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The prospect of a derivative market in bangladesh

It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets e. The capital market includes the stock market equity securities and the bond market debt. Tell us what you need to have done now!

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Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Stock is a security issued in the form of shares that represent ownership interests in a company. Common stock holders may also receive dividends, provided the company is profitable, obligations to commercial creditors and bondholders have been met, and the board sees fit to declare them. How can it be traded?

  • Private sector companies are generally reluctant to be listed for variety of reasons;
  • However, direct listing method offers an opportunity where the entrepreneurs may invest the sale proceeds of their shares of a company in another new company;
  • Institutional investors are active in the market;
  • The Securities and Exchange Commission will have to be more efficient and professional;
  • Fortunately, investors are getting matured gradually and hopefully we may not have to see shouting and slogan in front of the exchanges any longer;
  • Public Limited Companies arrange their equity capital and debt capital by selling shares bonds or debentures respectively to the surplus unit for the purpose of fund modernization or future business expansion.

For example if you want to transfer your part of ownership of the firm to other then you should sell the deed of ownership to someone else. In that case, you have to maintain some papers.

Problems and Prospects of Capital Market in Bd

For example, a sale deed will be signed and the deed will be registered in government registry office. This certificate certifies that you own that much part of the company. However, due to some problems with paper certificate — such as copied certificate, maintenance of huge paper certificates a new system of electronic stock dematerialized share is made.

In this system, your stock is preserved in an electronic system rather delivering you the paper shares. Moreover, you do not need to register your ownership.

  1. In particular there are three major abuses. Considering the present situation, the country like Bangladesh the establishment of a financial derivatives market is essential in many ways.
  2. The sustained upward surge, however, went beyond what could be justified by economic fundamentals by early 2010.
  3. In a small but rapidly developing stock market, there will be problems like market manipulation, over pricing of stock, panic created by vested interest, price distortion, and regulatory shortcomings and so on.
  4. As regards policy makers, their objective should be to help ensure a softer landing, and let the market find its fundamental valuation level.

The ownership is automatically transferred to you and preserved in an automatic system. What is stock exchange? Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends.

The securities traded on a stock exchange include: To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which give them advantages of speed and cost of transactions. The participants of capital market are mainly those who have a surplus of funds and those who have a deficit of funds.

The persons having surplus money want to invest in capital market in hope of getting high returns on their investment.

On the other hand, people with fund deficit try to get financing from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going.

Surplus Unit has enough funds over all of their liabilities to invest in the capital market. It may broadly be classified into two investors i Individual Investors; ii Institutional Investors. Individual Investors participate in the capital market through purchasing Govt.


When the institutional investors have surplus funds that are not needed for a short time period, they seek to make money from their cash surplus by purchasing securities from the market. Deficit Unit usually takes loans or capital by selling bonds or shares to the surplus Unit to arrange necessary funds for investment in different promising business. Deficit group may further be classified into two groups i Government; ii Public Limited companies. The Government of Bangladesh always experiences its expending requirements exceed their tax revenues.

To balance this difference, it needs to collect fund through borrowing.

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Government also borrows on behalf of nationalized industries, municipalities, local authorities and other public sector bodies. It can borrow by selling Treasury Bonds and Treasury Notes to the surplus Unit through capital market.

Public Limited Companies arrange their equity capital and debt capital by selling shares bonds or debentures respectively to the surplus unit for the purpose of fund modernization or future business expansion. It is located in Motijheel at the heart of the Dhaka city.

It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the country. Among them 12 are elected from DSE members, another 12 are selected from different trade bodies and relevant organizations.

The CEO is the 25th ex-officio member of the board. As of January 20, 2010, the Dhaka Stock Exchange had 444 listed securities with a combined market capitalization of TK. 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. As of January 20, 2010, the Chittagong Stock Exchange had 227 listed securities with a combined market capitalization of TK. Total Market Capitalization TK. Vibrant capital is likely to support a robust economy. While lending by commercial banks provides valuable initial support for corporate growth, a developed stock market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates.

Despite a challenging political environment and widespread poverty, Bangladesh has achieved significant milestones on the social development side. With growth reaching 5. It is noteworthy that the leading global investment banks, Citi, Goldman Sachs, JP Morgan and Merrill Lynch have all identified Bangladesh as a key investment opportunity. It is encouraging to see that the capital market of Bangladesh is growing, albeit at a slower pace than many would like, with market development still at a nascent stage.

After the bubble burst of 1996, the capital market has attracted a lot more attention, importance and awareness, which have the prospect of a derivative market in bangladesh to the infrastructure we have in the market today. The steady investment atmosphere prevailing throughout 2009 is considered one of the main reasons behind this surge. Good return prospects, stable market growth, and uninterrupted trading as a result of political stability attracted foreign investors to invest in local securities.

The banking sector, followed by the power, pharmaceutical and cement sectors, received the most foreign investment. More such large issues are required, which can emerge out of the energy, infrastructure and public sectors. Challenges Ahead of the Capital Market 1. Information Asymmetry Access to credible information is restricted — Retail investors lack dedicated investment process infrastructure. Syndicate of large investors manipulate the market through price inflation, pump and dump strategies.

