capital mkt termpaper

8/9/2019 Capital Mkt Termpaper

http://slidepdf.com/reader/full/capital-mkt-termpaper 1/26

CHAPTER ONE

INTRODUCTION

The Nigerian stock exchange is a self regulatory body that supervises the

operations of the formal capital market. it provides a mechanism for mobilizing

private and public savings, and making them available for productive purposes.

The NSE a means for trading in new and existing securities and encourages

enterprises of different scales to gain access to public listing. It also regulates

the market and protects the investors. it protects the main exchange for

relatively large enterprises and the second tier security market (SSM) for small

and medium scale enterprises. Since the inception of the NSE the securities

listed have grown from 8 in 1961 to nearly 260 in 2002 and counting,

consisting of government bonds /stocks, industrial loans, debenture/

preference stocks and equity /ordinary shares of companies. Unit trusts listed

on the Exchange are designated as memorandum q uotations.

The Exchange is a membership institution, with 296 dealing and non dealing

members as at end 2002. The dealing members are stock brokage firms, while

the non dealing firms are issuing houses, registrars, etc, as well as individuals

who are distinguished in capital market activities. The NSE is governed by a

council, which is presided over by a president. The members of the council are

elected at the Annual General Meeting. The functions of the council include



the following: granting of quotation and listing of securities; formulating rules

and regulations for the stock market; enforcement of discipline among

members of the Exchange; dealing with the complaints about and amongst

brokers and the investors; and protecting of Investors interest.

The Nigerian stock market came into existence in September 15th

1960 with

the establishment of Lagos stock Exchange which became operational in June

5, 1961. In December 5, 1977, following recommendations of the government -

financial system review committee of 1976; the Lagos stock exchange was

renamed and reconstituted into the Nigerian stock exchange. T he exchange

has since then been the hub of the Nigerian capital market and has been

operating through stock brokers or dealers who intermediate loan able funds

between lenders and borrowers.



CHAPTER TWO

STOCK MARKET DEVELOPMENT AND PRIVATE INVESTMENT GROWTH IN

NIGERIA

All over the world the capital market has played significant roles in national

economic growth and development. One intermediary in the market that

operates a rallying point for the overall activities is the stock exchange. It is a

common postulation that without a functional stock market, the capital market

may be very illiquid and unable to attract investment. Essentially, the stock

market provides liquidity, contributes to capital formation, and investment risk

reduction by offering opportunity for portfolio diversification.

The liquidity role stands out clearly as the most significant among the

numerous functions provided by the stock market. In the words of Levine

(1991, 1997), without o liquid stock market, many profitable long term

investments would not be undertaken because savers may be reluctant to tie

up their investments for long periods of time. The stock market mainly

provides liquidity by enabling firms to raise funds through the sale of securities

with relative ease an speed. Through this catalyst role, the stock market is able

to influence investment and economic growth in general. As argued by

Mohtadi and Agarwal (2004), large stock markets lower the cost of mobilizing

savings, faciliting investments in the most productive technologies.



Previous studies have mainly tried to examine the nature of the c asualties

between stock market and economic growth. Some researchers argue that a

country constitute the key drivers of stock market development. Others tend

to argue that it is rather growth in the stock market that spurs economic

growth and development. Of the empirical evidences backing up both claims,

no sharp demarcation yet existed between the developments in the financial

markets, in general, and national or regional economic development. The

whole controversy boils down to the paradox of the egg and the hen, which is

older .

The fact essentially is that no matter the extent of causality that exists, the

main essence of stock market is to consolidate growth in the financial systems,

and enhance economic development. According to Yartey and Adjasi (2007),

for instance, the establishment of stock markets in Africa is expected to boost

domestic savings and increase the quality of investments. Citind Singh (1997),

they emphasize that in principle, the stock market is expected to accelerate

economic growth by providing a boost to domestic savings and increasing the

quantity and the quality of investment. Equally, stock exchange can increase

economic growth by making available information on firms prospects and

redistributing investible capital. Supporting this view, in the case of Africa,

Yartey and Adjasi (2007) establish that the stock markets have contributed to



the financing of the growth of large corporations in certain African countries

and that large corporations in Africa have made considerable use of the stock

market to finance their growth.

