Reasons for Fluctuations in Share Prices in Secondary Market

Research PaperOn

The Reasons for Fluctuations in Share Prices in Secondary Market:

An Empirical Study on Chittagong Stock Exchange (CSE)

Shahjalal University of Science and Technology, Sylhet – 3114.

This Research Paper has been prepared for the submission into the Department of Business Administration, Shahjalal University of Science and Technology, Sylhet-3114, as a partial requirement for the fulfillment of the Masters of Business Administration Degree Program.

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A Research Paper on

The Reasons for Fluctuations in Share Prices in Secondary Market:

An Empirical Study on Chittagong Stock Exchange (CSE)

Course Code: BAN 509 Course Title: Research Paper

SUPERVISOR

Mr. Zillur RahmanAssistant Professor Department of Business AdministrationShahjalal University of Science and TechnologySylhet – 3114.

SUPERVISEE

Tahsina Haque SimuRegistration no. – 2004720004MBA 1st Year 2nd SemesterDepartment of Business AdministrationShahjalal University of Science and technologySylhet – 3114.

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Acknowledgement

This research paper is the outcome of joint efforts of a good number of people who have contributed

in various forms. But, before going to thanks all of them I want to express my heartful gratitude to

Almighty Allah who has created all the creatures of the universe.

I am highly grateful to my supervisor Mr. Zillur Rahman, Assistant Professor, Department of

Business Administration, Shahjalal University of science and Technology, Sylhet for his valuable

suggestions, guidance, constructive criticism and encouragement through the progress of the work.

I would like to thank Mr. Md. Nazrul Islam, Dean and Head, Professor, Department of Business

Administration, Shahjalal University of science and Technology, Sylhet and also the Chairman of

the Research Paper Evaluation committee for steering the conduct of the examination and

evaluation of our course BAN 509.

My heartful gratitude goes to all the teachers of the Department of Business Administration,

Shahjalal University of Science and Technology, Sylhet for their helping and friendly behavior.

I acknowledge the information, views and options of the target group i.e. the investors and people

associated with Chittagong Stock Exchange(CSE) whom I interviewed during the field level survey

and also express my humbly apology to those persons who helped me but may not find their names

in my narration.

And finally, I would like to thank my parents because all of my academic achievements are the

outcome of their sacrifice.

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Abstract

The paper aims to find out the reasons behind fluctuations in share prices in the Chittagong Stock Exchange during past years. Fluctuations in share prices are critically viewed by the investors and deter them from investing and as they view share price fluctuations as a sign of market stability and efficiency. As a result the capital flow in the secondary market may be hampered. The developing economies are looking forward to their capital markets as the engine for future growth as its presence ensures mobilization of funds from surplus units to the deficit unit. The capital market of Bangladesh is small, underdeveloped and inefficient. Of the total financial system, the non-securities part accounts for majority share of financial activities. As a developing country, Bangladesh needs to strengthen its capital market. This paper aims to explore the present scenario of secondary market in Bangladesh, to identify the causes of backwardness of the capital market caused by fluctuations in share prices in secondary market and to produce some viable recommendations to strengthen the secondary market.

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CHAPTER 1

Prologue

Secondary Market in BangladeshObjectiveScopeMethodologyLimitations

1.1. Secondary Market in Bangladesh

A strong and well-structured secondary market is the hub of capital market, which bears paramount

importance in the economic development of a country. It is not a mere coincidence that almost all

the developed nations exhibit a strong secondary market. It is perceived to act as the medium of

transactions between interested parties. Of the total financial system, the non-securities part

accounts for more than ninety percent of the financial activities in the country.

The secondary market, also known as the aftermarket, is the financial market where previously

issued securities and financial instruments such as stocks, bonds, options, and futures are bought

and sold. The term "secondary market" is also used 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.

In the secondary market existing securities are sold and bought from one investor or speculator to

another, usually on an exchange. After the initial issuance, investors can purchase from or sell to

other investors in the secondary market. It is a precondition for sustained economic development as

it forces the economic growth of a developing country. The major reason for the existence of the

secondary market is to provide liquidity of shares and diversified instruments which helps increase

market capitalization.

Stock market can perform well to meet the continuous financial needs of business enterprises if

there exists a congenial environment for boosting confidence of both stock market operators and

investors (Ahmed, M.F., 1996). The growth and development of stock market in a market economy

largely depends upon the creation of enabling environment for boosting up investor’s confidence.

Lassitier (1988) has identified five prime environment ingredients that contribute to the

enhancement of investors’ confidence and in turn, healthy growth of stock market. These are:

a) stable political environment

b) investment sensitive tax and regulatory environment

c) reliable flow of information

d) liquidity and

e) fair financial disclosure practice, codes of conduct and smooth trading guidelines.

Demirguc-Kunt and Levine (1996), Singh (1997) and Levine and Zervos (1998) find that stock

market growth plays an important role in predicating future economic growth in situations where

the stock markets are active.

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As a general rule, the greater the number of investors that participate in a given marketplace, the

greater the centralization of that marketplace, the more liquid the market. The capital market of

Bangladesh is not as effective needed to build a strong and sound economy. Addressing the issue

regarding our capital market, 'liquidity' and lack of "instrument" would top the list of challenges that

we have right now. (Kh. Ashadul Islam Ripon, 2007).

By providing liquidity of shares and diversified instruments the secondary market contributes in

increasing market capitalization. Investors become more confident and exert a positive impact on

the Gross Domestic Product (GDP) of our country. Neighboring countries such as India and

Pakistan have market capitalization of more than 75% of their GDP. In contrast Bangladesh capital

market accounts for a far lesser share of its GDP indicating ample scope for future intensification in

this sector. (Kh Asadul Islam Ripon, 2007)

To make the secondary market effective we should address two important aspects which act as

determinants of stock market effectiveness. “..volatility and market efficiency are two important

features which will ultimately determine the effectiveness of the stock market in economic

development.”(M. Kabir Hassan, et all,2000). A report published on The New Age stated expert

opinion on recent price hike in the year 2007 which reflected the volatility in share prices of the low

profile companies. Those were the non-performing and AGM defaulting companies. According to

the experts the hike was unreasonable. (The New Age, March 21, 2007)

The volatility of share prices in the secondary market aid to the general investors’ intention of not to

invest in the secondary market in our country. Many stock issues attained abnormally high price

earning ratio within a very short period. Many shares are heavily over-subscribed and some of the

stocks appear to be selling well above their intrinsic value for a short period because of the high

speculation about expected future earnings ("speculative bubble"). (Mazhar M. Islam)

The main problems of the secondary market of Bangladesh are: serious dearth of risk-free assets in

the secondary market to individual buyers, unfair treatment to the investors (mal-trading and

manipulation), lack of market information, absence of varied tradable financial instruments, the

deplorable standard of research information dissemination and book keeping, unprofessional

approaches of brokers to their services and so on and so forth. According to KVIBACK(1998), It is

difficult for Bangladesh to move forward for several reasons:

1. weak governance at the institutional and market levels;

2. high nonperforming assets among the nationalized commercial banks (NCBs);

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3. poorly defined and overlapping responsibilities of the Bangladesh Bank, Securities and

Exchange Commission, and Ministry of Finance; and

4. the lack of incentives and private initiative to drive market developments.

The research aims at identifying the reasons for fluctuations in share prices in the secondary market

which is a prime characteristic of Bangladesh stock market and suggesting some viable

recommendation to reduce the phenomena.

1.2. Objective The main objective of the study is to identify the causes for fluctuations in share prices in

Bangladesh by conducting an empirical study on Chittagong Stock Exchange (CSE) and to suggest

some policy measures in this regard. However, the study covers the following supporting

objectives:

1. To explore the present scenario of secondary market in Bangladesh and its development.

2. To focus on the recent trends in the secondary market.

3. To detect the causes triggering fluctuations in share prices in the secondary market.

4. Focusing on some corrective measures in this context.

1.3. Scope

The topic is very much relevant at present. A strong secondary market is a prerequisite of any sound

economic structure. The secondary market in the private sector is an important constituent of the

capital market. This market provides facilities for trading in securities which have already been

floated in the primary market. Thus, an organized and well-regulated secondary market (stock

market) provides liquidity to shares, ensures safety and fair dealing in the selling and buying of

securities and helps the monitoring of firms in the process of collection and use of funds by them.

We find sound secondary market as a prevalent characteristic of developed countries.

1.4. Methodology

In order to obtain a clear picture of the relevant and related issues primary data were collected from

people related with Chittagong Stock Exchange and stock trading. Primary data were arranged by

analysis. Several journals, magazines, articles and newspapers are collected and analyzed. Several

websites are searched for necessary information. From the collected data a few recent trends are

highlighted and analyzed with numerical data. Both the prospects and challenges faced by the

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different parties are discussed. The effort was directed to detect the reasons causing fluctuations in

share prices in secondary market.

a. Sources of data:

Both primary and secondary data were used in the research.

1. Sources of primary data: Primary data are collected from the interview with the executives

of DSE, CSE, BSB, ICB, prospective investors, stockbrokers and other professionals.

2. Sources of secondary data: Secondary data were collected from the following sources:

Publications of Securities and Exchange Commission (SEC), Dhaka Stock Exchange (DSE),

Chittagong Stock Exchange (CSE), Stock Market Reports on Daily newspapers, Bangladesh

Bank, Bangladesh Bureau of Statistics (BBS), etc.

Bangladesh Economic review

Books and Journals

Internet web sites.

b. Sampling Design: The performance of DSE and CSE are taken from the year 2002 to 2008. The

data of 5 companies of CSE have been taken for analysis. The data of dividend payment has been

taken from the year 2002 to 2008.

c. Analysis of data:

Both quantitative and qualitative analyses were conducted in the research.

Numeric data are analyzed with some statistical tools such as simple average, standard deviation,

skewness, trend analysis, growth rate, etc.

Some data are graphically represented with bar charts, line charts etc.

Qualitative information is presented with logical explanation.

1.5. Limitation:

Large organizations has scattered infrastructures, which made collection of necessary data

time-consuming and difficult.

The time was so limited for completing a task like this, which needs much time for analysis.

Lack of relevance in analysis by reason of inexperience.

Lack of cooperation from different sources accelerated the quandary.

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2.1. Literature Review 10

CHAPTER 2

Secondary market scenario in Bangladesh

Literature ReviewSecondary market ScenarioThe role of secondary market in developing countries: Bangladesh Perspective

The apex organ of Bangladesh Capital market is the Securities and Exchange Commission (SEC). It

was formed on 8 June, 1993 under the Securities and Exchange Commission Act 1993 as a capital

market regulator with a view to ensuring proper issuance of securities, protection of the interest of

investors in securities, development of the capital and securities markets, and regulation of the

capital and securities market in Bangladesh.

The capital market of Bangladesh is divided into different segments. The chart below shows

different parts of our capital market.

Financial Market

Money market Capital Market

Securities Market Non-securities Market

Primary Market Secondary Market

Chart: Capital Market Structure

The capital market in Bangladesh received significant boost in last year. All share price indexes,

turn over as well as market capitalization, improved substantially. However, the market lacks

reflection of company fundamentals and the possibility of price manipulation in the market through

insider trading cannot be ruled out. Unduly high increase of prices in some selected sectors

(investment and insurance) does not reflect signs favoring sustainable market development.

Moreover, volatility in the market seems to have magnified recently, which needs careful

investigation and monitoring by the stock market regulators.

There are two full-fledged automated stock exchanges the Dhaka Stock Exchange (DSE) and the

Chittagong Stock Exchange (CSE) ) which deal in the secondary capital market in Bangladesh.

The steady investment atmosphere prevailing throughout 2007 with good return prospects, stable

market growth and uninterrupted trading as a result of political stability attracted a good number of

investors to the market. The index of the prime bourse of the country was at a 10 year high in the

2007 year end (up 66 percent), which made it Asia’s top performer after China. The steady

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investment atmosphere prevailing throughout 2007 is considered to be one of the main reasons

behind that surge.

2.2. Secondary Market Scenario

The highlights of Bangladesh secondary market is given below. The share price index in Dhaka

Stock Exchange (DSE) shows a increasing trend with a downfall in the year 2006.

