The indispensable part of an economy is Stock Market which acts as an intermediary for movement of funds between surplus units and deficit units. It is a place to raise capital by means of issuing share and hence transacting it on a regular basis among the participants. Thus, a share is just like a commodity sold in the stock market through stock exchange. By purchasing shares of a company an investor become the owner of that company up to the intrinsic value of his shareholding and also become entitled to the profit or loss of the company proportionate to his share.
In a market economy, the capital market plays a vital role in the efficient allocation of scarce resources. Well-functioning and developed capital markets augments the process of economic development, efficiency welfare through different ways such as encourage savings, draw more savers and users into the investment process, draw more institution into the intermediation process, help mobilization of non financial resources, attract external resources, discipline sick organization and investments organizing production of goods and services and creating employment opportunities (Chowdhury, T.A., 2005). There is a saying that the stock market is the pulse of the economy. In the developed western world, how the stock market is doing is not only a matter for prime-time news bulletin but also a matter of public interest on an hourly-basis. Keeping conspiracy theory aside, instability or extreme volatility of a capital market may suggest weaknesses in the market. Further, this is an indicator of looming economic uncertainty (Monem, R., 2011).
There is no doubt that a vibrant capital market is likely to support a robust economy but two major catastrophes in the capital market of Bangladesh within one and half decades do not indicate the existence of a vibrant market; rather these show a highly risky and unstable capital market. The recent surge in the capital market has shaken the whole country as millions of people became insolvent within a very short span of time. It was observed in 2010 that the DSE general index was the highest ever which made it Asia’s top performer after China (Islam, 2011), while the reverse scenario was scaring investors in the 1st quarter of 2011 as the lowest down ever in the index was observed during that period.
Recommendations for the Government:
There is no doubt that the failure of the government in making various decisions regarding capital market played role behind the recent crash which was also admitted by the Planning and Finance Minister in his different speech. Thus, the govt. should ensure the followings:
i) Government should ensure the supply of fundamentally strong shares in the market to meet the demand which will make the market efficient as investors would not go for buying junk shares. For ensuring the supplies of such shares, Government can offload the shares of different companies which it possesses now. It also can urge the private limited companies to go public by offering tax benefits through fiscal policy. Even it can offer shares to the public for infrastructural development work like constructing big bridges, highways and power stations.
ii) Government must ensure the appointment of skilled and capable personnel in different regulatory bodies and must give punishment to the persons responsible for any kinds of irregularities.
iii) The responsible persons of the Government should refrain from delivering irrelevant, irresponsible and sensitive speeches which many of them did before.
iv) Government should ensure more active merchant banks to participate in the smooth building of a sound stock market.
v) Government must ensure that the chairman and members of the Investment Corporation of Bangladesh (ICB) are honest and skilled. Any sort of direct or indirect involvement of any of the ICB members and officials in the stock market must be stopped in any way.
vi) Government should delegate all power to the SEC to take legal actions against the criminals. Even if necessary, new Act may be passed in the Parliament in this regard.
vii) Flow of black money in the capital market must be restricted as it can never bring any good results in the long run other than creating bubble in the stock market the blast of which nothing but a disaster.
As an important part of the economy of the country, well-functioning of the capital market is a must for the industrialization process of a un-industrialized country like Bangladesh but un-stability in the same may negatively affect the total financial system. Therefore, all related corners including Government, Regulatory bodies, Listed Companies, Brokerage houses, institutional investors, and retail investors should act rationally to maintain the stability in the capital market for the greater interest of the country.