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Stock Market Bangladesh Essay

2424 words - 10 pages

STOCK MARKET CRASH OF BANGLADESH IN 2010-11 History of the stock market crashes show that ‘Bull Run’ before a stock market crash is kind of normal phenomenon. There was no exception for the stock market crash of Bangladesh in 2010-11. Most important factors that guided to the Bull Run are described here. Root of bubble Due to political conflict of Bangladesh state of emergency was declared and military took power of the country in 2007. Moreover, during military-backed regime investment in real sectors as well as FDI decreased but the inflow of foreign remittance increased. At that time, investors were looking for alternative investment sector to invest their savings and found stock market ...view middle of the document...

For that reason the daily transaction in the share market was on an average from Taka 20,000 to 30,000 million in 2010 and the figure was double comparing to 2009. To produce Bangladesh`s economy by 7-8% per year Bangladesh Bank adopted accommodative monetary policy during the high inflation periods to support investment. Bangladesh Bank has locked Taka against dollar to support exports. As Taka has been undervalued it has made excess growth in money supply. Because of Bangladesh Bank’s ex-change rate policy last couple of years broad money made excess. However, a big portion of this excess liquidity had gone to the stock market but there were very few shares in the market. The policy that was adopted by Bangladesh Bank to grow economy by increased exports and investment ultimately misguided and ended up blowing the mother of all bubbles. Besides, the government again increased the bubble after permitting whitening of black money through tax breaks and schemes.
Furthermore Security & Exchange Commissions was not proficient to monitor the market conditions properly. Because of the poor monitoring & market surveillance share prices of Z Category Companies and small companies increased dramatically. Though some initiatives were taken by SEC but those were not effective and changed directives frequently such as; it changed directives of margin loan ratio 19 times. Time of historical fall Timeline of historical fall of the crash has been divided into two sections which are December 2010 and January 2011.
December 2010
It has been stated by Bhuiyan (2011) that 5th December, 2010 as the last glorious day of the year for the investors of Bangladesh stock market. On this day DSE General Index (DGEN) gained its all-time highest 8, 918.51 point & broke all old records of DSE turnover by Taka 32.50 billion. Security & Exchange Commissions and Bangladesh Bank introduced a lot of directives to keep the market under control in 2010. Unfortunately, in December both BB and SEC changed many of their previous directives because of the failure and applied new more. On 6th December, 2010 SEC again introduced a directive saying that buy orders will be carried out after encashment of Investor`s cheque. In addition, on the following day another directive called “netting facilities” was applied. This instruction said that no investor will be able to purchase securities against the sale proceedings of any other securities during the settlement & clearance period. After that both directives of 6th & 7th December were cancelled on 8th December. The reason of cancelling these directives was a significant fall of share prices on 8th December. SEC changed directive of margin loan ratio by increasing it from 1:0.5 to 1:1 on 13th December and later it was again climbed to 1:1.5 & 1:2 because of free fall of share prices. Bangladesh Bank got objection that Banks are investing money in the stock market from their reserve. According to this complain on the 1st day of December...

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