Table: Trading Operation in Dhaka Stock Exchange

Year No. oflisted

securities

IPO IssuedCapital

(In million taka)

MarketCapital

(In million taka)

Turnover(In million taka)

PriceIndex

2001 249 11 33,454.3 65,222.8 39,868.3 817.792002 260 8 35,203.0 71,262.0 34,984.9 822.342003 267 14 46,055.0 97,587.0 19,152.1 967.882004 256 2 49,532.0 224,923.0 53,181.1 1,971.312005 286 22 70,313.0 233,075.0 64,834.8 1,275.052006 310 12 118,437.0 323,368.0 65,069.3 1,321.392007 350 14 214,470.0 753,950.0 322,820.1 2,535.962008Up to June

378 ------ 284,380.0 931,025.0 69,954.9 2,588.03

Source: Bangladesh Economic Review, 2008

The number of securities (including mutual fund and debentures) listed with the DSE increased to

378 by June 2008 from 350 of June 2007. By the end of June 2008, the issued capital of listed

securities stood at Tk. 284380 million, which is 32.6 percent higher than that of June 2007. Up to

June 2008, market capitalisation of securities stood at Tk. 931025 million. General share price

index of the DSE stood at 2588.03 in June 2008, which was 2535.96 in June 2007.

The number of securities listed with the CSE reached 231 as of June 2008 from 227 as of June

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2007. By the end of June 2008, the issued capital of listed securities stood at Tk. 102220 million

which is 14.62 percent higher compared to that at the end of June 2007. As of June 2008, market

capitalisation of securities reached Tk. 777740 million. General share price index of the CSE

reached 9050.56 as on June 2008, which was 7657.06 on June 30, 2007.

Table: Trading Operation in Chittagong Stock Exchange

Year No. oflisted

securities

IPO IssuedCapital

(In million taka)

MarketCapital

(In million taka)

Turnover(In million taka)

Price Index

2001 177 9 29,652.7 56,363.5 1,479.62 1,836.872002 185 9 31,079.9 60,467.7 13,586.1 1,841.142003 199 10 41,967.6 85,312.3 6,688.6 1,642.782004 195 3 46,978.7 215,010.8 17,551.3 3,597.702005 210 16 55,519.3 219,942.8 14,042.7 3,378.682006 213 6 69,378.4 270,510.7 15,893.1 3,724.392007 227 13 89,173.9 612,580.0 52,590.3 7,657.062008Up to June

231 ------ 102,220.0 777,740.0 10,347.6 9,050.56

Source: Bangladesh Economic Review, 2008

The billboard below shows the condition of the secondary market during last two quarters of the

year 2008.

Table: Secondary market Billboard (Figures in million)

Dhaka Stock Exchange

Chittagong Stock Exchange

As on 30th Sept

2008

As on 31st

Dec,2008As on 30th

Sept 2008As on 31st

Dec,2008

Total number of listed securities 400 412 234 238Total No. of Tradable securities 2,602 2,759 2,461.69 2,629.15Total issued capital of all listed

companies349,621 372,156 119,446.50 121,661.13

Total Market capitalization 1,068,275 1,059,530 819,898 807,875All Share Price Index 2,498.45 2,309.35 8,996.69 8,692.74

Source: (SEC quarterly report and CSE Portfolio; July-Sep 2008, and Oct-Dec 2008) The market billboard shows that the number of listed securities reached to 412 in DSE and 238 in

CSE. The number of tradable securities was 2759 in DSE and 2629.15 at CSE at the year end.

Issued Capital at DSE and CSE amounted tk. 372,156 million and tk. 121,661.13 million

respectively. Market Capitalization reached at tk. 1,059,530 million and tk. 807,875 million at the

end of year in DSE and CSE whereas the price index was 2,309.35 and 8692.74.

2.2.1. Fluctuations in share prices represented by movement in index.

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The two charts shown below depict the trend of market behavior in DSE and CSE.

Chart: Trend of market behavior in DSE

0

200,000

400,000

600,000

800,000

J an, 08 Feb, 08 Mar, 08 April,08 May,08 J une,08 J uly, 08 Aug, 08 Sep, 08

0

2000

4000

6000

8000

10000

Market Capitalization Turnover All Share Price Index

Chart: Trend of market behavior in CSE

2.2.2. Size of stock market in Bangladesh (2002-2008).

The size of Bangladesh stock market is small. Analysts frequently use the ratio of market

capitalization to GDP as a measure of stock market size. In terms of economic significance, the

assumption behind market capitalization is that market size is positively correlated with the ability

to mobilize capital and diversify risk on an economy wide basis. Table below shows the size of

Bangladesh stock market.

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Market Capitalization ratio has increased from 4.82% in 2002 to 14.28% in 2006. Then the stock

market experienced a sudden growth in market capitalization in the nest two years, 28.92% in 2007

and nearly 31.53% in 2008.

Table: Stock market size

Year Total Market Capitalization(in million taka)

Market Capitalization to GDP (%)

2002 131,730 4.822003 182,899 6.082004 439,934 13.212005 453,018 12.222006 593,879 14.282007 1,366,530 28.922008 1,708,765 31.53

Descriptive Statistics of Market capitalization to GDP Mean 15.86Standard deviation 10.46Skewness 1.04Minimum 4.82Maximum 29.95

Source: Bangladesh Economic Review, Chittagong Stock Exchange, Dhaka Stock Exchange and Securities and Exchange Commission (Annual Report and quarterly review), various issues

Mean market capitalization 15.86 with a standard deviation of 10.46 points to high level of

volatility in market capitalization.

The total market capitalization at DSE reached Tk.1,059,530 million in December 2008 with 412

listed securities consisting of 276 companies, 16 mutual funds, eight debentures, 111

Government bonds, and one corporate bond. The capital market reached new heights in terms of

market capitalization. At the end of 2008, market capitalization at DSE was 19.3 percent of the

country's GDP compared with 15.7 percent in December 2007.

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The second indicator of market size is the number of companies listed. The rationale of including

this measure is that as the number of listed company increases, available securities and trading

volume also increases. The table below shows the number of listed companies in both exchanges.

Table: Number of listed companies in DSE and CSE

Year Number of Companies listed

Dhaka Stock

Exchange

Chittagong Stock

Exchange

2001 249 177

2002 260 185

2003 267 196

2004 256 198

2005 286 210

2006 310 213

2007 350 227

2008 412 238

Source: Bangladesh Economic Review, Chittagong Stock Exchange, Dhaka Stock Exchange and Securities and Exchange Commission (Annual Report and quarterly review), various issues.

The table shows that the number of listed companies have grown from 177 to 221 in the year 2008

whereas the figure is 412 in DSE in 2008.

2.3. The role of secondary market in developing countries: Bangladesh Perspective

The secondary market plays an important role in quickening the pace of economic development.

The developing economies are looking forward to their capital markets as the engine for future

growth as its presence ensures mobilization of funds from surplus units to deficit units. Secondary

market pools the money from a wide number of people and channels it to the ultimate users. It

performs a critical role in acting as an intermediary between savers and companies seeking

additional financing for business expansion. Vibrant capital is likely to support a robust economy.

2.3.1. Reasons behind the underdevelopment:

A developed stock market is an important prerequisite for moving into a more mature growth phase

with more sophisticated conglomerates. Today with a $67 billion economy and per capita income of

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roughly $500, Bangladesh should really focus on improving governance and developing advanced

market products.

Despite a challenging political environment and widespread poverty, Bangladesh has achieved

significant milestones on the social development side. With growth reaching 7 percent in 2006, the

economy has accelerated to an impressive level. It is noteworthy that some of the leading global

investment banks have identified Bangladesh as a key investment opportunity. However, the capital

market in Bangladesh is still underdeveloped, and its development is imperative for full realization

of the country’s development potential.

The chart given below shows total market capitalization as a percentage of GDP in Bangladesh

compared to neighboring countries from the year 2003 to 2007. It is evident that the capital market

of Bangladesh has not been able to play a vital role in the economic development of the country.

Almost all the countries have experienced accelerated growth in market capitalization as a

percentage of GDP. But we could manage to achieve a very small rate of growth which is also much

lesser than the South Asian Average.

Table 1: Market capitalization of listed companies as % of GDP

Country 2003 2004 2005 2006 2007Bangladesh 3.12 5.86 5.04 5.83 10.04India 46.56 55.33 68.39 89.37 155.35Nepal 7.63 11.73 16.43 20.20 48.10Pakistan 19.89 29.60 41.95 35.88 48.93Sri Lanka 14.36 17.70 23.44 27.47 23.35South Asia Avg. 39.54 48.07 60.24 76.83 133.95

Source: The World Bank WDI database.

It is encouraging to see that the capital market of Bangladesh is growing, though at a slower pace

than man would like, with market development still at a nascent stage.

The market has seen a lot of developments since the inception of the Securities and Exchange

Commission (SEC) in 1993. After the bubble burst of 1996, the capital market has attracted a lot

more attention, importance and awareness, that has led to the infrastructure we have in the market

today.

Access to high quality and credible corporate information remains a major problem in the market.

While a handful of institutional investors may enjoy certain benefits since they have an investment

unit manned with qualified officers, nothing exists for retail investors. And, in the absence of

independent research houses, retail investors primarily focus on advice given by their brokers,

which often consists of market rumours. This is not acceptable, and it often leads to enormous

losses for small investors who are vital for a low-income and emerging market like Bangladesh.

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Filtering of information among different types of investors may leave scope for manipulation; this

assumption had been proved right in the 1996 market meltdown at the cost of many individuals and

households.

The market does not have an adequate number of fundamentally sound scrips. The market has to

reach such a stage of development that companies will take it as a serious alternative to bank

financing.

The government has reduced the interest rates on savings instruments, however this particular

market is still limited to the commercial banks, and individual investors do not have access to these

instruments. These savings instruments are considered risk-free, and since they are not present in

the capital market, the overall risk of investment for an investor remains very high. A portfolio

investor does not have the option of reducing his average portfolio risk by adding these risk-free

opportunities.

The ratio of institutional to retail investors is still low in Bangladesh, even relative to other

emerging markets. Institutional investors bring long-term commitment and a greater focus on

fundamentals and hence stability in the market. The presence of institutional investors is also

expected to ensure better valuation levels due to their specialized analytical skills.

Corporate governance of international standard is still lacking. Multinational corporations and

institutions operating in Bangladesh often adhere to a very high international standard compliance

regime. Parent companies of most of these corporations and institutions have their scrips listed in

developed markets. Unless the local market adheres to, and effectively enforces, a standard

corporate governance system, there will not be a level-playing ground for international business

houses vis-à-vis local operators.

An important aspect for capital market is reflection of fair value of scrips. This is not adequately

present in the current scenario, and due to this reason the market is not receiving the attention of an

important segment of investors, both foreign and local. Investors are perhaps depending more on

speculative analysis, resulting in volatility in the market, as opposed to fundamental analysis, which

could attract more stable long-term investors who are sure about their investment tenure and

expectations.

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2.3.2. Journey since the 1996

As on 7th August, 1996 there were 203 and 74 listed securities with DSE and CSE, respectively.

The listed securities comprise shares of 185 companies, 7 mutual funds and 11 debentures in DSE.

In CSE, total number of share issues is 67 and 7 mutual funds. The total market capitalization of

securities was about dollar1813.63 million on 7th August in DSE alone. The secondary securities

market witnessed exceedingly high activities after the election of June 1996 and continued till a

major crash in the market in the end of 1996.

The bull run that took place in 1996 has left a number of positives for the market. A lot of

investment-friendly regulatory reforms have been implemented by the SEC. We now have stronger

surveillance and improved rules relating to public issue, rights issue, acquisition, mergers and so on.

All these fundamental developments, which were well-overdue, followed the 1996 bull-run. It was a

learning experience for Bangladesh, and the desired level of changes was initiated by the market

watchdog subsequently.

In the secondary market, surveillance is more active and particular than ever before. These

developments, that are widely appreciated, are actually the fundamental requirements that are in

place today resulting from the continuous efforts of the government and multilateral agencies.

