AN ASSIGNMENT ON

Stock Index of Bangladesh Stock Market

Submitted By
Tahmid Zawad (B1506002)
Fuhad Ahmed (B1506025)
Sajeed Mahmud Mahee (B1506045)
Izbath Tarik (B1506061)
Abidur Rahman (B1506169)

Submitted To
Dr. Bayezid Ali

Date of Submission: February 12, 2018

 Stock Index of Bangladesh Stock Market

Capital market of Bangladesh is one of the smallest in Asia but the third largest in South Asia. It
has two full-fledged automated stock exchanges: Dhaka Stock Exchange (DSE), where trading is
conducted by Computerized Automated Trading System and Chittagong Stock Exchange (CSE),
which is also conducted by Computerized Automated Trading System . All exchanges are self-
regulated, private sector entities which must have their operating rules approved by the SEC. The
Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June, 1993
under the Securities and Exchange Commission Act, 1993.

Dhaka Stock Exchange is the first & biggest stock exchange of the country. The opera-tion of
Dhaka Stock Exchange started on May 14, 1964 after renaming East Pakistan Stock Exchange
Limited. Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its activi-
ties are regulated by its Articles of Association rules & regulations and bye-laws along with the
Securities and Exchange Ordinance - 1969, Companies Act - 1994 & Securities & Exchange
Commission Act - 1993. In the beginning DSE was a physical stock exchange and used to trade in
the open out-cry system. After that to secure smooth, timeliness & effective operation on the
market, DSE uses automated trading system. The system was installed on 10th August, 1998 and
was upgraded time to time.

Chittagong Stock Exchange is the 2nd stock exchange of Bangladesh. It is said that CSE is the
pioneer of the modern capital market of the country as it introduces modern technology &
sophisticated logistic support. It was incorporated as a self regulated non-profit organization on
1st April, 1995 and formally opened on November 4, 1995. It started its trading through cry-out
system. Then Chittagong Stock Exchange started first automated trading bourse of the country.
CSE started its automated trading on 2nd June, 1998 and internet trading service on 30th May,
2004. The working days & holidays of CSE are same as like as DSE. Chittagong Stock Exchange
has its own indices to calculate movements of its total market value.

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 1.0 DSE Indices

There are three categories for the DSE indexes:

 DSEX: 
DSEX represent the DSE all-Share Price index for the Dhaka Stock Exchange (DSE).
Trading History
The Dhaka Stock Exchange Limited introduced DSE Broad Index (“DSEX”) as per ‘DSE
Bangladesh Index Methodology’ designed and developed by S&P Dow Jones Indices with effect
from January 28, 2013. DSEX is the Broad Index of the Exchange (Benchmark Index) which
reflects around 97% of the total equity market capitalization.

 DS30: 
DS30 is an index where the best thirty stocks are listed. The best thirty performing stocks
information, movement, overall information is provided here.
Trading History
DSE 30 Index (“DS30”) was also introduced with DSE Broad Index (“DSEX”) as per ‘DSE
Bangladesh Index Methodology’ at the same time. DS30 constructed with 30 leading companies
which can be said as investable Index of the Exchange. “DS30” reflects around 51% of the total
equity market capitalization.

 DSES:
DSE Shariah Index (DSES) is constructed as a subset of the DSE Broad Index (DSEX) and
includes all the stocks included in the parent Index that rules- based screens for Shariah
compliance.
Trading History
The Dhaka bourse introduced the index-DSES index-that was designed and developed by S&P
Dow Jones Indices Methodology on January 19, 2014. Its target was to meet requirements of the
Islamic fund investors.

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 2.0 CSE Indices

There are five categories for the CSE indexes:

 CASPI:

CASPI represents the CSE all-Share Price index for the Chittagong Stock Exchange (CSE).

Trading History
The only index the CSE has been maintaining since 10th October 1995 is an ALL SHARE PRICE
INDEX using Chained Paasche method. It faces question of clarity. This index was subject to
unusual ups and downs and without a distinct base value. Therefore in need of a clean slate CSE
finds the date 1 January 2000 is the best date to start new index.

 CSE 30:

CSE 30 is an index where the best thirty stocks are listed. The best thirty performing stocks
information, movement, overall information is provided here.

Trading History
In 2000, it was introduced, which was found to be very popular in almost all the developed
exchanges worldwide at that time. After revision in the Listing & Index Committee Meeting held
on 28th Apr 2009, two layer methods are followed for selection of listed companies in the CSE-
30 Index. In the first layer method, basic criteria are considered for primary selection. On being
qualified on the basis of the Basic Criteria, the companies are required to meet further Selection
Criteria to have the final berth in CSE-30 Index.

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 CSCX:

It represents the Chittagong Special Categories Index. Here all the stock except the Z category
stock are included.

