CAPITAL MARKETS, ITS NATURE AND SIGNIFICANCE
Capital Markets, Its Nature And Significance
A capital market is a complex institution comprising of regulators, facilitators, issuers and investors. It is the mechanism through which long term funds for households, firms and government are polled and made available to various sectors of the economy, including transfer of instrument already outstanding. The capital market on the other hand, deals with long term financial claims and obligations. It provides the necessary facilities for users and supplier of capital (Longterm) funds to interact for their mutual benefit. Hence most financial activities which are necessary in the investment process are consummated in that market. Capital market instruments have long-term maturity. Some like equity stock have indefinite maturity dates. In general, all financial transactions which involve maturity periods of over three years could be presumed to belong to the capital market it also has no confined place for its operation however, parts of the market are concentrated in certain well-known centers. Participants in the market are businessmen, government at all levels, financial intermediaries and private investors. In this market buyers are more specific about their requirements.
1.2 STATEMENT OF PROBLEM
Capital market is a market that deals with long term funds and procedure for financing long-term investments. it is also a market where by small business cannot benefit because of its high interest rate.
I want to investigate on some of the problems that hinders the promotion of capital market in Nigeria, also the corrective measure which could be used in solving these problems.
Some of the problems the researcher intends to research are:
Dearth in securities
Lack of adequate publicity
Lack of interest in securities
Some of the corrective measures that could be adapted to resolve the problem are:
Education on the important of buying
Government helping to increase the standard of living in Nigeria.
High interest rate should be implemented
Establishment of more quoted companies that will participate is selling of securities
1.3 OBJECTIVES OF THE STUDY
The main aim of the study is to find out how capital market institutions can detect and control some of these problems in issuing of securities to the public for the improvement of capital market in Nigeria.
Some objective of this study are:
To draw a clear picture of the nature capital market, its significance to economic growth and development of the economics.
To know the causes of these problems facing them.
To identify the implication of these problems in our economic.
To profer the possible solution to the problem.
1.4 SIGNIFICANCE OF THE STUDY:
The study will be immensely beneficiary to the institution under study. The findings of the research work together with its conclusion and recommendation will be of importance in the regard to future researchers. It is also hoped that it will serve as a basis for further academic adventures.
The relief of these problems should improve capital market in our country.
These will also increase move surplus funds in economic development.
These will attract foreign capital inflows in Nigeria.
1.5 LIMITATIONS OF THE STUDY
This study centered in knowing what the capital market is all about and narrowly examining the operation of capital market in developing countries using that of Nigeria economy.
REVIEW OF LITERATURE
2.1 ORIGIN OF NIGERIA CAPTIAL MARKET:
In may 1958, the federal government in response to the various economic and professional opinion and conscious desirability for a market for trading in stock, set up a committee headed by professor Rott Barback to consider the means of establishing a stock exchange.
The creation of a final organized capital market in Nigeria began with the setting up of the Lagos stock exchange (Now Nigeria stock exchange) in 1961, and incorporated in 15th September 1960, a non-profit organization limited by gurarantee with an authorized capital of N10,000 having a nominal value of N20 each. It began operation on 5th June 1961, with 19 Securities but the total number has since increased to 49 in 1970 and 155 in 1980 with only one stock Exchange market. It now has branches in Kaduna, Port-Harcourt, Ibadan, Onitsha and Kano.
However, with the increase in the number of stock exchange floor, the number of listed companies, the value of number of stock traded have increased substantially from 334 in 1961 (in number) and N1.52 million (in value) to 440.104 (in number) and N1,084.6 million respectively in 1994. the number of listed companies have also rise significantly with only 3 in 1961, 33 in 1974 (as a result of indignation decree) 100 in 1987 and 77 in 1994. the performance of this emerging capital market in terms of quoted companies cannot be said to be modest particularly when compared with most African countries.
It is necessary to note that the prices of funds or securities are by no means dependent on new savings in relation to new industrial investment. The new securities issued at anytime are small in amount compared to total amount of second hand securities (that is those issued previously). Thus important changes which are largely reflected in purchase or sale of the existing huge stock of securities that are issued in previous months or years are often mainly responsible for the cyclic saving in security prices or price of funds.
