Capital Market Financing: Bangladesh's Capital Market Analysis

This report provides a comprehensive overview of capital market financing, beginning with an introduction to the concept and its significance in raising long-term funds for firms and governments. It details the two primary types of capital markets: the primary market, where new securities are issued, and the secondary market, where existing securities are traded. The report then focuses on the capital market in Bangladesh, specifically examining the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), including their historical background and operational details. It further explores the role of capital markets in an economy, highlighting their contribution to long-term financing, investment opportunities, and economic growth. The report also touches upon circuit breakers and settlement cycles, and concludes with a summary of the key findings and a list of references.

Capital Market financing
Submitted To:
Mr. Md. Mahfujur Rahman
Assistant Professor
School of Business
(BBA Program)
Submitted By:
Ehsanul Hoque
ID: 170202003
Section: A
Year: 4th year 2nd semester

Table of Contents
Introduction.................................................................................................................................................3
Types of Capital Market...............................................................................................................................3
The Primary Market.................................................................................................................................3
The Secondary Market.............................................................................................................................4
The capital market in Bangladesh................................................................................................................5
Dhaka Stock Exchange (DSE)........................................................................................................................6
Chittagong Stock Exchange..........................................................................................................................6
The Role of Capital Markets in an Economy................................................................................................7
Circuit Breaker.............................................................................................................................................8
Settlement cycle..........................................................................................................................................8
T+2 settlements cycle..............................................................................................................................8
T+3 settlements cycle..............................................................................................................................8
Math:...........................................................................................................................................................8
Conclusion:................................................................................................................................................12
References:................................................................................................................................................12

Introduction
In a capital market, firms and governments can raise long-term money by selling long-term
investments such as bonds and stock (debt or equity). Other markets raise short-term funds, but
this market raises long-term capital. This is how it's defined: In the money market, for example,
The stock market, as well as bonds and equity securities, comprise the capital market (debt).
Securities and exchange commissions like the Bangladesh Financial Services Authority (BFSA)
and the Bangladesh Securities and Exchange Commission (SEC) administer the capital markets
within their jurisdictions, protecting investors in Bangladesh against fraud.
Primary and secondary capital markets exist. The process of selling new stock and bond offerings to
investors is known as underwriting in the financial markets. Investors and traders buy and sell existing
securities in secondary markets, such as the stock exchange, over-the-counter, or somewhere else.
Secondary marketplaces, such as
As a major component of the financial system, the capital market has a significant impact on economic
growth.
The capital market is a place where companies and governments can raise long-term funds.
There is also a capital market in addition to the stock and bond markets. Capital markets allow
capitalism to flourish. Economies around the world are increasingly reliant on the size of their
respective global markets. This arrangement makes it feasible for everyone to own a piece of the
country's wealth. Having many ways to raise money is appealing since it allows you to keep
finding new sources of funding over time. The markets encourage more participation in order to
increase investor confidence. The internet can supply the steady flow of information that markets
require in order to operate correctly.
Types of Capital Market
The Primary Market
New securities are issued in the primary market, which is a part of capital markets. A new stock
or bond issue can provide capital for companies, governments, or public sector entities. A
syndicate of securities dealers is often used to accomplish this. Underwriting refers to the sale of
new securities to investors. If you're selling stock in a company for the first time, you're making
an initial public offering (IPO). Although it can be found in the prospectus, the commission paid

to dealers is included in the price of the investment. Companies can borrow from the capital
market using long-term instruments created in primary markets.
This is the market for new long-term equity capital, which is a characteristic of primary markets.
The first time a security is offered for sale is in the primary market. As a result, the fresh issue
market is another name for it (NIM).
Directly to investors, securities are issued through an initial public offering (IPO) or "primary
issue." The corporation receives the funds and then provides new certificates of deposit to the
investors who purchased them. A company's primary concerns are used to start a new company
or to expand or modernize an existing one. A key role of the primary market is to facilitate the
creation of capital in the economy.
Other long-term external financing options, such as loans from financial institutions, are not
included in the fresh issue market. "Going public" refers to borrowing money from the new issue
market in order to transform private capital into public capital. Only the original owner of the
sold financial assets has the right to redeem them.
The Secondary Market
The financial market where previously issued assets and financial instruments such as stocks,
bonds, options and futures are purchased and sold is known as the secondary market or the
aftermarket. [1]. An alternative application for an existing product or asset, which has a client
base in the second market is also referred to as "secondary market" (for example, corn has been
traditionally used primarily for food production and feedstock, but a "second" or "third" market
has developed for use in ethanol production). Loans that are sold to investors like Fannie Mae
and Freddie Mac by mortgage banks are another prominent use of the phrase "secondary
market."
When a company issues stock in an initial public offering (IPO), for example, or when the
federal government issues treasuries, investors can buy directly from the company or the
government, rather than through a broker. Investors can buy from one another in the secondary
market after the first issuance.
From loans to stocks, the secondary market for a wide range of assets can be fragmented or
centralized, illiquid or very liquid. Liquid secondary markets for publicly traded company stock

