Capital Market

Back to: ECONOMICS SS2

 

Welcome to class! 

In today’s class, we will be talking about the capital market. Enjoy the class!

Capital Market

Capital market is a market for medium and long-term loans. The capital market serves the needs of industries and the commercial sectors. It comprises all institutions which are concerned with either the supply of or demand for long-term loans. The capital market provides a system by which money for investment is distributed to institutions which require funds for their further growth.

FUNCTIONS OF CAPITAL MARKET

1. It helps to provide long-term loans to investors
2. It helps to mobilize savings for investment purposes
3. It helps to enhance the growth and development of merchant banks
4. It allows the general public to participate in the running of the economy

EVALUATION          

1. What is the capital market?
2. Outline three functions of the capital market.

PRIMARY OR FIRST TIER SECURITIES MARKET

The primary market is a market where new securities (share, stock, bond, etc.) are either bought or sold. That is a market where securities are traded for the first time. The operators in this market are the issuing houses such as stockbrokers, merchant banks, commercial banks, mortgage banks, insurance companies, the Central Bank of Nigeria and government. Investors pass on their resources to some of these institutions for investment purposes. Thus, these financial institutions effectively play the role of financial intermediation by mobilizing the savings of investors and investing them. The Securities and Exchange Commission sits at the apex of the primary market, regulating the issues of public companies and all private companies with foreign participation.

SECONDARY OR SECOND TIER SECURITIES MARKET

The secondary market is a market in which buying and selling of existing securities of companies take place. It came into existence to complement the efforts of the Stock Exchange Market towards funds mobilization for investment. The second-tier securities market is an appendage of the Stock Exchange and therefore serves to assist. The major participants in this market are stockbrokers and banks such as acceptance houses, investment banks, issuing houses, etc. The mode of operation in this market is similar to that of the first tier securities market but less restricted. The centre of activities for the secondary market is the Stock Exchange which provides a market in which holders of existing ‘quoted’ shares wishing to sell such shares can make contact with individuals and institutions who are interested in buying them. Hence the secondary market is dominated by the Stock Exchange, which provides a forum for trading in securities. Such a forum is an absolute necessity since many of the buyers of new securities will eventually resell them.

EVALUATION

1. What is the first-tier securities market?
2. Explain the Securities and Exchange Commission

STOCK EXCHANGE

Capital serves as the nucleus of any functional business unit.  The need to source for this factor becomes a major focus of the finance manager.  Registered companies or Limited Liabilities companies need fund in large volume. Hence there’s a need to source for fund.  A market which provides an answer to this is the stock exchange market.

The stock exchange is a highly organized market where investors can buy and sell existing securities such as shares, debenture, and stock. The stock Exchange serves as a medium through which companies raise capital for growth and development.  The stock exchange market ensures that every transaction must follow a prescribed set of rules and regulations, which are complex in nature.  The Lagos Stock Exchange which is an essential part of the capital market was established in 1960 through the Act of parliament with its branches in Abuja and Port Harcourt.  All public Limited Liability companies are quoted in the stock exchange.

HOW STOCK EXCHANGE OPERATES

A transaction at the stock exchange is facilitated by the brokers and jobbers. Not everybody is permitted to trade directly at exchange except the members. The actual dealers (participants) in securities are the jobbers who tend to specialize in particular types of stocks while the brokers act as agent for potential buyers. A broker working on behalf of a client will approach the Jobber with the intension of knowing the price. The Jobber will then quote for him two prices; higher price as the selling price and lower price as the buying price. The difference is the ‘Jobbers turn’.  When the broker signifies his intention to buy, the necessary documents will be prepared.

The shares of well-known companies are known as blue chips, while gilt-edged refers to government stocks. Prices of shares are quoted “cum-div” or “ex-div”. “cum-div” denotes the price at which the holders of such shares have the right to receive the next dividend payable, while “ex-div” denotes a price at which the holder of such share has no right to receive the next dividend.

Two documents are prepared to speed up transactions: contract not and transfer form note

Contract Note

It is a document sent by a stockbroker to his client to confirm a purchase or sale made on his behalf, while Transfer Note– is used to transfer ownership of shares.

FUNCTIONS OF STOCK EXCHANGE

1. Stock Exchange market serves as an avenue of raising capital for business growth.
2. It provides employment opportunities for a vast number of people e.g. brokers, jobbers, clerks and others
3. The information which informs business decision is made available to foreign and local investors through the stock exchange.
4. Stock Exchange provides a yardstick for measuring the performance of quoted companies.
5. Stock Exchange provides an avenue for the public to invest their idle fund in form of subscribing shares.
6. Dividends that accrued to shareholders serve as revenue, in turn, improve their living standard.

EVALUATION

1. What is the Stock Exchange?
2. Mention any securities traded in the Stock Exchange.
3. Outline five functions of the stock exchange.

PARTICIPANTS OF STOCK EXCHANGE

The following are the participants in the stock exchange.

1. Public Limited Liability Companies e.g. Dunlop Nig. Plc., Access Bank Plc., First Bank of Nigeria Plc., Zenith Bank, Guinness Nigeria Plc., UTC Nigeria Plc., Longman Nigeria Plc. etc.
2. Brokers
3. Jobbers
4. Speculators (Bull, Bear and Stag)
5. Government
6. Issuing houses

INSTRUMENTS TRADED IN STOCK EXCHANGE MARKET

The instruments used in the stock exchange market are shares, stock and debenture

1. Shares and Stock – Stocks and share are securities purchased by individuals, which is an evidence of contributing part of the total capital used in running an existing industry. Share and stockholders are entitled to dividend
2. Debenture – In the financing business, the owner’s fund (equity) can be used or debt. A debenture is a debt instrument which entitles the owner to a series of cash flow known as interest.  A debenture holder is a creditor to a business, unlike the shareholders.

EVALUATION

1. Mention any five participants in the stock exchange you know.
2. Mention any three instruments traded in the stock exchange.

DEVELOPMENT BANK

A development bank is a financial institution set up purposely to offer medium and long term loans meant for development. It provides loans for projects in the area of agriculture, commerce and industry.

EXAMPLES OF DEVELOPMENT BANKS IN NIGERIA

1.  BOI-   Bank of Industry
2. NARDB- Nigerian Agricultural and Rural Development Bank
3. FMBN- Federal Mortgage Bank of Nigeria
4. UDB – Urban Development Bank
5. NEB – Nigerian Education Bank
6. NEXIM – Nigerian Export and Import Bank
7. NACB – Nigeria Agricultural and Co-operative Bank

FUNCTIONS OF DEVELOPMENT BANKS

1. Provision of long term loans for capital projects
2. Implementation of the government’s industrial development policies
3. Supervision of projects
4. They advise both the government and industrialists
5. They underwrite securities issue
6. They contribute to manpower development and provision of technical support
7. They conduct extensive study on the industrial sector e.g. feasibility studies
8. They monitor and enhance general economic development activities
9. They research industrial development

EVALUATION

1. Define development banks
2. Outline five functions of development banks

 

In our next class, we will be talking about National Income.  We hope you enjoyed the class.

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