Capital Market of Bangladesh

CAPITAL MARKET OF BANGLADESH

HISTORY

The establishment of the Capital Market of Bangladesh was incorporated as East Pakistan Stock Exchange Association Ltd on 28 April 1954 and started their formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd on 23 June 1962. Later on, renamed as Dacca Stock Exchange Ltd on 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years and in 1976 trading restarted in Bangladesh, on 16 September 1986 naming the association Dhaka Stock Exchange.

The formation of Investment Corporation of Bangladesh in 1976, opened the door for professional portfolio management in institutional form. In the last two decades, the capital market has witnessed number of institutional and regulatory advancements which has resulted in diversified capital market intermediaries.

INSIGHTS

At present, capital market intermediaries are made up of the following types:

1. The Bangladesh Securities and Exchange Commission (BSEC): The Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June, 1993 as the regulator of the country’s capital market under the provision of Bangladesh Securities and Exchange Commission Act 1993. The purpose of the Commission is to protect the interest of investors in securities, develop the securities market and make rules for matters connected therewith or ancillary thereto. The Commission consists of the Chairman and four Commissioners who are appointed by the Government. The Chairman acting as the Chief Executive of the Commission. The Commission is a statutory body and attached to the Ministry of Finance. BSEC is an ‘A’ category member of International Organization of Securities Commissions (IOSCO) since 22 December 2013.
2. Stock Exchanges: Apart from Dhaka Stock Exchange, the primary stock exchange of the country, there is another stock exchange in Bangladesh which is The Chittagong Stock Exchange established in 1995.
3. Central Depository: The only governmentregulated depository system that records and facilitates the trade of securities in Bangladesh. Central Depository Bangladesh Ltd (CDBL) was formed in 2000 which conducts its operations under Depositories Act 1999, Depositories Regulations 2000, Depository (User) Regulations 2003, and the CDBL by-laws.
4. Stock Dealer/Sock Broker: Under SEC (Stock Dealer, Stock Broker & Authorized Representative) Rules 2000, these entities are licensed and they are bound to be a member of any of the two stock exchanges. At present, DSE and CSE have 262 and 136 members respectively.
5. Merchant Banker & Portfolio Manager: These institutions are licensed to operate under SEC (Merchant Banker & Portfolio Manager Rules) 1996 and 45 institutions have been licensed by SEC under these rules so far.
6. Asset Management Companies (AMCs): AMCs are authorized to act as issue and portfolio manager of the mutual funds which are issued under SEC (Mutual Fund) Rules 2001. There are 15 AMCs in Bangladesh at present.
7. Credit Rating Companies (CRCs): CRCs in Bangladesh are licensed under Credit Rating Companies Rules, 1996 and now, 5 CRCs have been accredited by SEC.
8. Trustees/Custodians: According to rules, all asset backed securitizations and mutual funds must have an accredited trusty and security custodian. For that purpose, SEC has licensed 9 institutions as Trustees and 9 institutions as custodians.
9. Central Counterparty Bangladesh Limited (CCBL): Automation of the trading system in Bangladesh started in mid-90’s. The objective was to make the capital market more efficient by providing all participants with quicker and more effective means of exchanging information. New products and instruments have been made available as a result of the sophisticated ICT inventions. As a part of the continuous modernization and increment in capacity of capital market in Bangladesh, Market Authority and relevant stakeholders took different initiatives such as modernization of Stock Exchanges, establishment of Central Securities Depository and such. Bangladesh Securities and Exchange Commission promulgated Clearing & Settlement Rules in 2017 to form a Central Counterparty (CCP) in Bangladesh. Under the said rules, a Company has already been incorporated in the name and style of Central Counterparty Bangladesh Limited (CCBL) in January 2019. The shareholding of the company is held by Dhaka Stock Exchange Limited (DSE), Chittagong Stock Exchange Limited (CSE), Central Depository Bangladesh Limited (CDBL), local banks and a strategic investor which is yet to introduced.
10. Investment Corporation of Bangladesh (ICB): ICB is a specialized capital market intermediary which was established in 1976 through the ordainment of The Investment Corporation of Bangladesh Ordinance. This ordinance has empowered ICB to perform all types of capital market intermediation that fall under jurisdiction of SEC. ICB has three subsidiaries:

• ICB Capital Management Ltd.,
• ICB Asset Management Company Ltd.,
• ICB Securities Trading Company Ltd.

