Dhaka, Feb 6 (bdnews24.com) — Investing in overvalued shares could lead to sudden losses for investors, the chairman of the Securities and Exchange Commission said Tuesday.
"In some cases, the current market price is above the reasonable limit. Investors should be careful in their investment decisions to avoid sudden losses," SEC chairman Faruq Ahmad Siddiqi told bdnews24.com.
In a similar vein, Salahuddin Ahmed Khan, chief executive of the DSE, advised investors, especially newcomers, to avoid investing in high-priced shares that have higher price-earning ratio.
The price-earning ratio is the ratio of the price of a share on the market to the company's stated earnings a share.
The implicit concern over an excessively high profit-earning ratio is that high demand for a share drives prices.
As investors realise their hopes for profit may be disappointed in near future, they sell off shares, causing the share price to plummet and leaving novice investors with a sudden loss.
Market data suggests that over 40 companies listed on the Dhaka Stock Exchange had price-earning ratios above 20 as of February 1.
A ratio of 20, for instance, means that a share is trading at twenty-times its actual earning power.
As of February 1, the price-earning ratio of Shinepukur Holdings touched 272.
Beach Hatchery Ltd, Peoples Insurance, Savar Refractories and Rupali Bank's price-earning ratio was 160.71, 142, 141 and 132, trading statistics show.
SIBL's price-earning ratio was nearly 71 on the day.
Price-earning ratios of 1st BSRS Mutual fund, Grameen1 MF, ICB Islamic MF, Power Grid Company of Bangladesh, Summit Power, BRAC Bank, IFIC Bank, UCBL, AB Bank, NBL, Uttara Bank, Southeast Bank, Eastern Cables, Midas Financing, Singer Bangladesh, Atlas Bangladesh, Kay & Que, S Alam Cold Rolled Steel Mills Ltd, Apex Foods, BATBC, Hill Plantation, Gulf Foods, Padma Oil, Bangladesh Welding, Modern Dyeing, Mita Textile, Chic Tex, Altex Industries, Ambee Pharma, Glaxo SmithKline, Kohinoor Chemicals, Perfume Chemicals, Samorita Hospital, Heidelberg Cement, Janata Insurance and Sinobangla Industries were all over 20.
"The chances of incurring a loss will increase if the price of certain shares go higher," Khan said.
He added that new investors opened nearly one lakh beneficiary owners' accounts last month.
"If investors rush to buy a certain number of shares, their supply will not increase over time, but rather, higher demands will push their price up, resulting in a higher risk of loss," the DSE chief said.
He suggested investors consider buying shares that have lower price-earning ratios.
Stocks fell Tuesday due to profit taking.
Spurred by profit taking by investors, Dhaka stocks finished lower on the day after a three-day steady rally.
Turnover also declined.
The DGEN or DSE general index shed 29.81 points or 1.58 percent to 1853.80. The DSI or all-share price index fell 21.71 points or 1.40 percent to 1518.52.
The DSE-20 blue chip index fell 16.28 points or 1.06 percent to 1511.53.
Turnover on the DSE declined to 1.47 billion from Tk 1.59 billion Monday.
Monday's trade was the highest ever in the bourse's history.
All the indices also fell on the Chittagong Stock Exchange.
Bangladesh Welding, Saleh Carpet and ICB were the main gainers on the DSE. Gulf Foods, 8th ICB MF and Grameen1 MF led the losers.
On the DSE, 53 advanced, 138 lost and 16 remained unchanged.
A total of 30 scrips gained, 70 lost and one held steady on the CSE.
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