Trading History
Chittagong Stock Exchange (CSE) launched a new index named CSCX (CSE Selective Categories'
Index) from 14th February 2004 to replace the earlier CSE Trade Volume Weighted Index. The
Base Date of this index is 15th April 2001 (when A, B & Z category were introduced) and Base
Value is set to 1000.

 CSE-50:

CSE 50 Index is constructed in order to provide an appropriate benchmark for the capital market.
The index comprises 50 leading and active stocks to ensure coverage of a large portion of market
capitalization in CSE.

Trading History
It was introduced in 2014. It was developed by India Index Services and Products Limited (IISL),
a subsidiary of the National Stock Exchange of India (NSE) and a subsidiary of NSE Strategic
Investment Corporation.

 CSE All Shariah Index

The CSE All Shariah Index – CSI Index – comprises all Shariah compliant companies listed on
the CSE. The index does not have fixed number of companies and it reviews the market on annual
basis. This index has variable number of constituents.
Trading History
It was also introduced with CSE-50 at the same time. It was also developed by India Index Services
and Products Limited (IISL). The CSE-50 Index and CSE Shariah Index helps investors to monitor
the performance of the market and Shariah compliant securities that form part of all listed
companies on the CSE other than mutual funds and corporate bonds.


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 2.0 Calculation Methodology

2.1 Index Calculation for DSE

The algorithm of index calculation according to IOSCO index methodology is:

Yesterday's Closing Index X Current M.Cap

Current Index = --------------------------------------------------------------
Opening M.Cap
Yesterday's Closing Index X Closing M.Cap
Closing Index = --------------------------------------------------------------
Opening M.Cap

Current M. Cap = ∑ (LTP X Total no. of indexed shares)

Closing M. Cap = ∑ (CP X Total no. of indexed shares)
Abbreviations and Acronyms
M.Cap: Market capitalization
M.Cap - Market Capitalization
DSE - Dhaka Stock Exchange
IOSCO - International Organization of Securities Exchange Commissions (IOSCO)
LTP - Last Traded Price
CP - Closing Price

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2.2 Index Calculation for CSE

All the indices of the Chittagong Stock Exchange Ltd (CSE) are calculated and maintained
following Laspayers Method which was considered as the most transparent and scientific at the
time of its inception.

Free-Float Calculation Methodology:

Total Outstanding Shares XXX

Less: Shares held by Directors/sponsors XXX

Government Holdings as promoter/acquirer/

controller XXX

Strategic Stakes by Private Corporate Bodies/ XXX

Individuals (Any holding more than 5% held by

an individual/company, be considered as strategic)

Shares held by Associated Companies

(Cross holdings) XXX

Other shares under lock – in (if any) XXX XXX

Free-Float: XXX

All CSE indices will be calculated using following formula:
Free-float market capitalization of index constituents/ Base Market capitalization * Base Index
Value

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2.3 How Different Provisions Incorporates Stock Price

In the last decade stock market of Bangladesh went through many changes and huge ups and downs
were seen. The economic crisis of the world in year 2009-11 also affected the market adversely.
All these fluctuations in the stock prices due to external factors, including international factors,
make it difficult to check the impact of different provisions. Here it is also pertinent to mention
that stock markets of Bangladesh are mainly speculative and capital gains are mostly sought by
investors, particularly individual investors. Institutions and long term investors give due
consideration to dividends and dividend polices of companies, which is a large and significant
portion of the total investment in the stock markets.

 Impact of Stock and Cash Dividend Declaration

Different studies in this field provide no strong evidence that stock price reacts strongly on the
announcement of dividend. Insiders, brokers and the exchange employees are the speculators of
the market and as these informed speculators play their role in the market for short term gain that
causes dividend information ineffective. As a result, announcement of dividend generates no
significant impact on the movement of stock prices.
Comparatively, declaration of stock dividends has more impacts on the share prices than that of
the cash dividends. Positive returns for stock dividends are reported after the announcement,
indicating positive attitude during the post announcement period. The positive returns could be
attributed to the lag between the announcement day and the record day. As the record day becomes
nearer, the stock indicates some positive returns, though the length of the lag may vary for A, B
or Z categories of companies as far as the DSE is concerned. Therefore, the investors in general
show more positive attitude towards stock dividends rather than cash dividend.

