Capital Market, Stock Exchange & Second Tier Securities Market

Capital Market

Capital Market refers to a platform designed for obtaining medium and long-term loans. Its primary purpose revolves around catering to the financial requirements of industries and the commercial sectors. Within this realm, it encompasses all establishments involved in either facilitating the supply of or catering to the demand for extended-duration loans. The overarching goal of the capital market is to establish a mechanism for distributing investment capital to entities seeking funds to foster their ongoing expansion.

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Functions of the Capital Market

The capital market serves as a pivotal component of the global financial system, facilitating the efficient allocation of capital and fostering economic growth. Its functions are multifaceted and play a crucial role in the functioning of modern economies. Here, we expand on the various functions of the capital market:

1. Facilitating Capital Formation: The primary function of the capital market is to enable businesses, governments, and other entities to raise long-term capital by issuing stocks and bonds. This process provides access to funds necessary for investments in infrastructure, research and development, expansion, and innovation.

2. Risk Transfer: Capital markets allow for the transfer of risk from investors to those who are better equipped to manage it. Investors can diversify their portfolios by buying and selling financial instruments with varying levels of risk, while issuers can offload some of their financial risks to investors.

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3. Price Discovery: Capital markets provide a platform where the prices of financial assets are determined through the forces of supply and demand. This price discovery mechanism reflects the market’s perception of an asset’s value, which is crucial for making investment decisions and allocating resources efficiently.

4. Liquidity Provision: Liquid markets enable investors to easily buy or sell financial instruments at prevailing market prices. This liquidity ensures that investors can convert their investments into cash when needed, increasing the attractiveness of these assets.

5. Efficient Allocation of Capital: Capital markets allocate capital to its most productive uses by directing funds towards companies and projects with the highest potential for growth and profitability. This helps channel resources to industries and sectors that can contribute most to economic development.

6. Wealth Creation and Preservation: Capital markets offer opportunities for individuals and institutions to invest and grow their wealth over time. This function is crucial in enabling people to plan for retirement, finance education, and achieve various financial goals.

7. Corporate Governance: Capital markets impose transparency and accountability on publicly traded companies. Shareholders, through their ownership, exert influence over corporate decision-making, ensuring that management acts in the best interests of shareholders.

8. Benchmark for Borrowing Costs: Interest rates in the debt market serve as benchmarks for borrowing costs, impacting the rates at which businesses and governments can secure loans. Lower borrowing costs can stimulate economic activity and investment.

9. Innovation and Financial Products: Capital markets continually evolve, leading to the development of new financial products and instruments. These innovations cater to the diverse needs of investors and issuers, providing them with customized solutions.

10. Globalization of Capital: Capital markets connect investors and borrowers on a global scale. International capital flows help countries attract foreign investment and provide access to a broader pool of capital sources.

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11. Economic Stability: Well-functioning capital markets contribute to economic stability by providing a reliable source of financing. In times of crisis, they can play a role in stabilizing markets by providing liquidity and funding options.

12. Wealth Distribution: Capital markets can facilitate wealth distribution by allowing individuals to participate in the ownership of profitable enterprises. This broadens access to wealth creation opportunities beyond traditional methods.

The capital market is a cornerstone of modern economies, performing a wide array of functions that facilitate investment, risk management, and economic growth. Its efficient operation is essential for the well-being of individuals, businesses, and nations alike.

Primary or First Tier Securities Market:

The primary market signifies a realm where novel securities like shares, stocks, bonds, etc., are either procured or traded. This sphere represents the initial point of trading for these securities. Major participants in this domain include issuing houses, such as stockbrokers, merchant banks, commercial banks, mortgage banks, insurance companies, the Central Bank of Nigeria, and the government.

Investors entrust their resources to these entities for the purpose of investment, with these financial intermediaries effectively mobilizing investor savings and channeling them into investments. Overseeing the primary market’s activities is the Securities and Exchange Commission, which regulates the issuances of public and foreign-participating private companies.

Secondary or Second Tier Securities Market:

The secondary market is a platform where existing securities of companies are bought and sold. It emerged to complement the Stock Exchange Market’s efforts in mobilizing funds for investment. This secondary market functions as an extension of the Stock Exchange, providing valuable support. Key players in this sector include stockbrokers and banks like acceptance houses, investment banks, and issuing houses. The operational model in this market closely resembles that of the primary tier, albeit with fewer limitations.

