Weaknesses are still aplenty

"Without acquiring proper knowledge, information and experience regarding different aspects and matters of capital market, one should not invest in the capital market. Gain or loss, whatever comes from the investment, it belongs to you. So, prudent investment decisions based on knowledge and fundamentals of the securities may be of real assistance to you. Don't pay any heed to rumours at the time of trading of shares; it may cause loss to you. Even spreading rumour is legally prohibited." These suggestions are always on display on the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) websites.
But, Bangladeshi stock investors hardly follow these suggestions while taking their investments decisions. Rather, their investment decisions are often heavily influenced by factors such as overconfidence, over-trading, disposition effect, cognitive tilt towards rumours, over-reaction, greed, etc. These are more prevalent during the bullish trend of the market.
Since the lion's share of the free-float shares of the companies listed with both DSE and CSE is owned by individual investors and daily trades are also notably dominated by them, such biases and irrational behavioural pattern together contribute to heavy price-volatility and market instability.
It has particularly been observed that all three DSE indices and many individual stock prices, especially those with more diffused individual ownership, have been experiencing price volatility in recent days. This is highly detrimental to the long-term prospects of the market.
Individual investors are observed to express positive feedback effects. This indicates that they prefer picking up stocks which are the recent-past winners. As a result, trade and individual shareholding in such stocks has increased significantly without taking fundaments properly into consideration.
Moreover, individual investors in Bangladesh seemed to behave in an overconfident manner, taking more risks and trading frequently. This is evident from the low inclination of individual investors toward recent IPO subscription of the closed-end mutual funds and their prices being traded at discount to their net asset value (NAV) per unit.
Moreover, individual investors in the Bangladesh capital market hardly recognise and balance their risk-absorption abilities and risk characteristics of the stocks that are being purchased. As in many cases, they select the security on the basis of rumours, speculation, advice from the non-expert market operator, relatives or friends, without doing adequate fundamental and technical studies.
Sometimes such behaviour turns into a pattern that affects market efficiency. Investors do not seem to have taken any lesson from the recent collapse of the market, as they keep on repeating the same behaviour.
Most of the retails investors are more focused on newly listed companies' shares in recent times, without taking the fundamentals or the company's performance into consideration.  So, far 14 new companies got listed on both the bourses -- DSE and CSE in 2014 till November 21, 2014.
Emerald Oil, Matin Spinning, Hwa Well Textile, FAR Chemical, The Peninsula Chittagong, Shahjibazar Power, Khulna Paper & Printing, Tung Hai Knitting, Shurwid Industries, Fareast Knitting & Dyeing, Saif Powertec, Ratanpur Steel Re-rolling Mills, Western Marine Shipyard and Khan Brothers PP Woven Bag Industries made trading debut in 2014.
Most of these newly-listed companies are overpriced. Yet the investors are still trying to grab these stocks. Even, the Bangladesh Securities and Exchange Commission (BSEC) suspended share trading of Shahjibazar Power Company for 'unusual' price hike, and formed probe body twice to investigate its unusual price hike.
Finally, the securities regulator on November 19 sent the shares of Shahjibazar Power Company to spot market making it non-marginable in line with the regulator's move to contain abnormal price hike.
A recent study by Accounting for the Capital Market Development, a research project sponsored by World Bank and the University Grant Commission, found that audited financial statements of a good number of listed companies contained 'unqualified' audit opinion by reputed firms and were not prepared according to international standards.
The irony in our capital market is that though individual investors have an acute dearth of adequate financial knowledge and many investment biases, they hold significant portion of the free-float shares and account for most daily trading. Moreover, the poor regulatory and corporate set-up where impact of corporate information like interim earnings, declaration of right issues or dividend declaration is passed to market via insider trading, before corporate declaration poses a serious problem. Such things do actually foil attempts for shaping investment behaviour of individuals properly.
The utility function of the individual investors in our capital market does not exhibit any rational risk-aversion attitude. This is evident from their significant holding of information technology (IT), textile, spinning, and engineering, insurance industry stocks and their trading of small-sized, high volatile stocks.
Furthermore, the non-availability of daily market-level data such as net buy-sale picture of different types of institutions in the market, totally idle nature of funds relating to those of mutual funds and merchant banks, aggregate disbursed amount of margin loans etc., persuade different heuristics like availability bias, anchoring, cognitive dissonance and mental accounting of individual investors. These, together with factors mentioned above, lead to poor and sub-optimal decision of individual investors.