2.3.3. Scenario in 2008

A healthy, transparent and dynamically evolving financial system helps mobilize savings and

allocate resources, ensure safe and efficient payment and settlement arrangements and ease financial

crisis management. Efforts continued in FY08 to establish a healthy and transparent financial

system in the country. In addition to the challenges emanating from the internal and external shocks

that affected the real sector, the share market witnessed a robust growth during FY08 supported by

strong economic prospect and outlook. As there is demand of securities having good fundamentals

in the capital market, at the time of rise in demand, the price of securities listed on exchanges

showed a remarkable upward trend that turned the capital market strong. On the other hand, major

economic indicators showed a positive trend to support the gradual development of the market. As a

result, all the indicators of the capital market increased in FY08 as compared to FY07. The capital

market was so active during FY08 because of significant improvements made in protecting

investors' interest and boosting confidence of investors in capital market, introduction of automated

trading through electronic registration and transfer of securities, simplifying rules and regulations

and notifying guidelines on corporate governance on comply or explain basis. These measures

created investment friendly atmosphere in the capital market and positive impact noticed in both

primary and secondary market. Thus, the depth of share market and daily turnover of securities 19

transactions have notably increased. Besides, positive public perception about the Bangladesh Bank

supervision of banks and financial institutions in addition to the general Securities and Exchange

Commission (SEC) supervision of public companies continued to attract strong investor interest in

the new capital issues of banks and financial institutions. This reawakened investor confidence in

the capital market should extend to new issues of listed companies in other economic sectors with

stronger SEC supervision, more demanding audit and financial disclosure standards, and credit

rating of issuers by independent rating agencies.

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CHAPTER 3

Chittagong Stock Exchange (CSE): An overviewBackgroundCSE initiatives in market developmentChittagong Stock Exchange: The Mission Chittagong Stock Exchange: The VisionChittagong Stock Exchange: The ObjectivesTrading Systems in Chittagong Stock ExchangeCSE IndicesScenario in CSE

3. 1. Background

The SEC approved the establishment of the second stock exchange of the country, Chittagong Stock

Exchange (CSE) by issuing the Certificate of Registration to CSE in February, 1995. CSE consists

of 70 members representing profession, trade, commerce and industry of Chittagong. It is managed

by a Board of Directors, comprising of 12 elected directors and 6 directors to be nominated by the

Commission. CSE was incorporated as a public company under the Company Act, 1994 on 1 April,

1995.

Chittagong Stock Exchange Ltd. (CSE) has a policymaking Body of 24 members, of whom 12 are

elected and 12 are non elected. This Board comprises of one President, three Vice Presidents and 19

Directors. There is an independent secretariat headed by a Chief Executive Officer (CEO).

Chart: Chittagong Stock Exchange structure

The responsibilities of Chittagong Stock Exchange include the followings.

Establishing listing requirements.

Approval , suspension or removal of listing privileges of companies.

monitoring listed companies in compliance with legal regulatory provisions

Permission of dual listing.

Providing the screen based automated trading of listed Securities.

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

Gifting of share / granting approval to the transaction/transfer of share outside the trading

system of the exchange.

Market Administration & Control.

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Market Surveillance.

Publication of Monthly Review.

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

Investors’ grievance Cell.

Investors Protection Fund.

Announcement of Price sensitive or other information about listed companies through

online.

Chart: Regulatory framework in Chittagong Stock Exchange

3.1. CSE initiatives in market development

CSE was very keen on development activities in 2008. From the very beginning CSE tried to get

along with the investors. On the continuation second CSE capital market fair was organized in

Sylhet. The first one was organized in Chittagong in 2005. CSE also organized a monthly training

program about capital market for the third time in March. The fourth and fifth was arranged in June

and the sixth and seventh in September. In the same time CSE arranged a five-day certification

course in collaboration with National Stock Exchange of India Ltd. to make people working in

brokerage firms and financial institutions aware of financial derivatives. In the year 2008, CSE

extended its network to Khulna, Moulovibazar, Sylhet, Chhatak, and Hathazary in Chittagong.Up to

now CSE trading network is extended to 11 cities and 4 upazillas.

Parliament

Ministry of Finance

Securities and Exchange Commission

Dhaka Stock Exchange Chittagong Stock Exchange

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3.2. Chittagong Stock Exchange: The Mission

To create an effective, efficient and transparent market atmosphere of international standard

to save and invest in Bangladesh in order to facilitate the competent entrepreneurs to raise

fund and accelerate industrial growth for overall benefit of the economy.

3.3. Chittagong Stock Exchange: The Vision

CSE has always been very focused in developing a strong capital market in the country. It

endeavors to improve its internal organizational capacities to make CSE a transparent, accountable

and dynamic capital market institution. Externally, it also gives its best efforts to develop a balanced

and vibrant capital market through empowering the other market participants and the investors. CSE

will continue to devote itself in attaining these objectives to be able to contribute to the industrial

and economic development of the country.

3.4. Chittagong Stock Exchange: The Objectives

The CSE works with the following objectives to:

Develop a strong platform for entrepreneurs raising capital

Provide an investment opportunity for small and large investors.

Develop a transparent market thereby ensuring investor’s interest.

Provide a fully automated trading system with most modern amenities to ensure; quick,

easy, accurate transactions and easily accessible to all;

Attract non resident Bangladeshis to invest in Bangladesh Stock market;

Attract foreign institutional investors to invest in Bangladesh.

Collect, Preserve and disseminate data and information on stock exchange

Develop professional service culture through mandatory corporate membership.

Maintain a research cell for analyzing status of the market and economy.

24

3.5. Trading Systems in Chittagong Stock Exchange

3.5.1. Automated Trading System

In the secondary market, surveillance is more active and particular than before. Trading has now

become automated, led by the Chittagong Stock Exchange through the central depository. In the

present automated trading environment, bids/offers, depth and required broker particulars are all

recorded and can be retrieved for future reference. The Central Depository Bangladesh Limited

(CDBL) was created in August 2000 to operate and maintain the Central Depository System (CDS)

of Electronic Book Entry, recording and maintaining securities accounts and registering transfers of

securities; changing the ownership without any physical movement or endorsement of certificates

and execution of transfer instruments, as well as various other investor services including providing

a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the

Bangladesh Bank. There are strict rules and guidelines, trading circuit breakers and international

standard surveillance to protect investor rights and ensure fair play.

The steady investment atmosphere prevailing with good return prospects, stable market growth and

uninterrupted trading attracted a good number of investors to the market. The P/E ratio now stands

at 20 times as compared to 14.1 times for emerging markets.

Besides its regular/normal trading facilities, CSE offers additional services, Internet Trading

Services (ITS) and Over-the-Counter (OTC) market.

Internet Trading Services (ITS): CSE is not only the pioneer of establishment of nationwide

trading mechanism. CSE introduced internet Based Trading in May 2004 to enable the remote

investors to have trading facilities from home and abroad directly. Investors may have access to

CSE trading network not only from the premises of the brokers but also from their PC/Laptop/Cell

Phone through the internet from any corner of the globe. The CSE network allows its user to use

internet as an order routing system for communicating clients’ orders to CSE’s main trading engine

through the brokers. Broker can provide this service to their client on obtaining necessary

permission from the exchange. CSE has stipulated the minimum conditions to be fulfilled by

brokers to start internet based trading services. The ITS is getting popular and the users of this

module are increasing.

25

Over-the Counter Market (OTC): CSE has also established an Over-the Counter (OTC) market

with a specific mandate to service small and medium innovative and high growth enterprises, in

raising resources efficiently through the capital market. De-listed companies are also eligible to be

traded on OTC. The trading System of OTC is automated. OTC market is only available at CSE.

The structure of financial activities in CSE is depicted below. It shows that CSE is associated with

different types of organization like merchant banks, commercial banks custodian banks which are

involved in underwriting of securities. Brokers of securities take part in the settlement of

underwriting of securities.

Chart: Structure of financial activities in Chittagong Stock Exchange

All companies in CSE are graded by 5 levels called A, B, G, N, and Z.

A Grade Companies

26

MemberCompanies

MerchantBank

Commercial Bank

Custodian Bank

Brokers of Securities

Portfolio Management

Underwriting new issues



Settlement Settlement

Issue Management

Companies which are regular in holding the current annual general meetings and have declared and

paid dividend at the rate of ten percent or more within sixty days from the date of declaration and

submission of compliance report thereof to SEC within seven working days from the date of

completion of disbursement.

B Grade Companies

Companies which are regular in holding the annual general meetings, declared and paid dividend

less than 10% and submission of the compliance report to SEC within the time limit belong to this

category.

G Grade Companies

Greenfield companies belong to this category.

N Grade Companies

All newly listed companies except Greenfield companies will be placed in this category and their

settlement system would by like B-category companies.

Z Grade Companies

Companies which have failed to hold the current annual general meetings or have failed to declare

any dividend or which are not in operation continuously for more than six months or whose

accumulated loss after adjustment of revenue reserve, if any, is negative and exceeded its paid up

capital provided that the chief executive officer of the exchange may bring any other company

under this category, if deemed necessary, with the prior written consent from the commission.

3.6. CSE Indices: Like other exchanges around the globe, CSE has also some indices to indicate

the relative value of prices or values of listed securities on a particular day compared with a base

day/prior day points.

The well-recognized indices of CSE are:

a) CSE All Share Price Index (CASPI)

b) CSE-30 Index

c) CSE selective Categories Index (CSCX)

d) CSE Sector wise index

CSE has been maintaining its All Share Price Index since 10 October 1995 using Chained Paasche

method. Considering its limitations, CSE has replaced its old method of calculation by new one 27

following Laspeyres Method where base index was set to 1000 points and the base date was 30

December 1999. This Index came into effect from 1 January 2000.

With the same base date CSE has also incorporated CSE-30 Index that includes thirty selective

stocks based on set criteria from all the listed companies with base index of 1000 points, which is

very popular among the investors. This index also came into effect from 1 January 2000. CSE has

played its pioneering role by introducing such a selective index as a benchmark index in the country

for the investors to have their exclusive view on the market and to help the other users of the index

particularly the financial institutions and portfolio managers to use as an underlying for creating any

index funds, portfolio and/or financial products like Index Futures, Index Options, ETF etc.

In 14 February 2004 CSE has launched another index named CSE Selective Categories Index

(CSCX). This index includes: ‘A’, ‘B’, ‘G’ and ‘N’ Categories stocks only. The base date of this

index is 15 April 2001 and base index was set to 1000 points.

Realizing the effectiveness of measuring the Sector wise performance of Bangladesh economy, CSE

has pioneered by launching another index named CSE Sector Wise Index, which came into effect

from 12 March 2005. All the securities listed in CSE are classified into 16 industry sectors.

The CSE-30 and CSE Selective Categories Index (CSCX) are being broadcasting through CSE

Automated Trading System and it is being updated automatically after every 3 minutes during

trading hours.

3.7. Scenario in CSE

Chittagong Stock Exchange passed another successful year 2008. In the year 2007, The total

transaction at CSE amounted 52363.1 million which reached 100747 million showing an increase of

92.08%. On 16th OCTOBER 2008, CSE trade volume hit a new record of tk.1091.7 million, the

highest ever mark amid buoyant stock trading. On this historic day, CSE’s market capitalisation

touched tk. 819 billion mark while the all share price Index( CASPI) closed at 8970.79 points which

is also another record for the Exchange. The previous trade records on year to year basis are as

follows:

Table: Trade records at CSE

Date Trade volume (in million taka)4 November 1996 365.921 November 2004 366.7

28 May 2007 367.526 June 2007 454.8

18 October 2007 457.722 October 2007 569.14 February 2008 631.2

28

21 April 2008 716.98 June 2008 883.1

12 October 2008 897.316 October 2008 1091.7

In the same year CSE all share price index reached 9368.8033 to make a new record of highest

marks. At the end of 2007 total market capitalization was 612479.2 million taka. It showed a

31.90% increase at the end of 2008 amounting 807875.3 million. At the last trading day of 2007

CSE all share price index, CSE-30, CSEX index amounted to 7657.0590, 6935.4926 and 4921.2508

respectively which reached 8692.7457, 7566.9466 and 5680.5869 respectively at the end of 2008. It

leads to an increase of 13.53%, 9.10%, and 15.43% respectively. The number of listed companies

was 227 in 2007 which reached 238 by showing an increase of 4.85%. The dividend was paid by

149 listed companies in 2007 and 169 in 2008. The cash dividend yield was 2.00 in 2007 which

reached to 2.61 in 2008 by showing an increase of 30.50%.

3.7.1. CSE Trading System: 2008

To provide the up to date trading logistics, CSE has been taking initiatives. In this regard CSE has

been modifying its trading system. At present the CSE is processing the Request for Proposal for

NTGS (Next Generation Trading System). CSE is the only stock exchange in the country which

offers ITS (Internet trading services).

