: The level of corporate governance of international standard is lacking. Inadequate disclosure requirement and culture of family-owned conglomerates deter the expansion of corporate governance into the local industry. Unless the local market adheres to and effectively enforces a standard corporate governance system, there will not be a level-playing ground for international business houses vis-vis local operators.

VALUATION DISPARITY: An important aspect for capital market is reflection of fair value of scripts. We find analysis touching the ruse or drop in stock prices on a post-facto basis, but investors would be glad to receive projections and recommendations from research analysts. This is not adequately present in the current scenario, and due to this reason Investors are perhaps depending much on speculative analysis resulting into volatility in the market as opposed to fundamental analysis. For this reason, the market is not receiving attention of an important segment of investors, both foreign and local. OTHER CHARACTERISTICS: the other remarkable features of Bangladesh stock markets are laid down as follows: Existence of only dealer-broker member (no specialist/ market maker) Inefficient capital market operational & informational Lack of proper or adequate disclosures of information & Lack of enforcement with the compliance of rules and regulations

Problems & Prospects of BD Capital Market Crash in 2010

Bangladesh's stock market performance, measured in terms of the stock price index, has been one of the best globally for a number of years. Its upward surge defied global and regional market developments. When almost all markets across the globe collapsed during the global economic crisis, DGEN was perhaps one of the very few which defied the global trend and maintained its upward progression fueled by local developments/conditions. The recent debacle in the stock market is an issue of debate. All the stakeholders and particularly the small investors want to know the true story behind the incident. Government also wants to know the reason and wants to address the issue to avoid further debacle in future. There is a major difference between two debacles of share market in 2006 and 2010. The former happened in secondary market but this time the manipulation happened during valuation and fixation of offered price of share and in side trading by different stake holders. It happened

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behind the screen. Even Investment Corporation of Bangladesh (ICB) also played in the game. They have purchased share of Tk 8.0 billion through 15 Omnibus accounts in October and November, 2010. They of course played the game for some influential officials in the government. When it started its upward trend in 2007, the market was certainly undervalued, and there were fundamental economic reasons for it to go up. At that time the average Price/Earning (P/E) ratio was in single digit and the market capitalization was less than 10 per cent of gross domestic product (GDP). The sustained upward surge, however, went beyond what could be justified by economic fundamentals by early 2010. Since mid-2010, as the index crossed the 5000 mark, the market has clearly been driven by speculative forces. During the last two-month period leading up to the peak, the index increased by more than 2000 points before crossing the 8900 level on December 5. To put it in proper perspective, the index level was at about 1500 until this recent surge started in 2007. Daily market turnover increased 30 fold about Tk. 1.0 billion to Tk. 33 billion over the three-year period. Clearly, economic fundamentals cannot support this level of valuation gain and turnover, and the market is bound to correct itself once it runs out of steam. The recent drop in the stock market index needs to be evaluated in this context. Even after a more than 2500 point decline, the index is still well above its mid-2010 levels. The corrections and volatility in the price index that we have experienced in recent days is nothing uncommon, and fully in line with what has been observed in many other important, and much larger stock markets across the globe. For the market to start consolidating, it needs to shed itself of speculative elements, and that can only happen once market valuations come back to their fundamental levels. The problem was created for a simple reason that there is a gap between demand and supply of stocks in the market. The primary reason is that the regulator could not stop manipulation rather the officials of SEC were involved in trading and other unfair practices. The other agencies and institutions having stakes in the share market possibly failed to perform the need of oversight functions. The share market experienced bullish trend in most part of the last year because of the overexposure of some commercial banks and other financial institutions. Bangladesh Bank was not much aware about banks' exposure to the stock market. They had invested beyond the limit of 10 per cent of their deposit. This is also unethical to invest depositor's money risking the investment and even without their benefit. One of the commercial banks made profit of Tk 10.40 billion last year. Of this amount of profit, Tk 4.40 billion came during the last month by investing in share market. Allegations have been found that bank officials provided false loan to fake clients for investment in the share markets. The