The focal point of the secondary market is the Stock Exchange, where holders of “quoted” shares looking to sell can connect with potential buyers. Thus, the Stock Exchange dominates the secondary market by furnishing a platform for securities trading—an essential function as many initial securities purchasers eventually seek to resell their investments.

STOCK EXCHANGE

The nucleus of any operational business unit is capital. Sourcing this essential factor becomes a central focus for finance managers. Companies registered as Limited Liabilities entities require substantial funds, necessitating proactive fundraising. Addressing this need, the stock exchange market emerges as a solution.

The stock exchange is a well-structured market where investors can purchase and sell existing securities like shares, stocks, and debentures. It functions as a medium through which companies secure capital for expansion and progress. Transactions within the stock exchange adhere to intricate prescribed rules and regulations. The Lagos Stock Exchange, established in 1960 under parliamentary legislation, is a vital part of the capital market with branches in Abuja and Port Harcourt. All publicly listed Limited Liability companies are featured on the stock exchange.

OPERATIONS OF THE STOCK EXCHANGE

Brokers and jobbers facilitate transactions at the stock exchange. Only members are permitted to trade directly on the exchange. Jobbers specialize in specific stock types, while brokers act as intermediaries for potential buyers. A broker representing a client will approach a jobber to determine prices. The jobber provides two prices: a higher selling price and a lower buying price, with the difference being the jobber’s profit. Upon the broker’s intent to purchase, necessary documents are prepared.

Well-established company shares are referred to as blue chips, and government stocks are termed gilt-edged. Share prices are quoted as “cum-div,” denoting the right to the next dividend, or “ex-div,” indicating no dividend entitlement.

To expedite transactions, two documents are employed: the contract note and transfer form note.

Contract Note: A stockbroker sends this document to a client, confirming a purchase or sale on their behalf.
Transfer Note: This document facilitates the transfer of ownership of shares.

FUNCTIONS OF STOCK EXCHANGE

The stock exchange serves as a critical component of the global financial system, facilitating the trading of securities and providing numerous functions that are essential for both investors and companies. These functions can be broadly categorized into the following:

1. Facilitating Liquidity: Stock exchanges offer a centralized marketplace where investors can buy and sell securities such as stocks, bonds, and derivatives. This liquidity ensures that investors can easily convert their assets into cash, enhancing the market’s efficiency.

2. Price Discovery: Stock exchanges play a crucial role in determining the prices of securities. Through the continuous trading of securities, supply and demand forces interact to establish fair market prices, reflecting the perceived value of the underlying assets.

3. Capital Formation: Companies raise capital by issuing stocks and bonds to investors through initial public offerings (IPOs) and subsequent secondary offerings. Stock exchanges provide a platform for these capital-raising activities, allowing companies to fund expansion and investment projects.

4. Risk Reduction: Stock exchanges offer tools such as options and futures contracts, which enable investors to hedge against price fluctuations and manage risk in their portfolios. This risk management function is vital for both individual and institutional investors.

5. Transparency and Information Dissemination: Stock exchanges require companies to adhere to strict reporting and disclosure standards. This transparency ensures that investors have access to accurate and timely information about companies, enabling informed investment decisions.

6. Wealth Creation and Distribution: Investing in stocks can lead to wealth creation as the value of investments appreciates over time. Stock exchanges provide a mechanism for the transfer of wealth from successful companies to shareholders.

7. Market Surveillance and Regulation: Stock exchanges have regulatory bodies that monitor trading activities to detect and prevent market manipulation, fraud, and insider trading. They also enforce rules and regulations to maintain market integrity.

8. Investor Protection: Stock exchanges implement mechanisms to safeguard investors’ interests. These include rules for prompt settlement of trades, protection against fraudulent activities, and ensuring compliance with market regulations.

9. Global Access: In the era of electronic trading, stock exchanges provide global access to markets, allowing investors from around the world to participate in trading activities. This global reach enhances market liquidity and diversifies investment opportunities.

10. Benchmarking and Indexing: Stock exchanges are home to various market indices, such as the S&P 500 and Dow Jones Industrial Average. These indices serve as benchmarks for evaluating the performance of the broader market and specific sectors.

11. Economic Indicators: Stock market indices and trends are often considered economic indicators, reflecting the overall health of an economy. Policymakers and analysts closely monitor stock market movements for insights into economic conditions.

