Stock Market Decline

Individual Assignment for “Business Communication”

South East University

Submitted to:
Dr. Md. Shahadat Hossain
Professor

Submitted by:
Md. Ferdaus Raihan
Batch: MBA (Friday),
Section: I
Roll: 20110005283
Semester: Spring

Submission Date: March 27, 2011

Word of the Report: 1000

1
A stock market crash is a sudden dramatic decline of stock prices across a significant
cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are
driven by panic as much as by underlying economic factors. They often follow
speculative stock market bubbles.

Stock market crashes are social phenomena where external economic events combine
with crowd behavior and psychology in a positive feedback loop where selling by some
market participants drives more market participants to sell. Generally speaking, crashes
usually occur under the following conditions a prolonged period of rising stock prices and
excessive economic optimism, a market where P/E ratios exceed long-term averages, and
extensive use of margin debt and leverage by market participants.

There is no numerically specific definition of a stock market crash but the term
commonly applies to steep double-digit percentage losses in a stock market index over a
period of several days. Crashes are often distinguished from bear markets by panic selling
and abrupt, dramatic price declines. Bear markets are periods of declining stock market
prices that are measured in months or years. While crashes are often associated with bear
markets, they do not necessarily go hand in hand. The crash of 1987 for example did not
lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred
over several years without any notable crashes.

Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of
Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was incorporated
in 1954. Dhaka stock exchange is the first stock exchange of the country. As of 18
August 2010, the Dhaka Stock Exchange had over 750 listed companies with a combined
market capitalization of $50.28 billion. Dhaka Stock Exchange (DSE) is a public limited
company. It is formed and managed under Company Act 1994, Security and Exchange
Commission Act 1993, Security and Exchange Commission Regulation 1994, and
Security Exchange (Inside Trading) regulation 1994. The issued capital of this company
is Tk. 500,000 which is divided up to 250 shares each pricing Tk. 2000. No individual or
firm can buy more than one share. According to stock market rule only members can
participate in the floor and can buy shares for himself or his clients. At present it has 230
members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion
in September 2007 and $27.4 billion on Dec 9, 2009.

Dhaka Stock Exchange suffered the biggest crash yesterday in its 55-year history. This
crash is bigger than what the country had witnessed in 1996, which had entered the lore,
although reassurances like "Nothing like '96 can happen again" have been often repeated
by market experts as well as ministers. For the first time in Bangladesh's history, Dhaka
Stock Exchange fell over 600 points on Sunday. It continued to bleed on Monday
shedding another 635 points in less than an hour, prompting the Securities and Exchange
Commission to suspend trading — another first in Bangladesh's history. The SEC was
quick to respond. On Sunday, it withdrew the loan ceiling for individual investors and
allowed netting facility for the market bigwig GrameenPhone, which did not really
improve the situation. Market insiders blamed the recent fall on the central bank's
measures to control the liquidity flow in the banking system. In an effort to contain

2
inflation, the central bank recently increased the Cash Reserve Ratio (CRR) for banks by
50 basis points to 6 percent. It was also aimed at stopping credit-flow to non-productive
sectors. The central bank also issued another directive asking financial institutions to
adjust their stock investment exposure by this month. From January, no institution will be
allowed to invest more than 10 percent of its total liabilities in the stock market, and the
exposure will be calculated based on market price, not cost price. The SEC's excessive
initiatives to cool the market in a short time are also blamed for the crash. “The measures
and unexpected and unnecessary intervention of a donor agency took a big toll on the
market,” said Prime Finance and Investment. The Securities and Exchange Commission
suspended the computation based on net asset value (NAV) in providing share credit by
lenders. According to the NAV-based calculation, a merchant banker or a stockbroker
gives loan on the basis of the value of a stock by adding the market value to NAV and
dividing the sum by two. The SEC increased the share credit ratio to 1:1.5 from 1:1. It
means an investor will get a loan of Tk 1.5 against shares worth Tk 1.

Conclusion:

Important trend is strict mechanical criteria for inclusion and exclusion to prevent market
manipulation, e.g. in Canada when Nortel was permitted to rise to over 30% of the TSE
300 index value. Ethical indices have a particular interest in mechanical criteria, seeking
to avoid accusations of ideological bias in selection, and have pioneered techniques for
inclusion and exclusion of stocks based on complex criteria. Another means of
mechanical selection is mark-to-future methods that exploit scenarios produced by
multiple analysts weighted according to probability, to determine which stocks have
become too risky to hold in the index of concern.

Critics of such initiatives argue that many firms satisfy mechanical "ethical criteria",
regarding board composition or hiring practices, but fail to perform ethically with respect
to shareholders, e.g. Enron. Indeed, the seeming "seal of approval" of an ethical index
may put investors more at ease, enabling scams. One response to these criticisms is that
trust in the corporate management, index criteria, fund or index manager, and securities
regulator, can never be replaced by mechanical means, so "market transparency" and
"disclosure" are the only long-term-effective paths to fair markets.