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Bangladesh Bank also investigated allocation of Tk 24 billion industrial loans by a bank to its clients last year. The situation worsened when it was made mandatory for all banks to maintain their investment in the stock market equivalent to 10 percent of their total deposit and to comply by December, 2010, when in reality, the ratio was much higher than this level. The central banks measure to rise cash reserve requirement of schedule banks from 5 per cent to 6 percent also has a small impact on cash flow in the capital market. The management of listed companies was busy to make easy money. The listed companies have withdrawn about Tk 170 billion from the market through private placement, issue of preference share and direct listing at the initial stage of listing with stock market. The private placement could reason unfair transaction. Companies sold their share to civil, military bureaucrats and also to other influential persons. Directors of Companies also benefited from direct listing. Another manner of manipulation was revaluation of assets and issue of bonus share which has a link to manipulation of market. It happened in many cases in Z category companies who either do not pay dividend to shareholder, or, do not meet at Annual General Meeting, or are unable to comply with other rules of SEC. Those Z category companies issued right share to the members and again sold those shares in the peak market. SEC did not give attention to Z category companies for preventing increase of price of share and find out the reason, stopping them to issue right share to the members. No proper vigilance and enforcement function was visible. It is found that the directors of some listed companies sold their share amounting Tk 60 billion. Most of those companies are banks, insurance companies and some manufacturers. These Directors are awarded bonus shares through revaluation, and also there was no ground to selling out the controlling share of own companies and banks. The auditors and issue managers, and valuation companies also manipulate the information and SEC approved the reports in opaque manner. The country's common people and hundreds of thousands of unemployed youths have entered into the overheated market as a record 1.57 million Beneficiary Owners (BO) accounts, more than half of the total investors, entered into the market in 2010. When Bangladesh economy looks like a good shape based on capital/share market, that time Trading on the Dhaka Stock Exchange index was halted after it fell by 660 points, or 9.25%, in less than an hour. Chittagong Stock Market also met a similar fate. An abrupt crash of the market sparked violent protests from the Bangladeshi investors. It was the biggest one-day fall in its 55-year history. It is estimated that over three million people - many of them small-scale individual investors
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- have lost money because of the plunging share prices. The benchmark index had climbed by 80% in 2010 but has lost more than 27% since early December. The experts give their comment that the immediate reason for this crash was the policy of the regulators of the market who laid down a limit for investment by the banks and other financial institutions in the stocks. This was done in order to avoid the market being overvalued. As the banks and other big investor institutions withdrew the capital from the market, the panic ensued. In this way, the index got down to 5,203.08 in February 2011 from 8,602.44 of November 2010. However, in table-1 we will see the DSI, DGEN & DSE 20 index from January 2010 to November 2011:
Month Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Index DSI 4,422.8 1 4,549.6 0 4,573.8 1 4,641.5 4 5,030.0 5 5,111.6 3 5,278.8 9 5,555.4 9 5,930.9 0 6,612.1 4 7,135.1 6 6,877.6 6 5,367.1 1 5,560.5 6 5,582.3 3 5,654.8 8 6,107.8 1 6,153.6 8 6,342.7 6 6,657.9 7 7,097.3 8 7,957.1 2 8,602.4 4 8,290.4 1 DSI 3,030.1 9 2,992.9 3 2,952.0 1 3,039.1 7 3,432.2 3 3,650.0 4 3,721.7 8 3,874.5 0 4,137.9 3 4,533.1 8 5,119.1 3 5,204.9 8 Mont h Jan-11 Feb-11 Mar-11 Apr-11 May11 Jun-11 Jul-11 Aug11 Sep-11 Oct-11 Nov11 Index DSI 6,198.8 2 4,317.8 9 5,275.1 3 5,032.9 5 4,798.3 7 5,093.1 9 5,380.1 0 5,195.6 8 4,944.9 6 4,205.0 7 4,403.3 7 Month DGEN 7,484.23 5,203.08 6,352.10 6,050.85 5,758.26 6,117.23 6,459.62 6,212.00 5,910.20 5,036.50 5,268.55 Index DSE 20 4,701.7 4 3,514.5 1 3,968.3 8 3,826.2 2 3,795.8 6 4,069.1 0 4,264.6 3 4,190.4 7 4,080.0 5 3,749.9 6 3,894.6 8

Table 1: Index from January 2010 to November 2011 Graphical presentation of the DGEN index from January 2010 to November 2011 is as follows:
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Fig 1: Index from January 2010 to November 2011 From the graph we can see that the index started falling after November 2010 and continued upto February 2011. Later on though a bit uptrend is noticed but the ultimate result is 5,268.55 DGEN index at the end of November 2011.

Possible Reasons for Stock Market Crash

Bangladesh suffered a big bang crash in stock market last few months which results in many investors loss and especially trust of the small investors have drastically reduced from the market. One of the biggest reasons may be is that market got artificial rise just to encourage the small and medium investors and as soon as they stuck their money in the market big fishes withdrew their money to a large extent hence causes sudden decline. Crash of Bangladesh market is a big blow to small investors, most of which heavily rely on stock market. Although artificial rise of stock prices is never a good omen for the economy but a sudden fall of market is equally damaging. The authorities in Bangladesh should have thought of the consequences of their decision to set the limits for the banks and other financial institutions to invest in the stocks. I do no doubt the good intention of the authorities but the way it was done and implemented had serious repercussions. They should have done it slowly and gradually. At this point of time it is not clear how much time and effort is required for Bangladesh stock market to recover from this shock. Having been a passive investor in a small way and watching things from a far, we outlined the following reasons for the market gyration while it was in motion, so it was good to see some of the recent policy responses

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address some of the points raised below. We believe the following played a major role in contributing to the crash: Disproportion of Supply and Demand of Share: In the market in comparison with the total investor i.e. the demand supply of New Share was not adequate. So, there was always a higher demand for the existing securities.
Aggressive Investment made by the Investors: Reportedly,

aggressive investment made by the investors in the capital market is the main reason behind the share market bubble and said a subsequent plunge in share prices has put pressure on the financial sector with a portion of bank credit being diverted to stock investment from productive sectors.
Overenthusiastic Investors:

Unrealistic expectation of investors who for some reason or another seem to think the market would only go up (taking a longer term view -- in decades -- this is probably not completely off the mark when anyone takes into account Bangladesh's growing economy, competitive positioning and progressive integration with the world market economy). Most of the investors thought it was because it was going up and they heard from other people it was a good script. A good portion of the investments in Bangladesh stock exchange are trend-driven and unfortunately even rumour-driven.