are best illustrated by the main stock exchanges. There is a centralized secondary market for
investors who own equities that trade on exchanges like the Dhaka and Chittagong Stock
Exchange. "Over the counter" trading of bonds and other structured assets is the most common
way to buy and sell these items. A Loan Exchange is a website where borrowers can trade loans.
The capital market in Bangladesh
Entrepreneurs who need money to start a business or grow an existing one can use the capital
market to transfer funds from savers (individuals and institutions) at reasonable pricing. Small
investors like you and me are able to buy a piece of the ownership of huge enterprises thanks to
the capital market mechanism. Simply said, it's a widely accepted strategy for spreading the
benefits of economic growth across the general public and private sector organizations. Smaller
than most Asian markets, Bangladesh's capital market is nonetheless the third largest in South
Asia. Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are two fully
automated stock markets, while the Securities and Exchange Commission (SEC) operates an
over-the-counter exchange (SEC). Additionally, the Securities and Exchange Commission (SEC)
oversees the implementation of laws and regulations and their impact on the capital market's
functioning and development. Since its inception, CDBL (Central Depository Bangladesh
Limited) has provided settlement services for dematerialized securities transactions on the CSE
and DSE. Established on April 28, 1954, the Dhaka Stock Exchange commenced regular trading
in the first three months of 1956. It was only in 1976, with nine issues on the books, that the
country's capital market was revived after a five-year hiatus due to a lack of government support.
The Chittagong Stock Exchange (CSE) was created in 1995 with advanced logistical support and
cutting-edge administration, making it the second stock exchange in Bangladesh. Bangladesh has
two stock markets, both of which are open to the public.
 Dhaka Stock Exchange (DSE)
 Chittagong Stock Exchange (CSE)
An investor should familiarize himself or herself with the markets in which he or she is
interested before making an investment. To make the statistics more understandable and specific,
we will just address the Dhaka stock market." Bangladesh's financial system relies heavily on the
country's stock market. It's a crucial approach to provide money to investors by enlisting the help
of the general public and other resources. Volatility in stock prices can have a significant impact

on both the financial sector and the wider economy because of the stock market's rapid rise in
importance in the economy. A correlation between stock market uncertainty and public
confidence in the financial market is strong. When it comes to gauging the stock market's
volatility, officials often look to what the market thinks of it. It is used by financial institutions
and other market participants to quantify the risk associated with investing in stocks over a long
period of time by comparing stock returns over that time period. High stock market volatility
without commensurate changes in the real world might lead to a general devaluation of investor
confidence and a shift of funds away from the market. As previously said, increased volatility
reduces the stock price's usefulness as a reflector of the true value of the company. In contrast,
volatility is not a symptom of market inefficiency or irrationality. Generally speaking, stock
returns to past negative price shocks are asymmetric when compared to stock returns to prior
positive price shocks, although it is not clear what causes the volatility over time. In addition, it
shows that an increase in firm-specific risk has a negative effect on the company's stock price.
Dhaka Stock Exchange (DSE)
Bangladesh's primary stock exchange is the Dhaka Stock Exchange (often referred to as the
DSE). It is situated in the center of Dhaka city in Motijheel. In 1954, it was formed as a
corporation. The first stock exchange in Bangladesh is located in Dhaka. In other words, it's a
publicly-traded firm. Under the Company Act 1994, the Securities and Exchange Commission
Act 1993, the Securities and Exchange Commission Regulation 1994, and the Security Exchange
(Inside Trading) Regulation 1994, it is regulated. There are 250 shares of this company's issued
capital of Tk. 2000 apiece, which is divided into a total of Tk. 500,000. A single share can only
be purchased by a single person or company. Only members of the stock exchange are permitted
to trade on the floor and purchase shares for themselves or their clients.
Chittagong Stock Exchange
Background
To develop a countrywide stock exchange, the Chittagong Stock Exchange (CSE) began its
journey on 10 October 1995, from Chittagong City, Bangladesh, using the cry-out trading
technique. After approaching the Bangladeshi government in January 1995, the Securities and