At this junction, the different types of securities offered for operation in the capital market in order to provide funds will be examine in detail. Securities can be viewed as the terms in varying rate of risk involved for the supplier of funds. The safety of an investment depends broadly on the security offered. Funds provided at an irredeemable basis are generally subject to greater risk.
The table below shows the main types of securities or classes of security in order of risk (see page).
CLASSES OF SECURITY
EXAMPLES OF TYPES OF CONTRACT
Various Types of Ordinary Share (Nvoting/Non-voting
Limited Liability Companies
Cumulative and non-cumulative Redeemable
Limited Liability Companies
Convertible and non convertible
Limited Liability Companies
15 years & above
First interest Irredeemable
5 – 15 years
(e.g. treasury bill)
Bank loans (if fixed interest) Commercial bill
Bank Loan and Overdraft
Firms, Individuals and Governments
2.2 FUNCTIONS OF CAPITAL MARKET
1. CREATING OF LIQUIDITIES:
Like any other markets, the capital market provides a means whereby fund raiser sell their assents in order to fund easily. If not for the market, most of the long term securities issued by companies would be for more permanent investment in the hands of their holders. Without an organized market, The owner of a stock of ordinary share is a particular company who wishes to dispose it would have to advertise or employ an agent. Without the market endowed quality of liquidity company shares and debenture would be less attractive to investors and companies would have difficulty in raising all funds they need for expansion.
Consequently, the liquidity provided by the stock in particular serves the useful purpose of ensuring that external investors are willing to make new funds available to business as required.
The market create this liquidity through its pricing mechanisms.
2. MOBILIZATION OF PRICE:
Share price moves frequently provides incentives and penalties on a personal basis for top managers of large companies. Many directors have large shareholders thus have a personal incentive to work to promote the efficiency of the company and hence up grade the value of their own state and of course to avoid the penalty of a falling share price which could arise if they were slipshod in undertaking their role.
3. PROVISION OF FINANCIAL MARKET
Capital market provides a market where the buying and selling of securities can take place.
4. PREVENTION OF FRAUDULENT ACTIVITIES
The market prevents some fraudulent tendencies of the participants by providing means of control on any irregularity or illeged irregularity by any part of the market.
5. PROVISION OF NETWORK INFORMATION
The capital market facilities the flows of information on the current price of securities. This is for the mutual benefits of the clients and dealers (that is the participants in the market).
2.3 PROCEDURE FOR PURCHASE AND SALES OF STOCK, DEALING PRICE FIXTURE:
The first step in the procedure for purchase and sale of stock is that the prospective customer will approach the broker who then undertakes the transaction on his behalf by communicating to the jobber of the intending transaction. A jobber is a principal who buys and sells share for himself. It will be necessary to mentions here that all business must be done through broker. Only the dealing and other members of the exchange and allowed into the exchange room or market floor for security purpose.
On receipt of information, the jobber quotes two rates, a higher rate and the lower represents his buying rate. If the rate are accepted by the customer, the deal is struck and the contract takes place. The difference between the buying rate and the selling rate is the profit of the jobber refereed warded by a commission called the brokerage.
2.4 CALL OVER PROCEDURE:
The procedure through which transactions are done floor of the exchange is what is referred to as the “call over procedure”.
However, it is necessary to remember that the exchange shall be opened for every working day as the council shall decide, all members are free to assess to the exchange only by specific permission of the chairman or his deputy shall any person other than those listed above be permitted or admitted to the exchange room.
A list of prices of shares and stocks which are suppose to be known are posted daily in the exchange room. At such times which will be prescribe by the council, there will be a call over of the price board and prices marked shall be considered to be the official prices of the day. All transactions shall be reported to the secretary on daily bases at such times and in such a manner as the council shall prescribe.