3.7.2. Regulatory Reform: 2008

SEC has reinstated ‘Money Adjustment Facility’ from the 3 rd February in 2007. It aids the trading

operation of CSE members and increases liquidity in the market. The free trade limit has been

increased to 5 crore from 1 crore. This also helped to make the trading operation flowing. Now the

members of exchange can use the additional amount for transactions. The compliance level of the

brokerage houses has also improved which lead to more investor confidence. Adherence to the rules

and regulation is improving.

The comparative market performance of CSE is shown below.

Table: Comparative Statement of Chittagong Stock ExchangeIndicators As on

30th June 2007As on

30th June 2008%

increasedTotal number of listed

securities219 231 5.48

Total Issued Capital of all listed securities(Tk. in million)

8,1032.9 102,220 26.15

29

Total Market Capitalization of all listed securities (Tk. in

million)

398,490 777,743 95.17

All Share Price Index 5,194.77 9,050.56 74.22

Market capitalization inclusive of new issues increased remarkable by 95.17 percent in Chittagong

Stock Exchange in FY08 than that of FY07. In FY08, the amount of market turnovers in the

secondary market also increased by 134.5 percent at the Chittagong Stock Exchange. The securities

market got a momentum during the year under report when both local and foreign investors took

part in the trading of securities in wide scale. As a result, all indicators of the stock market increased

notably in FY08. In FY08, all share price index in Chittagong exchange also increased by 74.2

percent. Day to day changes in price indices and market capitalization in FY08 mainly reflected

local conditions with a momentous response during the year under report.

Chart: Market structure

30

Securities Trading

Chittagong Stock ExchangeDhaka Stock Exchange

Equities Debts Mutual Funds

The comparative market summary of Chittagong Stock Exchange (CSE) is given below from the

year 2002 to 2008.

Table: Comparative Market Performance of CSE 2002-2008

SL No

Category 2002 2003 2004 2005 2006 2007 2008

1 No. of Securities Listed 185 196 198 210 213 227 2382. No. of trading days 287 286 271 263 231 237 2383. No. of securities traded 163 173 185 191 202 217 1774. Market Capitalization

In million takaIn US$ millions

60,4681,020

85,3121,451

215,0113,435

220,3533,390

267,5013,992

613,1759,017

807,87511,632

5. Total Turnover ValueIn million taka

In US$ millions13,581

2306,719114

14,808236

13,933216

16,530247

52,328770

100,7471450

6. Turnover Volume (shares) 586,846,683 203,731,008

332,534,611 308,901,797 330,662,106

652,254,942

972,811

7. Average Daily TurnoverIn million taka

In US$ millions47.320.80

23.490.40

54.640.87

52.980.82

71.561.07

2213.25

423.3

8. No. of companies declared cash dividend

133 131 135 161 113 116 92

9. IndicesCSE All Share Price Index

(CASPI)CSE 30 Index

CSCX

1,4161232----

1,6431,516-----

3,5983,466-----

3,3793,1592,348

3,7243,3422,432

7,6576,9354,921

8,6927,5665,680

10. Market Cap. To GDP (%) 2.15 2.80 6.07 5.61 6.44 12.00 14.9111. Market P/E ratio 6.47 8.50 18.65 15.67 14.31 22.83 19.0012. Turnover ratio (%) 22.54 7.86 6.87 6.37 6.19 8.53 12.4713. Dividend Yield (%) 7.08 6.29 3.23 4.35 4.25 2.00 2.6114. Currency Conversion Rate

(1US$= taka)59.30 58.78 62.60 65.00 67.00 68.00 69.45

#All Share Price Index is calculated on weighted average method. The index base was 1000 for CSE from the year2000.(Source: Chittagong Stock Exchange Profile)

31

32

CHAPTER 4

Hypothesis testing

Test of Randomness of the Changes in Share Prices

4.1. Test of Randomness of the Changes in share prices

Random Walk theory: According to the random walk theory, prices of shares change randomly. It

states that stock market prices evolve according to a random walk and thus the prices of the stock

market cannot be predicted. The study has examined the randomness of changes in share prices by

applying run test for randomness. Accordingly, the study has selected 5 companies randomly.

Ho: The changes in share prices are random.

Ha: The changes in share prices are not random.

The Ho has been tested at 5% level and the significance value of Z statistic is +/-1.96.

Name of Company ui ni E(ui)=(ni+2)/2 Var(ui) Z=[ui-E(ui)]/√var Ho=The Changes are random

ACIBeximco Ltd.Delta Brac HousingSummit PowerPeoples Insurance

4940364216

5349435218

27.525.522.52710

12.9911.9910.4912.754.24

+5.97+4.19+4.16+4.20+2.91

RejectedRejectedRejectedRejectedRejected

Source: Chittagong Stock Exchange, Data compiled by researcher.

ui =Number of runs for ith companyni = Total trading days of the share of ith companyVar (ui) = n/4[(n-2)/n-1)]

From the table, it has been found that calculated value of Z does not fall into the accepted region of

Z statistic +/- 1.96. So the null hypotheses in all five cases have been rejected. It can therefore be

concluded that changes in share prices in CSE are not random.

33

34

CHAPTER 5

Findings from Interview

Fluctuations in share prices is a prime characteristic of underdeveloped stock markets. Bangladesh

is no exception. The stock market of Bangladesh has to go a long way to be developed market. The

CSE has been growing on different fronts year by year, but the growth in different parameters is

still at low stage as compared to emerging to stock market in the world in general, and in Asia in

particular. This stage of development can be attributed to different issues. The study has identified

some important causes responsible for fluctuations in share prices by conducting interview of

personnel associated with stock market, DSE and CSE.

The reasons include:

Political instability

Inadequate market regulation

Inadequate disclosure of information

High interest rates in money market

Lack of supply of good shares

Dormant listed members

Lack of awareness of investors

These are discussed below.

Political Instability

This is a common feature, influencing the stock market like other sectors of economy badly. This

has caused a negative influence in number of trading days, sales volume, pricing of shares in the

stock market and thereby making it inefficient.

Inadequate market regulation

CSE has its own policy guidelines for operation. Besides, SEC keeps on promulgating different

laws and regulations for regulating the stock market and thereby establishing a congenial regulatory

environment in the stock market. Stock market experienced debacle in 1996 for lack of regulatory

control. Major share of respondents are of opinion that inadequate market regulation disrupts the

smooth operation of stock market. Apart from this, researchers have taken a note of objection from

good number of sample respondents that there has been some fraudulent acts and insider trading

35

which might have contributed to the abnormal fluctuations in the prices of security. This calls for

need based regulations to be regulated.

Inadequate Disclosure of Financial Information

Respondents are of the opinion that investors do not get adequate stock market information for

inadequate disclosure practice. It can be pointed out that SEC has obliged listed companies to

prepare financial statement according to its guidelines, Companies Act 1994 and IAS-I, preparation

of financial statement. Besides, it forces every listed company to get published semi-annual

financial statement. By this time, SEC has come out with guidelines of corporate governance and

made obligatory on the past of listed companies to introduce and publish.

Higher interest rate in Money Market

This is certainly encouraging investors to redirect their funds from stock market to money market.

All banks other than the specialized ones, have slashed their lending rates in June, 2008. A the same

time, private and foreign commercial banks have raised their deposit rates. This reduction in lending

rates and increase in deposit rates have narrowed the interest rate spread.

Table: Lending and Deposit rates in different banks

Banks Lending rates Deposit ratesAll banks 12.29% 6.95%

State-owned banks 9.41 4.93Specialized banks 9.78 6.58

Private banks 13.51 8.42Foreign banks 13.79 5.25

Source: (CSE Portfolio, June, 2008)

Lack of supply of good shares

Respondents are of the opinion that a large number of profitable enterprise-state-owned enterprises.

MNCs private telecommunication companies are still outside the stock market. Listing of these

shares would certainly increase the depth of stock market.

The Multinational companies are doing business in Bangladesh without enlisting in securities

market. It is not possible in developed countries. The MNCs are profitable companies. But they

have no accountability and they are transferring profit to their own countries from Bangladesh. If

they enlist on capital market, our nationals can get the share of profit. Very few MNCs are enlisted

36

in securities market like Bata which enriched our securities market. Grameen Phone, Banglalink,

Unilever etc. are successfully operating in our country. But after telling them several times by the

Finance Minister, they did not enlist in securities market. Government should take the strong step to

make them involved in security market. For this, our capital market will get the life.

Lack of awareness of investors

Most of the investors in stock market are not professionally sound for non-existence of training

institutes for HRD in this direction. Establishment of training institute for HRD in different level of

securities industry has become inevitable. This is because most investors in stock market are first

generation investors. As a result, they suffer a serious financial loss from any setback I n stock

market.

The majority people of Bangladesh do not have the knowledge about securities market. They do not

know the rules and regulations of investment in capital market. Two stock exchanges are located in

Dhaka and Chittagong. So, the people of other areas of the country deprived of the facilities of

trading in stock exchanges.

The communication system should be developed so that the people of every corner of the country

can invest in security market. The awareness has to develop through seminar, publicity in media.

The knowledge of securities market should be thought in secondary and higher secondary level of

education.

37

6.1. Performance Analysis of Chittagong Stock Exchange (CSE)-Part I

CSE has been performing different investment related jobs and undertaking and implementing

different programs in order to accomplish its objectives.

38

CHAPTER: 6

Performance Analysis of Chittagong Stock Exchange (CSE)

Part IPart II

Before evaluating the market performance of CSE, we need to overview CSE operations from a few

perspectives. The performances of CSE have been judged on different parameters such as number of

listed companies, number of listed securities, volume of trade, market capitalization, market share of

different sectors and sector wise performance.

6.1.1. Listing of companies and securities and no. of securities traded

On 1st day of trade (10th October, 1995) only 31 companies having 31 securities were listed with

CSE. The market capital stood at USD 0.20 billion. At present, the listing scenarios have been

found different. The chart shows that total number of listed companies reached 221 and listed

securities have reached 238 at the end of 2008.Listed securities are composed of 221 equity stock,

16 mutual funds and 1 corporate bond. It also shows that CSE has registered growth in number of

listed companies and growth in number of securities. CSE is expecting more number of companies

to be listed either for making new public issues or for direct trading at present environment although

historical growth rates appear to be relatively poor.

Table : The growth in listing of Companies and of securities and securities traded

Year Number of listed

Companies

Growthrate (%)

Number of Listed

Securities

Growthrate(%)

No. of securities

traded

Growth

rate(%)

2002 172 7.5 185 4.52 163 5.842003 183 6.4 196 5.95 173 6.132004 186 1.64 198 1.02 185 6.942005 199 6.99 210 6.06 191 3.242006 206 2.51 213 1.43 202 5.762007 211 2.43 227 6.57 217 7.422008 221 4.74 238 4.85 177 -18.43Mean 4.6 4.34 2.22SD 2.42 2.25 9.22

Skewness -2.96 -2.29 -1.15Source: (CSE Profile, portfolio)

The number of companies reached 221 in the year 2008 showing a growth rate of 4.74%. The

number of listed securities reached 238 with a growth rate of 4.85% in 2008. But there is declining

trend in number of securities traded. In the year 2008, the number of securities traded was 40 less

than that traded in 2007 which means many of the company’s securities remained untraded.

39

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008

Year

Number of Companies

Number of securities

Chart: The growth in listing of companies and of securities

150

160

170

180

190

200

210

220

230

2002 2003 2004 2005 2006 2007 2008

Chart: The growth in number of securities traded

The securities listed at the end of the year 2008 comprised of 221 equity stock, 16 mutual funds and

1 corporate bond. The scenario detects that there is lack of tradable securities of different types. We

need securities more in number and in types to attract investors to the market.

221

16 1

Chart: Composition of listed securities at the end of 2008.

6.1.2. The number of trading days in CSE

40

The number of trading days in CSE has been declining. In the year 2002, trade took place in 287

days which decreased to 238 days in 2008. Due to various reasons including political instability this

occurrence take place which is not positive for CSE. Uninterrupted trading is needed for a sound

stock exchange and therefore secondary market traded.

Table: No of trading days

Source: (CSE Profile, portfolio)

220

230

240

250

260

270

280

290

300

2002 2003 2004 2005 2006 2007 2008

Chart: No. of trading days

6.1.3. Market Capitalization in the Economy

Market capitalization is an indicator of economic development. The higher the amount of market

capitalization, the better the performance of stock exchanges. Market capitalization is calculated as

the closing price of the share on last date of reporting period multiplied by the number of shares

outstanding at the year end. In terms of economic significance, the assumption behind market

capitalization is that market size is positively correlated with the ability to mobilize capital and

diversify risk on an economy wide basis. (Agarwal, 2001)

The CSE market capitalization showed a huge growth in 2008. The share of CSE market capital in

the total is also increasing. It has reached almost half of the total market capital in the year 2008.

