Stock Exchange in Developing Economy (Role and Setbacks)

“STOCK EXCHANGE IN DEVELOPING ECONOMY” (ROLE AND SETBACKS)

The literature suggests that the practice that have gradually metamorphosed into the stock exchange as it is known today took their roots from the bourgeoning trade in agriculture and other commodities developing in some of the major European centres during the middle ages. It was the practice in these trade fairs for traders to gather at a place on appointed day to strike bargain in commodities. Trade was frequently conducted to credit notes, some to be in use as evidence of the credit and as instrument of effective settlement.  

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As a further development, it became possible after some times for those documents to be traded also or discounted through a process of endorsement and negotiation. The trade in these documents appear to be the forbearer to the trade in other forms of securities, such as the bonds issued by commercial firms. There is evidence of thriving trade in credit instruments in paris during the 12th and 13th centuries and of the development of the profession of courier de change (the modern courier de change) meaning brother in finance. During this period, similarly, development was taking place also in Burges ( now in Religious) during the same period.

This partner of development from trade in commodities, to trade in securities was roughly the same for most of the early stock exchange which spang up in many European centres. In Amsterdam for instance, trading centre in Europe by the developed a stock exchange where share in the Dutch East Indian company among others were publicly sold during the 17th century. In Germany, at Britain, from the periodic meetings of traders in coffee houses in Indian to strike bargain there also came into being a formal stock exchange which also developed  with time in virtually the same way in other trading centres in copenhunges. Berlin, Zurich, Philadelphia and also New York. In New York, traders have been meeting regularly at 68 wall street to engage in commodity trade, before the formal association of merchants took place from about 1792 to form the nucleus of the New York stock exchange.

Besides the initial impetus provided by the prior existence of trade, two other important factors by the early development of the stock exchange. The first was the development at about the same period of allied financial institutions such as banks and insurance companies which arose to meet the volume of trade and commerce. These institutions needed capital with which to finance their own operations and such finance could be obtained through the stock exchange.

The second was the increasing complexities of government which was in frequent need of funds with which to meet its expanded obligations. Government also resorted to the sale of securities through the facilities offered by the exchange, government securities are the main instruments which were dealt for very institution of stock exchange as a spontaneous reasons of enterprising business to the opportunities and challenges offered by the era of the industrial resolution bequeaths to the institution a character which remains typical of its today, that of a purely capitalist institutions. It is instructive that stock exchange are not found in socialist economy because they have no use these, the task of capital allocation being practised are performed by the central ( government) authority.

The image of a completely private club of individual which is more or less self – regulated has not however, completely survival the economic were expected by most expected by most economics since the individual age. The stock exchange in USA)United State of America are in slightly different category because of the securities and exchange commission acts of 1993 and 1994 which established a public commission that literally controls the exchange.

I large measure of public autonomy is however actually enjoyed by the exchange in practice. For the others, there has occurred every time, a major or minor things read by the government through legislations which seeks to control or regulate the operations of the stock exchange.

  • HISTORICAL BACKGROUND OF STOCK EXCHANGE IN OPERATION

This is the market where old and existing shares are bought and sold. New shares are not sold in the stock exchange market. Usually merchant or commercial banks are authorised by the company to the general public. Any member of the public willing to subscribe can do so without restriction.

Participation in the stock exchange market is restricted and not every body is allowed to participate. The participants must be a specialist in the act of buying and selling of a lincense to operate in essence he must be a qualified stock broker.

The “Brokers” and the Jobbers’ are the two major participants in this market. The broker is an agent to his client who would mainly be private individuals and corporate firms. He is an intermediary between his client and the principal (the jobber). He receives a commission called “BROKERAGE” for the service rendered. The jobber on the other hand, is the principal] in the sense that he buys and sells shares on behalf of himself. He deals directly with the broker who act directly with the broker who act as an agent for their clients.

Since, the jobber did not know before hand, whether the broker intends to either buy or sell shares on behalf of his client.  The jobber often quotes two prices for him. One is the higher price, at which the jobber will like to sell shares to the broker assuming he plans to buy. The other, is at a lower price, at which the jobber plans to purchase from the broker. The difference between the higher price and the lower price quoted by the jobber constitutes his commission called the JOBBER’ TURN.

Apart from the jobbers and brokers, other speculators like the tag, bear and bull also deals in the market. Stock exchange market is only market that approximates a perfect market in real life situation. Just recently, that the Abuja stock exchange was established and it has commenced operations.

  • MEBERSHIP OF STOCK EXCHANGE

EQUITY HOLDERS: equity holders are the investors who buy the ordinary (common) shares of the company. Equity holders or shareholders are the holders any and their returns are derived from dividends.

ISSUING HOUSES:  the issuing houses advise, assist and sometimes undertakes the issue of securities for a company which want to raise funds in the capital market.  Issuing houses in Nigeria are primarily merchant banks and stock brokerage firms.

DEALING MEMBERSHIP: a dealing member of the stock exchange is a person or an institution who in addition of being an ordinary member is licensed by the council to trade on stock, shares and bands on stock market and accepts to be bound of the rules and regulations of stock exchange.

Dealing members do not receive dividends from the stock exchange but only remuneration in the form of brokerage, commission. Other sources of income induced fees for investment counselling and issuing house fee.

