Company fundamentals, retail investors and capital market
Monday, 7 December 2009
Md Sajib Hossain
THE capital market in Bangladesh has been expanding in its depth, size, investors' participation, trade volume, exposure to domestic and international market, over the part few years. Gradually it is, thus, becoming an alternative source of finance for the medium and large scale companies. Besides primary market, general investors are actively participating in the secondary market, following heavily technical analysis than fundamental one. Technical analysis means investing in stocks following market trend, trade volume of individual stocks, price movements, corporate declaration, comments from economists and financial experts, short-term movement of the economy etc.
Obviously, institutional investors are better informed for analyzing this phenomenon and taking their decisions accordingly. This is evidenced by the fact that they are consistently outperforming the market return (average annual return of DSE 20, or DSE general index) in the stock market. Whenever institutional investors observe something unfavourable in the market, or they think, stocks of a particular industry or of the whole market are overpriced, they respond to it by selling their holdings of stocks in bulk amount, causing a downward trend in the market. When they leave a particular industry stocks, there is a significant reduction of buying pressure in that type of stocks, and, as a result, price levels of those stocks fall considerably. This bearish trend of stocks is further accelerated by the panic sale of the retail investors, thereby, worsening stability of the market.
This may cause a street protest by a group of general investors in front of DSE or SEC to blame the regulators as it is the general investors who bear the burnt of a bearish market. How can the general investors be protected in this situation?
One way is that general investors can follow the analyses and insights of the expert institutional investors, taking the cue about whether the institutional investors are entering the market with net buys of stocks or going out of market with net sales of stocks. Like our neighbouring stock exchanges, the DSE, CSE or SEC should publish daily and weekly sale or purchase reports of all the institutional investors in individual and aggregate respects.
For illustration, information like number of institutional investors participating in a day, the amount of total daily purchase and sale of all the institutional investors with net sale or net purchase, total daily purchase and sale of individual stocks by all institutional investors together, can be published. This will indirectly give a message to the individual investors to take position effectively in the market.
Moreover, leading institutional investors can be advised to value different stocks and publish their perceived value of different stocks monthly for the purpose of exchanging their knowledge about investment in stocks, without bearing any responsibility. This practice will motivate the retail investors to direct their investments to fundamentally good stocks, on one side, and encourage the investment professionals to investigate the performance and find out possible causes for success or failure of the listed companies, on the other hand. In the process, fundamentally sound stocks will be rewarded with good price and loss-making or poorly performing companies' stock will be penalized with low price. This will pave the way for efficient allocation of saving funds to make proper use of investment opportunities.
The writer can be reached at e-mail: sajibfin06@yahoo.com
THE capital market in Bangladesh has been expanding in its depth, size, investors' participation, trade volume, exposure to domestic and international market, over the part few years. Gradually it is, thus, becoming an alternative source of finance for the medium and large scale companies. Besides primary market, general investors are actively participating in the secondary market, following heavily technical analysis than fundamental one. Technical analysis means investing in stocks following market trend, trade volume of individual stocks, price movements, corporate declaration, comments from economists and financial experts, short-term movement of the economy etc.
Obviously, institutional investors are better informed for analyzing this phenomenon and taking their decisions accordingly. This is evidenced by the fact that they are consistently outperforming the market return (average annual return of DSE 20, or DSE general index) in the stock market. Whenever institutional investors observe something unfavourable in the market, or they think, stocks of a particular industry or of the whole market are overpriced, they respond to it by selling their holdings of stocks in bulk amount, causing a downward trend in the market. When they leave a particular industry stocks, there is a significant reduction of buying pressure in that type of stocks, and, as a result, price levels of those stocks fall considerably. This bearish trend of stocks is further accelerated by the panic sale of the retail investors, thereby, worsening stability of the market.
This may cause a street protest by a group of general investors in front of DSE or SEC to blame the regulators as it is the general investors who bear the burnt of a bearish market. How can the general investors be protected in this situation?
One way is that general investors can follow the analyses and insights of the expert institutional investors, taking the cue about whether the institutional investors are entering the market with net buys of stocks or going out of market with net sales of stocks. Like our neighbouring stock exchanges, the DSE, CSE or SEC should publish daily and weekly sale or purchase reports of all the institutional investors in individual and aggregate respects.
For illustration, information like number of institutional investors participating in a day, the amount of total daily purchase and sale of all the institutional investors with net sale or net purchase, total daily purchase and sale of individual stocks by all institutional investors together, can be published. This will indirectly give a message to the individual investors to take position effectively in the market.
Moreover, leading institutional investors can be advised to value different stocks and publish their perceived value of different stocks monthly for the purpose of exchanging their knowledge about investment in stocks, without bearing any responsibility. This practice will motivate the retail investors to direct their investments to fundamentally good stocks, on one side, and encourage the investment professionals to investigate the performance and find out possible causes for success or failure of the listed companies, on the other hand. In the process, fundamentally sound stocks will be rewarded with good price and loss-making or poorly performing companies' stock will be penalized with low price. This will pave the way for efficient allocation of saving funds to make proper use of investment opportunities.
The writer can be reached at e-mail: sajibfin06@yahoo.com