Some of the problems the researcher intends to focuse on which has been hindering the growth of this market are:
i. DEARTH IN SECURITIES
Instruments used in the capital market are limited when compared to those in developed countries. The number of quoted companies is very small and the shares they offer to the market are small in number.
ii. RETENTION ATTITUDE:
Most people who purchase securities buy them for the sake of keeping and not for trading in capital market. This restricts activities of the capital market.
iii. LACK OF ADEQUATE PUBLICITY:
The existence and functions of the capital market are not well published. People in the rural areas are not very much aware of the services offered by the market and most of them do not take part in the money market activities.
iv. LOW SAVINGS:
Accumulated funds for investment is lacking in developing countries is because of the low load of saving cause by low income earner.
v. LACK OF INTEREST IN SECURITIES
Majority of investors in Nigeria prefers to invest in real assets as against investment in financial assets. This is because the real investment attracts more returns than financial investment in Nigeria.
As capital market deals with long term funds, the small business centers cannot properly benefit from it due to the high interest rate that involves in it. In the ruling condition from 1978 to 1981 the higher margin was charged in long term lending which means that borrowers are not usually committed to the full stated maturity of the loan particularly if it is at variable rates. At times, the arrangements might opt to terminate, or at the cost of small fee, to suspend it for a temporary unspecified period.
The so called “conventional yield curve” predicts that long term interest rates are higher than short term rates, borrowers wish to borrow, the more it must normally expect to have to pay. This structure reflects the need of long-term investors to protect themselves against volatility in short term interest rates and against the rate levels.
Many analyst have studied emerging capital market, economists need to acquire more information to understand the relationship between the function of the capital market and economic development.
In one line of research, Goldsmith (1969) argues that as economic develop self finances capital investment first gave way to bank intermediated debt finance and later to the emergence of equity market as an additional source of external funds. Expanding on this relationship. Alike (1984) argues that since is to assist in the mobilization and allocation of savings among competing uses which are important to the growth and efficiency of the economy, the behaviour of the capital necessarily promotes economic growth.
RESEARCH DESIGN OF METHODOLOGY
3.1 SOURCE OF DATA
The sources of this data is based on the primary and secondary data and informations collected from visiting areas like libraries, banks, tertiary institutes and as well as research center. This is the examined place where the researcher locate this data for the study of this work.
3.2 LOCATION OF DATA
As it is mentioned earlier in this chapter that primary and secondary data were both used. In this regards, I source my information from the following places.
National Library Enugu
Library of Institute of Management and Technology, Enugu
Also from many published works such as periodical seminar, journals, textbooks.
3.3 METHOD OF DATA COLLECTION
The method adopted to represent the data collected are text from techniques, tables and graphs, some of the thing in this write ups are inform of a written report while some are represented in histogram and graphs or pie chart.
The essence of this study is to expose the capital market (its nature and significance) and have a closer look at its function mode of operation and problems.
Capital market as explained earlier in this work deals with the sale and purchase of securities. It is a market for long term capital. It supplies investors with opportunity to borrow and lend money on medium and long term basis. It would have been difficult for firms, business men and government to raise long term funds for their investment purposes. Capital market plays an important role of creating liquidity, allocating and penalties. It also mobilizes prices and make available share incentive to managers.
Considering the origin of capital market in Nigeria much has bee said on its origin, structure development and mode of operation effort in the area o9f huge investment in capital market development, the market is still shallow and narrow, indeed the market capitalization, liquidity and term over have not been done by developing countries to develop the stock exchange adequately.
In this work, I have been able to look at the nature of the capital market and have seen the important role it plays in the development of any economy. Considering the Nigeria capital market, the development of the market cannot be said to be encouraging.
Hence much need to be done in other to improve the capital market standard.
To promote the capital market and stimulate economic growth and development, great emphasis should be made on those things that will help in boosting the market. Given the greater impact of growth on capital development, these is need for sustained effort to stimulate production in both public and private sectors. This could be done by focusing on the stimulation of production and acquisition of technological capabilities in an environment like ours.
The capital market should be internationalized and integrated with other capital market in the world.
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Goldsmith, Raymond (1960) Financial Structure and development, New York Univer.
Okafor Collins (2004) Comparative banking.
Orjih, John (1996) Elements of Banking of Nigeria.