Reacting to stock market movements

The stock market is a fascinating and often unpredictable world, where fortunes are made and lost in the blink of an eye. In recent years, Bangladesh's emerging economy has been a hotbed of activity although the country's stock market is yet to be seen as playing a pivotal role in driving the country's economic progress due to the market capitalisation being still very small compared to the size of the national GDP. The regulatory body is continuously coming up with different reforms and directives in order to boost participation in the stock market and develop it in an up to date approach.   Consequently, it is crucial for investors to understand the dynamics of this market and make informed decisions to successfully navigate its ups and downs.

Currently, the stock market of Bangladesh is experiencing a unique phenomenon known as the floor price system. This system sets a minimum price for stocks, preventing them from falling below a certain threshold. The introduction of the floor price aims to protect investors from sudden market downturns and provide stability to the market. While this measure may instill confidence among investors, it can also create an artificial sense of security and hinder the natural price discovery process. It is crucial for investors to be aware of this dynamic and consider the implications when analyzing stock movements.

With this at the backdrop, one concerning trend in the current stock market landscape is the disparity between fundamentally good stocks and those with questionable fundamentals. It is not unusual now to see stocks with solid financials and promising prospects languishing while stocks with hazy fundamentals gaining popularity. This observable fact can be attributed to various factors, including speculation, market sentiment, and herd mentality. As an investor, it is essential to focus on the underlying fundamentals of a company rather than getting carried away by short-term market trends.

Investors must exercise caution and make informed decisions before diving into the stock market. Blindly following the crowd or succumbing to the fear of missing out can have severe consequences on one's capital. Thorough research, analysis, and a deep understanding of the company's financials, competitive position, and industry prospects are vital towards making an efficient investment decision. This diligence will allow investors to identify stocks with solid growth potential and reduce the risk of making impulsive and ill-informed investment choices.

Before investing in a stock, it is important to perform a comprehensive analysis of the company. Several key factors should be considered. First and foremost, investors should determine whether the company is in operation or not. Understanding the company's operational status is crucial, as investing in a non-operational or struggling company can lead to significant losses.

Next, investors should assess whether the company is making profits or not. Profitability is a vital indicator of a company's financial health. It is important to analyse the company's financial statements and evaluate its revenue generation and expense management strategies. Consistent profitability demonstrates the company's ability to generate returns for its shareholders.

Furthermore, investors should examine whether the company's profits are growing or not. Sustainable growth in profits indicates that the company is expanding its operations and increasing its market share. Comparing the company's profit growth to its peer companies can provide valuable insights into its relative performance within the industry.

In addition to analysing the company's financials, investors should also evaluate the economic growth prospects of the sector in which the company operates. Understanding the industry dynamics, market trends, and growth potential can help investors assess the long-term prospects of the company. A company operating in a growing sector has a higher likelihood of generating sustained profits and delivering value to its shareholders.

Moreover, diversification is the key to managing risk in the stock market. Spreading investments across various sectors can help mitigate risks associated with individual stocks or sectors. A well-diversified portfolio can cushion the impact of market volatility and provide a more stable investment experience.

Keeping up with the updates about the local and international economic indicators, political developments, and global trade patterns is also crucial for investors. These factors can significantly influence the stock market and individual stock prices. Keeping abreast of market news and trends allows investors to make informed decisions and adjust their investment strategies accordingly.

The stock market of Bangladesh has witnessed remarkable reforms in last few years with the introduction of order management systems, reducing settlement cycle durations, incorporating the SME and Bond markets with the main secondary market etc.  However, with a population of over 170 million people and an immense potential for economic development, the stock market is yet to reach its full potential. It still has room for expansion and offers opportunities for growth for both businesses and investors.

In conclusion, the stock market is a dynamic and ever-changing environment that offers both opportunities and risks. It requires careful analysis and decision-making. Investors must resist the temptation to swim blindly with the tide and instead pause, think, and evaluate before making investment decisions. By exercising caution, conducting thorough research, and focusing on the fundamentals, investors can protect their capital and navigate the stock market's ebbs and flows productively.

Tanzina Ahmed Choudhury, Head of Capital Market Research and Portfolio Management, SBAC Bank Investment Limited.
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