Exchange Commission granted authorization for the establishment of Bangladesh's second stock
exchange on February 12, 1995. Amir Khosru Mahmud Chowdhury (MP) led over the
Exchange's Board of Directors, which included twelve members. The Exchange was
administered by an independent secretariat from the outset. On November 4, 1995, then-
Bangladesh Prime Minister Sheikh Hasina declared CSE officially open.
The Role of Capital Markets in an Economy
 In addition to long-term financing for productive initiatives, it provides an important
option. To reduce the strain on the financial system, long-term investments are paired
with long-term capital sources like this one.
 Provides equity and development funding for infrastructure with high socio-economic
benefits - roads, water and sewer systems, housing and energy and telecommunications,
public transport etc. - excellent for financing through capital markets via long-dated
bonds and asset-backed securities.
 Provides avenues for investment opportunities that encourage a thrift culture critical in
increasing domestic savings and investment ratios that are essential for rapid
industrialization. The Savings and investment ratios are too low, below 10% of GDP.
 Encourages broader ownership of productive assets by small savers to enable them
benefit from Bangladesh’s economic growth and wealth distribution. Equitable
distribution of wealth is a key indicator of poverty reduction.
 Promotes public-private sector partnerships to encourage participation of private sector in
productive investments. Pursuit of economic efficiency shifting driving force of
economic development from public to private sector to enhance economic productivity
has become inevitable as resources continue to diminish.
 Assists the Government to close the resource gap, and complement its effort in financing
essential socio-economic development, through raising long-term project-based capital.
 Improves the efficiency of capital allocation through competitive pricing mechanism for
better utilization of scarce resources for increased economic growth.
 Provides a gateway to Bangladesh for global and foreign portfolio investors, which is
critical in supplementing the low domestic saving ratio.

Circuit Breaker
Both DSE and CSE have contributed to the development of this automated system, which is now
under construction. As a result of employing this technique to valuation, there is a limit to how
much a stock can rise or fall in value in the short term. According to the firm, the Power Grid's
closing price was 710tk, and the circuit breaker is worth ten percent of that amount. This means
that the value of Power Grid will not move by more than 10% today, regardless of how the stock
market reacts in the future. As a result, the highest price in a single day is 710+710*10 percent
=781tk, and the lowest price in a single day is 639tk. The average price in a single day is 710tk.
It has become vital to employ this method as a result of the excessive volatility of the stock
market.
Settlement cycle
T+2 settlements cycle
If you buy shares in any of the following categories: A, B, or N, you will have to wait until T+2.
You can sell the shares you bought in two business days. To finish your deal on Tuesday, you
must buy shares of a company that falls into categories A, B, or N. You can do this over the
weekend. If you want to talk about bank and exchange holidays or weekends, don't read this.
T+3 settlements cycle
In the T+3 settlement cycle, if you buy any shares from Category Z, your shares will mature in
that cycle (which refers to today and three working days). You will be able to sell the shares you
bought after three business days.
Math:
1: You purchase 300 shares at tk. 80 a share. This transaction is done on margin, which has an
annual interest rate cost of 7%. The selling price of the share at a tk. 110. You pay brokerage
costs of 5%, and the tax rate is 6.5%.
A). Assume the margin requirement is 45%. Calculate the amount gain or loss on this position.
B). Calculate the percentage return on investment.
A).