12. Job Creation: A vibrant stock exchange ecosystem creates employment opportunities in various sectors, including financial services, research, trading, and regulatory compliance.

Stock exchanges are essential financial institutions that perform multifaceted roles in the global economy. They promote investment, allocate capital efficiently, and ensure the smooth functioning of financial markets, thereby contributing significantly to economic growth and development.

PARTICIPANTS IN THE STOCK EXCHANGE

The stock exchange is a dynamic marketplace where various entities engage in activities that drive the financial ecosystem. Here is a more detailed exploration of the participants involved:

1. Public Limited Liability Companies:
Public Limited Liability Companies, such as Dunlop Nigeria Plc and Access Bank Plc, play a central role in the stock exchange. They are corporations whose shares are publicly traded on the exchange. These companies offer ownership stakes to the public through the issuance of shares, which are bought and sold in the stock market.

2. Brokers:
Brokers act as intermediaries between investors and the stock exchange. They facilitate the buying and selling of securities on behalf of their clients. These professionals provide valuable services by executing trades, providing market information, and offering investment advice.

3. Jobbers:
Jobbers are market makers who help maintain liquidity in the stock market. They buy and sell securities from their own portfolios, helping to bridge gaps in trading activity. Jobbers contribute to price stability by ensuring there are always willing buyers and sellers in the market.

4. Speculators (Bull, Bear, and Stag):
Speculators are individuals or entities who engage in the stock market with the goal of profiting from price fluctuations. There are different types of speculators:
– Bulls are optimistic investors who anticipate rising prices and buy stocks in the hopes of selling them at a profit.
– Bears are pessimistic investors who expect falling prices and may sell borrowed stocks with the intention of buying them back at a lower price.
– Stags are short-term traders who aim to profit from short-lived price movements, often during initial public offerings (IPOs).

5. Government:
Governments can also be participants in the stock exchange. They may issue bonds or stocks to raise funds for various projects and initiatives. Government securities are considered relatively safe investments and are often included in investment portfolios.

6. Issuing Houses:
Issuing houses are financial institutions that assist companies in raising capital through the issuance of securities. They play a crucial role in the initial public offering (IPO) process, helping companies navigate regulatory requirements, pricing, and marketing of their shares to potential investors.

The stock exchange is a complex ecosystem with various participants, each contributing to the market’s efficiency and functionality. These entities interact to facilitate the trading of securities, raise capital, and enable investors to achieve their financial goals.

INSTRUMENTS TRADED ON THE STOCK EXCHANGE MARKET

The stock exchange market, often referred to as the stock market, serves as a dynamic and crucial platform for the trading of a wide array of financial instruments. These instruments are vital for investors, businesses, and the overall functioning of the global economy. Here, we delve into the diverse range of instruments traded on the stock exchange market:

1. Common Stocks: Common stocks, also known as equities or shares, represent ownership in a corporation. When individuals buy common stocks, they acquire a piece of the company and often receive voting rights in shareholder meetings. Common stocks are the most widely recognized instruments on the stock market.

2. Preferred Stocks: Preferred stocks are similar to common stocks but come with distinct advantages. They offer fixed dividends, usually at a higher rate than common stock dividends, and have priority in receiving company assets in case of bankruptcy.

3. Bonds: Bonds are debt instruments issued by corporations, governments, or other entities to raise capital. Bondholders receive periodic interest payments and the return of their principal investment upon maturity. Bonds come in various forms, including government bonds, corporate bonds, municipal bonds, and convertible bonds.

4. Exchange-Traded Funds (ETFs): ETFs are investment funds that hold a diversified portfolio of assets, such as stocks, bonds, or commodities. They are traded on stock exchanges, allowing investors to buy and sell shares throughout the trading day. ETFs provide diversification and liquidity benefits.

5. Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of securities, managed by professional fund managers. Unlike ETFs, mutual funds are typically priced and traded at the end of the trading day at their Net Asset Value (NAV).

6. Options: Options are derivative contracts that grant the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price within a specified time frame. Options are used for hedging, speculation, and income generation.

7. Futures: Futures contracts are standardized agreements to buy or sell a specific quantity of an underlying asset at a predetermined price and date in the future. They are commonly used for commodities, currencies, and financial instruments to hedge against price fluctuations.