  11. Beneficiary Owner (BO) Account: Beneficiary Owner (BO) Account means the Account opened by the Client with any Depository Participant to keep their electronic securities in CDBL. A Beneficiary Owner Account (BO Account) is an account that allows investors to buy and sell shares or other securities in the stock market. It is an electronic account that holds the investor’s shares and is opened with a broker or other financial institution. The investor must provide personal information, such as a valid identification and proof of address, as well as any other required documents in order to open the account. Once the account is opened, the investor can then purchase, sell, and manage their investments.

There are three types of Beneficiary Owners Accounts available for investors.

• The Single/Joint BO account: Suitable for general investors
• NRB BO account: Only applicable to Non-Resident Bangladeshi investors.

Additionally, the Link BO account an activity that has been kept available in order to transfer shares from an existing BO accounts from one broker house to another. A person can open two BO accounts with any brokerage house, such as one single account and one joint account.

How to become an Investor in the Stock Exchange?

The first and foremost activity for any investor willing to invest in the stock market, is to have a bright and a strong mindset. As the stock market comes with a high amount of risk it is crucial for the investor to evaluate the conditions and make investments accordingly. As high-risk bring out high returns, it might also be the case of incurring losses as well. Hence, in order to successful in stock exchange one should be ready to bear the effect of both the situations.

How to start investing in the Stock Exchange?

In order to invest in the stock exchange and carry out buy trading activities one should first open a Beneficiary Owner’s or BO account. This account is usually opened through any stock-brokerage company listed in the stock market. This account is registered systematically, holding the investors finance as well as the shares they have purchased, acting as a digital wallet. To open one needs to submit their identification documents such as National ID card, bank account details for their investment to be sent to and others. One can easily open a Beneficiary Owner’s (BO) account within a day’s time by submitting the required documents.    

Let’s start getting to know some of the instruments in stock exchange

IPO (Initial Public Offering): An initial public offering (IPO) or stock launch is a public offering in which shares of a company are offered to sold in the stock exchange. An IPO is usually launched when a new company is about to offer their shares to be traded in the market.

Primary Share: Once a company has launched their IPO into the market their shares are offered to be bought by investors for a certain period of time. In this certain period of time the shares are at the price in which they are offered and are usually lower compared to when the shares enter the main market. Shares in that period of time is called primary shares.

Secondary Share: A share becomes a secondary share when a company’s IPO offering period has been ended and the shares enter into the main market. This is the time when most of the buying and selling of shares are carried out by investors. Therefore, it also affects the price increase and decrease in that certain share. The market which it is traded on is also called the secondary market or the main market. 

Category of Shares: Among the many shares that are traded in the market, every share is noted by a category which represents their strength and volatility. This determines whether an investor should invest or not in that company. In Bangladesh there are 5 categories in which shares are divided, they are A, B, G, N and Z group of shares.

• Companies listed In the A category of shares are companies who regularly hold their Annual General Meetings and provide a dividend of at least 10% to their investors.
• Companies who regularly hold their Annual General Meetings (AGM) but provide a dividend of less than 10% to their investors are usually listed as B category of shares.
• Any company who are offering their IPO and are new to the market, they are listed off as N category of shares.
• Any company which has been created as Green Field Investment or has been opened through a Joint Venture from foreign investment are usually categorized as G category. This category of shares are yet to be introduced into the market.
• Companies who are not performing well, do not hold their AGMs regularly and do not provide dividends regularly are categorized as Z category of shares.

Face Value: This is the price of a share at their primal stage. Which means the price that share has began their trading with. When a company issues their IPO there are 2 ways a company can set their pricing. One is the Fixed price method, where the price of a share is set to start trading 10tk per share. Another is the Book-building method, where a premium is added on top of the Face value which is set at 10tk. When calculating dividend for any company in Bangladesh, it is calculated on the Face Value which is 10tk for all companies.   

Market Value: Is the price on which the share is being traded at or the last traded price on which the market closes.

Record Date: Is the day when a company notes down which individuals owns their shares. This information is used by the company to calculate the dividend of their investors in how many individuals own their shares and how many shares each individual owns. This date is usually declared by the company and trading of their shares on this particular day is halted. 

AGM (Annual General Meeting): Is the Annual meeting that the company holds to discuss their entire year’s performance and decides on the amount of dividend to be paid to its investors. This meeting is usually attended by the Board of Directors looking into every aspect of the company.

