When rumours gain ground over speculation
Shamsul Huq Zahid | Monday, 14 July 2008
Bugs invaded the computers belonging to a large number of brokerage houses last Wednesday, causing serious disruption in daily operation of the Dhaka Stock Exchange-DSE. There had been no transactions during the usual hours of trading-between 10am and 2pm. However, the DSE authorities allowed trading for an hour behind the schedule on the day.
The incident, though technical in nature, happened at a time when the investors were in a depressed mood due to the reversal in the upward journey of the stock market indices. Erosion in the prices of mutual fund stocks has contributed largely to the slowdown of the market and also given rise to a sense of frustration among a section of investors who have invested heavily in these stocks out of the expectation that all the mutual funds would issue stock dividends. Investors did not exercise their wisdom properly while making investment in many stocks, including those of mutual funds, leading to an unbridled rise in stock prices.
So, the inevitable has happened. Following the decision of the Securities and Exchange Commission (SEC) to update rules prohibiting the close-end mutual funds from issuing stock dividends and right shares, the market suffered a big jolt. A small group of investors staged demonstration and formed a human chain asking the SEC to reverse its decision. As the SEC decided not to give in to pressures, the mutual funds started falling in the market. The fall had impacted the overall market trend.
Speculation, not rumour, is a basic instinct of the investors. Investors can have their own speculation about certain stocks. But rumour is something that has no root and is spread deliberately by someone or a group of people with a view to making undue gains by misleading the unsuspecting investors.
Rumours usually do not work in a perfect market. It gains ground in an imperfect market where too many investors chase too few stocks, sponsors of listed issues are not open and regulator chooses to be indifferent. The 1996 stock market crash is an example to this effect. It was a time when streets had turned into stock market trading floor and almost everyone became an investor overnight. The present market conditions, however, are nowhere near those of 1996. With so many changes effected during last 11 years in stock trading and rules thereof, it is difficult to engineer another 1996. But the sudden rush of investors since the early part of 2007 has made the market vulnerable to rumours.
For instance, last Tuesday in the backdrop of continuous erosion in prices of mutual fund stocks, a rumour was deliberately spread that the incumbent chairman of the SEC would leave his post following pressure from the government. And the investors took the rumour as for real and there was reversal in mutual fund stock prices. When newspaper reporters contacted, the SEC chairman described the news about his departure as totally baseless.
This particular incident shows the strength of the rumour-mongers and vulnerability of the investors to rumours. Those who had spread the rumour did it with a purpose. It could be that they had purchased the mutual fund stocks in large volume when their prices were falling and sold the same to the unsuspecting investors spreading the rumour about the SEC chairman's departure.
Both SEC and DSE, however, have to share a part of the blame as far as the unpalatable developments over mutual fund prices are concerned. The SEC preferred to remain a mute spectator when stock dividends were given to the holders of mutual fund stocks in the absence of necessary rules for close-end mutual funds. And when the prices of all mutual funds were soaring, the DSE, which frequently seeks to know about undisclosed information from listed companies, did not feel it necessary to gather price-sensitive information from the Investment Corporation of Bangladesh (ICB) or other sponsors of mutual funds and put the same on its website.
There is no denying that the stock market over the years has gained depth and a section of investors have been making informed investments. But the anti-graft drive by the present caretaker government in the early part of the last calendar year had brought in a new breed of investors, who have found the stock market a safe haven for their illegal or legal but undisclosed money. This class of investors has been extremely bold in their investment decisions. For them, it was worth taking risks than losing all of the money and landing in jails in the event of detection by the joint-forces or the Anti-corruption Commission. In many cases, such decision has paid them handsome dividends and rumours played a major part in it.
The long-term investors, who usually put in their money in stocks reading the fundamentals of listed companies, are rare species these days. Most investments are now short-term in nature. Investors, who are crowding the brokerage houses do know that the current stock prices are not sustainable and hence they dispose of their shares at a modest profit.
