When gamblers rule stock market

Stock market investment is now ruled by day-traders. Long-term investors are few and far between. Most of the investors who were active in the past have gone to the sidelines. They only occasionally take note of what is happening in the stock market. The turnover has gone down noticeably. The main reason behind continuous erratic  trend in stock price is the absence of investors who would be taking a position for a longer period no matter what happens to the short-term price movement. There is, however, no theoretical basis to determine who gain more - the  short-term stock traders or the long-term investors. Yet most of the active persons in Bangladesh's stock market have turned out to be day-traders. The holding periods of stocks, in most cases, are three days or a few days more for short-term traders when stocks that were purchased become saleable. These people gamble in stocks and also with their luck, they sell out the stocks in three days or a few days later no matter whether that sale brings them any profit or not. When asked, they say holding of stocks for a longer period will bring them only more loss. Also it is noticeable, these day-traders do not buy fundamentally strong stocks, or high-value ones; they go after low-priced junk stocks, buy those in thousands and sell them in thousands. Small margins on the sales, they think, will give them a huge profit though the reverse can also be true. 

There was no research as to what is the average holding period of stocks by the investors in the Dhaka Stock Exchange, but what we perceive the period is much short compared to that in a mature stock market. The shorter holding period is a pattern of stock trading which is based on a race to make short-term gain. Why do not Bangladesh's stock market investors go for long-term investment? The answer may be either stocks' yield rates are not competitive or investors do not find good stocks to invest for a long period. Many small savers inter-change their investible funds between government-owned savings instruments called Sanchayapatra and the stocks. When they see stock market is not behaving rationally or the way it is moving, they take the money out of the stock market and put the same either in banks' fixed deposits or government-supplied saving instruments. 

The main problem of Bangladesh's stock market is not availability of stocks, but availability of good stocks which the investors can choose confidently for a long-term investment. Good stocks are those which will be shining more in future. By taking a stake in them, the investors will only be happy when those stocks will fully bloom.  In contrast, bad stocks are those which seem to be shining now, but future for them turns to be gloomy. Most of the initial public offerings  (IPOs) that entered the stock market in the last two years fall in the latter category. The sponsors or the IPO issuers were not sincere with the investors' interest; they issued bonus stocks liberally only to benefit themselves. Issuance of bonus stocks without any commensurate business expansion plan is a kind of trick used by the IPO issuers to exploit the investors further. The present scenario in the stock market is so dismal that hardly any one takes note of what a company is giving out as dividend. It seems rate of dividend does not matter anymore; price moves up or go down without having any relation with the yield rate or fundamentals of the company.

Even stocks of some companies which declare a better-than-expected dividend, go down. How should someone explain this phenomenon? Only irrationality can explain such a phenomenon. In some sense, stocks are very cheap in  Bangladesh's market. In other sense, they are not. In recent times, some of the private commercial banks declared better-than-expected dividends, both in cash and stock, but prices of those stocks did not move - and at times behaved frustratingly. Why? The answer is when the day-traders rule the trading scene, the rate of dividend or yield does not matter. The day-traders are a kind of gamblers; they trade on rumours and also spread rumours. They are after capital gain whether they make it or not. One fact is that all these day-traders cannot be capital gainers at the same time. Rational explanation says the gain will follow the rules of zero-sum games, i.e. at the end, nobody gains. Gains and losses will only square up.

How to stop the gamblers or make the market free of swindlers? Gambling of one sort or other will be there so long as speculative stock investment is there. But gambling should not be there to dominate; gamblers should not be allowed to dictate the market trend. An effective way of minimising gamblers' tricks is to supply the market with good stocks. But the regulator and the government do not seem to be aware of  the need of good stocks.

The writer is Professor of Economics University of Dhaka. 

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