For a healthy and long term sustainable capital market, it is important to identify and assess the key dynamics, shaping the investment behaviour of individual investors. Identifying socio-economic background of investors, the extent of their financial knowledge and information needs should be ascertained the needs of investors can then be met though appropriate research. This is almost important for facilitating proper functioning of the capital market.
It is evident that high participation of individual investors directly leads to high stock price volatility, and sub-optimal investment decision. This creates hindrance to market efficiency. Under such circumstances, more and more institutional participation, from the long-term perspective, should be encouraged, as relative to individual investors' participation, with appropriate policies.
Bringing financial discipline and transparency and ensuring free flow of information, along with imparting financial knowledge and investment sophistication to individual investors, will be of enormous help to encourage a rational course of behaviour on the part of individual investors in our capital market.
However, even if it is late, our stock market has already implemented and finally initiated a number of contemporary reforms like demutualisation, internet trading, state-of-the-art surveillance, next generation trading platform, Bangla website, investment protection fund, introduction of a new index benchmark by S&P, Shariah index and so on.
Of all the recent reforms, demutualisation of stock exchanges was the most revolutionary initiative taken by the exchanges as it separated ownership (and voting rights) from the right of access to trading which will ensure transparency and accountability in exchange operation.
The securities regulator has also been continuing its reform activities of strengthening legal and institutional framework for creating a fair, transparent and accountable capital market. And the investors have gradually confident in investing share market due to timely disclosure of financial statements and information, payment of declared dividend and annual general meeting in time, proper supervision of securities transactions and market intermediaries, investor awareness program and resolution of investors complaints etc. But many analysts still raise questions, especially approval of new initial public offering (IPO).
Inadequate supply of securities having strong fundamentals also is one of the main problems of capital market in Bangladesh. But we know that it is very essential to ensure adequate supply of quality securities.
The government has been trying to bring shares of government and non-government companies in the capital market. For this, a number of companies have been converted into public limited companies to increase supply of securities and run the companies commercially and accountably.
When these companies will float their stakes, the depth of the capital market and investment opportunities in securities market will also go up. Big national and multination companies under private sector should also raise capital from the capital market to help the latter beef up its strength.
Rational investors, especially institutional ones, are expected to make an investment decision taking into account full financial and operational aspects of companies concerned.
The demutualisation of stock exchanges along with the BSEC's up gradation to 'A' category membership of International Organisation of Securities Commissions (IOSCO) from B-category, Bangladesh's capital market's prospect seems to be very bright.
Most of the companies are very small in terms of paid-up capital and additionally their financial base is very weak. So the market is being manipulated by some large investors. This results in regular ups and downs of the market.
In these circumstances, we have to bring more companies which are large in size and fundamentally strong. The government and the BSEC have to frame necessary laws, if possible, to bring such companies into the market in order to stabilise it. Most of the above-mentioned multinational companies are already listed in India. Therefore, the BSEC should look into the matter as to why it is not possible in Bangladesh. The BSEC also should take an initiative to bring all government-owned public companies in the stock market as early as possible.
In the years 2009 and 2010, the prime bourse used to arrange many awareness programmes about the market for investors across the country. Unfortunately, the DSE has stopped such programmes. Although some awareness programmes are still arranged, they are only limited to the capital city. Large potential investors are still unaware or uninformed about the market. Whoever knows about the market, they have either wrong perception or do not know the mechanism of the market. The DSE itself has to make all those arrangements for making them informed and skilled through various programmes across the country.
No institution or training centre for training or education about the capital market is there in other cities and towns except Dhaka. Although Finance Minister AMA Muhith inaugurated an institute-the Bangladesh Institute of Capital Market (BICM)-on December 9, 2010 with a view to strengthening the base of the country's stock market, the BICM could not start its academic curriculum yet. Its activities are still limited to some training for investors.
Even our universities and other educational institutions have not include any curriculum on the capital market functioning. Whatever has done is based on the US capital market and mostly impractical. Consequently, we are not getting capital market specialists or experts either from investors or from employees. Nonetheless, the Finance Minister said informally that education on financial market would be included in textbooks.
Capital market is at the heart of any economy. Through the stock market, savings are channelised to effective long-term investments. Such a market contributes immensely to a country's gross domestic product (GDP) growth. This is why sometimes it is called the barometer of an economy. A developing country like Bangladesh badly suffers from the lack of capital formation, a prerequisite for sustainable economic development. A developed and vibrant capital market can provide a big avenue for capital formation.
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The writer is a Staff Reporter of FE. He can be reached at:
[email protected]