In the case of Africa, however, little proofs are available to support arising

theoretical projections on the role of the stock market in encouraging capital

formation and investments. This situation has instead helped to tilt public

opinion towards believing the allegation that emerging African economies

have not felt the impact of huge growth recorded by the stock market over the

years, Thus, the primary goal of this paper is to examine the nature of the

relationship that exists between growth in the stock market and the level of

investment flows in Nigeria. The choice of Nigeria as a case study is justifiable

considering the significant upward movements in the key market indicators

such as stock market capitalization, value of traded securities, as well as the

All-share index. Given these rising trends in the Exchange, there is need to

establish an empirical link on how the economy has so far benefited.

THE STOCK EXCHANGE AND THE CAPITAL MARKET

CAPITAL MARKET

The role of capital market in the economic development of Nigeria has

continued to attract increasing attention among policy makers This derives



from the recognition that a deeper broader and better functioning capital

market provides long term finance which is necessary for economic growth

and development.

A capital market is a network of financial institution and facilities that interact

to mobilize and allocate long term savings in an economy, the long term funds

are exchanged for financial assets issued by borrowers or traded by holders of

outstanding eligible instruments. Therefore it provides services that are

essential to a modern economy mainly by contributing to capital formation

through financial intermediation. Financial advisory services and managerial

skill development. In addition, the capital market facilitates portfolio

diversification that allows savers to minimize returns on their assets and

reduce risks. Consequently, an efficient market optimizes the amount of

savings that finances investments at any level of saving.

In Nigeria, the capital market provides funds to industries and government to

meet their long term capital requirements for fixed investments like building,

plants, and other infrastructure. Empirical evidence however, indicates that

the role of the capital market in Nigeria is limited. This is shown by its own low

contributions to the level of capital mobilizations and investments as

evidenced by the low market capitalization over the years.



The stock exchange is the very hub of the capital market; the pivot, without

this facility and the chance, which is thus available to investors to liquidate

their investments or adjust their portfolio whenever they desire to do so, it is

doubtful if there would be any motivation to invest in securities. Most savers

would then simply hold on to their funds in cash or ba nk deposits which

guarantees that they will be able to meet the fundamental purpose of their

savings; such motive is usually quite far from the desire to invest.

Besides, there is a strong possibility that even a strong possibility that even

where savings remain constant in aggregate terms, that without the safe guard

and the guarantee of the quality and the resultant confidence generated by

stock exchange listing, most savers could not be easily persuaded to place their

money in securities, issued by firms to place their money in securities, issued

by firms whose competence or integrity they could not trust. Savers would

then probably put their money instead in small, owner- managed business

concerns. The implication of this for the entire economy could be a serious

handicap being placed on the promotion of large scale enterprises and with

this, a severe limitation on the nations production capacity. Because of the

impact of the scale on cost of production, prices and loss of international

competitiveness, the marketability of securities, which the stock exchange

impact on, therefore has extremely important implication for the individual



saver, the investor or fund user as well as the nation as a whole. This

tremendous impact that the capital market introduces to the capital formation

and investment process, ultimately to the promotion of individual and nation

well being and posterity, makes it seem today a vital component of the total

strategy for promoting national economic development. It was probably

because of these attractions that the emerging Nigerian nation in 1961 elected

also far the establishment of the stock exchange in Lagos.

The activities of the stock exchange fall into two broad categories, the primary

and the secondary markets. The primary market is concerned with the initial

issuance of securities. Such an issue can take any of the following forms; offer

for subscription, offer for sale, by introduction, private placement and right

issue. The market for outstanding securities(the secondary market) enhances

the new issues market in many ways, by providing the means by which

investors can monitor the value of their shares and liquidate them when they

so desire. The secondary market augment supply of funds to the primary

market stated somewhat differently. If there was no secondary market in

which investors could cash their investment in listed securities they choose,

many investors may not buy issues in the first place. From the perspective of

the overall company, the secondary market is particularly important, as it



makes it possible for the economy to ensure long term commitments in real

capital.

