SEC needs to ensure reliable information flow in the market

How does investing in the share market become gambling? When you are putting your life-time savings in the stock market without analyzing all the available information and, thus, payoff, you are exposed to gambling. When I was an investor in the Dhaka Stock Exchange (DSE) for last eight years, I was also doing betting rather than investing. I never received any annual financial report or invitation to attend Annual General Meeting (AGM) of any listed company where I had stock interest. Though according to law, I was supposed to get annual reports and other documents to keep myself updated about company's business condition. Moreover, given Bangladesh's perspective, it is not realistic to contact company's register office to collect information regarding its business. And after I have come to the United State, the situation is even more irritating.

Now from abroad, I even can not get a single piece of useful information to make a better investment decision. Online information is the only hope for the non-resident Bangladeshis (NRB), and researchers living abroad. However, there are so many companies listed on the Dhaka Stock Exchange that do not even have any website. And if you go to DSE website, it even does not have any company's annual audited financial report. As a matter of fact, it is very unlikely to get any useful information from DSE website since its is designed to provide only graph on volume and price for only last one year. Only some confusing, unnecessary information and ratios are included under the respective firm's stock analysis. Then, how do you take your investment decisions? Is it that you invest, basing on what you hear in media or from your friend who also stands just in your position? In such a situation, are not you taking huge risk with your lifetime savings?

What is the single most important factor to take investment decision? Yes, you are right: information. In fact, most of the research in finance was done on finding the effect of information on the stock price. When there is information in the market representing a company's prospect, investors will react positively towards that stock, and vice-versa. An investor's wrong investment decision based on inadequate and irrelevant information motivates him to demonstrate in front of DSE. In fact, having superior information and getting to know the essence of that information make the difference between you and your rival investor. When you do not have information regarding potential stock investment, it becomes gambling rather than investment. Unfortunately, in most cases, investors in Bangladesh make decisions, based on rumours instead of analyzing company fundamentals.

Rules that govern the securities business all over the world gain from a simple concept: all investors, whether large institutions or small investors, should have access to certain basic information about an investment, prior to buying related stocks and as long as they hold the same. To achieve this, the Securities and Exchange Commission (SEC) requires public companies to release meaningful financial and other information to the public. For instance, the SEC in the U.S. offers the EDGAR database which is used to disclose documents that public companies are required to file with the SEC. This database provides a common pool of knowledge for all investors to apply in order to judge for themselves whether to buy, sell, or hold a particular share.

If the SEC can force firms to make available all information relevant to its business, market as a whole will be more efficient than before. Investors will act, based on relevant and reliable information available rather than any word on the street. If investors can cultivate the habit of making investment decisions, based on relevant information, they will invest and also will be aware of consequences of bad investment decisions, and can avoid participating in any demonstration in front of DSE!

The SEC should have an information archive where investors and researchers will get all necessary information to take a wise investment decision. Information regarding volumes every hourly prices etc., should be included in the archive. All the annual and half-yearly financial statements must be in the spot light of the archive. Database of the U.S. Securities & Exchange Commission (SEC), i.e., EDGAR, might give us a direction where we should go. We need to remember that only through sound flow of timely, broad and accurate information, people can make sound investment decisions.

Could you guess the name of the top five countries that gave the best stock returns in 2007? This time you might be wrong! According to Motley Fool Global Gains research report, Bangladesh stands first in the list with 134% return. China, Ukraine, Cote d'Ivorie and Nigeria comes next in the list with 132%, 125%, 110% and 106% return respectively. But, why does our market or any other emerging market (though some academicians consider DSE as a frontier market) provide higher return? There is always a trade-off between risk and return, i.e., higher risk leads to higher return. So, the DSE is providing higher return which is, in part, because of higher risk. Lack of relevant information is the single most significant source of risk.

Because of higher return, our market is drawing the attention of the non-resident Bangladeshis as well as emerging market investment giants like Goldman Sach, Citigroup etc. In different articles on the Wall Street Journal, some contributors asked their valued readers to invest in the emerging markets like Bangladesh for the purpose of holding a diversified portfolio, instead of investing only in the industrialised countries. But from our part, before asking them to invest in our market we need to prepare ourselves first. Building a full-fledge database regarding firms' businesses could be the first step towards the dream of having efficient market system; otherwise, a new 1996 is eminent.

At least 0.10 million (one lakh) new investors have entered the capital market in the last two years. However, most of the newly signed-up investors have not even basic knowledge about the market system and investment techniques, though information-rich, educated and careful investors are so critical of the modus operandi relating to the functioning of an efficient market.

Thus, with few other things, the SEC should be concerned primarily with promoting the disclosure of important market-related information. And the result of this information flow will be a far more active, efficient and transparent capital market that facilitates capital formation which is vital to our economy.

*This article was published on the daily Financial Express in Bangladesh on January 28, 2008.