Stocks jumped on Tuesday amid a buying spree a day after the market regulator relaxed its rules regarding margin loans.
DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), closed 1.65% higher with a nearly 5% increase in the daily turnover at the country's premier bourse.
Investors take margin loans from their brokers or merchant banks to buy more shares for leveraged gains.
The Bangladesh Securities and Exchange Commission (BSEC) on Monday discarded the broad-index factor from its margin loans control mechanism and that offered the market an opportunity to see more demand for stocks.
The regulator had earlier said if margin loans can go as high as 80% of investors' equity until the DSEX goes above 8,000-mark and as soon as the index crosses the level brokers would not provide margin loans more than 50% of their individual clients' equity.
On Monday afternoon, the BSEC announced, regardless of index level, brokers and merchant banks can disburse up to 80% of loans as long as a stock remains marginal.
According to the current regulations, no stock is marginal if its price-to-earnings ratio crosses 40. Also, margin loans are prohibited a month after a scrip's category change in the bourse.
Investors were in fear of a big selloff by margin loan takers when the DSEX was approaching the 8,000 level in early October and the market went into a sharp correction for a month.
However, the regulatory move removed the barrier for the index to grow spontaneously, said stockbrokers.
Also, corporate earnings appeared to emerge more important in investors' stock selection process this week.
As soon as the possible increase in margin-trading loomed, investors began chasing stocks with lower PE ratios anticipating a similar collective move and that resulted in price and turnover hikes in low PE stocks.
Banking stocks having the lowest PE ratios in the market got a strong momentum on Tuesday after a months-long consolidation. At the end of the session, the banking sector's market capitalisation was up by 4.45%.
Non-bank financial institutions gained 3.71% on average, while IT gained 3.12%, cement 2.59%, general insurance 1.58%, and the pharmaceutical sector 1.09%.
Most sectors with high or negative PE ratios underwent a correction.
PE ratio reflects how expensive a stock is, in comparison to the company's annual earnings. Stocks with higher PE ratios take more time than their lower PE counterparts to pay back the invested amount out of the company's annual profits alone unless the company grows its profits.
Bullish sentiment on Tuesday encouraged investors to participate more in trading and DSE's daily turnover increased nearly 5% to Tk1,492 crore.
Banking stocks contributed to a maximum of 28% of the DSE turnover on Tuesday. Pharmaceuticals and textile sectors followed the banking sector in the turnover table.
In the DSE, 219 scrips gained, while 130 lost, and 27 remained unchanged.
Indices at the Chittagong Stock Exchange (CSE) also gained sharply and daily turnover increased to nearly Tk66 crore there, from 46 crores on the previous day.