Stock Market Crisis in Bangladesh in 2010-11 Essay Example

justify;">Very little research has been done to provide knowledge about the crash. So, the study tries to examine the reasons that leaded the “Bull Run” for dramatic increase of different instruments in Bangladesh stock market and the fundamental factors of the collapse. This study is focused on the recent trend of the capital market of Bangladesh. The study will explain the regulatory aspects of capital market of Bangladesh on the basis of disclosed regulations and will try to judge the quality of the regulations in terms of its achievement of the goals. This study is basically descriptive in nature. Data is collected from secondary sources like different publications of DSE, CSE, Bangladesh Bank, past researches, newspaper, journals etc. Some other research papers in this line will also be used.

The areas that will be concentrated are:

• Various aspects of capital market regulations of Bangladesh
• Recent trends of Capital Market
• Bubble creation and Bubble Burst and reasons behind this market collapse

1.3 Objectives

a. Broad objective

To examine the reasons that caused “Bull run” for dramatic increase of different instruments in Bangladesh stock market and the fundamental factors of the collapse.

b. Specific objectives

1. To provide knowledge about the crash.
2. To analyze the role of DSC, CSE, SEC as market regulators during the bubble formation and burst.
3. To provide knowledge for the stock market stake holders to aware them about future collapses.
4. To know what has the government & market regulators done to improve the market condition and prevent this kind of collapse in future.

1.4

Limitations

This study discusses only the role of SEC, DSE, CSE and government and ignores the role of Bangladesh Bank as the central bank of the country and its monetary policy which affected the market heavily in different time periods.

Due to time constraints the author could not go for Primary data.

2. Methodologies

The aim of this section is to show how the data was collected, by which method and source and the process of analyzing the data.

2.1 Source of data and method

The data used for this research were obtained and used from secondary sources.

• Secondary Source

The used secondary sources for the study are Books, investigation report, past researches, newspaper, journal, electronic publications and indices data of DSE and CSE.

• Books

To execute methodology part of the study the author went through few books written on different methodologies in business studies and qualitative research approaches.

• Investigation report

Here investigation report of Khondkar Ibrahim Khaled (2011) is used as the main resource for theoretical part. The report was collected from bdnews24.com. The full report consists of 300 pages. The report is very useful for the research as it gives complete idea about the context of the problem with case studies. It also helps to estimate the role of regulators and government in the capital market of Bangladesh during and before the crash.

• Data of indices

Indices data of DSE was collected from broker house and indices data of CSE from Chittagong stock Exchange website. These data was used to examine significant fall and rise

of share prices in both exchanges and to draw graphs of indices for different time periods.

• Past researches

Finding past researches for stock market crash of Bangladesh in 2010-11 was very difficult for the author. But I found some articles on the crash and researches on other crashes done by different scholars.

• Newspaper, Journal and other sources

Newspaper, Journal and other electronic sources are the most important and more used sources than other sources used for the study. Important daily news and other information were collected from the newspaper which is crucial for this kind of research. The used journals for the study were both recent and archives. Different articles were collected from these sources. The resources of these sources are downloaded via inter-net.

2.2 Data processing

A qualitative research approach has been chosen for the study. Data will be gathered from secondary sources for the study.

Secondary research will be done by using theories written by scholars, economists and writers. Text books, investigation report, previous researches related to the topic, Journals, newspaper, indices data and electronic sources will be used as the secondary sources.

First, I familiarize myself with the topic by studying newspapers, investigation report, articles and information from friends, relative and different TV channels. As I used to keep records of Bangladesh stock market for the personal interest helped to get more information about the crises. Then published investigation report described full scenario of the problem.

Secondly, a proposal of the research was submitted to the supervisor. The proposal was approved and I started writing theoretical part explaining the stock market

of Bangladesh, stock market crash of 1987 and previous stock market crash of Bangladesh.

3. Data Analysis

3.1 Stock market & Crash

A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell.

3.2 Bangladesh Stock Market

Here it explains Bangladesh stock market’s history, role and functions of DSE and CSE, capital market structure of the country, Security & exchange commission as the market regulator and CDBL as an important organization of the market.

3.3 History of Bangladesh stock market

The stock market history of Bangladesh refers back to 28 April, 1954 when the East Pakistan Stock Exchange Association Ltd. was established. Formal trading began on the bourse in 1956. The trading was suspended during the liberation war of Bangladesh in 1971. Operation resumed again in the 1976 with the change in government policy. During 1976, there were only 9 listed companies with total paid up capital of Tk.0 .138 billion and market capitalization of Tk. 0 .147 billion which was 0.138 % of GDP (Khan,

1992). Since then the stock exchange continued its journey of growth. The second stock exchange of the country, the Chittagong Stock Exchange(CSE) was established in December 1995.In order to control operation of the stock exchanges and trading of stocks of listed companies, the government of Bangladesh established the Securities and Exchange Commission of Bangladesh on 8th June, 1993 under the Securities and Exchange Commission Act, 1993 .The mission of the SEC is to protect the interests of securities investors, develop and maintain fair, transparent and efficient securities markets, ensure proper issuance of securities and compliance with securities laws.

3.4 Dhaka stock exchange

The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activities are regulated by its Articles of Association rules & regulations and bye-laws along with the Securities and Exchange Ordinance, 1969, Companies Act 1994 &Securities & Exchange Commission Act, 1993. It is the first and biggest stock exchange of the country.

Functions of DSE:

1. Listing of Companies (As per Listing Regulations).

2. Providing the screen based automated trading of listed Securities.

3. Settlement of trading (As per Settlement of Transaction Regulations).

4. Gifting of share / granting approval to the transaction/transfer of share outside the trading system of the exchange (As per Listing Regulations 42).

5. Market Administration & Control.

6. Market surveillance.

7. Publication of Monthly Review.

8. Monitoring the activities of listed companies. (As per Listing Regulations).

9. Investor’s grievance Cell (Disposal of complaint bye laws 1997).

10. Investors Protection Fund (As per investor protection fund Regulations 1999).

11. Announcement of Price

sensitive or other information about listed companies through online.

3.5 Chittagong stock exchange

The Chittagong Stock Exchange (CSE) began its journey in 10th October of 1995 from Chittagong City through the cry-out trading system with the promise to create a state-of-the art bourse in the country.

Founder members of the proposed Chittagong Stock Exchange approached the Bangladesh Government in January 1995 and obtained the permission of the Securities and Exchange Commission on February 12, 1995 for establishing the country's second stock exchange. The Exchange comprised of twelve Board members, presided by Mr. Amir Khosru Mahmud Chowdhury (MP) and run by an independent secretariat from the very first day of its inception.

CSE was formally opened by then Honorable Prime Minister of Bangladesh on November 4, 1995.

Vision: Aspire a global standard transaction place of securities and financial product.

Mission: Practice a set of core values to build competency in compliance, diversification and technology so that an accessible platform, market confidence and wealth maximization scope can be ensured.

Objectives:

• Increase business turnover
• Modernize trading system
• Ensure effective relationship management
• Achieve high level of confidence & professionalism
• Engage in product and market diversification
• Contribute to capital market policy development
• Ensure exchange related quality services

3.6 Structure of Bangladesh stock market

3.6.1 Primary market

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain bonds through the sale of a new stock or bond issue. This is typically

done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market.

3.6.2 Secondary market

The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie Mac.

The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production).