Price restriction is to "serve big investors"

​The prime bourse recorded the lowest turnover on Thursday in more than two and a half years just the day after the regulator lifted the floor price restriction for 169 stocks.

If inflation is taken into account, the present stock market is even behind what it was back in 2013-2014 in terms of daily turnover, said Md. Ashequr Rahman, managing director at Midway Securities.

Instead of ensuring more activities in the market, the policy makers enforced measures, such as floor price and circuit breakers, stopping the movement of stocks.

That, for the time being, averted erosion of share prices but "it created an illusion of a stable market", said Mr Rahman in an interview with the Financial Express.

On Tuesday, the Bangladesh Securities and Exchange Commission replaced the floor price by 1 per cent lower circuit breaker for the low-cap stocks. Price correction is now allowed up to 1 per cent from the previous day's closing price.

According to Mr Rahman, all the strategies stop freefall of the market but do not make it functional. Neither do they bring any good for investors and stocks in the long run.

With bars preventing downward price movement, investors have no way to figure out fair prices of stocks. That is the reason investors -- small or big -- are showing no interest in injecting funds into the market.

This is the backdrop to good stocks facing a shortage of buyers.

"There is money in the economy but the market needs to have its natural functions restored to attract investments."

Though the regulator repeatedly said it is the individual investors who are protected by the price movement restrictions, the stock analyst argued that it is rather high net worth investors whose interests are served.

Another factor that is tied to the issue is margin loans, Mr Rahman said.

A significant amount of investments in this market came through margin loans.

Lenders encourage high net worth individuals to take margin loans and invest since the borrowing limit depends on the size of one's investment.

When the equity goes negative, a part of the investments made by margin loans get wiped out.

"Then what happens when such investors lose 75 per cent of their principal investments! That's why the floor price was introduced to protect those high net worth individuals," said Mr Rahman.

Moreover, the compounding rate of interests charged on the margin loans is often higher than the return.

For example, if the compounding interest rate is 13 per cent, it is highly unlikely for an investor to realise a return of 13 per cent or above from the market.

The market is still bearing the fallouts of the 2010 market crash. All the margin loans taken to invest in the securities at the time have not yet paid off. Lenders have continued to reschedule loans to realize funds.

The exit from the market controlling episode this time will be trickier than in June last year, said Mr Rahman. The regulator removed the restriction back then as the economy started to rebound with the help of stimulus packages from the central bank.

This time the monetary policy has been tightened to tame inflation and to cope with the global economic scenario that emerged out of the Russia-Ukraine war and the foreign currency reserve crisis.

What will happen in 2023 is not predictable, said Mr Rahman, adding that the economy might not return to the post-Covid level.

Amid these realities, an investor should study balance sheets and weighs market sentiments before making an investment. Stocks with good fundamentals will give good returns on investments in the long run.

The regulator's stance is unfavourable for the market's development, said the chief of Midway Securities.

Buyers should be allowed to quote prices based on their judgment about a particular security and will make profit or loss accordingly.

At present, they cannot quote price more than 1 per cent lower than the reference price for 169 stocks. For the rest, floor price is still in effect.

Source: ​thefinancialexpress