Module B: Primary and Secondary Market Operations

Primary and secondary markets are essential components of the financial system. The primary market is where securities are created and issued for the first time, while the secondary market is where those securities are traded after they have been issued. In this article, we will discuss the various aspects of primary and secondary market operations.

Primary Securities Market:

The primary securities market is where new securities are issued and sold to the public for the first time. In Bangladesh, the primary securities market is regulated by the BSEC. The following are some key features of the primary securities market in Bangladesh:

  • Initial Public Offerings (IPOs): This is the process by which companies issue new shares to the public for the first time.
  • Book Building Method: This is a process used to determine the price of an IPO by collecting bids from investors.

Secondary Security Markets:

The secondary securities market is where securities that have already been issued are bought and sold by investors. In Bangladesh, the secondary securities market is regulated by the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). The following are some key features of the secondary securities market in Bangladesh:

  • Stock brokers: These are licensed professionals who buy and sell securities on behalf of investors.
  • Trading system: The DSE and CSE use an automated trading system to facilitate securities trading.
  • Indices: The DSE General Index and the CSE All Share Price Index are the two primary stock market indices in Bangladesh.

The primary and secondary securities markets are critical components of Bangladesh’s financial ecosystem and are regulated by the BSEC, DSE, and CSE.

Management of Capital Issues

The management of capital issues involves the process of creating and issuing new securities in the primary market. The key activities involved in the management of capital issues are:

IPO: listing and fund raising

An IPO (Initial Public Offering) is a process by which a company offers its shares to the public for the first time. The main objective of an IPO is to raise capital for the company. The process involves several steps, including:

  • Selection of investment bankers and other advisors
  • Valuation of the company
  • Preparation of the prospectus
  • Roadshows and investor presentations
  • Pricing of the shares
  • Listing of the shares on the stock exchange

Underwriting

Underwriting is the process by which an investment bank agrees to purchase any shares that are not sold to the public during an IPO. The investment bank takes on the risk of purchasing these unsold shares and reselling them to the public at a later date.

Issue of Prospectus

The prospectus is a document that provides information about the company, its business, and the securities being offered for sale. It is a legal requirement for all companies issuing securities in the primary market to prepare and file a prospectus with the regulatory authorities.

Private Placement

Private placement is the process by which a company offers its securities to a select group of investors, rather than to the general public. Private placements are typically made to institutional investors or high net worth individuals.

Mutual Fund (open-ended and closed-ended)

Mutual funds are investment vehicles that pool money from multiple investors and invest the funds in a portfolio of securities. There are two types of mutual funds:

  • Open-ended mutual funds: These funds do not have a fixed number of shares outstanding and can issue new shares or redeem existing shares at any time.
  • Closed-ended mutual funds: These funds have a fixed number of shares outstanding and do not issue new shares or redeem existing shares.

Reference Curve

The reference curve is a benchmark interest rate that is used to price debt securities. In the United States, the reference curve is the Treasury yield curve.

Bond Pricing

Bond pricing involves determining the price at which a bond should trade in the secondary market. The key factors that affect bond pricing are:

  • Interest rates
  • Credit risk
  • Maturity

Primary Dealer

A primary dealer is a financial institution that is authorized to participate in the trading of government securities in the primary market.

Auction Calendar

The auction calendar is a schedule of upcoming auctions of government securities. The schedule includes the type of security being auctioned, the auction date, and the settlement date.

Demat

Demat refers to the process of converting physical securities into electronic form. Demat accounts allow investors to hold securities in electronic form, rather than in physical form.

Settlement of Trades

The settlement of trades refers to the process by which securities and cash are exchanged between the buyer and the seller. The settlement date is typically two business days after the trade date. The settlement process is facilitated by central depositories and clearinghouses.

Security Valuation in Bangladesh

Security valuation is a critical process used in the investment industry to determine the value of securities, such as stocks and bonds. In Bangladesh, the process of security valuation is governed by the Bangladesh Securities and Exchange Commission (BSEC). Here are some of the key aspects of security valuation in Bangladesh:

Overview of the Valuation Process:

The valuation process in Bangladesh involves assessing the value of securities based on their future cash flows. This includes analyzing the issuer’s financial statements, market trends, and other relevant factors to determine the security’s intrinsic value.

Theory of Valuation:

There are several theories of valuation used in Bangladesh, including discounted cash flow (DCF), dividend discount model (DDM), and price-earnings (P/E) ratio. The DCF model is the most commonly used method in Bangladesh, which involves projecting future cash flows and discounting them to their present value.

Bond Fundamentals and Valuation of Bonds:

Bonds are debt securities that are issued by governments or corporations to raise funds. The following are the key fundamentals of bonds valuation in Bangladesh:

  • Coupon rate: The interest rate paid by the issuer on the bond.
  • Maturity date: The date on which the issuer is obligated to repay the principal amount of the bond.
  • Par value: The face value of the bond that the issuer is obligated to repay at maturity.

Computing Bond Yields:

In Bangladesh, bond yields are computed using the following formulas:

  • Current Yield = Annual Interest Payment / Market Price of Bond
  • Yield to Maturity (YTM) = [(Annual Interest Payment + (Par Value – Market Price of Bond) / Years to Maturity) / (Par Value + Market Price of Bond) / 2] x 100%

Valuation of Equities:

Equities are ownership securities that represent a share in the ownership of a corporation. The following are the key factors used in equity valuation in Bangladesh:

  • Company financials: This includes analyzing the company’s revenue, earnings, and cash flow over time to determine its intrinsic value.
  • Market trends: This includes analyzing the current market trends, such as the stock’s price-earnings (P/E) ratio, to determine the market value of the stock.

Leave a comment

Your email address will not be published. Required fields are marked *