CAPITAL MARKET GROWTH AND DEVELOPMENT

The capital market was established in1961 to provide and sustain the capital

requirement of the Nigerian economy. The mechanism for mobilizing long

term funds for investment purposes in the Nigerian stock exchange between

1961 and 1997, the stock exchange operated a manual call over system with its

inherent problems, which could be summarised as undue delays, high risks and

manipulations due to long transaction cycles, minimal transparency and

therefore a general lack of confidence in the system (NSE 2006)

Information and communication technology (ICT) transformation in the

Nigerian Capital Market began in 1997 with the establishment of the

automated trading system (ATS). This is a system that enables dealers trade

through a network of computers connected to a server using the queuing

system. Thus stock brokers, investors and dealers have equal access to

information for purchase and sale of securities and can execute transactions

through a network of computers even from remote locations during Exc hange

trading hours. This has enabled more participants to trade daily boosting



liquidity and creating opportunity for price discovery. The ATS eliminated price

manipulations which was prevalent during the call over system and also

reduced transactions cycles.

In 1999 the Nigerian stock exchange introduced a computerised clearing,

settlement and delivery system for transactions in listed share s known as the

central securities clearing system (CSCS). The CSCS is interfaced with the ATS

thereby facilitating a T+3 transaction settlement cycle. In addition the CSCS is

responsible for dematerialization share certificates of quoted companies and

storing them in electronic form in a central depository. Other ICT adoptions

include the CSCS trade alert, phone- in- service alert, E- bonus, and E-dividend

payments.

CAPITAL MARKET DEVELOPMENT INDICATORS IN NIGERIA

MARKET SIZE

Economic theory postulates that market size is positively correlated with the

ability to raise capital and diversify risks. Therefore, it follows that the larger

the market, the greater its ability to attract capital from surplus sectors of the

economy, and also the more efficient its ability to diversify risks. Two measures

of stock market size considered are the number of listed shares and market



capitalization. From various researches, it was proven that there was

tremendous increase in the number of shares listed shares from 8 in 1961 to

288 in 2006 Taking into account new listings and de -listed securities. The trend

evidences a continuous rise in the activity of the market especially in the

equity market mostly powered by banks, although the debt and bonds market

witnessed a decline after 1990. The plausible explanation for this increase,

other than government policies like the reduced listing requirements for the

second tier security market, is the expansion in availability of information,

which has led to increase in investor confidence and transparency in the

capital market, all brought about by the adoption of information in the

Nigerian stock exchange. The second measure of the market size in Nigerian

capital market is the value of market capitalization. This is an aggregate value

of the total number of issued and paid - up share capital multiplied by the

prevailing share capital multiplied by the prevailing share price for each

company. The Securities and Exchange Commission explains market

capitalization as an indicator of investors perception of assignment of a

company and by implication the market as a whole

LIQUIDITY:

Liquidity refers to the ability of the investors to easily buy and sell shares or in

other words the ease of acquiring assets and converting such investments in



the stock exchange into cash. Three measures of liquidity considered are total

value traded, total volume traded and the All share index. The aggregate value

of approved new securities grew significantly from N3 BILLION in 1992 to an all

time high of N552.8 BILLION in 2006. The decrease in new listings in 2006 was

due to new government policies on increase in capital base for companies

resulting in mergers and acquisition

The stock exchange has over (2) two million individu al investors and above 300

institutional investors including NPF now NSITF, insurance, government and

parastatals using the facilities of the exchange. In about forty years history, the

NSE has been devoid of any major fraud, shocks and scandals except the one

recently witnessed as regards fraudulent sale of share certificate relating to

Nestle foods Nigeria plc. In this regard, the listing requirements and code of

conduct of members and staff of the NSE have helped to ensure;

(i) Disciplined public accountabil ity

(ii) Continued survival and improved performance of the quoted

companies

(iii) Disciplined management of listed companies and market operators

(iv) An increasing pool of ingestible funds for economic development.

