The Nigerian Stock Exchange and the Economy
The Nigerian Stock Exchange – Different opinions have been expressed about what stock exchange (S.E) is, it has form time been referred to as the source of capital for business expansion. During the war between France and England, there was much devastation of the British economy that it couldn’t finance Merchant trade. As a result of this and the intention to spread the risk arising from the attack of British ships by pirates, there was need to mobilize capital to finance trade since direct financing was not enough to sustain the trade levels , and the remedy was the creation of a formal market. The market on which money is provided.
The stock exchange does exist for the purpose of channeling personal savings into industrial place for trading company shares.
Since there was the potentials polices of capital widening rather than capital deepening.
Kenneth Midgley said that the stock is the prime institution in the stock market and it is a specialist market place. It also provides the mechanism for the exchange of shares which already exist. But the encyclopedia of banking and finance expressed the view that the exchange themselves do not trade in the listed securities they merely provide the facilities for trade.
Other opinions such as Christy et al look at stock exchange as an associate of broker formed to provide improved facilities for the execution of customers order and the Nigeria stock exchange in her pamphlet question and answer” meant for distribution to the public for enlighten purpose define the market as “A stock exchange is a market where large and small investors alike buy and sell through stock brokers the stock (or shares) of companies and government agencies the stock exchange provides the essential facilities for business expansion and development projects through investors who share in cooperation for the ultimate economic benefit of all Nigerians.
From the various opinions and views as stock exchange, they have portrayed the market as a medium of raising capital, through the stock market does not participate the actual fund creation but offer facilities for raising fund (capital formation) and this is crucial to the economic growth of any economy.
To participate in the activities of the stock exchange, the firm has to become a member before benefit can accrue to her.
Perhaps its exclusion policy the prestige it enjoys in all the stock market may be defined as a market creating form for registered companies who to raise additional fund for expansion modernization. Purpose by using the facilities provided in the stock market. It has the ability to bringing together potential sellers and buyers.
Therefore the prior conception of the stock exchange, as a provider of fund for the formation of new enterprises is an illusion. Realistically, it could be properly referred to as a provider of fund for expansion for listed companies and a market creating forum for the sale of the shares of existing quoted firms.
2.1 EVOLUTION OF THE STOCK EXCHANGE
Event keep reminding us of the strong dependence of any economic policy on the flow of capital. Historically, the development of any economic activity depends on the situation prevailing at that time and the corresponding development of any economic activity will meet the demands of the time.
Stock exchange like any other economic activity grew out of the these factors. The stock market developed during the year of commercial and intellectual dermal between the restoration and death of Anne.
Before this there must obviously be as considerable volume of securities, the ownership of which in fairly widely distributed, there must be a sufficient number of wealthy men and women who wish to hold some of them possession in financial assets rather than in business or real properly, the development of the market will also be procedures for the transfer of titles and fairly small denomination and if there is a banking system to provide a simple means of payment. England fulfilled all these primary condition at the end of the 17th century.
The formation of the stock depend strongly on the availability of securities and supply by the formation of font stock companies and during the beginning of the permanent natural department.
This was possible because of the fusion of the partnership and cooperation in the middle of the 16th century and this was provided the basis feature of the modern joint stock company’s.
The first set of stock exchange developed by 218 merchant who wanted to open up trade with the India and East Indies pulled their resources together and signed into charter on December 31st 1600 after a prolonged negotiation, this early voyages of the east India company market the beginning of a transition to more modern practice, the share were generally of fixed though still large amount of subscription list were kept open until the total sum required had been raised.
Another landmark in company history accrued in 1962, when an act of parliament gave limited liability to share holders in the East India, Africa and fishery company’s.
The prolonged war of England and France brought the government into borrowing in large scale hitherto unprecedented, and there was a wide spread inflation, which was fed by a rising supply of coins and notes.
Prices rose sharply between 1990 and 1995 and there was great commercial activity and speculation. It was thin period that produced the first real boom in company floatation and which brought. The profession of stock broking for the first time into limelight.
As a result of the prevailing situation then was wide spread holding of government short-term depts. And was normally with people whose market was obviously wanted, and the uncertainty of payment gave by opportunities to speculation.
It can be safety said that the foundation of modern stock market started from the tally broken” who death with government short-term dept to that turned their attention to longer term dept and to company stocks and shares in the seventeenth century. During this periods, the dealing in stock and share were haphazard and unorganized before 1860 but in the mid-nineties there was highly developed market.