Another significant boost took place in the year 2004.

Table: Market capitalization in CSE, its growth and as a % of total (2002-2008)

Year No. of trading days Year No. of trading days2002 287 2005 2632003 286 2006 2312004 271 2007 237

2008 238

41

Year Market Capitalization(in million taka)

Growth of Market Capitalization (%)

CSE MC as % of total capitalization

2002 60,468 7.28 9.142003 85,312 41.09 8.682004 215,011 152.03 48.872005 220,353 2.48 48.602006 267,501 21.40 45.272007 613,175 129.22 44.872008 807,875 31.75 49.76Mean 55

SD 62.6Skewness 2.52


From the chart above it has been observed that market capitalization has a tendency to grow up over

the passage of time. The highest growth in market capitalization was 152.03% in the year 2004. In

the year 2008, the secondary market experienced a steady rate of growth.

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

2002 2003 2004 2005 2006 2007 2008

Year

(in

mil

lio

n t

aka)

Chart: Market capitalization in CSE

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2002 2003 2004 2005 2006 2007 2008

Chart: Annual growth of market capitalization

42

9.14 90.86

8.68 91.32

48.87 51.13

48.6 51.4

45.27 54.73

44.87 55.13

49.76 50.24

0 20 40 60 80 100

2002

2003

2004

2005

2006

2007

2008

CSE MC

DSE MC

Chart: CSE MC as a % of total Market capitalization

6.1.4. Turnover in CSE: The turnover in CSE showed an upward trend as it grew at a rate of

92.53% in 2008. Although there has been negative growth in three years under study, namely 2002,

2003 and 2005, the turnover at CSE could have maintained a steady rate of growth in the recent

three years.

Table: Turnover in CSE (2002-2008)

Year Turnover(in million taka)

Annual Growth rate (% )

2002 13,581 -9.172003 6,719 -50.532004 14,808 120.392005 13,933 -5.912006 16,530 18.642007 52,328 216.562008 100,747 92.53


0

20000

40000

60000

80000

100000

120000

(in

milio

n t

aka)

2002 2003 2004 2005 2006 2007 2008

Year

Chart: Total Turnover value over the years6.1.5. The Number of companies declared cash dividend:

43

The dividend was paid by 149 listed companies in 2007 and 169 in 2008.

Table: No. of companies declared cash dividend

Year No. of companies declared cash dividend

Growth rate (%)

2002 133 2.32003 131 -1.502004 135 3.052005 161 19.262006 113 -29.812007 149 31.862008 169 13.43


0

20

40

60

80

100

120

140

160

180

2002 2003 2004 2005 2006 2007 2008

Year

Chart: No. of companies declared cash dividend

6.1.6. Market P/E ratio and Dividend Yield:

The P/E ratio depicts the relationship between market's valuation of a company's shares and the

wealth the company. The ratio stays the same if price and earnings increase or decrease by the same

margin. If the ratio fluctuates markedly, or stays at a higher or lower than normal, we can argue that

recent company performances are no longer the main factor in pricing of a share at the marketplace.

Generally, a higher P/E means the company has the potential to improve its fundamentals so that

investors may be willing to pay a large multiple of its current earnings to buy the stock. However,

from the viewpoint of an investor, a higher P/E is risky because there is possibility that current price

does not reflect the company’s fundamentals, rather, non-fundamental factors may support the price

rise and hence price may go down substantially in the future.

P/E ratios are higher for firms or sectors as a whole with higher growth prospects.

44

The market P/E ratio reached 19% in the year 2008 which was 22.83% in 2007.The cash dividend

yield was 2.00 in 2007 which reached to 2.61 in 2008 by showing an increase of 30.50%.

Table: Market P/E ratio and dividend Yield (%)

Year

Market P/E Ratio

Growth rate (%)

Dividend Yield (%) Growth rate

(%)

2002 6.47 7.80 7.08 8.922003 8.5 31.37 6.29 11.162004 18.65 119.41 3.23 -48.652005 15.76 -15.49 4.35 34.672006 14.31 -9.20 4.25 -2.292007 22.83 59.54 2.00 -52.942008 19 -16.77 2.61 30.50


0

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008

Year

%

Chart: Market P/E Ratio

7.08

6.29

3.23

4.35 4.25

22.61

0

1

2

3

4

5

6

7

8

Dividend Yield (%)

2002 2003 2004 2005 2006 2007 2008

Year

Chart: Dividend Yield (%)

6.1.7. CSE Indexes: The value of CSE indices are shown below. CSE indexes include CASPI

(CSE All Share Price Index), CSE-30 and CSCX (CSE Selective Categories Index).

45

Table: CSE Indexes; CASPI, CSE-30, CSCX


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2002 2003 2004 2005 2006 2007 2008

Year

CASPI

CSE-30

CSCX

Chart: CASPI, CSE-30 and CSCX

6.1.8. Category wise share of transaction and market capital in CSE:

Year CASPI CSE-30 CSCX

2002 1416 1232 02003 1643 1516 02004 3598 3466 02005 3379 3159 23482006 3724 3342 24322007 7657 6935 49212008 8692 7566 5680

46

We know that there are 5 categories to which all the listed companies belong according to set

criteria. At the end of year 2008, the share of different categories in transaction, market capital and

paid-up capital are shown below.

Table: Category wise transaction and market capital in 2008

Category Share in

total transaction (%)

Share in

total paid up capital (%)

Share in

total market capital (%)

A 70.88 67.40 80.04

B 0.30 3.82 1.02

N 25.36 14.66 8.82

Z 3.45 14.12 10.11

Source: CSE Bazar Porikroma

It is found that the category A share plays the major role in respect of transaction, paid-up capital,

and market capital.

6.1.9. a) The top ten companies in transaction:

The list of top ten companies who achieved highest position in terms of trade in December 2008 are

given below.

Table: Top ten companies in transaction in December, 2008.

Name of Company Amount

(in million taka)

Percentage of

total transaction (%)

Beximco Pharma 593.2 12.67

Beximco 575.2 12.29

Summit Power 295.8 6.32

Shinepukur Ceramics 292.8 6.26

ACI Formulations 217.4 4.65

Titas Gas 206.5 4.41

Grameen One: Scheme Two 201.0 4.3

Citi Bank 119.5 2.55

AB Bank 115.9 2.48

Lankabangla Finance 110.8 2.37

Total 2728.1 58.3


6.1.9. b) The top ten companies: share price increased in December 2008:

47

The table below shows the companies whose share price got momentum in December 2008.

Table: Top ten companies in terms of rising share prices in December, 2008

Name of Company Market Price

30/11/08

(taka) per share

Market Price

31/12/08

(taka) per share

Monthly

Change (%)

Summit Power 583.25 963.00 65.11

JMI Bangla 60.00 91.25 52.08

Beximco Pharma 112.30 167.90 49.51

Bangladesh Online 50.20 74.80 49.00

Shinepukur Ceramics 60.40 88.60 46.69

Beximco 126.90 185.30 46.02

Bextex 16.50 23.80 44.24

Summit Alliance Port 608.25 877.00 44.18

Beximco Synthetics 114.25 163.25 42.89

Quasem Drycells 32.20 45.60 41.61


6.1.9. c) The top ten companies: share price decreased in December 2008:Table: Top ten companies in terms of fall in share price in December 2008.

Name of Company Market Price

30/11/08

(taka per

share)

Market Price

31/12/08

(taka per

share)

Monthly

Change

(%)

National Polymar 1,400.00 750.00 -46.43

Social Investment Bank 321.25 213.00 -33.70

Eastern Bank 770.50 592.00 -23.17

BCIL 39.50 31.75 -19.62

BD Luggage 22.00 17.75 -19.32

Saiham Textile Mills 120.00 100.00 -16.67

Aftab Auto 412.50 350.75 -14.97

Rupali Insurance 670.00 570.00 -14.93

Wonderland Toys 43.50 37.25 -14.37

Phoenix Insurance 417.75 360.50 -13.70


6.1.10. Region wise CSE members’ activity: 2008

48

The activity of CSE members is depicted below. From the pie chart, we find that members of Dhaka

and Chittagong are ahead of other members in trading which indicates that members from other

region are not so active.

Table: Region wise activity of CSE members

Region Activity Region ActivityChittagong 49.90% Khulna 0.21%

Dhaka 35.11% Barisal 0.36%Sylhet 13.89% Jessore 0.01%

Rajshahi 0.45% Narayanganj 0.06%

13.89%

0.45%

0.21%

0.36%

0.01%

0.06%

49.90%

35.11%

Sylhet

Rajshahi

Khulna

Barisal

Jessore

Narayanganj

Chittagong

Dhaka

Chart: Region wise activity of CSE members

6.2. Performance Analysis of Chittagong Stock Exchange (CSE)-Part II

49

It is necessary to analyze the liquidity and efficiency condition of CSE to unravel the causes for

fluctuations in share prices.

6.2.1. Liquidity and Efficiency

The ability of the market to buy or sell securities is termed as liquidity. According to (Agarwal, R,

N, 2000) two measures are generally used to measure liquidity. They are turnover (total value

traded) in the stock market as a ratio of:

(i) GDP; and

(ii) Stock market capitalization.

The second measure is also called turnover ratio. High turnover ratio is associated with low

transaction cost. It also denotes the degree of activity on a stock market. Thus, a small but active

stock market has a small size but a high turnover ratio. (Agarwal, R, N, 2000)

Turnover equals the value of total shares traded divided by market capitalization. High turnover is

often used as an indicator of high level of liquidity. Turnover also complements total value traded

ratio. While total value traded /GDP captures trading compared with the size of the economy,

turnover measures trading relative to the size of the stock market. Put it differently, a small, liquid

market will have a high turnover ratio but a small total value traded/GDP ratio

The turnover ratio gives the total value of shares traded in relation to the size of the market.

Table: Turnover and GDPYear Turnover

(in million taka)Annual Growth

(%)As a % of GDP

2002 13,581 -9.17 0.492003 6,719 -50.53 0.222004 14,808 120.39 0.442005 13,933 -5.90 0.372006 16,530 18.64 0.392007 52,328 216.56 1.112008 100,747 92.53 1.86

Descriptive StatisticsMean 54.64 0.69SD 93 0.5862

Coefficient of Skewness

1.95 33.72

Minimum -50.53 0.22Maximum 216.56 1.86

Source: CSE Portfolio

50

Turnover/GDP equals total value of shares traded on the stock market divided by GDP. The total

value traded ratio measures the organized trading of equities as a share of national output .The total

value traded/GDP ratio complements the market capitalization ratio. Together, market capitalization

and total value traded/GDP inform us about market size and liquidity. Table shows the liquidity

situation of Bangladesh stock market in terms of total value traded to GDP ratio. The ratio has

increased form an insignificant number (0.49) in 2002 to 1.86 % in 2008. Mean value of 0.69 with a

standard deviation of 0.5862 for the ratio imply that the increase is not even smooth; there is a

marked fluctuation in the value traded to GDP ratio over the years.

Table: Market capitalization and TurnoverYear Market

Capitalization(in million taka)

Turnover(in million taka)

Ratio ofTurnover to

Market Capitalization

2002 60,468 13,581 22.462003 85,312 6,719 7.882004 215,011 14,808 6.892005 220,353 13,933 6.322006 267,501 16,530 6.182007 613,175 52,328 8.532008 807,875 100,747 12.47Mean 10.10SD 5.85Coefficient of Skewness

1.94

Source: CSE Portfolio

Chart: CSE market performance: Turnover and market capital

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

2002 2003 2004 2005 2006 2007 2008

Year

Mn. ta

ka

Market capital

Turnover

It has been found that volatility in turnover across the periods understudy is a regular feature. The

growth in sales is found to be inconsistent. The ratio of turnover to market capitalization has a up-

down tendency over the periods. The turnover ratio has been very low.