It could be that once an elected government takes over the rein of the country's administration those who have invested tainted money in stocks might decide to withdraw from the stock market. In that event, the market might see a severe downturn. However, this is just a probability. The market might even turn more bullish. Who knows?
The incident, though technical in nature, happened at a time when the investors were in a depressed mood due to the reversal in the upward journey of the stock market indices. Erosion in the prices of mutual fund stocks has contributed largely to the slowdown of the market and also given rise to a sense of frustration among a section of investors who have invested heavily in these stocks out of the expectation that all the mutual funds would issue stock dividends. Investors did not exercise their wisdom properly while making investment in many stocks, including those of mutual funds, leading to an unbridled rise in stock prices.
So, the inevitable has happened. Following the decision of the Securities and Exchange Commission (SEC) to update rules prohibiting the close-end mutual funds from issuing stock dividends and right shares, the market suffered a big jolt. A small group of investors staged demonstration and formed a human chain asking the SEC to reverse its decision. As the SEC decided not to give in to pressures, the mutual funds started falling in the market. The fall had impacted the overall market trend.
Speculation, not rumour, is a basic instinct of the investors. Investors can have their own speculation about certain stocks. But rumour is something that has no root and is spread deliberately by someone or a group of people with a view to making undue gains by misleading the unsuspecting investors.
Rumours usually do not work in a perfect market. It gains ground in an imperfect market where too many investors chase too few stocks, sponsors of listed issues are not open and regulator chooses to be indifferent. The 1996 stock market crash is an example to this effect. It was a time when streets had turned into stock market trading floor and almost everyone became an investor overnight. The present market conditions, however, are nowhere near those of 1996. With so many changes effected during last 11 years in stock trading and rules thereof, it is difficult to engineer another 1996. But the sudden rush of investors since the early part of 2007 has made the market vulnerable to rumours.
For instance, last Tuesday in the backdrop of continuous erosion in prices of mutual fund stocks, a rumour was deliberately spread that the incumbent chairman of the SEC would leave his post following pressure from the government. And the investors took the rumour as for real and there was reversal in mutual fund stock prices. When newspaper reporters contacted, the SEC chairman described the news about his departure as totally baseless.
This particular incident shows the strength of the rumour-mongers and vulnerability of the investors to rumours. Those who had spread the rumour did it with a purpose. It could be that they had purchased the mutual fund stocks in large volume when their prices were falling and sold the same to the unsuspecting investors spreading the rumour about the SEC chairman's departure.
Both SEC and DSE, however, have to share a part of the blame as far as the unpalatable developments over mutual fund prices are concerned. The SEC preferred to remain a mute spectator when stock dividends were given to the holders of mutual fund stocks in the absence of necessary rules for close-end mutual funds. And when the prices of all mutual funds were soaring, the DSE, which frequently seeks to know about undisclosed information from listed companies, did not feel it necessary to gather price-sensitive information from the Investment Corporation of Bangladesh (ICB) or other sponsors of mutual funds and put the same on its website.
There is no denying that the stock market over the years has gained depth and a section of investors have been making informed investments. But the anti-graft drive by the present caretaker government in the early part of the last calendar year had brought in a new breed of investors, who have found the stock market a safe haven for their illegal or legal but undisclosed money. This class of investors has been extremely bold in their investment decisions. For them, it was worth taking risks than losing all of the money and landing in jails in the event of detection by the joint-forces or the Anti-corruption Commission. In many cases, such decision has paid them handsome dividends and rumours played a major part in it.
The long-term investors, who usually put in their money in stocks reading the fundamentals of listed companies, are rare species these days. Most investments are now short-term in nature. Investors, who are crowding the brokerage houses do know that the current stock prices are not sustainable and hence they dispose of their shares at a modest profit.
It could be that once an elected government takes over the rein of the country's administration those who have invested tainted money in stocks might decide to withdraw from the stock market. In that event, the market might see a severe downturn. However, this is just a probability. The market might even turn more bullish. Who knows?