The Nitty-Gritty of the Share Market

The foundation of the share market consists of companies that are actively in business. Only a company that came to the stock exchanges to raise capital for the business from public investors is listed. Initially they arrive at the bourse as an entrant at the primary market offering primary shares to public through the process called the Initial Public Offering (IPO) and remains listed, then the purchaser of the shares trades those shares through the bourses at the secondary market on the basis of supply and demand formula.

The companies that are run or operate by private funding or privately arranged funding are not listed with the stock exchanges nor do they offer shares of the company to public. However, if at any time, a company decides to go public to raise capital for expansion of the business they may do so provided they meet the requirements outlined by the Securities and Exchange Commission (SEC) and the bourses, i.e., The Dhaka Stock Exchange and the Chittagong Stock Exchange.

When a company goes public, it is no longer a private company. The public investors through the purchase of the company shares also become the owners having a say on the matter related to the development and improvement of the company. The external share holders are basically financial investors only for the amount or number of shares they hold. Their primary interest is in the profitability of the company to earn dividends, bonus shares, etc if they are to continue to hold the shares for a long term.

Often, the public investors exchange their share holding with other interested share holders by buying and selling the shares in the stock market at the offered prices. This process of change of hands of shares is the main activity if the stock market. Apart from the public involved in buying and selling of shares, many different businesses are there to handle the daily transactions on a daily basis. For instance, there are stock brokers who handle the share trades for the public investors at different locations outside the bourses making it a huge financial industry called the "Capital or Securities Market".

Today most of the shares are trades in electronic form resulting in quick settlement of each trade. Handsome revenue is generated at each of the transaction hops handling the transaction through pre-defined fees and charges coming from the investors. Therefore, in this business, money could be made only if there is a transaction.

Strangely enough, the companies that are the basis of this industry have no control or have nothing to do with the secondary market profit or losses. Once the primary shares are settled and the money is realized, that is all they get to keep and use. They have no access to the funds generated in the secondary market no mater how valuable their shares get. In the secondary market a share is allowed to go boom and bust as per the supply and demand principle in the open market.

Share prices are normally much higher in the secondary market compared to the original IPO price. Therefore, it is always profitable to off load shares in the secondary market at the open market prices, which many of the company share holders often do for their personal financial gains. But if ever a company decides to buyback the shares from the open market to reduce debt and for management freedom then they would have to pay a lot more than the original price.

The business model of a bank is built on "other people's money (OPM)"; while the business model of the share market is built on "other company's shares". This business thrives on trading of shares of other companies who knows nothing about it nor is it affected financially or in any way.

Unlike the Fixed Deposit Return (FDR) that yields a fixed annual return for a deposited amount that could not be used until it matures; unlike the interests earned in a bank savings account, which is much lower compared to the earning potentials in the share market or any other financial market instruments, the share market holds a relatively much more potential for higher returns of the investments. The only difference is, there are some risk factors on applying this instrument and there is a need for regular involvement in this market instrument.

Theoretically, our economists and financial experts have formulated many different methods and analytical techniques to play safe in the stock market game, but majority of the investors are not aware of those tools and techniques. Instead, they go with their own judgment and intuitions as well as rumors. In Bangladesh, the stock market is still very immature due to involvement of immature investors who thinks stock market is nothing but a place for gambling.

However, the situation is gradually changing as more and more educated investors are entering the market. Many are taking interest in the technical aspects of the investment techniques for risk management. As a result we see many old and new investors are getting themselves involved in training and educating themselves by attending workshops offered by the experts in the industry.

Slowly the investors are beginning to realize that the health of a company in question whose share will be bought and sold actually matters as the return on their investment largely depends on the performance of the management team of the company and some other factors. If they end up buying shares of a poorly performing company then there is a risk of going bust if that business goes bust. In other words, if a company goes out of business then the shares are of no value and no one would want them. Thus there would be no transaction for those shares in the market, which means no money could be made with those shares by any of the components of the share market that handles transaction.

Monitoring the activities and performance of a company is therefore an important factor in determining whether or not to buy a share. Because a share will be in the market and will be traded in the secondary market as long as it is in business. A dead share is worthless that belongs to a dead company. And this is the main risk in this investment game.

The author is Chief Operating Officer, Central Depository Bangladesh Limited

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The Nitty-Gritty of the Share Market

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