Investment in Stock market: Why, How?
Whenever anyone asks me, “I’ve a little savings, how to make it grow?" Without any hesitation I straight forward suggest them to put it in the stock market.
Why?
Because I think for little amount of savers it is the best option to multiply their money. Now let us see why it is the best option among some alternatives.
They can not start a business of their own because they have too little savings to start with or they don't have enough time for it.
They can put their money in government issued savings certificate which eventually provide 8%-12% interest. Now if someone have a savings of Tk. 100,000/= at 12% interest his return will be only Tk. 12000/= a year- assuming no taxes on this return. But having a 10% tax this return is only Tk. 10800/= only.
In case of putting the money in the bank, it provides 10%-13% return on fixed deposits and even lower in savings account and pension schemes. Here too the return is at best 13000/=. If we deduct 10% govt tax, it will be only 11700/=
Now focus on stock market. Usually what do small investors do? At the starting level they usually rush to catch the IPOs. Most of the IPOs come with 5000/= market lot. It means someone can invest his money even if his savings is as small as Tk. 5000/=. Now what is the earnings possibility? Assume Tk. 100,000/= as investment capability as before. Now he can apply for 20 lots of shares Tk.5000/= each. What is the possibility to get at least one lot of share. This possibility varies depending on the size of the IPO. Historical evidence shows that for a renowned company number of applications is much higher than others. Considering that issuing firm is a renowned one, applications are 5-7 times it the size of the issue is more than Tk. 500million. For an issue size of less than Tk. 100million number of application is 30-40 times the size of the issue. Assuming the size is in between Tk. 300-700 million we can expect applications not more than 10 multiple of the issue size. In this case at least two lots out of twenty has a very much possibility to click. Now here comes the final question of return. On an average returns from IPOs are not less than 100%. So, the return will be at least Tk. 10000/= from two lots of stock. Usually it takes approximately three months to start trading of a new issue (time considered from the time of subscription to trading).The return stands for 10% on the whole investment in three months and annualized return of 46.41%!
There is another dimension of stock market- secondary trading. From BD perspective still it is very much risky for new comer. But people who have the least technical analytical ability of stock market- can get a super profit.
From above discussion you already decided to plunge into stock market.
But HOW?
Here comes the reply.
Step-1)
To invest in stock market you must have a Beneficiary Owner (BO) account with a Depository Participant (DP). Just go to a DP, collect the BO a/c opening form, fill it up properly and submit. It doesn't take more than a week process the BO a/c. Generally it takes only 2-3 days.
Step-2)
As soon as you have a BO a/c, you are registered to invest in stock market. Your BO are accompanied with a 16digit BO ID and client code given by your broker.
Now you can invest in IPO and secondary market. For secondary trade just go to your broker place your order for stock purchase and pay for it. That's all, easy and simple. You've invested in stock market!
If you want to subscribe for primary share commonly referred as IPO you just have to collect the subscription form fill it up and submit to the bankers to the issue (names of the bankers to the issue are generally printed at the back of the form) with the amount of money required. And you did it all!
If you are the one of the lucky winners of IPO then you’ve to wait a little more until the trading of the stock starts to buy more stock or sell out your primary stocks.
This is all easy and simple way of investing in stock market.
Now here are some tips for naive investor to invest in stock market.
Ø Don't take high risk as a naive investor.
Ø At the starting level you should be cautious of your investment so that you may not loss your precious savings.
Ø Collect information about an issue before pouring your capital in it.
Ø Stocks market it, broker, other investors, financial news papers (Specially Financial Express) and annual reports of the firms are good source of information.
Ø Don't follow any rumor.
Ø From holding a stock, when you are in a positive position realize the gain as soon as possible, if you are not sure about further gain.
Ø Regularly contact with your broker and maintain a good relation.
Ø Try to read financial news papers on a regular basis.
Ø Before investing in a stock you must do all your calculations specially the break-even price.
Ø Invest in stocks with concrete base, well graded and good credit rating.
Ø Try to avoid stocks that are very much sensitive with external factors like govt regulation. Because any unanticipated regulatory change can push the price much lower.
So, waiting for what? Just do it!
Now here’s the brief of Bangladesh Stock Exchanges for people who are interested in it.
An overview of Bangladesh Stock Exchanges
Dhaka Stock Exchange
Chittagong Stock Exchange
Date of Incorporation
April 28, 1954 (As East Pakistan Stock Exchange Limited)
April 01, 1995
Trading started
1956
October 10, 1995
Number of Members
233
140
Active Securities
Average 150
Average 50
Brokerage commission
.3%-1%
.3%-1%
Trading Method
Automated Order matching system
Automated Order matching system
Trading time
10.00AM-2.00PM
10.00AM-2.00PM
Daily turnover
.16% of the market capitalization
Market Capitalization
$7 billion as per 02 July 2007
Number of listed companies
259 as per 02 July 2007
Market capitalization
6.5% of total GDP
[1]Functions of
DSEThe major functions are:
- Listing of Companies. (As per Listing Regulations).- Providing the screen based automated trading of listed Securities.- Settlement of trading. (As per Settlement of Transaction Regulations)- Gifting of share / granting approval to the transaction/transfer of share outside the trading system of the exchange (As per Listing Regulations 42)- Market Administration & Control.- Market Surveillance.- Publication of Monthly Review.- Monitoring the activities of listed companies. (As per Listing Regulations).- Investors grievance Cell (Disposal of complaint bye laws 1997).- Investors Protection Fund (As per investor protection fund Regulations 1999)-Announcement of Price sensitive or other information about listed companies through online.
[2]How do you understand the quality of security from their grade?
A-Grade: Companies which are regular in holding the current AGM and have declared dividend @ 10% (minimum) per year.
B-Grade: Companies which are regular in holding AGM but failed to declare at least 10% dividend.
G-Grade: Companies which are in developing stage. Yet to launch it product in the market. Called Greenfield.
N-Grade: New listed companies those didn’t aged a single fiscal year.
Z-Grade: Companies which have failed to hold the AGMs and to declare any dividend. Those may also not be in operation continuously for more than 6 months or whose accumulated lose after adjustment of profit reserve if any is negative and exceeds its paid up capital.
Trading Settlement of shares:
A Group: Number of Instruments are 145 (123 + 8D + 14M), Here D for Debentures, M for Mutual funds & TB for Treasury Bonds (Trading in Public, Block & Odd-lot Market with trade for trade settlement facility for scrip only through DSE Clearing House on T+1, T+3 basis). "A" and “DA” is marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading Software.
B Group: Number of Instruments are 33 (Trading in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+3 basis). "B" and "DB" is marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading software.
G Group: Number of Instrument is 1 (Trading in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+3 basis). "G" and "DG" is marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading software.
N Group: Number of Instrument is 4 (Trading in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+1, T+3 basis). "N" and "DN" is marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading software.
Z Group: Number of Instruments are 93 (Trading in Public, Block & Odd-lot Market with trade for trade settlement facility through DSE Clearing House on T+3, T+7 basis). "Z" and "DZ" is marked in BASES columns for Non-Demat & Demat instrument respectively in our TESA Trading software.
Here in the system when it is said T+3 it does mean that you can’t sell the security until 3 working days have passed after you bought the stock.
Whish you a good understanding of stock market and a good business their.
[1] Some of the parts of the writing are extracted from class presentation and Jobayer Mohsin Kobir shares the credit.
[2] From
DSE website.