Use of Omnibus Account: An omnibus account is a stock holding

account that involves more than 10,000 investors although actual shareholders, individual investors don't have the accounts in their names. Bulk amount of shares have been traded from hidden or omnibus accounts used as a major tool of stock market manipulation, according to the government probe body on the recent market debacle. Most big players chose omnibus accounts to gamble in the market, as it's not possible to find out issue-wise or client-wise transactions of actual number of shares from omnibus accounts.
Share Splitting used as a Tool to Inflate Prices: Split of shares

used as a tool to sweep up small investors' money had been a major reason behind the massive price inflation on the stock market for the recent market debacle. Split of shares affected the circuit breaker on share price movement, the probe body said. In order to control price movement, the circuit breaker threshold remains low, if the share price slab is high. Market capitalization of the companies, which split their shares between July 2009 and December 2010, soared by 655 percent, and that of those which did not split shares went up by 46 percent at the same time. This fragmentation of shares had an "unexpected impact" on share prices and liquidity in the market. Market capitalization of companies that did not split shares was three times higher than the companies that split shares until July 2, 2009. But market capitalization of companies, which split shares, doubled

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compared to the ones that did not between July 2009 and December 2010, the committee found. Issuance of Right Shares in the wrong way: On issuance of right shares, a company's earnings per share are diluted as the number of shares gets increased. Although share prices are supposed to come down after that, the opposite happens on Bangladesh's capital market. Here the prices go up after issuance of right shares.
Stock Protectors turned Predators: Market regulator officials and

their relatives made windfall profits from share market by using power, which played a major role behind the recent stock market manipulation, as per government probe.
Policy

Failure from Securities and Exchange Commission (SEC): Policy failure from Securities and Exchange Commission (SEC) to make any meaningful policy change that could have stopped the bubble when the market was moving up 3% + every week for months. It's not sustainable or even natural for markets to rise consistently on a daily basis as it has for the last nine months or so and we have seen what happens when it does. While we agree that there was some warning from the policy makers, they failed to take any concerted actions to impact the rise in any sustainable way. And when the SEC did take action, the regulators were flimsy in adhering to the policies, caving under pressure whenever there was protest as often happened when there was a 2% correction. This whimsical behavior does not exactly lend to its credibility as a market regulator. When an overdue market correction was finally underway, the constant policy change of SEC didn't help the fact; it added additional uncertainty to a market that was already volatile. If there is one thing markets hate more than negative news, its downbeat uncertainties. Had the regulators stayed away and not made drastic policy changes every other hour, things would have been more manageable. Another policy mistake made by the regulators was stopping trading practically every day for a week. This is the last resort a regulator takes, yet they were doing it practically every day. Before taking such a hasty decision, one should ask what kind of confidence this instills in the market. Adding fuel to the fire, regulators supposedly put an index breaker in place yet it did not kick in when it was required. Had regulators want to resort to closing the market, they should have done things properly by closing the market for a week or so and let the "Bengali emotions" settle down a bit while also using the time properly as a stop gap measure. This time could also have been used to shore up any other support they wanted to implement in concerted efforts with the financial institutions as was finally done. Exchange Commission (SEC), the regulatory authority for supervising the stock market, has taken some steps to control the market instability. To limit investor funds flowing into these already

Frequent Change in Equity to Loan Ratio: The Security and

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overheated/more than saturated shares and help the market to cool down, the SEC has tightened the conditions of margin loans. Initially, the SEC set the limit of equity to loan ratio at 1:1.5, later which was modified to 1:1 when the market was already in a bullish mood.
Revision in Maximum Market Exposure of Banks: Another

regulation was introduced on the maximum market exposure of banks at a time when the banks have already invested more than the limit. New embargo on share market exposure triggered the collapse as some banks, which had invested heavily in the market, tried to offload their shares quickly. Most of the investors, very emotional in nature, are small investors who invest without looking at the fundamentals of the market. Panic seized those investors when the index started to fall which apparently led them to panic selling. That eventually led to a nasty fall as predicted by many.
Revision in Statutory Reserve Requirement of Banks: Upward

fixation of Statutory Reserve Requirement resulted in liquidity crisis as well as constrain in flow of money in the capital market resulted in fall of share price.
Manipulators

Played on the "Psychological Weakness: Manipulators played on the "psychological weakness" of retail investors and encouraged them to buy lower denominated shares that had a huge impact on the stock market.

Violating the Rules of SEC by High Officials: Many high officials

have involvement with stock business in spite of prohibition. This violation has an impact on the overall market.
BO Accounts Maintain by High Officials of ICB: High officials of

ICB also maintained BO account in own and joint names.

