THE CAPITAL MARKET AND ITS IMPACT ON THE NIGERIAN ECONOMY WITH PARTICULAR EMPHASIS ON THE STOCK EXCHANGE
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY SUBJECT MATTER
The financial system of any society is the framework within which capital formation takes place. It is within this framework that savings of society for productive investment.
The process is made possible by the intermediation of financial institutions like commercial banks, insurance companies and such other institution.
For this process of financial intermediation to take place, every society needs to major categories of financial institutions as follows:
A. Primary market institutions
B. Secondary market institutions
Primary market institutions are those that provide the means for directing saving into new investment outlets. In this category, we may distinguish two main functions.
a. New direct investment; and
b. New lending activity
By new direct investment, we mean the process whereby investors pass on their resources to their resources to institution, which will either invest these funds directly or will hand such funds over to those institutions that have outlined their investment.
Examples of institutions in the latter category are;
i. Issuing houses - Stocks and shares
ii. Mortgage banks - Mortgage and deposit accounts and
iii. Banks – sales of commercial papers and acceptance.
Financial institutions in this category perform the functions of standing between the investor perform the user of fund- Their function is really that of a broker; bringing buyers and sellers together. The most important example of his is the sale of shares through new issues.
Lending activity is performed by commercial bank, merchant banks, insurance companies and other finance houses. The difference between this category and the one noted earlier is that institutions in this category are lending their own funds. They are therefore actually taking risks of direct investment. Banks take this risk every time they lend money to any individual or institutions.
There are two categories of financial institutions that operate in the secondary market. Whereas the function of primary market institutions is to create financial claims or assets, the functions of secondary market is to provide a mechanism whereby these financial claims are not liquidated merely by the withdrawal of one of the parties. For Example: Assume that you were one of the original subscribers of the share of U.A.C after three years of holding the shares and receiving dividends, you now wish to liquidate your investment to enable you build a house, without a secondary market, you would have to call all the shareholders of U.A.C together and tell them of your decision to quit. They would all have to decide there and then whether you would all come up with money to buy you out, the only alternative would be to liquidate U.A.C. Thanks however, to the existence of a secondary market and secondary institution like the stock exchange there would be no need for U.A.C or any other company to fold up merely because one shareholder no longer wishes to remain a shareholder.
The first category of secondary market institutions provides the framework for investors to exchange ownership of shares, stock, mortgages and other forms of financial assets, to enable the institutions on whom the assets are a claim to live on forever. Without institutions of this nature, it is unlikely that modern corporations as we know it would exist. The institutions that perform these functions are:
i). The stock exchange
ii). The stock brokers; and
iii). The discount market
In Nigeria, only the stock exchange and the brokers are active. There is hardly a discount market for other assets either at the Central Bank of Nigeria or in the rest of the market. The Nigerian stock exchange itself is a continuous auction market; but it is not yet developed to the extent that exchange of ownership can be affected with the some speed as in the developed capital markets of the world. However, significant gains have been made in recent times. It is against this background that the researcher decided to assess the performance of the Nigerian Capital Market with particular reference to the Nigerian Stock Exchange.
1.2 STATEMENT OF THE PROBLEM
The economic model of capitalism or free market private enterprises requires, among other things, efficient capital markets that allocate investible funds where they are needed most and will be used most productively.
The tremendous import which the stock exchange introduces to the capital formation and investment process and ultimately to the promotion of individual and national well-being and prosperity make it a vital component of the total strategy for promoting natural economic development. It was probably because of these attractions that emerging Nigerian nation in 1961 elected also for the establishment of a stock exchange in Lagos.
Whether that decision was justified, the extent to which the institutions may have fulfilled, expectations, is the main focus of this research work.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study includes:
(i) Appraise the level of development of the Nigeria stock exchange.
(ii) Examine the roles played by the Nigerian stock exchange in mobilizing funds and resources needed for development.
(iii) Examine the role of Nigerian stock exchange in the ongoing privatization and commercialization process.
(iv) Examine the theory of stock market efficacy as it relates to the Nigerian stock market.
(v) Make recommendations that can be useful in ensuring an efficient stock exchange in Nigeria.
1.4 SCOPE AND LIMITATIONS OF THE STUDY
Due to the similarities in operation and the low volume of transportation obtainable at the Kaduna, PortHarcourt and Onitsha trading floors of the exchange, our study shall be restricted to the activities in the Lagos office.
Furthermore, it is quite clear and generally known that the market is still developing and thus not achieved the purpose for which it was established. That is why we did not choose to test any hypothesis or employ the use of complex statistical tool to analyze our data.
Time and financial constraints have also contributed to the restrictions of this study. Procurement of relevant data had been inhibited by the non-availability of data and by the bureaucratic and long process it takes to obtain the required information.
All these notwithstanding, satisfactory efforts were made to ensure unbiased conclusions.
1.5 DEFINITION OF IMPORTANT TERMS
Above par (value): The Price of a stock or bond, higher then its face value (amount).
Broker: A member of a stock exchange firm or any exchange member who handles orders to buy and sell securities and commodities for a commission
Call: Investment to demand payments of an installment of the price of bond or stocks that have been subscribed.
Common Stock: Securities that present an ownership interest in corporation.
Debenture: Used to describe indebtedness, usually in long-term obligations, which is unsecured.
Dividend: A portion of net profits that has been officially declared by the board of directors for distribution to shareholders.
Equity Capital: Stockholders or owners investment made in a company insider transaction, purchasing or selling securities by offers, large shareholders, or other key member in a corporation.
Institutional Investors: A company having substantial funds invested in securities (e.g) Bank, Labour union, College.
Jobber: An individual or firm dealing in stock as principal rather than as a broken.
New Issue: A stock or bond sold by a corporation for the first time.
REFERENCE
Dennis, O. Dite (1985): Understanding the Nigerian Stock Exchange market New York; Ventage Press.
H. I. Alile, R.A Anoca (1986): The Nigerian Stock Market in operation Lagos Jeromalacho & Associates Ltd.