51

Table: Correlation between Turnover and market capital

Year Turnover(in million taka)

Growth

rate (%)


(in million taka)

Growth

Rate (%)

2002 13,581 -9.17 60,468 7.282003 6,719 -50.53 85,312 41.092004 14,808 120.39 215,011 152.032005 13,933 -5.90 220,353 2.482006 16,530 18.64 267,501 21.402007 52,328 216.56 613,175 129.222008 100,747 92.53 807,875 31.75

Correlation coefficient 0.49

From the chart above it has been observed that market capitalization has a tendency to grow up over

the passage of time. The highest growth in market capitalization was 152.03% in the year

2004.Besides the correlation between market capitalization and turnover is 0.49 which is found

positive but insignificant. The results lead to a small product and a low level of market activity.

6.2.2. Stock Market SizeThe market capitalization ratio is generally taken as a measure of stock market size. (This

is measured as a ratio of market value of stocks which are listed on a stock market to GDP.)

Alternatively, size is measured by the number of listed companies on a stock market.

Table: Market Capitalization as a % of GDP

Year


(million tk) GDP (million tk)Market Capitalization

to GDP (%)2002 60,468 2,732,010 2.152003 85,312 3,005,800 2.82004 215,011 3,329,730 6.072005 220,353 3,707,070 5.612006 267,501 4,157,280 6.442007 612,479 4,724,770 12.002008 807,875 5,419,190p 14.91Mean 7.14SD 4.68

Coefficient of Skewness 0.98P=Projected

Source: CSE Bazar Porikroma and Portfolio

52

The table indicates that share of market capitalization to GDP has been increasing across the period

under study. Although it appears to be low; it indicates the growth potentially of market

capitalization. Positive growth in market capitalization as well as the ratio of market capitalization

to GDP indicate the better performance of CSE. La porter et al (1997,1998) and Levine and Zervos

(1998) used the market capitalization to GDP ratio as an indicator of market development.

Stock market can perform to the satisfactory level if degrees of confidence of both investors and

market operators are very high. Their level of confidence can be judged with the ratio of turnover to

sales.

Table: Growth of Secondary market at a glance

Financial

Year

No. of Listed

Companies

MCAP/GDP Turnover /GDP Turnover ratio

2002 1722.15 0.49

22.46

2003 1832.8 0.22

7.88

2004 1866.07 0.44

6.89

2005 1995.61 0.37

6.32

2006 2066.44 0.39

6.18

2007 21112.00 1.11

8.53

2008 22114.91 1.86

12.47

Table: CSE market performance: MC, Turnover and indexes

Year MC Turnover CASPI CSE-30 CSEX

2002 60,468 13,581 1416 1232 02003 85,312 6,719 1643 1516 02004 215,011 14,808 3598 3466 02005 220,353 13,933 3379 3159 23482006 267,501 16,530 3724 3342 24322007 612,479 52,328 7657 6935 49212008 807,875 100,747 8692 7566 5680

53

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

2002 2003 2004 2005 2006 2007 2008

0

1000

2000

3000

4000

5000

6000

7000

8000

MC

Turnover

CSE-30

CSEX

Chart: Market capitalization, Turnover and CSE Indexes

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

2002 2003 2004 2005 2006 2007 2008

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

MC

Turnover

CASPI

Chart: Trend in CASPI, Market capitalization and Turnover

6.2.3. Market concentration

It can be measured by looking at the share of market capitalization accounted for by the large stocks

or large sectors. These large stocks are seen as the leading 3 to 5 firms in the market (Maunder et al.

1991). In many economies only a few companies dominate the stock market (Bundoo 1999). High

concentration is not desirable as it can adversely affect liquidity, and it is common to find a negative

correlation between concentration and liquidity. To measure the degree of market concentration, we

compute the share of market capitalization by largest 5 sectors and by the largest sectors, turnover

by the largest 4 sectors and by the largest sector.

54

Sector-Wise Financial Performance of CSE

CSE has segmented the whole economy of the country into 17 sectors. The stock market is

dominated by financial service sector (80 companies), followed by textile & clothing,

Pharmaceuticals & Chemicals, Food and allied, cement etc. It is observed that economically

important sectors like energy, ICT State owned enterprises, Private telecommunication; utility

sectors etc. have least exposure to the stock market. The participation of different sectors in various

aspects in the year 2008 are depicted below.

Table: Share of different sectors in the Chittagomg Stock Exchange, 2008

Sectors No. of companies

% of MC Turnover Value (%)

P/E Ratio

Div Yield/DPS

Index

Insurance 32 5.05 2.3 18.71 0.45 8761Textile 25 1.90 3.83 17.54 2.33 2186.88Pharma & Chemical

18 10.62 15.11 26.14 1.44 13143.16

Food and allied 20 0.44 0.74 29.62 1.70 1602.75Cement 8 4.85 2.79 10.39 0.63 2722.39Engineering 17 1.74 3.51 32.72 1.53 2416.16Leather 6 1.08 1.34 16.40 4.54 2668.79Service 4 0.76 1.75 14.58 1.63 2088.95Paper & printing 5 0.15 0.24 18.59 2.52 1057.63Energy 8 14.53 15.84 15.86 1.18 6349.23Mutual Funds 16 1.94 10.27 68.38 0.71 12099.76Banking 29 43.14 23.14 18.22 0.26 30367.56Ceramics 5 0.86 0.35 60.70 0.45 1055.89ICT 7 0.59 2.94 45.88 0.00 5694.12Leasing and Finance

18 8.15 8.03 20.77 0.85 12040.41

Miscellaneous 12 3.85 7.13 25.74 1.74 3523.52Corporate Bond 1 0.34 0.68 ---------- -------- ------------

Source: Portfolio, Chittagong Stock Exchange

The above table shows the exposures of different economic sectors to stock market with respect to

parameters such as shares of market capitalization, share of sales value, P/E ratio, dividend and

Index. Financial services sector that includes insurance, Banking, Mutual Fund, and Leasing &

Finance constitutes a lion part (58.28%) of market capitalization. It has also been found that

financial sector has about 43.74% contribution to sales. This implies that the economic sectors other

than financial sector are to be brought into the spectrum of stock market through different policy

and regulatory programs.

55

5.05 1.910.62 0.44

4.85

1.74

1.08

0.76

0.1514.53

1.9443.14

0.86

0.59 8.153.85 0.34

Chart: Sector-wise market capital, 2008

Turnover Value (%)

2.30% 3.83%15.11% 0.74%

2.79%

3.51%

1.34%

1.75%

0.24%

15.84%10.27%

23.14%

0.35%

2.94%

8.03%7.13%

0.68%

Insurance

Textile

Pharma & Chemical

Food and allied

Cement

Engineering

Leather

Service

Paper & printing

Energy

Mutual Funds

Banking

Ceramics

ICT

Leasing and Finance

Miscellaneous

Corporate Bond

Chart: sector wise turnover, 2008

Table: Market Capitalization by different sectors

Sectors % of MC

2006 2007 2008Insurance 3.08 3.38 5.05

Textile 3.20 2.07 1.90Pharma & Chemical

9.98 8.74 10.62

Food and allied 0.58 0.37 0.44Cement 10.15 6.01 4.85

Engineering 1.68 1.45 1.74Leather 0.90 0.91 1.08Service 0.57 0.27 0.76

Paper & printing 0.22 0.17 0.15

56

Energy 8.37 10.28 14.53Mutual Funds 0.55 0.84 1.94

Banking 52.70 56.94 43.14Ceramics 0.20 0.11 0.86

ICT 0.67 0.44 0.59Leasing and

Finance4.03 4.65 8.15

Miscellaneous 3.09 2.67 3.85Corporate bond ------ 0.70 0.34


Table: Share of Market Capitalization (%)Banking Other 4 largest sectors Total

2006 52.7 32.53 85.23

2007 56.94 29.68 86.62

2008 43.14 38.15 81.29Source: Portfolio, Chittagong Stock Exchange

52.7

32.53

56.94

29.68

43.14

38.15

0

1020304050

60708090

100

% of market Capitalization (million taka)

2006 2007 2008

Year

Chart: Market capitalization by largest five sectors (2006-2008)

The chart indicates increasing market concentration by largest five sectors in Chittagong Stock

Exchange. Market capitalization for largest five sectors in 2006 was 85.23 % which decreased to

81.29 % by 2008.

57

It is evident that the market is highly concentrated by the financial services sector specially banking

and this domination is expressed in grabbing more than 50% of total market capital by the

respective sector.

Table: Dominance of Financial Services sector in respect of Market capitalization

Year Financial Services Sector (%) Other Sectors (%)2006 60.36 39.64

2007 65.81 34.19

2008 58.28 41.72Source: Portfolio, Chittagong Stock Exchange

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008

Year

% o

f M

ark

et

Cap

italizati

on

(m

illio

n t

aka)

Financial Services Sector (%)

Other sectors(%)

Chart: Dominance of Financial Services sector in respect of Market capitalization

Turnover by the largest 5 sectors decreased from 83.59 % in 2006 to 72.02 % in 2008 whereas, the

turnover by the banking sector decreased form 46.88 % in 2006 to 19.84% in 2008. Overall, the

Bangladesh stock market remains highly concentrated to the banking sector in terms of market

capitalization and turnover.

Table: Market Concentration: turnover by largest 4 sectors and largest sector in the CSE.

Concentration measures 2006 2007 2008Turn over by the largest 5 sectors (%) 83.59 78.78 72.02Turnover by the largest sector (% ) 46.88 50.41 19.84


6.2.4. Volatility in Stock market performance:

58

i) IndexesStock index is a parameter for judging stock market performance. It reflects the changes in prices of

securities as well as value of securities. CSE determines three stock indices-CSE All Share Price

Index, CSE-30 Index, CSCX Index.

Table: The quarterly changes in CSE All Share Price Index: 2008

Index Quarter 1 Quarter 2 Quarter 3 Quarter 4CSE All Share Price Index 8329.01 9050.56 8996.69 8692.7457

Growth rate (%) 8.77 8.66 -0.59 -3.37

Mean 8767.25SD 332

Range 721.55Coefficient of Variation .038

Maximum 9050.56Minimum 8329.01


Table: The changes in CSE-30: 2008Index Quarter 1 Quarter 2 Quarter 3 Quarter 4

CSE-30 7120.05 8037.02 7862.52 7566.9466Growth Rate (%) 2.66 12.88 -2.17 -3.76

Mean 7646.63 SD 401

Range 916.97Coefficient of Variation 0.052



Table: The changes in CSCX: 2008Index Quarter 1 Quarter 2 Quarter 3 Quarter 4CSCX 5380.16 5853.58 5892.71 5680.5869

Growth Rate (%) 9.32 8.79 0.668 -3.6Mean 5701.76SD 233.37

Range 512.55Coefficient of Variation 0.041



From the above table, it has been found that stock index has changed quarterly at varying degrees,

including ups and downs in share prices and securities over the periods. The changes in stock index

59

over the period have been found inconsistent. This implies that market return has changed

abnormally, indicating the inefficiency of Chittagong Stock Exchange.

ii) Fluctuations in share prices in CSE:

The analysis shows that the stock market volatility changes significantly over time. The volatility of

stock return is determined by the fluctuations in stock index. Fluctuations in the stock index also

depends on the demand for and supply of securities traded in the stock exchange. Sometimes the

stock return volatility is driven by trading volume following new information and by the process

that incorporates new information into market prices. At the aggregate level, stock return volatility

rises sharply during stock price declines following bad news than in periods of stock price increase

following good news. While relating changes in stock market volatility with a number of economic

factors, such as financial leverage, corporate bond yields, corporate earnings and dividend yields,

stock trading activity, volatility of interest rates, bond prices and other macroeconomic variables,

Schewert (1987) concludes that “none of these factors….plays a dominant role in explaining the

behavior of stock volatility over time.’’

Variances in share prices of some selected companies

The share prices are volatile. The degree of volatility differs from security to security depending

upon financial performance of concerned company as well as stock market environment. The study

has determined variances and coefficient of variances in share prices of companies, selected

randomly from different sectors.

Table: Comparative Statistics of 5 randomly chosen companies

Name of Company

Group Issued Share(’000)

Market lot/stated

price

Earning per

share (taka)

Book Value per

share/NAV

DPS P/E ratio

Dividend Yield

Market Capital

(in million taka)

ACI A 16170 50/10 19.36 60.33 8.5 26.73 1.64 8368.0Delta Brac

Housing

A 3510 50/100 72 100 0.00 18.75 ---- 4738.5

Peoples Insurance

A 1500 10/100 128.67 197.27 10.00 5.04 1.54 972.0

Beximco Ltd.