The whole process of stock exchange evolution was as a result of economic situation existing at that time accompanied by government in public department. This takes us to the peculiar nature of the development of stock exchanges in Nigeria.
2.2 HISTORICAL DEVELOPMENT OF THE NIGERIA STOCK EXCHANGE.
The Nigerian stock exchange evolve purely out of the act of parliament and speculation of future business expansion. During the late 50’s when it was becoming eminent that there was to be independents state and growth of commercial activities, some Nigerians in collaboration with their foreign partners (British) wanted a local source of fund for enterprise promotion. As a result of the desire for the establishment of an institution in the country to be used as an avenue for funds mobilization and development of local capital formulation. The federal government had interest and took the initiative to establish a formal market for trading in stock and shares. The economic situation at that time brought many consequences and there was a retardation of business activities and basically the government initiatives were based on.
- The need to finance growing budget deficit as from 1958 by the issue of money capital market instrument.
- The deteriorating balance of payment position as from the government desire to facilitate the repatriation of funds invested abroad.
- The need to mobilize finance to embark upon development programme.
Consequently in 1853 the government set up a committee under bar back to advice on way and means of fostering a share market in Nigeria. The report of the bar back committee was in 1959 and it recommended among other things.
- The creation of facilities in dealing in the shares.
- The establishment of rules regulations transfer and
- Measures to encourage savings and issue of securities of government and other organization.
As a follow up of bar back committee the Lagos state exchange now Nigerian stock exchange was established on the 1861 under the Lagos stock exchange act 1961 no 1 the act states that.
An act to prohibit the carrying of the business of stock broking in relations to stocks bearers and other securities granted in 1979, there was another movement in Lagos for the provision of the necessary facilities to handle the work forested on it by the country’s economic circumstance. Today the Nigerian stock exchange occupies her permanent building at 2/4 customer street Lagos, directly opposite the central bank.
As the economy grew it is accompanied by an expansion of business activities and the need to spread out into other parts of the country so as to after an opportunity for equal participation, the stock exchange opened trading floors in Port-Harcourt and Kaduna in 1977 further more, it could also mean the reflection of federal character.
The additional two floors in Port-Harcourt and Kaduna brings to three the number of trading floors while the national consist of the exchange retains the overall responsibility for quotation and the enforcement of regulations in the capital market.
Further development led to the setting up of Nigerian financial system review committee in 1976.
On he recommendation of the Nigerian financial system review committee in 1976, there was the transformation of the Lagos stock exchange into the Nigerian stock exchange.
It’s operational guidelines are as stated at the formation period of the Lagos state exchange with minor amendments made to suit the changing needs of the time.
2.3 GENERAL RELATIONSHIP OF THE STOCK EXCHANGE AND THE ECONOMY.
The stock exchange follows the rhythm of the economy, always fluctuating according to the events in the economy and the absence of the stock exchange restricts the amount of investment that take place in a country and makes investment more difficult. It is the investment capacity of any nation that determine the rate of her economic growth and the level of the people’s welfare. It is that role of the stock exchange in mopping up money capital for investment purpose that forms its relationship with the economy.
Baumol has this to say that the market for stock and bond perform many essential and useful function in the limited state economy. This statement was further buttressed by Christy who said that bulk of American securities (about one half) of the new savings of the country for investment being raised in the capital market.
Every economy aims art improving the welfare situation of her inhabitants by providing quantitative and qualitative consumer product in sufficient amount and this can only be achieved via investment process. In a well developed economy the bulk of her inventible fund passé through the stock exchange and this could be explained by the diagram below.
| Stock exchange | Investment | G.N.P | Economy |
| Market | Increases | Grows |
The mopped up capital is invested in the production sector of the economy to stipulate production and increase the output levels thereby improving the gross national product (G.N.P) and by making more goods available to the people for more consumption and improvement of their welfare.” This relationship between the stock exchange and the economy makes the economy and the stock exchange to often more in the same direction particularly on the monetary policy influence via it’s impact on the stock market if the expansion of the money supply reduce yields the discount factors to the future return from stocks will work to increase stock values.
As the economy improve so also is the stock exchange trade performance improve this pari-passu movement of stock exchange and the economy confirms the claim that stock exchange pay close attention to the economy’s health. Having being able to always run ahead of anticipated events and the events when they happen; being so discounted have less effect if any effect at all.
