Many small investors in the share market tend to rely on the regulator (Bangladesh Securities and Exchange Commission-BSEC) for saving their interests. However, this is wrong. Even though the regulator is responsible for formulating securities legislation and regulating the market duly, they mostly fail when it comes to saving the interests of the small investors.
In a circumstance where failure and fraudulence are common, small investors must protect their self-interest by educating themselves about the share market.
The IPO (Initial Price Offering) valuation is very important. In most cases, the IPOs are overvalued. The deceit starts there. And when an accredited investor sells off his previously held shares, the web of deceit begins. It is only possible in this country that an early investor is running a company as the head of management without holding any shares.
In other countries, shareholders do not occupy any position in the management, regardless of being an early investor or the biggest shareholder. Rather, they hire people for management on condition that they will earn money for the shareholders.
As long as the early investors remain in management of a company in our country, especially after they sell off their shares, the general shareholders will never get a fair share of the profit.
Another side of this trickery is that, for instance, they sell a premium share at Tk40, but the dividend given is 15 percent or less. But if the investor loaned the money from a bank, they would have to pay a 15 percent interest. It means, the debt would stand at Tk1.5 against Tk10, and Tk6 against Tk40. But after selling the IPO at a four-times higher rate, they are giving only Tk1.5 to the shareholders. Now, what is the profit rate for the people who buy an IPO at Tk40? It is an easy calculation!
Instances of not paying dividends after selling premium IPOs are plenty in our share market. Many sell a premium share in the name of closed companies. Sometimes a steel company turns out to be a tin company, and so on. The truth is, these fraudsters have been selling premiums with approval from the regulators.
Selling IPO placement is another source of deception. No one will ever find any explanation why placement shares are sold, or at what price. BSEC is not held responsible by anyone about the reason of selling shares on placement where the IPOs are generally oversubscribed by 30/40 times. The stakeholders who generally attend in meetings with the BSEC members never raised these questions. Why would that be? Is the reason that the stakeholders negotiate with BSEC about their self-serving interests only, and thus intentionally avoid raising questions on these issues?
Small investors also have their own faults. Why do they buy an IPO at a four to five times the price from the secondary market? When will they ever learn? My experience says that they have been making the same mistake repeatedly. Even though I am not the right person to advise them, I do have some requests based on my education and experience:
- There is no alternative to learning. It is better to attend classes to understand the valuation of shares and other issues.
- Stay away from buying shares from the companies whose early investors have already sold their shares.
- Do not gamble, you will lose your money. It is better to invest your money in the good shares for a long time.
- There is nothing called a good or a bad market. In a bad market, the shares are cheap. But in that case, you have to have enough money at due time.
- Cash holding is also a kind of investment. If you understand the market, you will be able to use the cash properly at the right time.
- To win in the share market you need to have money, education and patience. If someone said there's no need for knowledge in the share market, they are in the wrong.
- Learn about the history and people in the management of a company before buying their share.
- You must have the will and ability to analyse any financial report. You do not need to be a pundit to do that. Experience and knowledge will help you to make the right decision.
- Discuss the price and the future of a share among yourselves. Use the advices of an experienced person instead of discussing with someone as clueless as you. Remember, discussing with an ignorant will only fool you. Do not be convinced by the brokers, they earn commissions from your dealings.
- It is better not to buy shares with margin loans. It can be profitable when the market is on the rise, but in other times the loan provider will take back the profit. Many people fall in danger buying shares with a loan and the whole market can collapse because of this tendency. It was the reason behind the 2010 crisis.
Abu Ahmed is an economist and honorary professor of economics at the University of Dhaka.