The role of Nigerian stock exchange as a vehicle of rate mobilization of long

term capital and platform for buying and selling of shares/stocks is not only



geared towards the socio-economic aspiration of the nation; it is also efficient

and cost conscious.



CHAPTER THREE

STRUCTURE; PERFORMANCE OF THE NIGERIAN STOCK EXCHANGE

STRUCTURE: The Nigerian Stock Exchange (NSE), the apex body on the

Nigerian capital market was established in 1960 as the Lagos stock Exchange.it

later became the Nigerian Stock Exchange in 1977. At present,there are six

branches with each having a trading floor. The branch in Lagos was opened in

1961, Kaduna 1978, Port Harcourt 1980, Kano 1989, Onitsha February 1990,

Ibadan August 1990. The exchange which started with only 19 securities traded

on its floor in 1961 has about 257 securities as at 2002 with a total

capitalization of approximately N763.9 billion . the total value of reading

transactions on the exchange rose from N13.6 billion in 1998 to N59.0 billion in

2002. As at 2003, 180 companies were listed on the first tier market of the

stock exchange and there were 19 listed on the second tier security market.

There is an increase in all the parameter used to measure the performance

summary of the Nigerian stock exchange from the year 2003 -2006.

However the stock market is illiquid, small and volatile. Although the number

of listed securities is increasing, trading activities is very thing due to the

observed reluctance of institutional and individual investors to trade in the

secondary market.



NSEA REVIEW OF PERFORMANCE IN 2009 AND THE OUTLOOK IN 2010

The harsh operating environment hampered the performance of most

companies as shown in the quarterly results of Quoted companies. Rising

unemployment, weakened purchasing power and weakened investor

confidence further exerted downward pressure on the stock market. The

impact of the global meltdown worsened the scenario as foreign investors

shunned assets considered risky while local investors sought refuge in short

term securities. Also the initial negative reaction to the decision of most banks

and insurance companies to make full provision for their non performing

assets dampened investors appetite and slowed down market recovery . In the

long term; the decision is healthy for the market, in the sense that it would

show a true and fair position of the institutions concerned.

ACTIVITIES IN THE NIGERIAN STOCK MARKET

Stock market indicators recorded downward movements. In addition, a

significant portion of the funds that left the stock market for the private

placement market in 2007/08 remained locked in, as many of the issuers have

not yet applied to the Nigerian stock Exchange for listing .



Turnover on the exchange closed the year at N685.72 billion or 2.9% of

GDP,down by 71.2% from the N2.4 trillion (10.4% of GDP) RECORDED IN 2008.

Average daily Activities dropped from 777.65 million shares worth N9.55 billion

in 2008 to 414.73 million shares valued at N2.8 billion in 2009.

Bulk of the transactions were in equities, which accounted for N685.3 Trillion

or 99.94% of the turnover value compared to N2.376 trillion or 99.85%

recorded in 2008. Transactions in the industrial bonds sector accounted for

N412.8 million or 0.06 % compared to N3.53 billion or 0.15% in 2008.while

transactions in the state government bond sector were very minimal,

accounting for only N119.530. The preference stock sub sector was inactive in

2009.

Furthermore, turnover on Federal Government bonds on the exchange was

idle, while a turnover of N18.51 trillion in 134,120 deals was recorded in the

over the counter market (OTC) for the federal government bonds, as agalnst

N10.44billion in 78,248 deals recorded in 2008.

Overall, the exchanges turnover ratio dropped from 21.86% in 2008 to 13.26%

in 2009, attributing to the decline in stock prices. The following is a list of thr

years 20 most active stocks (by turnover volume);



S/No COMPANY VOLUME TRADED(Billion shares)