Therefore, in the strict sense there is close relationship between the stock exchange and the economy. The stability of any economy and confidence in the ruling class depends on its ability to improve the welfare situation of the inhabitants and one way of doing this is by an increase in consumable items which always come as a result of investment.
For this reason a health stock market is an important ingredient in the capital formation and economic growth process.
2.4 ADVANTAGES OF THE STOCK EXCHANGE
As a sources of fund to the industry. “ scarcity and dearness of capital are a common place complaint whenever men of business are gathered together”. It is where a company has succeeded in joining the big companies on the stock exchange that it will be assumed as having derived and when admitted it offers the company easier means of raising money than was the previous case. Raising money on the stock exchange usually implies that there is a public limited liability company that required new capital and make an offer of this capital generally to the public and simultaneously an application is made to the stock exchange for permission to deal in the share.
It is the public given to the stock exchange that widens interest in the stock, the prestige of the market enhance it’s collateral value and supervision of exchange and regulatory agencies usually brings good corporate and trading practices.
This prestige offer quoted firms the advantages of better prices for their shares fairly determined financing is facilitated and added value is imparted by listing.
Further advantage is its quality of liquidity which makes companies shares and debentures more attractive to investor’s who would like to associate themselves with companies quoted on the stock exchange and to provide the need capital for expansion.
2.5 FUNCTION OF THE STOCK EXCHANGE.
In influencing the development parameters the propelling factor of any development parameter in her productive sector so as to enhance a growth, expansion of the industry Nigeria stock exchange is central in the investible fund mobilization act. Having said this we shall examine how the stock exchange has influenced the development of these parameters, namely.
- Growth in industry
- Cost of capital
- Efficient allocation of funds between industries
- Availability of funds
- The stock market and problem in indigenous enterprise.
- GROWTH INDUSTRY: Firms need funds to expand, it is this desire that the government created and maintained an ordinary market for the issue of trading in securities, thereby facilitating the providing of industrial finance, its benefits as regards the financing of industrial development to ensure expansion and growth reflected the common optimistic conviction that the presence of special primary and secondary market in securities would solve the problem of growing needs for industrial finance and thereby promote economic development. The stock exchange form an avenue from which the saving of the problem can be mobilized and channeled into financial development in both the public and private sector of the economy.
- COST OF CAPITAL: The benefit from the stock exchange quotation is the result of lower cost of finance when raising fund through the market as against the utilization of alternative source and the relation case of rising found through the market. A high stock price will exchange for relatively generously quantities of resources, and this is generously referred to as lower cost of capital. But in reality the cost of living makes it higher in raising fund through the stock market and where there are no artificial constraints or the existence of any rigid and baseless financial tradition, the bank and other financial institution can provide the needed fund without much difficulties.
- EFFICIENT ALLOCATION: Of funds if the stock market is to save as a efficient allocation of fund, it must device a means whereby it values the shares of a company on the bases of its expected capitalization earning when stock market closely correspond to perfect competition ideas the more efficient is the market as allocation of resources. Thus if the stock market is to serve as an efficient allocation of capital in the economy at large, it must some how expect influence in the capital market over which it has no approach I direct control.
- AVAILABILITY OF FUNDS: By the manner of valuation whereby the share of progressive companies are increased and non-profitable are penalized, it has succeed in allocating funds to the most productive sector of economy thereby enhancing the rate of growth of the nation.
- The stock market and problem in indigenous enterprises with the number of listed securities in the Nigeria stock market slow that the stock market is still to witness the listing of a company wholly promoted by Nigerian entrepreneurs go this reluctant attitude of Nigeria enterprises to go public and get listed has been a ca se of concern on the management of the Nigerian stock exchange. If the market is to grow, strenuous must be made to persuade and encourage indigenous business to make public issues and raise fund from the Nigerian capital market for this reason, Nigeria stock exchange has to conduct seminars, and adopt other advertisement media to activate and stimulate public awareness about activities on the capital market and the benefit accruing to public quotation of companies.
Therefore, the apparent reluctance of Nigerian promoted companies to avail themselves of the services of the Nigerian stock exchange can be attributed at least in part to the failure of the exchange to persuade them to do so.
This article was extracted from a Project Research Work Topic
“THE ROLE OF NIGERIAN STOCK EXCHANGE IN INDUSTRIAL DEVELOPMENT.”
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