8. Real Estate Investment Trusts (REITs): REITs are companies that own, operate, or finance income-generating real estate properties. Investors can buy shares in REITs, allowing them to invest in real estate without directly owning properties. REITs typically provide steady income through dividends.

9. Commodities: Commodities include physical goods such as oil, gold, agricultural products, and metals. Commodity futures contracts are traded on stock exchanges, enabling investors to speculate on future price movements.

10. Cryptocurrencies: In recent years, digital currencies like Bitcoin and Ethereum have gained recognition as speculative assets. Some stock exchanges offer cryptocurrency trading, allowing investors to buy, sell, and trade these digital assets.

11. Indexes: While not direct investment instruments, stock market indexes like the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite are essential benchmarks that track the performance of specific groups of stocks. Investors use index-based instruments like index funds and ETFs to mimic index performance.

These are just a few examples of the myriad financial instruments traded on the stock exchange market. Each serves unique purposes, offering investors diverse opportunities to achieve their financial goals, manage risk, and participate in the global economy’s growth and stability. Understanding the characteristics and risks associated with these instruments is essential for informed and successful investment decisions.

DEVELOPMENT BANKS

Development banks are pivotal financial institutions with a specialized mandate aimed at fostering sustainable economic growth and progress. These institutions play a crucial role in catalyzing socioeconomic development by channeling their resources towards projects that hold the promise of transformative change over the medium and long term.

At their core, development banks serve as the financial backbone for initiatives that might otherwise struggle to secure the necessary capital. They are committed to facilitating progress in a wide array of sectors, including but not limited to agriculture, commerce, and industry. Through their financial expertise and strategic investments, development banks empower businesses, communities, and governments to realize their potential and address critical challenges.

In agriculture, development banks extend their support to farmers and agricultural enterprises, providing them with access to affordable credit to modernize farming techniques, improve infrastructure, and enhance productivity. This, in turn, leads to increased food security, higher incomes for rural populations, and a more resilient agricultural sector.

In commerce, development banks act as catalysts for entrepreneurship and trade by offering loans and credit facilities to budding enterprises and small and medium-sized businesses. This vital assistance not only fosters economic diversification but also contributes to employment generation and the expansion of market opportunities.

Within the industrial sector, development banks play a central role in advancing technological innovation and industrialization. They offer financial assistance for projects that promote the creation of new industries, enhance manufacturing capabilities, and boost competitiveness on a global scale. By supporting these endeavors, development banks contribute to economic growth and reduce dependence on imports.

Furthermore, development banks often prioritize environmentally sustainable and socially inclusive projects, recognizing the need for balanced growth that does not compromise the planet’s well-being or leave marginalized populations behind. This commitment extends to initiatives related to renewable energy, clean technology, and social infrastructure, such as education and healthcare.

In essence, development banks serve as key drivers of progress, bridging the gap between financial resources and development aspirations. Their role goes beyond mere lending; they also provide technical expertise, policy guidance, and risk mitigation strategies to ensure the success and sustainability of the projects they support. By partnering with governments, businesses, and communities, development banks contribute to building a brighter, more prosperous, and equitable future for societies across the globe.

EXAMPLES OF NIGERIAN DEVELOPMENT BANKS:

1. Bank of Industry (BOI):
The Bank of Industry (BOI) is a key player in Nigeria’s industrialization and economic development. Established in 2001, BOI provides financial support and assistance to various industrial sectors in Nigeria. Its primary focus is on promoting and financing small, medium, and large-scale industrial enterprises through loans, equity participation, and advisory services. BOI plays a pivotal role in driving economic growth, job creation, and technological advancement in the country.

2. Nigerian Agricultural and Rural Development Bank (NARDB):
The Nigerian Agricultural and Rural Development Bank (NARDB) is dedicated to advancing agriculture and rural development in Nigeria. It provides financial resources, technical expertise, and advisory services to farmers, agribusinesses, and rural communities. NARDB’s mission includes boosting food production, reducing poverty in rural areas, and promoting sustainable agricultural practices, making it a crucial institution for Nigeria’s agricultural sector.

3. Federal Mortgage Bank of Nigeria (FMBN):
The Federal Mortgage Bank of Nigeria (FMBN) plays a critical role in addressing housing challenges in Nigeria. Established to provide affordable housing finance, FMBN offers mortgage loans, housing construction finance, and other housing-related services to Nigerians. By facilitating access to housing finance, FMBN contributes to improving housing standards and reducing the housing deficit in the country.