Involvement of Some Political Persons in the Share Scam:

Some veteran political personnel were also involved in this share debacle.
Biases related to behavior of investors: One of the major biases

is the tendency of the investors to hold on to a "losing share" too long and sell "winning share" too soon. Apparently investors fear losses much more compared with the possibilities of value gains. When the investors find that the value of a share is decreasing, prudent portfolio management strategy demands the sale of the share if the market price covers the cost of purchase, the cost of financing and the cost of transaction and to reinvest the proceeds in undervalued shares. It is even necessary sometime to sale the share at loss and try to recover

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the loss by investing in another share. But sometime investors hold on to "losing share" with the hope that its price will rise soon. Another type of bias is termed as confirmation bias, whereby investors look for information to validate their prior opinions and decisions. Sometime, after making an investment decision, investors look for information to justify their prior decisions and rumour plays an important role at that point. If there is a shift of sentiment regarding the particular share, some investors move together which increases the prices and the volatility of that particular share during trading hours. Escalation bias is commonly known as "averaging down" and is a relatively popular investor practice. If investment in a particular share has declined in value since the initial purchase, investors rather than admitting it as a mistake and selling if, put more money to purchase the same shares with an expectation that the price of that shares will rise soon. But careful analysis is very essential to undertake this decision. Investment behaviour depends not only on the fundamental values regarding the investment but also on the sentiment. People invest with an expectation of future income from the investments. Expectation can be explained partially by the standard theory of finance and by fundamental and technical analyses. But behaviour of the investors is very important to understand expectation because even though risk aversion is the common phenomenon of the investors but some investors like to speculate with high risk and earn a very high return and these have a spill-over effect among the general investors. General investors jump on the bandwagon without understanding the nature of risk and return.
Violation of Insider Trading Prohibition: Generally, a person

violates the insider trading prohibition when that person violates a duty owed either to the person on the other side of the transaction or to a third party (such as a customer or employer) by trading on or disclosing the information. The insider trading prohibition applies to an issuer's directors, officers and employees, investment bankers, underwriters, accountants, lawyers and consultants, as well as other persons who have entered into special relationships of confidence with an issuer of securities. Examples of insider trading cases: Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; Friends, business associates, family members of such officers, directors, and employees, who traded the securities after receiving such information;
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Employees of law, banking, brokerage firms who were given such information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their employment by the government; and Other persons who misappropriated, and took advantage of, confidential information from their employers.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the stock market regulators all over the world has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.
Greed, Fear & Noise:

Stock market trading is an activity that is controlled by human emotions. It is inescapable that there is always a fear of losing and the greed to win. The behaviour of "Noise trading" is also coupled with these emotions. Even if one studies the fundamentals of a listed company, he still consciously or subconsciously depends on "noise trading". Greed and fear are the two basic human emotions at work in the stock market. These two emotions are the motivating force behind almost all market participants. In the case of trading, when a declining trend comes, the regret and frustration can carry over into the next trade. This particular problem is fuelled by the expectation that every trade one enters into should be money-spinning. But the fact is, not every trade will be profitable! Greed creates the reverse problem. With a couple of consecutive profitable trades, the ego can be enlarged and one can feel himself to be unbeatable. This would eventually lead one to such kind of trades that he normally would not have entered into. When stocks make strong moves to the upside, greed from all the cumulative market participants joins the move that leads to upward movement of the index. But the tragic thing is that the stocks prices usually fall faster then they go up, and when this happens, fear grips all the participants. Despite reaching the "sell" price, many hold on because greed is by their side, hoping for a further increase. Next day a heavy selling might start but still greed suggests one to hang in there and the price would come back. The price keeps going down rapidly and subsequently, fear starts to grow. But by that time, it is too late and one's nice profit has turned into a loss.

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One might be saying that greed and fear will never get in the way of his trading, but greed and fear always will be in trading. It is not something to be ashamed of. It is something one has to admit to, if one is to become a successful stock trader or investor. "Noise trading" is one of the market forces that cause equity prices to deviate from their true values. The term 'noise' describes the constant changes in market prices and volumes that cause investors to get confused about the market's direction. Most "noise traders" believe they are making sound investment decisions when they follow market noise. Nobody knows exactly what would be the maximum and minimum price of a particular share. People think that the capital market is just a money spinner and once one has invested, he would get a handsome profit within a short time. They should keep in mind that traditional banking gives 9-12 per cent interest per annum and thus dream of realizing a profit more than 20-30 per cent or even more within a few days or a month is never wise because there is always a chance of a reverse swing. It is extremely vital to focus on not losing instead of focusing on the potential profit because if one loses, especially the small investor, he might not be able to trade further. Thus, discipline is what will make one take a profit at the right time, get out with a small loss at the right time, wait for the right entry point or perhaps not trade at all. The other factor is self-control over greed, fear and noise. Absence of this control has led to sharp rise and drastic fall in our capital market, besides factors like manipulation (which is focused by many).

