When we go through books on finance that deal with stock market investment, we think there is no way of understanding it without grasping these issues as written in books. It is, as if, there is an unending flow of knowledge about the issue in these books a little of which stock investors should gather. There is nothing left without discussing anything relating to stock market investment. When as a teacher of Economics this writer started reading some books on financial management for his own personal purpose of understanding portfolio management, he was amazed to see so many things there to understand and use for the purpose.
In fact, what this writer learnt about portfolio management with stocks is from reading books on finance and management. Unfortunately, although it is very important as a subject, he learnt little about the issue from books on Economics. His interest in stock market issues took him to reading of basic books in portfolio management with stocks. Though over time he could have filled up that gap, he still remained illiterate on finance when it comes to understanding of accounting or accounts and audit reports. Later, this scribe also went through some basic books relating to accounting and financial reports which helped him, to an extent, to understand what the auditors say. Ironically, the audit reports in Bangladesh, in many instances, are trashes, not at all to be believed. These are only made prepared as wanted by the management of the listed companies. But what can the investors do to seek refuge from false financial reports? Only investors' knowledge about the subjects, especially where the auditors wrongfully present figures or how they do the so-called window-dressing in auditing, can help protect them against the auditors' false report.
Is it possible to gain knowledge needed by an ordinary investor to protect his own investment in stock investment? It's almost impossible. What he can do is to learn as much as possible from reading of books and from lectures in classrooms and then take a discounting position about the veracity of audit reports. The government of Bangladesh, even in the face of fierce opposition from the auditors, passed the FRA (Financial Reporting Act) through the Jatiyo Sangshad, but to the dismay of the investors, the government is yet to put the Act into operation by constituting the FRC (Financial Reporting Council) as required under the said law. We hope if FRC becomes operational, the auditing practice will much improve. The tendency of filing false financial reports will be lessened substantially.
Are all the investors everywhere in the world financially literate while they invest in the stock market? No. Many investors never attend any management or accounting class, nor receive any training but they are investing and doing well. How do they practise the subject and also become successful? The truth is that their practical knowledge in this respect is no less worthy than the one they would have received in classrooms. In fact, most of the day traders in stocks never read any ground-breaking book, nor do they have any knowledge of accounting. But many of them proved to be successful traders. Day traders also make money, in some cases, more than the long-term investors. Most of the day traders in the markets like that of Dhaka Stock Exchange gamble for making money. Gamblers beat the gamblers. Who can beat whom, depends on the rival gamblers' tricks and strategies.
The day traders are, in most cases, penny stock traders. Penny stocks are those stocks that are valued very poorly by other investors but when they move, they move fast. In the Dhaka Stock Exchange, the penny traders are always active. In fact, they are the drivers behind the trade volume. The brokerage houses also patronise the penny stock traders by offering them discounts in commission they charge.
If a brokerage can have 10-15 good day traders, its basic cost can be covered from the commission. Day traders are very dear ones to the brokerages; they are greeted with tea and biscuits a number of times in a day. The day traders mostly use technical analysis in taking positions. However, overall, who wins, whether a long-term investor or a day trader, remains an unsettled issue.
In between the day traders and the long-term investors, there are other short or medium-term investors who buy and sell stocks keeping gaps. They never wait on a stock for a very long period. When they see stocks already attaining the full potential, they want to get out. But here, too, investors see things differently and that is why, one investor sells stock and another buys it. That is the way trading also goes on.
The writer is Professor of Economics, University of Dhaka.