4. Urban Development Bank (UDB):
The Urban Development Bank (UDB) focuses on supporting urban development projects and initiatives in Nigeria. It provides financial assistance for urban infrastructure development, including housing, transportation, and public facilities. UDB plays a vital role in enhancing the quality of life in Nigerian cities and ensuring sustainable urbanization.

5. Nigerian Education Bank (NEB):
The Nigerian Education Bank (NEB) is committed to promoting access to quality education in Nigeria. It provides educational loans and grants to students pursuing higher education, enabling them to afford tuition fees and related expenses. NEB’s efforts contribute to increasing the country’s educational attainment levels and building a skilled workforce.

6. Nigerian Export and Import Bank (NEXIM):
The Nigerian Export and Import Bank (NEXIM) is a crucial institution for promoting international trade in Nigeria. It supports export-oriented businesses by offering various financial instruments, such as export credit guarantees, export credit insurance, and export financing. Additionally, NEXIM facilitates imports to meet domestic demand, ultimately fostering economic growth through trade.

7. Nigeria Agricultural and Co-operative Bank (NACB):
The Nigeria Agricultural and Co-operative Bank (NACB) focuses on the development of agricultural cooperatives and rural enterprises. It provides financial services, technical assistance, and capacity-building support to cooperatives, agricultural associations, and rural businesses. NACB plays a pivotal role in empowering rural communities, enhancing agricultural productivity, and promoting cooperative enterprises in Nigeria.

These Nigerian development banks collectively contribute to the economic growth and development of the country by addressing the specific needs of various sectors and communities. They play a significant role in financing, advising, and facilitating projects that are essential for Nigeria’s overall progress.

FUNCTIONS OF DEVELOPMENT BANKS

Development banks play a multifaceted role in promoting economic growth and development within a nation’s financial ecosystem. Their functions can be broadly categorized into several key areas:

1. Provision of Long-Term Loans for Capital Projects: One of the primary functions of development banks is to provide long-term financial assistance for capital-intensive projects. These loans are instrumental in financing infrastructure development, large-scale industrial ventures, and other projects that require substantial upfront investment. By offering favorable terms and extended repayment periods, development banks facilitate the execution of such projects, thereby contributing to economic expansion.

2. Execution of Government Industrial Development Policies: Development banks act as key instruments in implementing government policies aimed at fostering industrial growth and economic development. They align their activities with the strategic objectives set by the government, ensuring that financial resources are allocated efficiently to sectors and projects that align with national priorities.

3. Project Oversight and Supervision: Development banks play a crucial role in monitoring and supervising the projects they finance. This oversight ensures that funds are utilized effectively, projects are executed as planned, and risks are managed to safeguard the interests of both the bank and the broader economy.

4. Offering Advice to Governmental Bodies and Industrialists: Development banks possess extensive expertise in economic and industrial matters. They provide valuable advisory services to both government authorities and private sector industrialists. This guidance can encompass areas such as project feasibility, risk assessment, financial structuring, and policy formulation, fostering informed decision-making and sustainable development.

5. Underwriting Securities Issuance: Development banks often participate in underwriting securities issued by private companies or public entities. By doing so, they help these entities access capital markets more easily, reducing financing costs and promoting capital formation.

6. Contributing to Manpower Development and Technical Support: Recognizing the importance of human capital in economic development, development banks may support programs for manpower development. This includes initiatives for skills training, education, and vocational training to enhance the workforce’s capabilities. Additionally, they offer technical support to businesses and industries to improve their efficiency and competitiveness.

7. Conducting Extensive Research on Industrial Sectors: Development banks engage in in-depth research and analysis of various industrial sectors. This research involves conducting feasibility studies, market assessments, and identifying emerging trends and opportunities. Such information is valuable for making informed investment decisions and directing resources towards sectors with high growth potential.

8. Monitoring and Enhancing General Economic Development Activities: Beyond their specific projects and initiatives, development banks play a broader role in monitoring and contributing to general economic development activities. They collaborate with various stakeholders to implement policies and strategies that stimulate economic growth, reduce poverty, and improve living standards for the population.

Development banks are pivotal institutions that perform a wide range of functions to support economic development. Their efforts extend beyond financial assistance, encompassing strategic planning, policy implementation, research, and capacity-building activities that contribute to the overall prosperity of a nation.