Remedies to Avoid Stock Market Crash in Future

Partnership Building with Other Developed Exchanges: Our first

long-term recommendation for the SEC/our exchanges is to build a partnership with other developed exchanges in the region to become competent; much like the Bombay exchange has with Singapore Exchange. This will facilitate knowledge-sharing that can potentially be adapted to our exchange over time, whether it's surveillance programme or technology adaptation. Singapore Exchange is a premier bourse in the region that not only enjoys confidence of global investors and institutions all over but is also one of the most profitable.
Review SECs Policy on Dividend and Right Share: Our second 6

recommendation for the SEC to review its policy on share dividends and rights share is to ensure that it does not add to instability of the market. We are pleading ignorance here as I could not find any documents to understand on what basis dividends bonus share and rights share are approved by SEC but my feeling is that it is a very

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arbitrary and non-transparent process. The arbitrary nature of this process not only opens it up for abuse and outside influence but also indirectly fuels some of the high P/E ratio we are witnessing in some of the sectors and companies right now. The other important recommendations are as below:
Demutualization of DSE & CSE: The demutualization of the

exchanges begins after the crash. Demutualization will mean converting these organizations into for-profit share-holding joint stock companies. Demutualization offers potential opportunities for strengthening governance, offering alternative business models, raising capital and improving operational efficiency. Most of the major exchanges in our neighboring countries have already gone through the process of demutualization. However, our exchanges do not seem to be ready for it yet partly because of unfounded concern of the existing members. It may be mentioned that a membership can be transferred in exchange of a fabulous amount of money and, therefore, cause of concern however, unfounded, is understandable. While demutualization is likely to take some time, currently the member-based exchanges are managed by boards of elected and non-elected mix of directors. Being member-based, the exchanges lack proper corporate management and the chief executive officers (CEOs) may often be influenced by leading members. This can be a major cause of concern of the investors and other stake holders.
Corporate Governance Practice in the Exchanges: Corporate

governance practice in the exchanges is extremely important because they are the front-line regulators and need to function independently without being influenced by the members to ensure transparency and build confidence among stake holders. The exchanges have enormous responsibilities that include listing of companies as per listing regulation, providing screen-based automated trading of listed securities, settlement of trading under settlement and transaction regulation, administration and control of market, monitoring activities of listed companies and the very important function of market surveillance.
High Degree of Expertise & Professionalism with Adequate

Infra-structure: For efficient execution of responsibilities, exchanges need high degree of expertise and professionalism and adequate infra-structure. These are not there in any of the exchanges. One basic problem is lack of professional manpower for management of capital market. The market expanded quickly in the last few years. New asset management companies, mutual funds, merchant banks, broker houses and other market intermediaries sprang up to seize the

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opportunities of a rapidly emerging market. All of them need capital market professionals and there are not many. As a result, the exchanges like many other capital market-related organizations are short of trained manpower. The SEC is addressing the problem by establishing a securities training institute. Meanwhile the problem is likely to continue or perhaps aggravate and the exchanges will have to struggle with the problem. Other infrastructural facilities also need to be improved to strengthen market monitoring, surveillance and control. Settlement procedure in the exchanges is outdated. Establishment of the proposed company for automated settlement calls for urgent attention.
Overall Supervision: The Vital Roles of SEC: The exchanges work

under overall supervision and guidance of Securities and Exchange Commission (SEC). The commission, established by an act of the parliament in 1993, consists of a chairman and four members. The commission chairman and members are appointed by the government for a three-year term. Once appointed they cannot be removed by the government except under certain special circumstances like conviction in a criminal case or losing mental balance. The basic purpose of the commission is to provide regulation of the capital market in order to protect interest of the investors, develop securities market and frame necessary regulations and rules for the purpose. The function of the commission includes taking necessary steps to: (a) Ensure proper issue of securities, (b) Regulate stock exchanges or any securities market business, (c) Regulate activities of market intermediaries like stock brokers, bankers to the issue, merchant banks, issue managers, under writers, portfolio managers, investment advisors, asset management companies, custodians, credit rating companies or any other intermediary likely to be involved in securities market, (d) Regulate mutual funds, (e) Prevent manipulation and frauds, (f) Stop related parties transaction, (g)Ensure submission of properly audited annual reports and periodic disclosures in a transparent manner by the listed companies, (h) Ensure compliance of securities laws, (i) Undertake market surveillance, (j) Conduct proper inquiry into allegations of fraud and irregularities, (k) Promote investor education and securities training to all involved, (l) Undertake research and publication, and (m) Frame rules and regulations for proper regulation of the market. SEC conducts its business independently and does not need government approval even while framing new rules and regulations.

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However, government is competent to issue directives to the commission, subject to prior consultation with the commission. An important function of the commission is to frame rules under Securities and Exchange Commission Act, 1993 and Securities and Exchange Ordinance, 1969 for carrying out the purposes of the act and ordinance. Regulations made by the stock exchanges need to conform to the provisions of these laws and rules. Such regulations can be made by the exchanges only with prior approval of the commission. Perhaps, the most important function of the commission is to improve quality of financial disclosure and transparency of the listed companies. This is also the most challenging area. Ultimately, an investor takes investment decision on the basis of financial statements of the companies and, therefore, ensuring credibility of these statements is extremely important. Submission of annual financial statement by the issuer companies to the commission and exchanges is binding. These audited statements are required to include a balance sheet, profit and loss account, cash flows statement and notes to the account. It is mandatory to prepare this statement in accordance with the requirements of the international accounting standards as adopted by the Institute of Chartered Accountants of Bangladesh (ICAB). Examination of these audited financial statements is a vital responsibility of the SEC. This needs adequate manpower and expertise and the commission lacks both. However, the commission has been trying to carry out this responsibility as far as possible with its limited resources. If in the opinion of the commission, the audited financial statements do not reflect the true state of affairs of the listed company, it can refer the matter to the ICAB with a request to take appropriate disciplinary action against the concerned chartered accountants within a period of sixty days. If ICAB does not take any action or, in the opinion of the commission, the action taken by the Institute is not satisfactory, it can give an opportunity to the concerned firm or chartered accountants an opportunity to explain the position. If such explanation is not satisfactory to the commission, it can declare the concerned firm of chartered accountants or the auditor ineligible for acting as an auditor of any listed company for a maximum period of five years. For ensuring quality and credibility of financial disclosure, the commission should have played an important role in this area. Unfortunately, that has not been the case. Examination of audited statements needs high degree of professional standard. The commission can not afford to employ that level of professionals with its poor pay structure. As a result, this job is done without noticeable consequence. Improving quality of audit, ensuring proper audit fees, promoting ethical standard in this area are important responsibilities

