70% of the daily turnover on the exchanges comes from junk stocks

Recently, we saw junk stocks trading like hot cakes on the country’s stock exchange.

Traders are happy with this situation, and so is our stock market as the daily turnover is about 2,200 crore Tk. The number may seem very lucrative at first glance, but can turn out to be frightening in the long run.

When the market fell, the price of junk stocks was also very low. Even the most hyped junk stocks sold at a low price. Lately, the market has been in a continuous upward trend, with nearly 70 percent of stock prices rising.

Since the 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 mainly focus on junk stocks.

Junk stocks are popular in Bangladesh for several reasons. Our traders generally don’t have long-term plans or a lot of capital, so they don’t want to buy fundamentally strong stocks.

They usually have a budget of Tk10 lakh to Tk30 lakh. If the market now goes for a massive correction, they will bear the brunt as they will not receive anything from the respective companies.

When the stock market crashed in 2010, we witnessed the devastation everyone faced. However, the fundamentally strong shareholders recovered within two to four years. Unfortunately, the junk shareholders were unable to recover from that loss.

If such a thing is repeated, the result will be no different.

Interestingly, junk stocks are being scrapped in other countries, but we’ve listed them. Bangladesh Securities and Exchange Commission (BSEC) wants everyone to participate.

BSEC treats it as an open secret that junk stocks are very risky and no one should be buying them. But at the same time, BSEC doesn’t terminate the stocks they know are junk shares, even after they know the whole picture.

There is a rule to end companies that sell junk stocks worldwide, but we don’t have such a rule here. Instead, BSEC has marketed and engaged a few over-the-counter (OTC) companies.

The price of a single share is determined by earnings per share, expected earnings per share, and dividend rate. Junkshare does not meet any of these criteria. Yet people buy these. Why? For the purpose of gambling.

As a stock analyst, I constantly warn them, but they are quite laid back, leading to the conclusion that they only care about their earnings. Besides, why shouldn’t they care? 70 percent of the stock market’s daily turnover comes from this junk stock, or gambling, whatever you call it.

Fundamentally strong stocks are actually scarce. As a result, our day traders invest in junk stocks and develop a gambling addiction.

So far, these junk stocks have not resulted in an immediate loss to our stock market. However, we must not forget that in the stock market any high curve must also touch the ground. Every trader thinks that he/she has sold the stock but someone is facing the loss. And in the end, everyone will have to bear the brunt of the loss.

Today, brokerage houses also offer margin lending to day traders, which is in huge demand. But these loans are usually for a week. After that, the high interest is always added to their portfolio.

So if the market price falls, they will sell the stock at any price within seven days. Traders think they can still make some profit even after paying off the loan. However, the win rate remains very low.

All of these things will affect the market when a massive correction occurs. To remedy this situation, there is no other way than to scrap the companies.

Good days in the stock market do not last long, but neither BSEC nor the Treasury Department is willing to accept this. They want this market to remain positive. The higher the indicators get, the more dangerous a situation is created.

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

Companies such as Incepta Pharmaceuticals, Radiant Pharmaceuticals and Nestl also do not participate in our equity markets.

If our Ministry of Finance and Bangladesh Bank make an effort to get 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 discount on corporate tax for five to seven years. In return, they will all agree to join our stock market and we can have some semblance of stability in the stock market.

Abu Ahmed

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Abu Ahmed