1. Access bank plc 6. 348

2. UBA Plc 5.405

3. Wema Bank Plc 4.913

4. First bank of Nigeria Plc 4.804

5. Guaranty trust Bank Plc 4.413

6. Zenith Bank Plc 3.823

7. Intercontinential Bank Plc 3.209

8. FinBank Plc 3.004

9. First city monument Bank 2.929

10. Oceanic bank International 2.902

11. Diamond Bank Plc 2.849

12. Fidelity Bank Plc 2.805

13. Skye Bank Plc 2.541

14. ALLCO INSURANCE PLC 2.388

15. Gold link Insurance Plc 2.203

16. Bank PHB Plc 1.938

17. Investment & Allied Assurance Plc 1.795

18. Chams Plc 1.789

19. Transnational Coporation of Nig LTD 1.718



20. International Energy insurance Plc 1.666

The banking and insurance subsectors accounted for 18 of the Top 20

companies by turnover volume. Consequent upon their being the most

capitalized subsectors while also having the largest float. Information and

Communication Technology and Conglomerates had one representative

each to complete the top 20 list.

Trading in Rights

Investors traded rights in two companies, compared to four companies in

2008. In all, 136 deals valued at N46.04 million were executed in this market

segment in 2009, down by 87.1% on the N375.05 million value of transactions

in the previous year. The companies whose rights were traded during the year

include:

Cadbury Nigeria Plc

Elema Oil & Gas Plc

Foreign Portfolio Investment

Despite price declines and the shunning of risky investments, foreign investors

continued to demonstrate confidence in the Nigerian economy during the



year. Following modest recovering in their home markets, some of our

erstwhile foreign investors returned while new investors sought opportunities,

considering the key attributes of high returns, liquidity and safety of

investments. Hence, despite the global recession, our market remained

attractive to foreign investors and portfolio managers seeking cheap equities

and high-yielding bonds. Interim statistics show purchases (inflow) by foreign

investors during 2009 to be in excess of N228.986 billion representing 33.4% of

the aggregate turnover an increase, when compared with the N153.457

billion recorded in 2008. Consequently, total sales (outflow) during the year in

excess of N195.583 billion, culminating in a net inflow of N33.403 billion, a

reversal of the net outflow of N480.5 billion in 2008.

Market Capitalization

The total market value of 266 securities listed on the Exchange dropped by

26.5%, from N9.563 trillion to stand at N7.03 trillion at year -end, seven

subsectors recorded increased market capitalization of between 6.4% and

77.3%. Two subsectors (Machinery Marketing and Aviation) did not record any

change in market capitalization.



At the end of the year, the following 20 companies emerged with the highest

market capitalization, in descending order:

S/No Company NSE Sector

Classification

Market

Capitalization

(NBillion)

Annual

Change

1 First Bank of Nigerian Plc Banking 407.54 (22.35)

2 Nigerian Breweries Plc Breweries 401 29.8

3 Zenith Bank Plc Banking 341.6 (7.3)

4 Guaranty Trust Bank Plc Banking 289.13 48.3

5 UBA Plc Banking 232.81 2.7

6 Guinness Nigeria Plc Breweries 188.05 28.1

7 Dangote Sugar Refinery

Plc

Food &

Beverages

181.2 2.6

8 Benue Cement Company

Plc

Building

Materials

168.41 198.7

9 Nestle Nigeria Plc Food and

Beverages

158.2 25.1

10 Stanbic IBTC Bank Plc Banking 140.1 (31.5)

11 Ecobank Transnational Inc The Foreign 130.4 (52.31)



Listings

12 Access Bank Plc Banking 124.92 7.5

13 First City Monument Bank

Plc

Banking 116.5 18.54

14 Diamond Bank Plc Banking 107.12 (0.8)

15 Lafarge Cement WAPCO

Nig. Plc

Building

Materials

90.05 17.65

16 Oando Plc Petroleum

(Marketing)

85.1 17.81

17 Union Bank of Nigeria Plc Banking 81.1 (53.95)

18 PZ Cussons Nigeria Plc Conglomerate

s

79.41 122.42

19 Ecobank Nigeria Plc Banking 76.73 (62)

IMPORTANCE OF STOCK MARKET

The stock market plays a pivotal role in the growth of the industry and

commerce of the country that eventually affects the economy of the country

to a great extent. This is the reason that the government, industry and even

the central banks of the country keep a close watch on the happenings of the



stock market. The stock market is important from the industrys point of view

as well as the investors point of view.