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that call for urgent attention of the ICAB and government. ICAB is a self-regulatory body but its regulation has not been adequate due to various reasons. Perhaps, the Institute should come forward with ideas to improve its regulatory function. This is important for the capital market and for the financial sector as a whole. SEC also has to do various other works requiring high degree of expertise. Examination of Initial Public Offerings (IPOs) and premium proposals control over prospectus and documents, understanding complex securities laws, market surveillance, detecting fraud and many similar works need a team of efficient and confident work force that simply is not there. The DSE market capitalization in September, 2007 was only $ 9.0 billion. Current market capitalization is about $ 50 billion. Number of BO account holders is up from less than one million to more than three million. Number of market intermediaries has increased in similar proportion. But SEC is working with almost similar manpower. Thorough restructuring of manpower, up-gradation of their required professional standard and improving compensation package are necessary for efficient market regulation by the commission. In the general public perception, the main responsibility of the SEC is to regulate price index of the market. Whenever the market is over- or under-priced, SEC is held responsible for that. Regulating market price of the stock is not a responsibility of any regulator anywhere. Ideally, market price of shares should be left to market forces. This has not been the case in Bangladesh.
Market Intervention by SEC: Most of the small investors in

Bangladesh are inexperienced with very little idea about the stock exchange. Many of them are not capable of understanding financial strength of companies. They are guided by advice of others who are possibly equally ignorant. So, investments are, often, rumour-driven. A rumour-based small market is more vulnerable to manipulation. Bangladesh stock market is no exception. So market intervention by SEC becomes necessary at times to protect the interest of the inexperienced investors. In doing so, a situation has been created in which SEC is expected to regulate stock price. Of late, in the context of a highly over-priced market, the commission is possibly more concerned with the bubble in the market than its normal responsibilities. This is indeed a paradoxical situation for the commission. Regulating a small and inexperienced market is a formidable task.
Assistance

from International Association of Securities Commissions: A brief reference to the international regulator is possibly necessary to complete this piece of writing. Bangladesh is a member of the International Association of Securities Commissions

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(IOSCO). This organization was established in 1983 with a permanent secretariat in Madrid to regulate world's securities and future markets. IOSCO has membership of more than one hundred countries and regulate more than 90% of world' securities markets. Role of this organization is to assist its members to promote high standard of regulation in order to maintain just, efficient and sound market and to act as a forum of national regulators. IOSCO has a set of objectives and principles and recommends all its members to adopt these regulatory principles. It also has a committee for emerging markets and Bangladesh is a member of this committee. However, it only recommends the principles and does not have the mandate to enforce them on member countries. Bangladesh maintains a low profile in the activities of this organization and needs to be more actively involved in IOSCO like our neighboring countries. Closer association with IOSCO can equip SEC with the knowledge of the latest securities laws and practices in developed and emerging markets and help improve professional expertise of the commission.
Changes in Book Building Method: The Securities and Exchange

Commission (SEC) has sent to the finance ministry for approval a guideline that, among others, contains the maximum allowable priceearning (P/E) ratio at 15 for a company willing to go public under the book building method, sources said. The securities regulator has also proposed the formation of a fivemember committee to review the balance sheets of the companies that are interested to go public under book building method. A top official of the SEC said the review committee will work until the government forms the Financial Reporting Council of Bangladesh. In the revised guideline, the regulator has also proposed a two-month lock-in on the shares of institutional investors who will quote to fix the companies' indicative prices during road shows.
The Role of Bangladesh Bank: The role of Bangladesh Bank should

have been more strong and timely in dealing with the commercial banks involvement in the market. The experts observed that until now all blames fell on only SEC as a regulator. Khondaker Ibrahim Khaled, probe committee chief, said he highlighted the regulatory lapses by the central bank officials in some decision making process in 2009 and 2010, which resulted in market bubbles. Ibrahim Khaled, however, said that he tried his best to find out the responsibilities of regulators and share traders, explicitly in a very short period of time. No doubt, SEC has played the most devastating role. However, he said other agencies and institutions having stakes in the share market possibly failed to perform the need of oversight functions. For example, BB should have come down more strongly
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and much earlier to arrest the over exposure of the commercial banks to the market, he added. Because of the overexposure of some commercial banks, the share market experienced bullish trend in most part of the last year. The BB should also have more effectively track down the money commercial banks had invested in the share market. Regulators then took measures to limit the proportion of deposits that banks can invest in the stock market, amid concerns over shares being over-valued and financial institutions getting over-exposed to the volatility in the capital market.
Reform of SEC: The government should reform the securities