THE JOBER: The jobber is the principal in the sense that he buys and sells shares on behalf of himself. He deals directly with the broker, one is a higher price at which the jobber will like to sell shares buy. The other is the lower price at which the jobber plans to purchase from the broker. The difference between the higher and lower price quoted by the jobber constitutes his commission, called the jobbers turn.

ORDINARY MEMBER:  Ordinary members (individual or institute) of the Nigerian stock exchange is a member who is accordance with the articles of the exchange taken up 5 shares of N20. each of the issued share capital of the exchange and has been admitted into the register of members . An ordinary member does not receive dividend from the stock exchange market.

THE BROKER: This is an agent to his client who would mainly be private individuals and co-operate firms. He is an intermediary between his client and the principal (the jobber). He receives a commission called BROKERAGE for the service rendered.

THE NEW ISSUES MARKET: This is also called the primary market in the sense that it is concerned with the offering of new issues or the initial issuance of a new issue, a firm has to deal at one time or the ot her with the following in conjunction with the stock exchange. Securities and exchange commission, the functionaries, commercial and merchant Banks, the investors, individuals and institutions.

SHARE REGISTRARS: A share registrar maintains the register of share holders for a company which has raised funds from the capital market. The registrar is also responsible for issuing the shareholders their share certificates, and he may be the secretary of these functions are contracted out to other organisation with a specialized department to handle share registration.

UNIT TRUSTS: These are the new institutional arrangements for the small and or unsophisticated investors in Nigeria to invest in the capital market. These trusts pool the funds of the public by and the fund mobilized are used to buy capital market securities. The dividends and capital gains received from the investments are distributed to the unit trust holders in proportion of their total holdings.

  • ROLES OF THE STOCK EXCHANGE

The stock exchange market performs the following functions.

PROVISION OF FINANCIAL MARKET: It provides a market where old and existing stocks, share, bonds and debentures are bought and sold. No other market deals on old shares except the stock exchange market.

REGULATION OF BUYERS AND SELLERS:

The participants have perfect knowledge about the market source the are specialists in the market by dealing in buying and selling of old and existing share. They keep themselves in constant check about the preventing market conditions.

SOURCES OF CAPITAL: Government and corporate firms raise funds from the markets. If for instance government is in need of large capital, she will sell government bond to raise the much –need capital.

PREVENTION OF FRAUDULENT ACTIVITIES:

Any fraudulent or suspected fraudulent activities among the participants must be properly investigated with the aim of bringing to book any culprits.

STANDARDIZATION AND REVIEW OF FEES AND CHARGES

Since the market approximates a perfect market, the fees and charges by the participants are standardized and made subject to review in order conform to an already laid down standard.

PROVISION OF A NETWORK INFORMATION

Information about the market changes is immediately made known to every participant of the market. No one is put in doubt about the prevailing prices of shares in the market.

They answers that, the viability of quoted enterprises through easy access to a pool of fund which is available in the market.

The stock exchange make shares to be liquid and attractive to many indigenous investors, the stock exchange helps in ensuring fair dispersal of share holding across the nation.

They enforce a set of rules and regulations among members, the stock exchange helps to ensure fair dealing among those instit6utions and their dealings with the public.

  • PROBLEMS OF THE STOCK EXCHANGE

Like most development market, the problems facing the capital market in Nigeria are diverse. However, some of the most pressing ones are identified below:

INFRASTRUCTURE: Transactions often take weeks or months before they are finalized. That aside the drags and delays in our postal system compound this problem.

IGNORANCE: The level of public awareness as to the benefits derivable from the operations of the capital market is very low.

INADEQUATE SUPPLY OF SECURITIES: The most serious problem facing the capital market is inadequate supply of securities. Most companies, most especially the indigenous ones are still reluctant to raise funds. The stock exchange probably for fear of loosing control, cost of going public and the burden of disclosing corporate information. The Nigerian investing public has demonstrated a strong appetite for participating in the capital market as examplied by over-subscription of most public issue. It is my believe that better persuasive methods, among others; through fiscal incentives. Such as two tier corporate fat system in favour of the quoted companies should be introduced to lure companies to the exchange to meet excessive demand in the market.

THE STOCK EXCHANGE REQUIREMENT: The present stock exchange full listing requirement are said to be too stringent. However the stock exchange is currently reviewing the full listing requirements in order to make them less stringent. A welcome development in 1985 was the establishment of small and medium size companies. The SSM will act as training ground in preparation for full listing on the exchange.

LIQUID MARKET: The buy and hold attitude o investors with regard to securities impairs activities on the market. The investors should be encouraged to invest for speculative purposes. These require a socio-cultural re-orientation which is always a very slow process. It is an arduous but challenging task for the SEC and the stock exchange.

  • IMPORTANCE OF STOCK EXCHANGE

The stock exchange protects the holders of securities from fraud. It also inspects applications for new quotations.

The stock exchange enables securities to be valued at any particular place or time.

It provides a market where those wishing to invest can buy securities and those wishing to reclaim an investment or invested securities can sell such securities on terms that are agreeable for a both parties.

The stock exchange market deals in securities of government and commercial undertakings all over the world. Therefore with its regular contacts with principal stock exchange in all parts of the world.

Stock exchange market sometimes arranges for a new issue of shares to be made. Example, when a private company wants to convert to a public company.

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