A 54884.9 100/10 1.53 15.98 0.00 121.11 ---- 10170.2

Summit Power

A 18532.8 50/100 30.90 129.50 0.00 31.17 ---- 17847.1

Source: Bazar Porikroma, Chittagong Stock Exchange

60

Table: Price Changes in 5 randomly chosen companies

Name of Company

Highest Market Price (taka)

Lowest Market Price

(Taka)

Range Mean(Stated Price)

Standard Deviation

Coefficient of

Variation

ACI 660.00 160.00 500 410 353.55 0.86Delta Brac Housing 2100.00 999.00 1101 1549.5 778.5 0.50

Peoples Insurance 1375.00 392.00 983 883.5 695.08 0.78

Beximco Ltd. 253.00 34.30 218.70 143.65 154.64 1.07

Summit Power 1695.00 526.50 1168.50 1110.75 826.25 0.74Source: Portfolio, Chittagong Stock Exchange

The table shows coefficient of variation in share prices for 5 randomly selected companies. Among

these Beximco Ltd. shows the highest value for coefficient of variation and therefore is much riskier

than the others. There is possibility that the share price of Beximco Ltd. will fluctuate more than the

rest. ACI is in the second position while Peoples Insurance and Summit Power are just after it. The

less riskier among the five is Delta Brac Housing with coefficient of variation value of 0.5. The

possibility of it’s share price fluctuation is much less among the selected ones.

61

62

CHAPTER: 7

Summary of the study and findings:

Summary of the Study and Findings:

The study has been conducted aiming at identifying the causes of share price fluctuation by

evaluating performance of CSE. It has employed different statistical and financial techniques in

analyzing data, collected from both primary and secondary sources. The findings of the study have

been summed up as follows:

1. CSE has been growing on all fronts such as number of securities, number of listed companies,

market capitalization, sales volume, financial disclosure, matured investors etc. But the performance

in most of the cases like products, market capitalization to GDP, sales to market capitalization,

financial indicators are not comparable to those in other developed stock markets in Asia as well as

in the world. The turnover ratio has been very low. Market capitalization shows increasing trend

but could not reach a satisfactory level in terms of share to GDP. The stock market size is small and

activity of CSE members are concentrated on Metropolitan areas like Chittagong, Dhaka and

Sylhet.

2. Participation of all economic sectors into stock market has been found inconsistent in number.

Financial service sector is dominating the stock market. Different economically important sectors

are still outside the stock market. It was found that the financial services sector has grabbed a huge

part of market turnover and market capital whereas the other important sectors like energy or ICT

are not able to play their respective role in the secondary market.

3. Financial performances of Banks, Insurance, Mutual Fund, Engineering in terms of EPS, P/E

ratio, and DPS, market capitalization and sales have been found out and not satisfactory.

4. Changes in share prices of securities enlisted with CSE are not random. Stock index of CSE

changes due to causes not directly related to the stock market. Random walk theory is not supported

by the movement of stock price index in CSE. It has been found that growth in all the three indices

was negative in last one or two quarter of last year. Moreover, the price of the shares fluctuates to a

huge amount, in either direction than the stated price as reflected in the analysis of 5 randomly

selected companies.

5. In Bangladesh, the inadequate supply of securities is a major constraint to the development of a

capital market. As on December 2008, the number of listed securities was 221, however, about 72

63

percent of the turnover is represented by largest 5 sectors. This implies that the supply of securities

is dominated by a few entrepreneurs. This has been due to lack of supply of securities by other

public limited companies. Inadequate supply of good quality securities is another major impediment

to the development of securities market.

6. It has been complained by many investors that true information on the performance of companies

selling shares are hard to get. Transaction costs can be quiet high. Some restrictions on foreign

investment may apply. However, the trend is toward rapid deregulation and liberalization.

64

65

Chapter 8:

Policy Implication : Recommendations

Policy Implication: Recommendations

In view of the foregoing analysis of findings of the study, the following suggestions have been put

forwarded for consideration of Government, policy makers, SEC, stock exchanges and other

concerned parties in order to develop the performance of stock market, especially of CSE.

a) SEC along with stock exchanges should make a provision to compel every member of stock

exchange either to trade or to give-up membership of exchanges. Besides, regulation is warranted

for checking the fraudulent activities of stock exchange.

b) Government should promulgate macro-economic policy such as fixation of interest on treasury

securities considering the interest of stock market of the country. Besides, it should come out with

policy for bringing profitable SOEs, and MNCs into the net of stock market.

c) SEC in corporation with CSE and DSE should establish a training institute for research and

development of human resources in the different level of security industry. This will help improve

the awareness of investors.

d) SEC should come out with full-fledged guidelines for introducing corporate governance to listed

companies. This may improve not only financial disclosure practice; but also stock market

operation of the country.

e) Listed companies should disclose financial information through different vehicles such as

newspapers, websites, report form etc. This will give investors easy accessibility to the information.

f) Supply of securities can be increased enormously if all profitable public and government owned

companies float shares.

g) The management of stock exchanges should be separated from ownership in order to avoid

unethical transaction. The SEC should enact regulations to require that the executive head of every

stock exchange be a paid full time non-member executive. The board of a stock exchange should be

broad based and well represented. Foreign auditing company should be hired in order to properly

audit the balance sheet and income statements of the companies selling shares.

h) The development of a National Market System (NMS) can be suggested because it is expected to

provide greater efficiency, competition, and lower cost of transactions. Four major characteristics of

NMS are (1) centralized reporting of all transactions, (2) centralized quoting system, (3) centralized

limit-order book, and (4) competition among all qualified market makers.

66

67

Chapter 9:

Conclusion

Conclusion

The investment activities often allied with risk is important for increasing productivity and

economic development of a country. This requires cooperation in stimulatory, supporting and

sustaining activities. Hence a favorable environment needs to be created by the government, non-

government, and incubator organizations to develop entrepreneurs.

Fluctuations in share prices are common phenomena in the equity market. Individual stock price

undergoes ups and downs which is a regular feature of an efficient stock market. In the absence of

price fluctuations, potential investors lose interest to participate in the stock market. However,

careful monitoring of fluctuations by the concerned authority is needed in CSE which is yet to

achieve maturity especially when price fluctuates irrationally high in the market. If necessary, there

should be effective intervention when the market experiences excess volatility.

Development of securities market is a precondition of the government's strategy to develop the

economy through private sector. A strong securities market mobilizes internal and external

resources for faster economic growth, ensures efficient allocation of resources and eventually

generates economic development. Diversification of portfolio and large supply of securities are

required to attain depth and breadth of the market.

CSE has been found to play a pioneering role in boosting the confidence of all participants

including investors. It has implemented different revolutionary programs for developing a congenial

regulatory and administrative environment in its operation. Of course, it has exerted influence in the

entire stock market of the country. The study has identified different impediments to development

of stock market; and also suggested some policy measures for improvement of the operational

efficiency of CSE. The suggestions are expected to develop the stock market of the country as well.

68

Appendix A

Z score calculation: Price Charts for 5 randomly selected companies.

69

70

Appendix B

List of tables:

Table: DSE and CSE activities in last three fiscal yearsParticulars End June

DSE CSE

FY06 FY07 FY08 FY06 FY07 FY08i. No. of listed securities* 303 325 378 213 2

19

219

231

ii. Issued equity and debt* (billion Taka)

85.7 164.3 284.4 63.8 81.0 102.2

iii. Market capitalization (billion Taka)

225.3 491.7 964.8 195.6 398.5 776.1

iv. Turnover in value (billion Taka)

46.0 164.7 543.3 11.4 34.2 80.2

v. Turnover in volume(no. in billion)

0.6 2.0 3.8 0.25 0.59 0.74

vi. All-share price Index 1339.5 1764.2 2588.0 2879.2 5194.8 9050.6

* Including companies, mutual funds and debentures.Source: (Bangladesh Bank, Annual Report 2007-08).

Table: DSE statisticsYear 2004 2005 2006 2007 2008Listed Securities 256 286 310 350 412All Share Price Index

1275.05 1321.39 2535.96 2309.35

Market Capital(bn tk)

224.16 228.57 315.45 742.20 1043.80

Turnover (mn tk) 53181.17 64863.64 65079.12 322867.07 667964.82DSE General Index 1971.31 1677.35 1609.51 3017.21 2795.34DSE-20 Index(DS 20)

2158.66 1608.63 1406.35 2485.87 2328.71

Market Cap to GDP Ratio

6.73 6.17 7.59 15.88 19.26

Source: Dhaka Stock Exchange

71

Table: Comparative Statistics of DSE and CSEDSEAs on 30th sept 2008

CSEAs on 30th sept 2008

Total number of listed securities 400 234No. of companies 272 217No. of mutual funds 16 16No. of corporate bonds 1 1No. of debentures 8 -No. of treasury bond 103 -Total No. of Tradable securities 2602 2461.69No. of shares of all listed companies 2271 2133.21No. of certificates of all listed mutual funds 325 325.28No. of debentures of all listed debentures 0.41 -No. of all listed govt. T-bonds 2210 -No. of all listed corporate bonds 3000 3.000

Total issued capital of all listed companies 349621 119446.50Issued capital of all companies 121463 113331Issued capital of all mutual funds 3116 3115.30Issued debentures 140 -Issued govt. T- bonds 221903 -Issued capital of corporate bonds 3000 3000Total Market capitalization 1068275 819898All Share Price Index 2498.45 8996.69

Table: FIVE YEARS INDEX & MARKET SUMMERY OF CSE2001 2002 2003 2004 2005

Annual Turnover (Mn. Tk.) 14,953 13,580.84 6,719.40 14,807.40 14,045.12

Market Days 268 287 286 271 263

Daily Average Turnover (Mn Tk.) 55.79 47.33 23.49 54.64 53.39

Securities Traded 593,754,410 586,846,683 203,731,008 332,534,611 310,319,542

Trades(No.) 839,123 691,001 258,686 550,729 669,991

Number of new Listings 12 10 11 9 14

Securities Listed 177 185 196 198 210

Market Capital (Mn. Tk.) 56,364 60,468 85,312 215,011 219,942

CSE All Share Price Index 1352.39 1415.92 1642.79 3597.70 3378.67

CSE-30 Index 1240.05 1232.40 1515.93 3463.76 3159.54

No. of Companies Declared Dividend 112 133 131 135 118

No. of Companies Issued Bonus Shares 7 16 16 39 52

72

Table: CSE Operational StatisticsJanuary-March 2008* Index and Market Capitalization of the last trading day of the months have been considered as relevantfigures of respective months.Trading Month

All SharePrice Index

Market CapitalizationIn Million

No. of trading days

Turnover of securities in Million (No.)

Traded amount in million

Monthly DailyAverage

Monthly Daily Average

January 7454.9100 Tk.629,615US$ 9,180.77

22 46.93 2.13Tk.4,998.04US$ 72.88

Tk 227.18US$ 3.31

February 7536.9300 Tk 639,445US$ 9,324.07

19 60.53 3.19 Tk 6954.37US$ 101.40

Tk 366.02US$ 5.34

March 8329.0100 Tk. 706,904US$ 10,307.73

21 84.29 4.01 Tk. 9014.51US$ 131.44

Tk.429.26US$ 6.26

Total 62 191.75 3.09 TK. 20,966.9

US$ 305.73

Tk.338.18US$ 4.93

Table: CSE Operational StatisticsApril-May 2008* Index and Market Capitalization of the last trading day of the months have been considered as relevantfigures of respective months

TradingMonth


MarketCapitalization

In Million

No. ofTrading

days





April 8655.77 Tk. 7,42702 US$ 10,837.62

21 103.92 4.95 Tk.10,494.37 US$ 153.13

Tk 499.73

US$ 7.29

May 9101.56 Tk 784,039 US$ 11,440.81

19 67.89 3.97 Tk 7,859.21 US$ 114.68

Tk 413.64

US$ 6.03June 9050.56 Tk 777,743

US$ 11,348.9422 93.61 4.26 Tk 10,347.63

US$ 150.99 Tk 470.35US$ 6.86

Total 62 265.42 4.28 Tk 28,701.21 US$ 418.81

Tk462.92US$ 6.75

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Table: CSE Operational StatisticsJuly-September 2008* Index and Market Capitalization of the last trading day of the months have been considered as relevantfigures of respective months.