regulator, identifying its "complete failure" to remove irregularities as one of the prime factors leading to the largest ever fall of the prices of the listed issues in the capital market. It also suggested that the government should disallow forthwith any "distribution of placement shares" as many key persons have "become corrupt" through both allotment and transfer of such shares. We think the government should appoint the persons of integrity at the office of the Securities and Exchange Commission (SEC), the capital market watchdog, so that they cannot be influenced by the vested quarters. The system of distribution of private placement shares has polluted the society. We have seen that the private placement has become a very alarming issue in the country as a large number of people were used in the process of allotment of placement shares for the interest of the vested quarters. It is alleged that many important persons, including the key officials of government, securities' regulator, Investment Corporation of Bangladesh (ICB) and both the bourses were favored with placement shares to serve the interests of such vested quarters. In one example, we have found that the placement shares of Tk 190 million were transferred to two individual addresses. Even some journalists who cover stock market were involved in the business of placement shares. According to the probe body's chief, the committee in its recommendation largely blamed the securities regulator for recent stock market scam as it completely failed to ensure 'due-diligence' about issues in the primary market. The irresponsibility and dilly-dally on the part of the SEC paved the way for corruption and irregularities that occurred in the stock market.

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SEC Official should not involve in the Secondary Market: After

investigation we like to suggest the government to stop involvement of any SEC official in share transaction in the secondary market.
Casino or Investment: Awareness of Investors: The stock market

had become a casino and that is apparently true. So, people came here, gamble and tried to make hard cash. And many have been able to make it. At least we know few of them have made it. Alright, but what is a casino? A casino is a public place for gambling and other entertainments. Firstly we have to make the investor realize that stock market is not Casino. Its a place where people should invest for long term to get capital gain and dividend gain. Financial illiteracy is one of the major problems in our stock market. They have mostly invested in an overpriced market with the expectation of gaining abnormal returns, but have in fact ruined their luck. Interestingly, a majority of the small investors who burnt their fingers already did not even know that they were gambling with. A substantially large number of small investors are innocent in the sense that they are not properly educated and trained on principles of investment and the mechanism of stock market. It is quite usual that market will have investors from a variety of professions including, businessmen, students, service holders, and therefore many of them will have no knowledge at all on finance, financial market or market mechanism. Because, everyone does not study finance or economics or may not have enough time to study first and then go to the market. Despite this fact, authorities kept the stock market wide open to all and sundry, failed to create adequate awareness among investors on the darker side of the market, and did not take enough care for the safety of the investors. Therefore, small investors have always been overlooked. The mostly disregarded is their psychology which is the key determinant of their confidence. Mob psychology constitutes mob confidence. Whenever stocks keep falling for any reason, investors start losing their confidence, rush to panic sale, and finally cause further plunge in the prices. This is true not only for Bangladesh, but also for the US and the rest of the world. It's quite normal. Investors' psychology and confidence are the basic foundations of a market mechanism. Investors' confidence has two major characteristics: Once it is ragged, it causes massive damage to the market structure for a long term, and it takes a substantial amount of time and other resources to get confidence back to the earlier level. Hence the cost of downward confidence is very high in two ways: one is the cost of the consequent
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impact on the market due to loss of confidence and the other is the cost of recovery to a desired level from such condition.
Improve Investors' Confidence: Harsh and adverse comments of

many well-known political figures have hit the psychology of the investors negatively, generated anger, and reduced even further the confidence level on the government. Therefore, adverse and harsh comments by different parties, differing and conflicting views, comments, and decisions by Bangladesh Bank, the ministry of finance and the SEC have created massive degree of no confidence among the investors. The market plunged further down. Nothing could stop it and at one stage it seemed non-stoppable. But at the same time protests along with violence have been going on. The situation is not normal; thousands of investors have become indecisive, as they find no more confidence on the regulators and the government. The primary objective of all government initiatives must be to improve investors' confidence by honoring and respecting their psychology. An effective measure may be to communicate with the investors through mass media more widely with a common message by the top offices of the market. They should sit in a serious multilateral dialogue. The dialogue may include the Bangladesh Bank, SEC, ministry of finance, Merchant Bank Association (BMBA), top financial experts, analysts and academics along with investors' representatives to find out a common strategy for the future development of the stock market. The dialogue may be arranged by the SEC or the ministry of finance that would sort out both short- and long-term approaches for restoring investors' confidence and market structure. Common people and investors want to hear things about the market that will make them feel better and confident. They are now frustrated and are lacking proper direction. The strategy paper should set clear cut suggestions and strategies for the investors that will get them back on track. Later, we believe, a joint press conference by the heads of the top offices can pronounce the outcome of the dialogue. We are sure such a well planned and well organized dialogue at a fixed date can come up with a common strategy paper and effectively restore the confidence of the investors. This would create a strong positive impression on the investors' psychology regarding the willingness, intention, and degree of coordination of all the offices mentioned above which, in turn, would lift up the confidence level on the future progress of the market.
Activate the Institutional Participants: As one of the many 6

measures, the regulators must take immediate steps to fully activate the institutional participants who are the vital players in the market. We are not yet clear why the intuitional investors are almost inactive. One answer was the liquidity crisis but recently that has also been removed as can be perceived speaking to the banking professionals.

