THE ROLES OF CAPITAL MARKET IN A DEVELOPING ECONOMY

1.0 Introduction

1.1 Background of the Study

The capital market is the market for dealings (that is lending and borrowing) in long term loan-able find. The market is the source from which commerce and industry obtains its capital for expansion. Modernization and technological break through. It is also a source from which government at various levels borrow on long-term basis for developmental purposes. The capital can be traded and re-traded for investments, liquidity and risk reduction or management. It offers access to variety of financial instrument that enable economic agents to pool, price and exchange risk. Through assets with attractive yield liquidity and risk characteristics, it encourages savings in financial form. This is very important of long-term finds and for suppliers of long-term funds in that because of the nature of their liabilities, undertakes to maintain part of their asset in relatively illiquid form.

Before the Nigerian independence in 1960, the capital market was not in existence rather what was in existence was a finance system, which was totally monopolized by expatriate commercial banks. The absence of a capital market in Nigeria within that period hindered economic development. The non existence of this market meant that Nigerians who had surplus funds had no such market to invest them in Nigeria. They had to expatriate such funds for investment overseas especially in London thereby resulting to export capital which could have been used in the economic development of Nigeria. This in addition resulted to lack of market where Nigeria industrialist and business men could raise capital for the operation and construction of their business.

On the side of government, there was no effective tool for monetary policy and control with the above situation, there was an obvious need to provide a local market for the borrowing and lending of long term funds for the economic development of Nigeria. To achieve this objective, the central bank of Nigeria (CBN) went into operations on 1st July 1959 and in that same year the Nigerian stock exchange was established. And the actual operations started in 1961 with 19 securities listed for trading. Today there are more than 260 securities listed on the exchange and most of the listed companies have foreign/multinationals affixations and represent a cross section of the economy ranging from agriculture through manufacturing to services. Following the deregulation of the capital market in 1993, the federal government in 1995, internationalized the capital market with the abolition of laws that constrained foreign participation in the Nigeria capital market.

Foreigners can now participate in the Nigeria capital market both as investors and operators. With this the stock exchange has linked up with the Reuters electronic contributor system for online global dissemination of stock market information like trading statistics, all this have contributed to the development of the economy.

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1.2 Statement of Problems

Although the capital market has contributed significantly to the growth and development of the Nigerian economy certain lingering problems still constrain its operations. They include infrastructure inadequacies; this has resulted to delays in affecting transactions between issuing house, brokers, dealers, registrars, investors and their banks. The drag in the delivering services discourages many investors who sometimes view with distrust their registrar and brokers when share certificates are delivered or proceeds of shares sold not delivered promptly. Also infrastructural limitations insulate many investors especially those in the rural area from broker dealer thereby trading in securities, which would have aided development.

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1.3 Objectives of the Study

Having the above problems in mind as militating against the development of capital market through stock exchange market, the purpose of this study is determine:

1. Contribution of the capital market to economic growth.
2. The possible strategies to enhance the efficiency of the capital market.
3. The relevance or usefulness of Nigerian stock market in the economy.

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1.4 Research Questions

• What are the achievements and challenges of Nigerian stock exchange in developing the capital market?
• How do investors respond to the capital market?
• What are the instruments often used by the capital market in raising funds?
• Why do banks sources for finds through the capital market?
• Can the Nigerian capital market be improved?

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1.5 Significance of the Study

This study will be of immense important to individuals, private and public companies, financial institutions, government parasatals.

1. It will enable them know when to provide or source money from capital market.
2. It will also enable them to know and understand the role which capital market play in developing economy.
3. It will help them to know the part of stock exchange in mobilizing the funds needed for investment by them.
4. It is also important because it will encourage the investors to invest into the stock market with the full assurance that their investments are intact.

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1.6 Scope of the Study

This research work revolves on the Nigerian stock exchange and how it aids the capital market in a developing economy like ours. It is important to note that the capital market is not a single entity, but rather a network to specialized financial institution that in various ways bring together suppliers and users of capital which will be fully emphasized in this study. It will also examine the various regulatory bodies of the capital market, especially the Nigerian stock exchange. This scope will cover the Nigerian stock market, its operations and impact in the economy.

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1.7 Limitation of the Study

In the course of this study I encountered some problems which in one way or the other challenge the simple flow of this work. These include:

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1. Distance: in the course of this study I was visage with the challenge of actually traveling to the Nigerian stock exchange in Owerri, bank Road near Okigiwe Park.

2. Time: There was no enough time to meet up with this work but I properly managed the time effectively and efficiently.

3. Finance: At a point it was difficult and nearly impossible to continue because of demand of finance.

4. Hoarding of Information: During the research, I noticed that those approved for information were not really within to give it.

5. The difficulty to approaching respondent.

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1.8 Definition of Terms

1). Shareholder:

A shareholder is one who holds a share certificate, who has legal title to shares. It is also called or referred to as stockholder.

2). Share Index:

It is made up of a number of bonds, stock or shares selected from a lot of various trades or business with their market price added together.

3). Speculation:

It is the buying and selling of goods with the object of gaining from difference in prices.

4). Stag:

It is an experienced dealer in stocks, who believe that a stock is presently undervalued and that when the stock hits the market and investors come to appreciate the full value of that stock, the price will undoubtedly explode upwards.

5). Stop Loss:

This type of order instructs a broker to sell a stock when the price gets to a certain level.

6). Odd Lots:

Any volume of stock which is less than one hundred.

7). Bear:

A “bear” is one who sells his stocks because he expects that the price of stock will crash in the near future.

8). Stock Broker:

It is a licensed member of the stock exchange, who has the responsibility of maintaining a fair and orderly succession of prices for a specific security, traded on the exchange.

9). Securities:

This refers to various promissory document adopted as evidence of claim in the market.

10). Primary Market:

It is where securities are offered for sale in the public from the issuer for the first time.

11). Secondary Market:

It is where people or investors can buy or sell previously quoted securities and get their money back for alternatives uses.

12). Market:

Is an occasion when people buy and sell goods the open or building where the meet to do this a fruit/flower/antiques market.

13). Fund:

It is an amount of money that has been saved or has been made available for a particular purpose.

14). Development:

Growth the gradual growth of 5th so that it becomes more advanced. Stronger etc. a baby's development in the womb. The development of basic skills such as literacy and numberacy.

15). Economy:

It is the relationship between production, trade and supply of money in a particular country or region.

16). Exchange:

Giving and receiving an act of giving to 5th to 56 or doing 5th for 56 and receiving 5th in return. The exchange of promote an open exchange of ideas and information.

17). Financial:

This is connected with money and financial services, institutions to give advices / assistance /support to be in financial difficulties advice an independent financial adviser.

18. Risk:

The possible of the bad happening at some time in the future. A situation that could be dangerous or have a bad result: smoking can increase the risk of developing heart disease patients should be made aware of the risk involved with its treatment.

19). Commercial Bank:

Commercial bank is the oldest of all the banking institution in Nigeria with the first commercial back being established in 1892. Commercial bank is the most important financial institution and also the most popular with the Nigeria public.

20). Capital:

City the most important town or city of a country usually where the central government operates from. Cairo is the capital of Egypt, pains, the fashion capital of the world.

A large amount of money that is invested or is used to start a business, to set up a business with a starting capital, wealth or prosperity that is owned by a business or a person, capital assets capital expenditure, money that an organization spends on buildings, equipment.