TradingMonth


MarketCapitalization

In Million

No. ofTrading

days





July 8593.93 Tk. 766618

US$11188.23

22 104.72 4.76 Tk 9570.12

US$ 139.67

Tk 435.01US$ 6.35

August 8676.33 Tk.773512US$ 11288.04

19 56.86 2.99 Tk 6607.94

US$ 96.44

Tk 347.79US$ 5.07

September 8996.6852 Tk. 820537US$ 11975.14

19 96.98 5.10 Tk. 9091.46

US$ 132.68

Tk. 478.50

US$ 6.98

Total 60 258.56 4.31 TK. 25269.52

US$ 368.79

Tk.421.16US$ 6.15

Table: CSE Market Performance: July-September 2008

This quarter

Last Quarter

Quarterly Change

(+/-) (%)

CSE All Share Price Index 30/09/08 8996.69 9050.56 -53.87 -0.60CSE 30 Index as on 30/09/08 7862.52 8037.02 -174.50 -2.17CSCX Index as on 30/09/08 5892.71 5853.58 39.13 0.67Total Turnover Value (Tk mn) 24832.34 29328.21 -4495.87 -15.33TotaL Turnover Value(US$ mn) 362.41 427.96 -65.55 -15.32Total turnover volume (No. mn) 262.15 264.45 -2.30 -0.87Market Capitalisation (Tk Bn) as on 30/09/08 819.9 767.77 52.13 6.79Market Capitalisation (US$ Bn) as on 30/09/08 11.97 11.2 0.77 6.84Issues Traded 201 211Issues Gained 53 117Issues Declined 143 94Average Daily Turnover Value (Tk. Mn) 413.87 473.04 -59.17 -12.51Average Daily Turnover Volume (No. Mn) 4.37 4.27 0.10 2.32Number of days traded 60 62 -2.00 -3.23Cash Dividend Yield as on 30/09/08 2.19 1.90 0.29 15.26Price Earning Ratio (X) as on 30/09/08 21.01 22.86 -1.85 -8.09Dollar conversion rate= Tk. 68.52Tk.mn= Taka in Million, Tk Bn= Taka in BillionUS$ mn= US Dollar in million, US$ Bn= US Dollar in Billion, No. mn= Number in Million

Source: Portfolio (CSE).

74

Table: CSE Market performance: Oct-Dec 2008This quarter

Last Quarter

Quarterly Change

(+/-) (%)

CSE All Share Price Index 30/09/08 8692.7457 8996.69 -303.94 -3.38CSE 30 Index as on 30/09/08 7566.9466 7862.52 -295.57 -3.76CSCX Index as on 30/09/08 5680.5869 5892.71 -212.12 -3.60Total Turnover Value (Tk mn) 24165.621 24832.33 -666.72 -2.68TotaL Turnover Value(US$ mn) 348.16 362.41 -14.25 -3.93Total turnover volume (No. mn) 243.85 262.15 -18.30 -6.98Market Capitalisation (Tk Bn) as on 30/09/08 807.88 819.9 -12.02 -1.47Market Capitalisation (US$ Bn) as on 30/09/08 11.63 11.97 -0.33 -2.79Issues Traded 207 201Issues Gained 67 53Issues Declined 140 143Average Daily Turnover Value (Tk. Mn) 447.51 413.87 33.64 8.13Average Daily Turnover Volume (No. Mn) 6.45 4.37 2.08 47.57Number of days traded 54 60 -6.00 -10.00Cash Dividend Yield as on 30/09/08 2.61 2.19 0.42 19.18Price Earning Ratio (X) as on 30/09/08 19.00 21.01 -2.01 -9.57Dollar conversion rate= Tk. 69.45Tk mn= Taka in Million, Tk Bn = Taka in Billion.

Table: Sectoral Index(July-Sep 2008)SL Sector 25 Sep 08 30 Jun 08 Change(+/-) Change %1 Insurance 11221.37 10631.23 590.14 5.55 2 Textiles & Clothing 2102.36 2034.86 67.5 3.323 Pharma & Chemicals 12438.09 12943.27 -505.18 -3.904 Foods & Allied Products 1488.87 1583.45 -94.58 -5.975 Cement 2978.74 2852.73 126.01 4.426 Eng. & Electrical 2444.37 2368.17 76.2 3.227 Leather & Footwear 3214.96 3196.76 18.2 0.578 Services & Property Development 2238.26 1412.6 825.66 58.459 Papers & Printing 1126.28 1379.16 -252.88 -18.3410 Energy 6251.77 6313.26 -61.49 -0.9711 Mutual Funds 14837.28 13846.3 990.98 7.1612 Banking 30891.55 33418.16 -2526.61 -7.5613 Ceramic 1067.21 1199.55 -132.34 -11.0314 ICT 5300.42 4171.57 1128.85 27.0615 Leasing & Finance 13587.58 13649.72 -62.14 -0.4616 Miscellaneous 4263.52 2714.05 1549.47 57.09

Table: Sectoral Index, (Oct-Dec 2008)

SL Sector 31 Dec 0830 Sep 08

Change(+/-) Change %

1 Insurance 8761 11221.37 -2460.37 -21.93 2 Textiles & Clothing 2186.88 2102.36 84.52 4.023 Pharma & Chemicals 13143.16 12438.09 705.07 5.674 Foods & Allied Products 1602.75 1488.87 113.88 7.655 Cement 2722.39 2978.74 -256.35 -8.616 Eng. & Electrical 2416.16 2444.37 -28.21 -1.157 Leather & Footwear 2668.79 3214.96 -546.17 -16.998 Services & Property Development 2088.95 2238.26 -149.31 -6.679 Papers & Printing 1057.63 1126.28 -68.65 -6.1010 Energy 6349.23 6251.77 97.46 1.56

75

11 Mutual Funds 12099.76 14837.28 -2737.52 -18.4512 Banking 30367.56 30891.55 -523.99 -1.7013 Ceramic 1055.89 1067.21 -11.32 -1.0614 ICT 5694.12 5300.42 393.70 7.4315 Leasing & Finance 12040.41 13587.58 -1547.17 -11.3916 Miscellaneous 3523.52 4263.52 -740.00 -17.36

Table: Sector-wise market indicator: September 2008

SL Sector PE Ratio Change%

Cash Dividend Yield

Change %Jun 08 Sep

08 Jun 08 Sep 081 Insurance 10.77 22.30 107.09 0.70 0.33 -52.93 2 Textiles & Clothing 16.14 17.76 10.01 3.67 2.39 -34.953 Pharma & Chemicals 27.86 24.71 -11.29 1.51 1.62 7.424 Foods & Allied Products 32.71 30.67 -6.24 1.84 1.64 -10.815 Cement 12.56 10.62 -15.41 2.36 0.55 -76.556 Eng. & Electrical 39.36 40.38 2.58 2.58 1.42 -45.137 Leather & Footwear 19.50 19.89 2.01 3.9 3.77 -3.318 Services & Property

Development25.27 21.41 -15.28 5.07 2.26 -55.33

9 Papers & Printing 15.40 10.66 -30.78 3.33 3.84 15.4310 Energy 24.08 23.16 -3.80 2.96 1.17 -60.3111 Mutual Funds 108.02 86.28 -20.12 1.43 0.58 -59.4312 Banking 23.19 18.43 -20.53 2.07 0.55 -73.5513 Ceramic 43.23 44.53 3.02 3.51 3.80 8.1614 ICT 18.84 45.87 143.45 0 0.00 0.0015 Leasing & Finance 31.73 29.24 -7.84 1.01 0.74 -27.0916 Miscellaneous 18.05 28.23 56.39 2.90 1.56 -46.34

Table: Sector-wise market indicator: December 2008SL Sector PE Ratio Change

%Cash Dividend Yield

Change %Sep 08 Dec

08 Sep 08 Dec 081 Insurance 22.30 18.71 -16.11 0.33 0.45 36.21 2 Textiles & Clothing 17.76 17.54 -1.26 2.39 2.33 -2.443 Pharma & Chemicals 24.71 26.14 5.77 1.62 1.44 -10.884 Foods & Allied Products 30.67 29.62 -3.41 1.64 1.70 3.955 Cement 10.62 10.39 -2.18 0.55 0.63 14.976 Eng. & Electrical 40.38 32.72 -18.96 1.42 1.53 7.867 Leather & Footwear 19.89 16.40 -17.55 3.77 4.54 20.498 Services & Property

Development21.41 14.58 -31.89 2.26 1.63 -27.75

9 Papers & Printing 10.66 18.59 74.38 3.84 2.52 -34.3910 Energy 23.16 15.86 -31.53 1.17 1.18 0.5211 Mutual Funds 86.28 68.38 -20.74 0.58 0.71 22.6712 Banking 18.43 18.22 -1.16 0.55 0.26 -53.0713 Ceramic 44.53 60.70 36.32 3.80 0.45 -88.1514 ICT 45.87 45.88 0.01 0.00 0.00 0.0015 Leasing & Finance 29.24 20.77 -28.96 0.74 0.85 14.5216 Miscellaneous 28.23 25.74 -8.83 1.56 1.74 11.23

76

Glossary

AGM: Annual General Meeting.

Div: Dividend

Div. Yield: Dividend Yield calculated as DPS/Closing Price of Share on last date of reporting period * 100

DPS: Dividend Per Share; Total cash dividend/ Number of Shares Outstanding at the year end.

EPS: Earning Per Share calculated as Net Profit After Tax/Number of Shares Outstanding at the year end.

GDP: Gross Domestic Product.

HRD: Human Resource Development.

Market Capital: Market Capitalisation calculated as Closing Price of Share on Last date of reporting period ×Number of shares outstanding at the year end.

Mkt Lot: Market Lot.

PER: Price Earning Ratio calculated as Closing Price of Share on last date of reporting period/ EPS.

SD: Standard Deviation

Secondary market: A part of financial market where previously issued securities and financial instruments such as stocks, bonds, options, and futures are bought and sold.

77

References

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Growth, Volatility and Efficiency in the Indian Capital Market”, Institute of Economic Growth

Delhi University Enclave, Delhi-110007, India, Delhi, India in its series Institute of Economic

Growth, Delhi Discussion Papers with number 21.

2. MIKAEL KVIBÄCK, 1998,Bangladesh Survey:Issues in Local Bond Market Development, pp 254.

3.Kh. Ashadul Islam Ripon, 2007, The Financial Express

4. Mazhar. M. Islam, POTENTIAL GAINS FROM EMERGING STOCK MARKET OFBANGLADESH: FACTS & FIGURES FOR FOREIGN INVESTORS, 2004,pp-18.

5. Khan, Harun-or-Rashid.1992. “The Performance of Stock Markets in Bangladesh:An Appraisal”. Finance and Banking. The Journal of the Department of Finance and Banking, University of Dhaka. Volume 2, Number 1

6. La Porter, R. Lopez-de-Silanes.,F, Shlieifer A. and Vishny R.W. 1997."Legal Determinants of External Finance ", Journal of Finance, 54 p. 471 – 517.

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8. Maunder, P., Myers, D., Wall, N. & Miller, R. 1991. “Economics Explained.” 2nd ed. London, HarperCollins

9. M Khokan Bepari & Dr. Abu Mollik-BANGLADESH STOCK MARKET GROWING? KEY INDICATORS BASED ASSESSMENT.pp-1-15

10. Ahmed M.F.(1998),Dr. M. S. Jahur & M. J. Uddin, Evaluation of Stock market Performance in Bangladesh-A case study of Chittagong Stock Exchange, Portfolio,pp-1

11. M. Kabir Hassan, Anisul M. Islam, Syed Abul Basher, 2000 “Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market”pp-18.

12.Lassitier(1988), Dr. M. S. Jahur & M. J. Uddin, Evaluation of Stock market Performance in Bangladesh-A case study of Chittagong Stock Exchange.

13.Bangladesh Economic Review, Various issues

14. Securities and Excahnge Commission, Annual Report and Quarterly Reports, Various issues.

15. Chittagong Stock Exchange, CSE Bazar poricroma, CSE Portfolio, profile, Various issues

16. The New Age, March 21, 2007 78

17. Retrieved from

i. www.cse.com.bd

ii. www.dsebd.com

iii. www.bangladeshbank.org

iv. www.secbd.com

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http://www.secbd.com/

http://www.bangladeshbank.org/

http://www.dsebd.com/

http://www.cse.com.bd/

Documents

Reasons for Fluctuations in Share Prices in Secondary Market