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7 years ago

The hype in stock market

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Over-enthusiasm over stock market brings only more woes at the end. A stock market should never be hyped artificially. If it is done, it will render millions penniless. Stock market does not go by anybody's advice or forecast. It moves on its own way; sometimes it takes character of wolves tearing apart and punishing many so-called investors. Among the investors, the greedy, illiterate and late entrants bear most of the brunt when stock market crashes.
A low-lying stock market does not crash, but high-flying one does. Nobody knows how long or how far a bull run will last or go, but bullrun must come to an end sooner or later. As stock market movement is related to so many factors--external and indigenous--it is very difficult to predict where it will go and where it will end. Building confidence plays a great role in stock market buoyancy when confidence turns into a runway expectation. Then the real bubble is formed only to burst after a period.
By using stock market bubble, many become millionaires and again when it bursts many are rendered paupers. The successful investors are those who can read the run to the bubble build-up and the impending burst. Many novice investors become hostage to the instinct of greed and do not sell stocks but wait for higher prices. In stock market investment, the winning situation for everyone seldom happens; most of the time, the market goes by following the rules of zero-run game. Every investor can be benefited only in a bull run, but when the market starts squaring up, then one group of investors wins while others lose. The market becomes more dangerous when it only goes up one way by snatching all its ties with the real economy.
The core of stock market investment is to understand stocks and its prices, but the reality is that most of the investors here fail to understand these or understand wrongly. When stock market attains unusual buoyancy, only then there will be so many so-called experts who will give long lectures explaining the benefits of investment in stocks. But when the market moves to the reverse cycle, the experts keep mum or talk less. Even, some of the so-called experts also blame the government for the burst.
A good stock market needs time to build up. The main components of the strength of a stock market are how good the companies listed with it are and, how good the watchdog is there to protect the interest of the investing public. It also matters how good financial reporting is and, above all, how good the macroeconomic variables in the economy are. If these factors do not support a stock market to grow and then if the market is pushed up by pumping more money in it, the market will neither last at the expected level nor will this market assure the investing public with their long-term investment.
True, Bangladesh's stock market is low compared to other macroeconomic variables in the company. But this market, with an average p/e of between 17 and 19 is not that bad for the investing public. Now, as the market has gathered more than 1,000 points in its price index in a short span of time, the investors are also entering into a danger zone. The yield rate will go down with the price hike and we wonder how long the present bull run will last without a support from the real economy. To prevent unwanted moves from the vested quarters, the regulator, the Bangladesh Securities and Exchange Commission (BSEC) should impose some restrictions on sale of sponsors' shares and also on margin loans.
Our investors should keep in mind that the sky is not the limit for stock prices. The bull runs everywhere followed by prolonged bearish condition. The market in Bangladesh is not an exception. Things would have been different had the market was supplied with more quality stocks including those from local subsidiaries of the international companies. In a bull run, very few investors take lessons from the past. They target what they learn from the textbooks. The novice and new entrants are losers everywhere when the market takes a nosedive.
The writer is Professor of Economics, University of Dhaka.
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