70% of the stock market’s daily turnover comes from junk shares

Recently, we saw junk shares being traded like hot cakes in the country's stock exchange. 

Traders are pleased with this situation, and so is our stock market, because its daily turnover is around Tk2,200 crore. The number appears to be very lucrative at first glance, but it can prove to be frightening in the long run.

When the market was down, the price of junk shares was also very low. Even the most hyped junk shares were selling at a low price. Recently, the market has been in a continuous uptrend, with nearly 70 percent of the share prices increasing.

Because the percentage rate of increase is quite noticeable and there is no chance of a massive correction in the stock market, daily traders seeking short-term success primarily focus on junk shares.

Junk shares are popular in Bangladesh for a variety of reasons. Our traders, in general, do not have long-term plans or a lot of capital, so they do not look to buy any fundamentally strong shares. 

They usually have a budget of Tk10 lakh to Tk30 lakh. Now, if the market aims for a massive correction, they will be the sufferers because they will not receive anything from the respective companies.

When the stock market crashed in 2010, we witnessed the devastation that everyone faced. However, the fundamentally strong shareholders recovered within two to four years. Sadly, the junk shareholders could not recover from that loss. 

If anything like that repeats, the consequence will not be any different.

Interestingly, junk shares are delisted in other countries, but we have them listed. Bangladesh Securities and Exchange Commission (BSEC) wants everyone to participate. 

BSEC treats it as an open secret that junk shares are highly risky, and that no one should buy this. But at the same time, BSEC does not terminate the ones they know to be junk shares, even after knowing the whole picture. 

There is a rule to terminate companies that sell junk shares, worldwide, but we do not have such a rule here. Instead, BSEC has introduced a few companies from over-the-counter (OTC) in the market and enlisted them.

The price of a single share is determined by its earnings per share, expected earnings per share, and dividend rate. Junk share does not meet any of these criteria. Nonetheless, people are purchasing these. Why? For the purpose of gambling.

As a stock market analyst, I am constantly warning them but they are quite laid back, which leads to the conclusion that they only care about their earnings. Also, why should they not care? 70 percent of the stock market's daily turnover comes from this junk share, or gambling, whatever you call it.

Actually, fundamentally strong shares are scarce. As a result, our day traders are investing in junk shares and developing a gambling addiction.

Until now, these junk shares have not resulted in a direct loss for our stock market. However, we must not forget that in the share market, every high curve must also meet the ground. Every trader thinks that s/he has sold the share, but someone faces the loss. And eventually, everyone will have to bear the brunt of the loss.

Nowadays, broker houses are also offering margin loans to day traders, which has a huge demand. But these loans are usually for a week. After that, its high-interest rate keeps getting added to their portfolio. 

So, when the market rate drops, they sell the share within seven days at any cost. Traders think they will be able to make some profit even after paying the loan. However, the profit rate remains very low. 

All these things will affect the market when a massive correction takes place. To overcome this situation, there is no other way than to delist the companies. 

Good days in the stock market do not last, but neither BSEC nor the finance ministry is ready to accept this. They want this market to stay positive. The higher the indicators become, the more dangerous a situation is created.

I am very disappointed that many big companies are still not part of our stock market. Metlife company holds 45 percent of the life insurance business. But surprisingly, they are not a part of our stock market. If they had taken part, the risk might have been significantly reduced. 

Also, companies like Incepta pharmaceuticals, Radiant pharmaceuticals and Nestlé do not have any share in our stock markets.

If our Ministry of Finance and Bangladesh Bank puts some effort into bringing these companies on board, this goal can be achieved. We all know how much tax our local companies pay, but what about the international companies? 

The government can offer these companies a five to seven year reduction in corporate tax. In return, they will all agree to join our stock market and we could have some semblance of stability in the stock market.

Abu Ahmed

Abu Ahmed is a stock market analyst and former economics professor at the University of Dhaka.