Margin Loan = 24000 * 65% = 15600
Interest = 15600*7% = 1092
If the market value of the share is Tk. 110;
Selling 33000
- Buying Share 24000
9000
- Commission 2850
6150
- Interest 1092
5058
- Tax 329
Total gain 4729
B).
Percentage Return = (Price changes + Cash Dividend – Interest expense – Commission –
Tax)/Margin money paid
= (110-80)*300+0-1092-2850-328.77
= 4729.23
2: The initial margin requirement is 40% of the entire amount of money borrowed. You have Tk.
20,000 and a stock that costs Tk. 70 per share. A rise in the stock price to Tk. 110 per share and a
subsequent drop to Tk. 30 per share, provided no taxes or commissions are paid, should alter
your rate of return.
a). The stock is purchased in cash, and you are given the shares in the form of a dividend in
exchange for your investment.
b). You utilize as much leverage as possible in order to achieve the greatest possible price.
a).
Assume you pay cash for the stock;

No. of shares purchases = 20000
70 =286 shares.
If the stock is later sold, the price will be Tk. 110.
The sales price of shares = 110*286 = 31460
Rate of return = 31460−20000
31460 = 36%
If the stock is later sold for tk. 30 per share, the profit is tk.
Sales price of shares = 30*286 = 8580
Rate of Return = 8580−20000
20000 = -57%
b). The leverage factor for a 70% margin requirement is, if you utilize all of your available
leverage to acquire the stock = 1
% of margin requirement
= 1
0.70 . = 1.43
Thus the rate of return on the stock if it is later sold at Tk. 110 = 36%*1.43 = 51%
In contrast, the rate of return on the stock if it is sold for Tk. 30 a share;
= -57%*1.43
= 82%
3: During a one-year ownership period, an investor performed a comprehensive study of a stock.
There is a 60% chance that the stock will trade at 50 or 55 cents a share by the end of the year,
despite the fact that it does not pay a dividend. If 240 shares are purchased using 70% borrowed
cash, what is the expected return and risk? Suppose that a ten percent fee on the entire amount
borrowed is the cost of borrowing money. (There are no additional charges for fees such as
commissions or taxes.)
Calculation of Probable return
Year-end prices (Pi- P0) Return (%)

[(Pi-P0)/P0]*100
50 10 25
55 15 37.5
Calculation of Expected Return
Probable return
(Xi)
Probability
p(Xi)
Product
Xip(Xi)
25 0.6 15
37.5 0.4 15
Calculation of Standard Deviation
Probable Return
(Xi)
Probability
p(Xi)
Deviation
(Xi-x̄)
Deviation squared
(Xi-x̄)2
Product
(Xi-x̄)2p(Xi)
25 0.6 -5 25 15
37.5 0.4 7.5 56.25 22.5
Calculation of Standard Deviation
Probable Return
(Xi)
Probability
p(Xi)
Deviation
(Xi-x̄)
Deviation squared
(Xi-x̄)
Product (Xi-
x̄)p(Xi)
25 0.6 -5 25 15
37.5 0.4 7.5 56.25 22.5
σ 2 37.5
Variance, σ2= 37.5
Standard deviation, σ = 6.12
Return and risk of buying 240 shares
Investment in 240 shares = 240*40 =9600
Borrowed funds = (9600*70%) = 6720

Expected return from 240 shares;
Gross return = 9600∗30
100 =2880
Less: Interest at the rate of 10% on borrowed funds
= 6720∗10
100 = 672
Net return = (2880 – 672) =2208
Risk in Investing in 240 shares = 9600∗6.12
100 = 658
Conclusion:
The capital market enables companies to invest in and raise funds for expansion. Bangladesh's
stock market is set to boom. The SEC, DSE, CSE, and all other market participants should work
together to achieve this goal. Inconsistencies in government signals will affect the market's faith
in the system. Any stock market will have ups and downs, and investors can't blame others when
prices fall. But investors are maturing, so the yelling and chanting in front of the stock exchanges
may soon be over. Better governance and advanced market products like futures, swaps, and
other comparable instruments should be Bangladesh's top priorities.
References:
Foley, B. J. (1991). Capital markets. Macmillan International Higher Education.
Stiglitz, J. E. (1981). Information and capital markets (No. w0678). National Bureau of
Economic Research.
Lev, B. (1999). R&D and capital markets. Journal of Applied Corporate Finance, 11(4), 21-35.
Shin, H. H., & Stulz, R. M. (1998). Are internal capital markets efficient?. The Quarterly
Journal of Economics, 113(2), 531-552.
Obstfeld, M., & Taylor, A. M. (2003). Globalization and capital markets. In Globalization in
historical perspective (pp. 121-188). University of Chicago Press.
Lev, B. (1999). R&D and capital markets. Journal of Applied Corporate Finance, 11(4), 21-35.