Popular media has always portrayed the glamour of Wall Street. Trading stocks and other securities have been shown as an exciting and rewarding thing to do. Movies like 'The Wolf of Wall Street', 'Wall Street' (1987), 'The Big Short', 'Margin Call', and many others have cemented our view of the stock market participants as individuals who lead an exciting life followed by a very lavish lifestyle. Even regional shows like 'Scam-1992: The Harshad Mehta Story' draws a similar picture. So, it is no wonder that many young individuals exposed to these stories would like to try their hand in the stock market in Bangladesh as well.
Regulatory barriers and a lack of options only make the trading of stocks, and to a lesser extent, bonds, possible in Bangladesh. There is also a distinction between trading and investing. Investing usually entails buying and holding shares of a company after doing deep dives into the company while trading entails buying and selling stocks without holding on to them for more than a few days or even hours.
Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are the two bourses in Bangladesh with DSE leading by a huge margin. Following the 2010 crash and a prolonged pullback in the 2018 to mid-2020 period, stock market participation in Bangladesh had remained low. All this changed in June of 2020 when the market seemingly out of nowhere made a comeback during the pandemic period. In June 2020 to June 2021 period, DSEX, the country's prime index rose by 56 per cent, eventually leading to its all-time high of 7,297 points. With such a rally came new speculators. Interest in the market soared and many new investors, including young individuals, joined in. However, the market has since seen a correction and now sits at 6906 points.
This observation makes one thing clear. The stock market is risky. And that risk is amplified for traders as they are more susceptible to buying high and selling low, whereas long-term investors might find a profitable exit in the future. So, trading requires in-depth knowledge about the specific stocks and the market itself. Many inexperienced individual investors end up following the market without in-depth studies and end up making losses. This is why studying the market variables is essential. But can this be done by a non-professional? Zulkarnain Islam, a third-year student at IBA, University of Dhaka, might be able to answer that.
"I invested via my mom's account in 2017 but that was a one time thing. I properly started investing in August 2020." Zulkarnain currently manages a portfolio of Tk 2.0 million and mostly focuses on companies with strong fundamentals.
However, he also mentioned challenges in the investing environment. "Our stock market is made up of mostly retail investors and they are mostly making decisions based on rumors and not on solid analysis. Additionally, I have noticed that the effect of broad macroeconomic news isn't reflected in the market since people are busy searching for rumors. Also, there are a lot of junk stocks in the market and very few stocks with strong fundamentals and corporate governance."
Furthermore, he talked about some soft infrastructure issues in the bourses. "Some structural hassles in investing in DSE are the inability to take a short position, the inability to hedge risk due to the absence of instruments like options and derivatives, and the inability to conduct day trades."
Mohammad Asrarul Haque is the team coordinator of the research department at EBL Securities Limited. With seven years of experience in the stock market in Bangladesh, he said, "Young individuals should be involved in stock investing. Rather than trading, they should focus on learning. It is not for everyone. But those with sufficient bookish knowledge, enough earnings, or family support, should invest a portion in the market based on their risk tolerance. One way to do it could be buying stocks of five fundamentally sound companies and watching their movement over a year. This should be treated as a learning opportunity."
Mr Haque also suggested investing a portion of investable funds in Mutual Fund SIPs and IPOs. "Mutual Funds are managed by professionals and hence are likely to provide a better return than a mismanaged portfolio. IPO shares carry very little risk and a certain amount of return is guaranteed. The new regulatory framework makes buying IPO shares easy." On the pitfalls of investing, he commented, "Never take a loan, whether from an external source or as margin from the brokers. The inherent risks of the market are amplified by the risks of margin loans."
Institutional traders around the world employ individuals having in-depth knowledge in finance, statistics, economics, etc. They also make use of statistical models and algorithms in their trading activities. Individual traders, especially young individuals, often lack this level of expertise and resources that are needed. This makes trading even more difficult when market risk is taken into account.
So, young individuals looking to get into investing should be long-term oriented. It is also important that they do their homework before risking any amount of capital. By properly researching their investment opportunities and accepting market risks, even the young can make a profit in the stock market.
The writer can be reached at [email protected]