Continuous negative returns have been found since 23rd day prior to the announcement. This
continues even up to the 2 days after the announcement day. It is further evidence that if anybody
holds a share up to the announcement day, he/she will incur a significant loss of 0.90%. However,
the market bounces back with positive returns immediately and significant positive returns are
reported for 2 days immediate after the announcement and again continue to with positive returns
from the 9th working day and beyond. It is found that the record day plays a very important
indicator for realizing the abnormal returns for stock dividend.
However, the significant negative returns for equity dividend prior to the announcement day is
observed which indicate speculative nature of the investors’ behavior. As it is with the nature of
weak form efficient market to predict the returns around an upcoming event, the rumors and
hearsay dominates the market. It is also possible that the news has been leaked out earlier resulting
in the negative effect of the event. In such a case the negative returns associated prior to the
announcement justify that the speculators are in action with negative news about the
announcement.
As far as cash dividend is concerned, there is no significant returns exist as a result of cash dividend
declaration. For cash dividend, though positive returns exist immediately prior to the

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announcement date, they are statistically insignificant. Once the rumor and speculation regarding
the dividend announcement subsides, immediately after the declaration day statistically
insignificant negative returns are reported.

 Impact of Stock Split

Two different incident are studied for evaluating the impact of stock split:

Stock market crash of Bangladesh in 2010-11

According to the Investigation report (2011) of the probe committee, one of the reasons for the
stock market crash was uniform face value of share. During the meeting between investigation
com-mittee and different stake holders of share market, a most important reason for abnormal
climbing of index was indicated to uniform face value of share at Taka 10. Splitting share does not
change revenue or asset of a company and should not affect the share price. But Small investors
showed their utmost interest to buy split share with their small investment and consequently
pushed the price up. Up to 62 listed companies split their shares in 2009 & 2010. So, it abnormally
increased liquidity of the market and brought notable change in market capitalization. Investigation
report shows that MC increased 655% of companies those adopted share uniform and MC
increased only 46% of those that did not adopt. From July 2009 to December 2010 the role of total
MC were 81.5% of companies which adopted share uniform and only18.5% those that did not
adopt.

Regulator-induced stock split in December 2011

A study on event of regulator-induced stock split in the Bangladesh markets that took place in
December 2011 based on the sample of 117 mandatory stock splits during that time period, indicate
there is overall sort of an equal distribution of positive and negative excess return pattern on both
sides of the event date. This study found that stock splits, especially when they are undertaken as
per regulatory directives, are basically a neutral event. One strong explanation for this finding can
be the mandatory nature of the split.

 Impact of Stock Repurchase

A Bangladeshi company may buy back its own shares only by way of a court-approved reduction
of capital. There have three exceptions, regarding the share buyback:
1. The lending money by a bank or company in the ordinary course of its business.

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2. The provision of money for the purchase of full paid share in the company by trustees for and
on behalf of the company’s employee.
3. Lending money by a company to its employees to enable them to by fully paid shares in the
company and to hold them by way of beneficial ownership. The amount of loan cannot exceed the
employees’ salary for a period of six months. The word employee for this purpose does not include
directors or managers.
Share repurchases are an alternative to dividends. When a company repurchases its own shares, it
reduces the number of shares held by the public. The reduction of the float, or publicly traded
shares, means that even if profits remain the same, the earnings per share increase. Repurchasing
shares when a company's share price is undervalued benefits non-selling shareholders (frequently
insiders) and extracts value from shareholders who sell. There is strong evidence that companies
are able to profitably repurchase shares when the company is widely held by retail investors who
are unsophisticated and more likely to sell their shares to the company when those shares are
undervalued. By contrast, when the company is held primarily by insiders and institutional
investors, who are more sophisticated, it is harder for companies to profitably repurchase shares.
Companies can also more readily repurchase shares at a profit when the stock is liquidly traded
and the companies' activity is less likely to move the share price. When companies repurchase their
own shares, they decrease the number of outstanding stock available, which theoretically increases
the stock value.

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 References

 Alam and others, (n.d.). “Effect of Policy Reforms on Market Efficiency: Evidence from
Dhaka Stock Exchange”. Economics Research International, vol. 2011, Article ID 864940,
2011.[Internet], Available from:
<http://www.hindawi.com/journals/econ/2011/864940/> [Accessed April 1 2012].
 Ali ,Mohammad, Bayezid & Ahmed ,Tanbir, 2010, “Effect of Dividend on Stock Price in
Emerging Stock Market: Astudy on the Listed Private Commercial Banks in DSE”.
International journal of Economics and Finance,4,52-64
 Rahman, M., Baten, A., Uddin, B., Zubayer, M..(2006. Fama-French’s CAPM: An empirical
investigation on DSE. Journal of Applied Sciences, 6(10), 2297 2301.
 Raihan, M. A., Ullah, M. A. 2007. Chittagong stock market of Bangladesh: Turning of a weak-
form market into an efficient market.
 Tafirenyika ,Sunde and Abel ,Sanderson,2009, ”A Review of the Determinants of Share
Prices”. Journal of Social Science, 5,188-192
 Wohar and Mark, E. 2006, “What drives stock prices? Identifying the determinants of stock
price movements”. Southern Economic Journal.

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