Basics of share trading can make an investor a safe player
Monday, 8 February 2010
Sayed Javed Ahmad
The foundation of the share market consists of companies that are actively in business. Only a company that comes to the stock exchanges to raise capital for the business from public investors is listed. Initially, they arrive at the bourse offering primary shares to public through the process called the Initial Public Offering (IPO) and remains listed. Then the buyers trade shares at the secondary market.
The companies that are run or operate by private funding or privately arranged funding are not listed on the stock exchanges nor do they offer shares of the company to public. However, if at any time, a company decides to go public to raise capital for expansion of the business they may do so provided they meet the requirements outlined by the Securities and Exchange Commission (SEC) and the bourses, i.e., The Dhaka Stock Exchange and the Chittagong Stock Exchange.
When a company goes public, it is no longer a private company. The public investors through the purchase of the company shares also become the owners having a say on the matter related to the development and improvement of the company. The external share holders are basically financial investors only for the amount or number of shares they hold. Their primary interest is in the profitability of the company to earn dividends and other benefits as decided by the board of directors.
The process of shares changing hands through buying and selling is the main activity in the stock market. Apart from the public involvement in buying and selling of shares, many other business activities are there. For instance, there are stock brokers who handle the share transactions for the public investors.
Today most of the shares are traded online resulting in quick settlement of each trade. Handsome revenue is generated at each of the transaction at pre-defined fees and charges. Therefore, in this business, money could be made only if there is a transaction.
Strangely enough, the companies that form the basis of this industry have no control over or have nothing to do with the secondary market profit or losses. They have no access to the funds generated in the secondary market no mater how valuable their shares get.
Share prices are normally higher in the secondary market compared to the original IPO price. Therefore, it is always profitable to off load shares in the secondary market at the open market prices, which many of the company share holders often do for their personal financial gains. But if ever a company decides to buyback the shares from the open market to reduce debt and for management freedom then they would have to pay a lot more than the original price.
Economists and financial experts have formulated many methods and analytical techniques to play safe in the stock market, but majority of the investors are not aware of those tools and techniques. Instead, they go with their own judgment and intuitions as well as rumours. In Bangladesh, the stock market is still very immature due to involvement of immature investors, who think stock market is nothing but a place for gambling.
However, the situation is gradually changing as more and more educated investors are entering the market. Many are taking interest in the technical aspects of the investment techniques for risk management. As a result we see many old and new investors are getting themselves involved in training and educating themselves by attending workshops offered by the experts in the industry.
Slowly the investors are beginning to realise that the health of a company in question whose share will be bought and sold actually matters as the return on their investment largely depends on the performance of the management team of the company and some other factors. If they end up buying shares of a poorly performing company then there is a risk of going bust. In other words, if a company goes out of business then the shares are of no value and no one would want them. Thus, there would be no transaction of those shares in the market, which means no money could be made with those shares by any of the components of the share market that handles transaction.
Monitoring the activities and performance of a company is therefore an important factor in determining whether or not to buy a share. Because a share will be in the market and will be traded in the secondary market as long as it is in business.
(The writer is Chief Operating Officer of Central Depository Bangladesh Limited (CDBL) He can be reached at www.cdbl.com.bd)
The foundation of the share market consists of companies that are actively in business. Only a company that comes to the stock exchanges to raise capital for the business from public investors is listed. Initially, they arrive at the bourse offering primary shares to public through the process called the Initial Public Offering (IPO) and remains listed. Then the buyers trade shares at the secondary market.
The companies that are run or operate by private funding or privately arranged funding are not listed on the stock exchanges nor do they offer shares of the company to public. However, if at any time, a company decides to go public to raise capital for expansion of the business they may do so provided they meet the requirements outlined by the Securities and Exchange Commission (SEC) and the bourses, i.e., The Dhaka Stock Exchange and the Chittagong Stock Exchange.
When a company goes public, it is no longer a private company. The public investors through the purchase of the company shares also become the owners having a say on the matter related to the development and improvement of the company. The external share holders are basically financial investors only for the amount or number of shares they hold. Their primary interest is in the profitability of the company to earn dividends and other benefits as decided by the board of directors.
The process of shares changing hands through buying and selling is the main activity in the stock market. Apart from the public involvement in buying and selling of shares, many other business activities are there. For instance, there are stock brokers who handle the share transactions for the public investors.
Today most of the shares are traded online resulting in quick settlement of each trade. Handsome revenue is generated at each of the transaction at pre-defined fees and charges. Therefore, in this business, money could be made only if there is a transaction.
Strangely enough, the companies that form the basis of this industry have no control over or have nothing to do with the secondary market profit or losses. They have no access to the funds generated in the secondary market no mater how valuable their shares get.
Share prices are normally higher in the secondary market compared to the original IPO price. Therefore, it is always profitable to off load shares in the secondary market at the open market prices, which many of the company share holders often do for their personal financial gains. But if ever a company decides to buyback the shares from the open market to reduce debt and for management freedom then they would have to pay a lot more than the original price.
Economists and financial experts have formulated many methods and analytical techniques to play safe in the stock market, but majority of the investors are not aware of those tools and techniques. Instead, they go with their own judgment and intuitions as well as rumours. In Bangladesh, the stock market is still very immature due to involvement of immature investors, who think stock market is nothing but a place for gambling.
However, the situation is gradually changing as more and more educated investors are entering the market. Many are taking interest in the technical aspects of the investment techniques for risk management. As a result we see many old and new investors are getting themselves involved in training and educating themselves by attending workshops offered by the experts in the industry.
Slowly the investors are beginning to realise that the health of a company in question whose share will be bought and sold actually matters as the return on their investment largely depends on the performance of the management team of the company and some other factors. If they end up buying shares of a poorly performing company then there is a risk of going bust. In other words, if a company goes out of business then the shares are of no value and no one would want them. Thus, there would be no transaction of those shares in the market, which means no money could be made with those shares by any of the components of the share market that handles transaction.
Monitoring the activities and performance of a company is therefore an important factor in determining whether or not to buy a share. Because a share will be in the market and will be traded in the secondary market as long as it is in business.
(The writer is Chief Operating Officer of Central Depository Bangladesh Limited (CDBL) He can be reached at www.cdbl.com.bd)