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Investing behaviour: Why trading volume is falling down?
Share Shah
The stock exchange trading volume is falling down. Does this mean that we are heading towards a bear market? Perhaps we are with all the discouraging attributes of the financial environment. One significant reason is the realisation that making money on the market has nothing to do with intelligence. There is this old Wall Street adage, "Don't confuse brains with a bull market." In a bull market, we have a lot more investors who trade more actively than they would in a bear market.
Key reason for trading volume to decrease is the attitude. People tend to hold onto their losers and sell their winners. In a bear market, they do not have very many gainers to sell. Another reason is attention. People tend to buy the stocks that catch their attention. In our market the top ten shares are the real attention getter and once the top stocks start going south people loose interest. People pay more attention to a bull market. While a lot of attention is given to market crashes in general people pay more attention to the market when it is going up. My interest in our national cricket team increases when they do very well in some offshore match. Even after I have seen the game on the TV, I look at the sports section of the newspaper the next morning in order to read about what I already know.
Another reason relates to an idea which comes from gambling. Say if one walks into a casino with say Taka 5000, and has made up his mind to play only until the Taka 5000 runs out. Suddenly he finds that he is ahead by Taka 15000 or Take 20000. He will start to play a little looser with that money. He would take the original Taka 5000 and stick it in your back pocket, and assume that the rest of it is just fun money. He will use it to gamble more aggressively or buy things one would not normally buy. In a booming market a lot of investors were probably thinking that they had made money they had never expected to make. They were willing to play with some of that money and drive up trading volumes. In a bear market, investors are back to playing with their own money, and so the trading volumes decrease.
The recent curb on over extended margin lending by certain merchant banks surely has had some effect on the fall in prices and trading volume. Vernon Smith, Nobel Prize winners for economics, has done some experimental market studies about stock market bubbles. He would conclude that when one injects more liquidity into a market, people trade more actively, and they tend to run the market up higher for awhile. In some other studies on online trading in 1998 and 1999, reveal that the amount of borrowing that investors were doing on their margin accounts was much higher relative to their income than it had been for the previous twenty or thirty years. As liquidity goes up, one will get more trading.
Another reason for the current trend may be attributed to peoples’ perception. This is the idea that people follow short-term trends. People tend to buy stocks that are going up. In a bull market, more stocks are going up so there are more stocks people like to buy. In a bear market, there are fewer stocks that people like to buy so trading volume goes down. One could conduct a study of crowds in brokerages houses and surely find it more crowded with investors when stock prices are moving upwards than when share prices are going down.
One should not forget that the stock market is very entertaining. Thus the reason for many a shoddy talk shows on the capital market in our cable television. However the final reason that trading volume goes down in a bear market is that it is no longer fun or entertaining. Some people trade for entertainment and it is a lot more fun to trade when one is making money.
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Banking: Gap between lending and deposit rates is wide
Mohammad Ataul Hoque
The Bangladesh Bank authority deserves thanks for its belated step in directing the commercial banks of the country to find ways to reduce their wide gap between lending and deposit rates. But it is not always the deposit rate which affects the cost of fund in a bank. Although it has a direct link, but free money ( about 20 per cent app.) in the banking channel plays a great part in arriving at the funding cost of any bank which means actual effective funding cost of any bank is much less than the real deposit rate. Therefore, it would have been better if the equation could be made between their cost of fund and the lending rates. The spread in such circumstances would be more yawning. A spread of seven percent and above at the sweet will of the banks is too high for the entrepreneurs to do business profitably by taking bank loan and if allowed to continue with this trend will undoubtedly impede industrial development in the country.
The result of previous fiscal year’s dismal growth in industrial sector is obviously in view of the above fact. Let us hope that the commercial banks will now come to their senses and realize the harm they were causing to the industry and economy of the country by keeping their lending rates unnecessarily high. Even during the last fiscal period when business activities were reported to be at its lowest ebb, the banking companies made a record profit after tax, the lion share of which went to a handful of large shareholders in the form of dividend, equity, reserve etc.
It is apparent the activities of the banks are centered round the profiteering motives of a few large shareholders and their representing Directors in the Board. The Board of Directors should realize that besides earning a reasonable dividend for the shareholders the commercial banks of a country has a more important and bigger obligation towards economic and industrial development of the country. Unfortunately our banks have consistently failed in this direction. Despite huge liquidity in the money market and large hue and cry from the entrepreneurs to reduce the lending rates the commercial banks put down their feet in the absence of any regulatory restriction and did not lower their interest rate and continued with their money making business only.
The contention of the BAB Chairman that it would be difficult for them to reduce the lending rates unless the interest on savings certificates and treasury bonds were slashed, is not based on facts. Few years back when under a directive from the Bangladesh Bank the banks were gradually bringing down the rates to single digit figure, no one raised this question. Moreover actually some banks brought down the rates to single digit level and still they were doing business comfortably and profitably. There is no apparent direct linkage between the lending rate and the rates of Government securities. After all migration of bank depositors to opt for Government securities on better rate of return basis is not violent.
As a regulator of the economy, such action from the Bangladesh Bank was, therefore, overdue. In my opinion they along with SEC should work together closely in opening more investor friendly avenues for raising capital at a reasonable cost by the entrepreneurs to reduce their dependence on commercial banks. The incentive given by the Government on issuance of ZERO coupon bonds could be cited as an example. Income from investment in ZERO coupon bonds has been made totally tax free. This incentive has attracted a number of financial institutions and private companies to raise funds by issuing such bonds at a much lesser cost than the bank loan which will cast a positive impact on the industrialisation and economic development of the country. Moreover the investors whether private or public have shown keen interest in such bonds in view of the generous tax incentive given by the Government.
But the recent step by the Bangladesh Bank to refer to NBR before granting permission to the private companies; other than financial institutions and banks, to float ZERO coupon bonds is perhaps a wrong step. It may engulf the issue into more bureaucratic tangle and thus may jeopardize development of a vibrant capital market free from any undesirable bureaucracy by the regulators. The regulators are now regulating a virtually non-existent capital and bond market with so many rules and regulations but no place to apply! Let us relax all bureaucratic influence and let the market develop first. The controlling part and the bureaucracy may wait for the time being for the better interest of the country.
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Weeklong agri technology fair begins in Comilla
Holiday Desk
A weeklong agricultural technology fair began at the Comilla district Town Hall premises on Tuesday.
Agriculture adviser CS Karim inaugurated the fair, organised by the Department of Agriculture Extension, Comilla, as chief guest.
In his address, the adviser said it’s not possible to achieve self-sufficiency in food in the country without the application of appropriate new agriculture technologies.
Agriculture secretary Abdul Aziz was present as special guest.
Among others, DAE director general M Shamsul Alam, director of agriculture information service M Nazrul Islam, Comilla’s Joint Forces Commander Lt Col Anwar Hossain, director of TV Channel-I Shaikh Siraj, DAE deputy director of Comilla Khorshed Alam Bhuiyan were present at the inaugural function.
Some 52 agricultural technologies from 27 government and private organisations have been put on display at some 42 stalls in the fair.
Another report from Brahmanbaria adds: A three-day agriculture fair concluded at Banchharampur upazila headquarters on Tuesday.
Department of Agriculture Extension organised the fair. Some 15 stalls were established with different agri-inputs and products and flowers and fruits.
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