Dividend: It is the benefit or profit an investor earns after holding a particular share before their Record Date. If a company is proven to be profitable from their Audit, that company is bound to pay dividend to their investors. There are 2 types of Dividend, they are as follows:

• Cash Dividend: where a company declares a certain percentage of dividend is to be paid to their investors, which is calculated on the Face Value of the share.
• Stock Dividend: where a company declares a certain percentage of stock to be offered as dividend for their investors. This usually occurs when the company has made a profit but are not able to offer cash due to their activities or other noted reasons

Right Share: When a company plans to increase their capital or equity, they are required to take permission from their Board of Directors and launch new shares into the market. But unlike launching shares on an IPO this time the company has to issue shares to individuals who already own their shares at the Face value. Hence, the surplus of shares an individual receive are called as right shares.

Authorized Capital: It is the amount of capital the company has the right to own or the ceiling limit on the amount of investment a company can hold as equity.

Paid-up Capital: It is the amount of capital the owners of the company has invested on the starting of their business. Or the amount of investment has been brought to the company by the Directors as equity. This amount usually falls within the Authorized Capital since that acts as a ceiling for equity.

Net Asset Value (NAV): Is the value of an entity’s assets minus the value of its liabilities it currently possesses. When we deduct the two values and get the result that amount is considered as Net Asset Value (NAV). When we divide that number with the number of shares the company we get Net Asset Value Per Share. This figure is usually used to assess the strength of company, whether they are performing good or bad.

Earnings Per Share (EPS): It is the earning of a company that they make against each share they own. This figure is usually calculated on the Face Value of their shares, dividing net income by the average amount of shares they hold. This is calculated whether to find if the company is profitable or not and if it is safe to invest in their shares

Price to Earnings Ratio (P/E Ratio): Is the ratio of a company’s share (stock) price to the company’s earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued. For e.g. if a company’s market value is 100tk and EPS is 5tk per share, their P/E ratio would stand at about 20. Which means if the company is operating the way they are currently operating it would take 20 years to get the return of one’s investment.  It is crucial to know that the higher the P/E ratio is of a company the worse they are performing in the environment.

Index of the Market: This is the figure that describes the current position of the market. Every stock market consists of one or more indexes. This index is made up from a combination of the performance of the all the companies listed in the stock market, dictating the trend whether the companies would make a gain or loss in their prices.

Methods of Investing in the Stock Exchange:

1. Investing slowly and gradually: They key to investing in stock exchange is to invest slowly gradually. One may own a lot of capital to invest but if he/she invests in full amount quickly it might most likely to turn out to be a loss. One should always remember investing in the stock market is of high risk-high return policy. One should also see what tomorrow has in store for them.
2. Carrying out Research: To carry out investing smartly and wisely one should carry out a thorough research on the company they are about to invest in. The essentials things one should look for is a company’s EPS, their NAVPS and their P/E ratio. Then they should analyze at which point the current market value of the company and where it is about to head in the future.
3. Investing without interest: while investing one should usually invest with the capital they currently possess. When an individual is about make investments beyond of what they possess in the BO account, the stock brokerage is bound to write it off as a loan. Hence, just like every bank loan has an interest similarly loans in the stock market comes with an interest.
4. Analyzing the Trend: One should analyze the trend of the market understanding whether the current market is a Bull market or Bear market. A Bull market is labelled off as market which is in its increasing stage and Bear market is a market that is labelled off as a market which is in its decreasing stage. If one has a sound knowledge of the market trend that is currently it becomes significantly easy for them to understand the market.
5. Realizing the loss bearing reasons of other Investors: It is crucial for an investor to know why some investors are making losses, before entering the market. In stock exchange the circumstances of making a profit and loss is always an ongoing process. But to understand and identify the reasons why certain investors have made a loss would act as a game changer for the investor.

Some Methods to become profitable in Stock Exchange

1. To Gain after purchase: One should determine a good price to purchase where the price is expected to increase after their purchase.
2. Having the mindset of becoming a long-term investor: If an investor is engaging is daily purchase and sale of shares it is most likely at some point that investor is to get caught up in the ongoing market trend. Rather one should purchase a share when the prices are low and wait for the best possible outcome of the price to be sold off for.
3. Not paying heed to rumors and fake news created in the market: As this market comes with high amount risk, it also comes with high amount rumors created in the market. One should never pay attention to the rumors they hear and always trust their own analysis and judgment.
4. Being able to handle losses: The circumstance of profit and loss is always an ongoing process in the market. Hence, one should never get agitated or lose hope only because one has incurred a loss. Always to remember a bad market always gives the opportunity to bring out a profitable market if invested wisely.
5. Having the ability to analyze: When an individual understands the market and possesses the knowledge to analysis the ongoing market trend, analyze companies and their strengths, that investor is surely to come out as a gainer in the market.