Supply Side Constraints Lack of fundamentally sound scrips as companies prefer traditional bank finance to capital markets — Need to encourage listing of good scrips in the market.

Lack of Professional Portfolio Management Ratio of institutional-to-retail investors remains low — Institutional investors bring stability through non speculative long term investments. Listing of more mutual funds can be a starting point to increasing institutional activity.

Valuation Disparity Value of scrips is subject to speculative trading rather than sound fundamentals, resulting in market volatility — Education of investors, overall development of capital markets through time can address this issue. Lack of a Formal Debt Market Bangladesh does not have established secondary debt market — Markets are unable to provide short term financing solutions to corporations, i.

Listing of debt instruments from quality issuers and institutional trading can increase activity. Quality Research and Analysis Development of quality equity research in the country is yet to match the growth of local capital markets — Quality research increases investor awareness, reducing speculative trading and market volatility. Strengthening of Surveillance Following the stock market crash of 1996, measures have been taken to prevent future incidents of the sort — Constant market surveillance by the SEC.

Focus on investor education the prospect of a derivative market in bangladesh establishment of Capital Markets Institute. Ensures fair pricing by factoring in demand, likely to encourage listing of large, well-reputed companies.

Bangladesh Capital Markets — The Future 1. Institutionalization of the Market We expect to see more institutional investors bringing long term commitment and liquidity to the market -Longer investment horizons reduce market volatility. Listing Fundamentally Sound, Well-reputed Companies With the improvement of corporate governance, we can attract sound corporations to come to capital markets -Quality scrips provide liquidity and motivation for educated investors to participate in capital markets.

Facilitation of Private Equity Investments Recent introduction of certain foreign private equity investors in Bangladesh -Provide stable flow of capital given mid to long term investment horizon of PE investments. High risk hurdles and selective investments direct PE funding to quality local corporations. The Telecom companies Aktel, Teletalk, and Banglalink are interested to be listed in capital market like Grameen Phone.

Necessity of the Establishment of a Financial Derivatives Market in Bangladesh

British High Commissioner of Bangladesh Stephen Evans has recently said about 1 million Bangladeshis living in UK are willing to invest in the capital market. Introducing book-building method that is well accepted by everybody and it is expected that the SOEs will also be off-loaded through the method.

A deep-sea port requiring 1 billion dollar is going to start with a policy decision that it will also be listed. Export oriented food processing industry needs huge capital and technical capacity to meet the growing standards in global market for marine food, fruits and poultry.

IT sector with our talented developers, yet to demonstrate the massive potentials of software industry of the country. Problems of the Capital Market in Bangladesh The unexpected rise and fall in share prices are mostly followed from the general confidence of the investors about political stability, euphoria the prospect of a derivative market in bangladesh investment in shares, prospect of quick capital gains, a vacuum in respect of institutional presence in the share market, monopolistic dominance of member brokers, inefficiency of the SECS to cope up with the developments, xistence to Kerb market, and absence of proper application of circuit breaker etc.

Delivery versus payment mechanism was used as one of the main vehicles of manipulation. Kerb market gave birth fake and forged share certificates. Price manipulation It has been observed that the share values of some profitable companies has been increased fictitiously some items that hampers the smooth operation of Stock market. Financing procedures and delivery of securities sometimes take an unusual long time for which the money is blocked from nothing.

  • But to see the bubble as arising from such actions is ridiculous;
  • Until and unless these fundamental issues are addressed the capital markets here will fail to see the light of the day;
  • Among them 12 are elected from DSE members, another 12 are selected from different trade bodies and relevant organizations;
  • The ownership is automatically transferred to you and preserved in an automatic system;
  • Government has to take some necessary step;
  • In the second part, we have tried to explain the importance of derivatives in details and make a theoretical framework of the potential usage of such instruments to bring the market efficiency and stability, and thus attracting the foreign capital to turn the economy of Bangladesh as a global one.

Some companies do not hold Annual General Meeting AGM and eventually declare dividends that confused the shareholders about the financial positions of the company 4. Some members being the directors of listed companies of DSE, CSE look for their own interest using their internal information of share market.

Many companies do not focus real position of the company as some audit firms involve in corruption while preparing financial statements. As a result the shareholders as well as investors do not have any idea about position of that company OTHER PROBLEMS The concept of centralization of the securities market has not been implemented that arises technical problems and political infighting. The intrinsic values for securities traded are sometimes estimated without considering the current market prices of the securities.

  • Some other from the internet;
  • Therefore, the market price of a fund share is often close to the per share NAV;
  • While lending by commercial banks provides valuable initial support for corporate growth, a developed stock market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates;
  • How it can be traded?

The absence of comprehensive legal and supervisory framework. Lack of skilled manpower as well as financial and non-financial institutions involved in the securities market. The lack of proper policy framework that provides incentives and protection to investors.

The dominance of bigger public sector and borrowing of public sector as well as government form the institutional sources rather than the market.

Suggestions to Improve the Activities of Capital Market To introduce automated monitoring system that may control price manipulation, malpractices and inside trading. To introduce full computerized system for settlement of transactions. To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors.