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Stock market and the people

Saadat Husain
AS a graduate student of economics in the late seventies in Boston University, I had studied bond and share markets along with their interactions with the interest rate regimes, exchange rate fluctuations and transnational capital movements. We were introduced to the writings of Walras. Tobin, Lucas, Barro and other prominent economists in this area.
However. I did not have a real feel for the stock market, it remained an esoteric field to me. Though I had a graduate degree in economics from Dhaka University I had, till that time, not seen a person transacting with the stock market. let alone myself transacting in that market.
Stock market was a recondite area in Bangladesh till the mid-nineties. Some senior government servants and a few well-to-do persons used to buy mutual funds of ICB The market was not considered as a source for mobilising capital by the entrepreneurs. Savers also did not
consider this as a window for investing their surplus resources. No exercise at individual level would be carried out to size up the comparative returns from investing in share or bond instruments.
The bubble, the "irrational exuberance" and the scams of '96 '97 made the small savers aware about the potential of stock market as an option for investment. Inside traders, experienced margin debtors and ponzi schemers made a big kill at the cost of neophytes who entered the market for quick gains. The middle class and lower middle class citizens were drawn to the mythical or magical aspect of the stock market. Not surprisingly, a tiny mass got attracted to the finer details of the game. The number of investment accounts in ICB increased exponentially. The corporation floated an asset management company; merchant banks and brokerage firms came into being. A new bourse was commissioned in Chittagong. After a few rollercoaster rides the market has more or less stabilised, with infrequent convulsions induced by the powerful market manip-
ulators. The Security Exchange Commission (SEC) is much better equipped to address such situations and to counter the tricks of the manipulators.
More importantly, the stock market is viewed as a source for mobilising financial resources to upscale an industrial or business enterprise. In the process, the market for financial intermediation is reshaped, with far reaching implications for the monetary sector, lor asset holders, the stock market offers dual benefits. They earn a yearly return based on the performance of the companies; they can also gain from appreciation of asset value if the companies do well in the stock market transactions. Further, they are sometimes awarded additional stocks and right shares at face value.
Informed savers are, therefore, attracted to shares in portfolio management. In developed countries with very low interest rates, buying physical assets and investing in stock market are two options favoured by savers. Companies can enlist the participation of a large number of savers by collecting their contributions through the stock market.
Despite some improvements listed above, stock markets in Bangladesh are still in an inchoate state. Bond market is practically non-existent. Companies issuing bonds are not ready to pay higher returns to investors than the conventional banks. Savers are inclined to keep their money in fixed deposit reserve (FDR) accounts of the banks.
Derivatives, futures and credit swaps are not in vogue in the Bangladesh market.
It is the opposite in developed countries where, because of very low rate of interest in the banks, savers are keen to buy bonds which promise higher returns. The reluctance of listed companies to declare high dividends or to fix higher rates of return for bonds is a big obstacle in the development of the stock market in Bangladesh.
As it stands, participation in stock market is confined to a minuscule elite
group. The low literacy rate, small number of savers and asset holders, insufficient exposure to various modes of financial transactions and the esoteric character of the stock market operation discourage common citizens from investing in this market. This is one market which is an exclusive preserve for the wealthy, and unless the country reaches a certain level of development, most of its citizens will remain outside the purview of the stock market because they cannot afford to match the skill
required for transacting in this market.
The above explanation is sound from a noetic point of view. It may not, however, be true for Bangladesh in the dynamic context. We are responsive to correct incentive structure. If the stock exchanges are properly organised and the Security and Exchange Commission (SEC) launches a massive publicity and social mobilisation campaign to orient the common citizens towards the stock market, it may work wonders. Formal and informal training will also be helpful in this respect.
The extent of mobile phone penetration, the number of Bangladeshi expatriates, the expansion of RMG sector, the spread of new products and processes like bottled water and tissue papers, and commercial cultivation of fruits and flowers indicate that once our people can read the potential returns from an economic option they readily court such anoption.
The benefits of the stock market are evident to the informed and analytical mind. At the moment it is seen as a den for speculation. The main element of attraction, the potential for high annual return is not in sight. This aspect has to be highlighted. The bourses and the SEC will do a good job if they can accomplish this task.
Dr. Saadat Husain is Chairman, Public Service Commission