Whenever a company wants to raise funds for further expansion or setting up

of a new business venture. They have to either take a loan from a financial

organization or they have to issue the shares through the stock market. In fact

the stock market is the primary source for any company to raise funds for

business expansions. If a company wants to raise some capital for the business

it can issue shares of the company that is basically part ownership of the

company. To issue shares for the investors to invest in the stocks, a company

needs to get listed to a stock exchange and through the primary ma rket of the

stock exchange they can issue the shares and get the funds for business

requirements. There are certain rules and regulations for getting listed at a

stock exchange and they need to fulfil some criteria to issue stocks and go

public. The stock market is primarily the place where these companies get

listed the shares and raise the funds. In case of an already listed company, they

issue more shares to the market for collecting more funds for business

expansion. For the companies which are going public for the first time, they

need to start the Initial public offering or the IPO. In both cases these

companies have to go through the stock market.



This is the primary source of the stock exchange and thus they play the most

important role of supporting the growth of the industry and commerce in the

country. That is the reason that a rising stock market is a sign of a developing

industrial sector and a growing economy of the country. Of course this is just

the primary function of the stock market and just half of the role that the stock

market plays.

The secondary function of the stock market is that the market plays the role of

a common platform for the buyers and sellers of thes stocks that are lister at

the stock market. It is the secondary market of the stock exchange where retail

investors and institutional investors buy and sell the stocks.

For investing in the stock or to trade in the stocks, the investors have to go

through the brokers of the market. Brokers actually execute the buy and sell

orders of the investors and settle the deals to keep the stock trading alive. The

brokers basically act as middlemen between the buyers and the sellers. Once

the buyer places a buy order in the stock market, the broker finds a seller and

the deal is closed. All these take place at the stock market and it is the demand

and supply of the stock of a company that determines the price of the stock of

that particular company.

So the stock market is not only providing the much needed funds for boosting

the business, but for also providing a common place for stock trading. It is the



stock market that makes the stock a liquid asset unlike the real asset

investment. It is the stock that makes it possible to sell the stocks at any point

in time and get back the investment along with the profit. This makes the stock

much more liquid in nature and thereby attracting investors to invest in the

stock market.



CHAPTER FOUR

INVESTORS SENTIMENT, STOCK MARKET LIQUIDITY AND ECONOMIC

GROWTH IN NIGERIA

The way the investor perceive the stock market goes a long way in determining

not only the return or the stock prices, but also the future and growth of the

capital market. Sentiment of the investors play significant roles in determining

prices, the rate of turnover in the stock market and of course its capitalization.

Thus investors sentiment (their pessimism or optimum about stocks) has

become a factor to be reckoned with more so, as it affects liquidity in the stock

market and economic growth.

In offering a stock to the market, the psychology and perception of the would-

be-investors come to play. Their sentiment determines whether an offer would

be fully subscribed. If under subscribed whether or not to extend the offer

period. Empirical evidences abound that investors confidence is significantly

associated to stock market growth in both developed and developing

countries. Several studies have proved the long run relationship between stock

market liquidity and economic growth, a lot others have equally established a

relationship between sentiments and capital market liquidity.



CHAPTER FIVE

CONCLUSION

Several studies have found a strong positive relationship between the impact

of the Stock Exchange in the stock market development and Economic growth

in Africa. In the long run, a 1%increase in the liquidity rather than in the size of

the stock market, could account for up to 3.7% points of African economic

growth(Yartey and Adjasi 2007). In the short term there is evidence in favour

in the increased importance of stock market development in economic growth.

Stock market development could well be a means to help African countries to

overcome the growth impasse caused by the Global Financial Crises. This work

goes further to examine the role of the Capital market in the economic

development of a nation which cannot be over emphasised. It further goes

ahead to expose the weaknesses in the Nigerian capital market caused by The

Global Economic Meltdown. Yet the hope for the revival of the stock exchange

is not lost. It requires dedication and sincerity on the part of the regulators and

the participants. One thing must be understood that the security price may not

be able to return to the pre-downturn era in the short run.

capital mkt termpaper

Documents