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We have no idea about the real reasons although we feel that there should be an urgent full-fledged reactivation of the institutional participants. However, the gambling issue is there still now. The government is trying hard to find out the culprits. Every day there are such promises and every night they go into oblivion. The government is trying, really working hard to find them. True, but they are still unable to find out those big gamblers who have destroyed the market and ruined the fate of millions of small investors.
Dividends Collection is much safer Investment in volatile

market: After a runaway rally in the last calendar year, stock market in Bangladesh has finally witnessed a pause over the past few months with some volatility. After sustaining an upward momentum, the stock markets have refused to move upwards in a straight line, and are showing signs of choppiness over the past several weeks. While one of the reason why the benchmark indices have taken some profit taking over the past few weeks includes the spiraling crude oil prices and a shift in focus of investors towards precious commodities, there are some investors, still betting on stocks, which could offer healthy returns even in times, when market takes time to consolidate near current levels before a decisive breakout. So what could be the ideal preposition for such investors, to make the best out of market, even when volatility has dampened the spirits of investors looking for a healthy return in last few weeks? One of the ideal foils, under such volatile circumstances, could be to look for safe dividend yield options, which keep offering steady returns over a period of time. While choosing the dividend yield options, an investor needs to outline a few factors, which could be: For one, to select such dividend yield options, by checking out the consistency of the past few years, of the dividend paid by companies chosen. For that matter, only the companies offering uninterrupted dividend every year, usually qualify as the ideal dividend yield plays. Apart from same, even amongst the stocks which qualify amongst the dividend yield stories, there are outright winners, in which such companies may have even been aggressive enough to raise the dividend paid several times over the past few years, to authoritatively qualify as outright winners. In case of such dividend yield stories, the ideal bet should be placed on stocks, which have a strong statement in the making, with the product they offer, so as subsequently qualify as growth stories, apart from being dividend yield options. Investors should remember that in order to get a right mix of portfolio between growth in the portfolio and the dividend yield options, only a part of the portfolio should be allocated to the

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dividend options, rather than entirely betting on them. Any such move could hamper the chances of getting a healthy return out of aggressive portfolio. Also, investors opting for dividend yield should not frequently get into the habit of shuffling their selection of dividend yield options and remain put with the same as a strategic part of portfolio as defensive stocks. Such types of companies should do well during inflationary economic conditions, as they would be able to pass cost increases over the consumers, who demand that specific product type. The rising dividend would also provide investors with an inflation adjusted stream of income, which would maintain and grow its purchasing power over time. Investors should be selective enough to not to overpay for them. The lost decade for stocks was caused exactly because investors bid up stock prices to high levels.

Following Some Advice Regarding Investment in the Stock

Market All Investor should to be more careful and consider couple of think when he/she invest money in market Never sell valuable property only to invest in share market If anyone is not well educated about share market than only invest in primary share of reputed companies and don't take risk anyway. Try to attend in seminars which are conducted by stock exchanges to teach investors about the current condition and investment policy of share market. Discuss with educated and experienced people to learn about share market and Read newspapers, books, etc to learn about share market Invest in Secondary market very meticulously when he or she has confident that know well about the secondary market. Never and Never invest only hear the fake information about the condition of various companies. Many evil people make rumor to plunder the hard earned money of small investors. And always keep it mind that invest in share market is like invest in other risky business. Nobody can earn money here only by luck

Conclusion
The bullish mood of the market attracted an increasing number of small investors to the market, with the number of new Beneficiary Owners' (BO) accounts surging to high levels. All these opened up the potential for the stock market to become a real alternative to mobilize funds for investment, moving away from the traditional dependence on the banking system. However, while welcoming these developments, the
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recent dilemma may discourage the small investors. The past experience suggests that the 1996 shock lasted almost 8 years. It is expected that the implementations of the above suggestions would help strengthen our share market and beware of manipulators. In the countrys financial sector through ameliorating concerns regarding market failure and redressing problems arising from missing markets and institutions. Last but not least, serious act with prudence to strengthen our share market and beware of manipulators. And the government of Bangladesh may be under pressure to intervene in order to protect the hard earned money of the small investors from being lost due to this unusual crash of the stock market. So, this is the right time to work together (Government as well as other financial institutes) to decide what actions to take to save the market from further falls. Stock Market is by and large well established all over the world. Its expansion plays important roles in output growth, capital formation for mega projects like Bridges/Expressways/ Subways. The Banking sector, which leads the financial sector in Bangladesh, has served the economy very well, and its exposure is broadly comparable with other developing countries. However, the share-market has considerably lagged behind in Bangladesh. The current increase in investors' attention in the Bangladesh capital market is a welcome development which has to be nurtured cautiously otherwise every now and then this sort of catastrophe will be observed. Regulatory agency should not fix the rules depending on the index point rather they should compel those initially. Once law is formulated and applied, the authority should let the system run on its own way because any intervention on a smoothly running system just creates panic among the small investors. This is the right time to learn from the past and make a complete overhaul of the market.