The Nigerian Capital Market

Module 2

UNIT 3 THE NIGERIAN CAPITAL MARKETCONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Meaning of Capital Market
3.2 Instruments of the Nigerian Capital Market
3.3 The Participants in the Nigerian Capital Market
3.4 Structure of the Nigerian Capital Market
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Capital is very crucial for any business, both private and public. The capital market provides the much needed capital, on a long term basis.
Globally, the capital market plays the important role of channeling capital from the surplus unit to the deficit unit of the economy, for investment purposes.
The instruments traded in the capital market are- shares, debt, unit trust/mutual funds, and derivates. The role of the capital market in the economic development of Nigeria has continued to attract increasing attention among policy makers.
However, this unit explains the meaning of the capital market as well as the instruments used in the market. Furthermore, it examines the operators in the market.

2.0 OBJECTIVES

At the end of this unit, you should be able to:
 define capital market
 describe the instruments of the Nigerian capital market
 discuss the operators in the Nigerian capital market
 examine the structure of the Nigerian capital market.

3.0 MAIN CONTENT

3.1 Meaning of Capital Market
The capital market is a segment of the financial market that provides
medium and long term capital for development purposes. The capital
market facilitates the transfer of funds from the surplus unit to deficit
unit of the economy. The financial market, as defined by Ekoko
(2007:16), is a market where institutions exchange financial assets
through a process of intermediation. The financial market comprises of
the money and capital markets.
A capital market is a network of financial institutions and facilities that
interact to mobilise and allocate long term savings in an economy. Long
term funds are exchanged for financial assets issued by borrowers or
traded by holders of outstanding eligible instrument. Therefore, it
provides services that are essential to a modern economy, mainly, by
contributing to capital formation (Nnanna, Englama, and Odoko, 2004:
65).
Jhingan (2004:294) explains that funds flow into the capital market
come from individuals who have savings to invest. The capital market
functions through the stock exchange. A stock exchange is a market
which facilitates the buying and selling of shares, bonds, debenture etc.
It is a market for both old and new securities.
The functions of a capital market, as identified by Anyanwu (1993:192),
are the following:
1. Promotion of rapid capital formation
2. Provision of sufficient liquidity for investors
3. Creation of a built-in operational efficiency within the financial
system, to ensure that resources are optimally utilised, at
relatively little cost
4. Mobilisation of savings from numerous economic units for
economic growth and development
5. Encouragement of a more efficient allocation of new investment,
through pricing system
6. Provision of an alternative source of funds for government, other than taxation
7. It is a machinery for mobilising long-term financial resources for industrial development.

SELF-ASSESSMENT EXERCISE 1
Define capital market and outline its functions.
3.2 Instruments of the Nigerian Capital Market
The type of instruments traded in the capital market can be classified
into categories. Each of these categories is a group identity, within
which a number of specific instruments come in. They are as listed
below.
1. Shares
 Ownership instruments (ordinary share or equity)
 Preference share
2. Debt
 Bonds
 Stocks
3. Funds
 Unit trust/mutual funds
4. Derivates
 Rights
 Futures
 Options
 Swaps
 Warrants
(a) Shares
A share is a unit of ownership in a company. When you buy shares, you
become a part-owner of a company or a shareholder of a company.
Thus, a shareholder is anyone who owns, at least, a unit of share in a
company.
Share, literally, means a portion or a fragment which belongs to you.
This means that you share in the profit and loss of that company. This is why you are a shareholder. The contribution of each shareholder towards the capital of the company is represented by shares.
As owners of a company, shareholders are entitled to dividends. There are two main kinds of shares; these are ordinary shares and the preference shares.
1. Ordinary Shares

This is an ownership instrument which is held, in perpetuity, until the
owner decides to sell it off. Once the investor sells off the entire shares,
he/she no longer has any linkage with the company. However, as long as
the investor holds the shares, he/she is entitled to the following- access
to the company’s annual reports and accounts, opportunity to attend
general meetings and vote, and the opportunity to receive dividends in
form of cash and bonus share.
Ordinary shares, usually, have a par value and a market value. You may
have come across the phrase- “a 50k share of N5.00 each”- this means
that the share sells in the market for N5.00 (which is the market price).
The 50k figure is the share’s par value, which means that the company’s
shares are in units of 50k. This figure is of no practical relevance to us.
This type of share is called common stock in USA.
2. Preference Shares
This is a mixture of ownership and debt security. It does not confer
voting right on the investor, unless it is specifically stated so. It can be
redeemable or convertible; thus, when it is redeemable, it is virtually
similar to a bond or stock, which has to be paid back at maturity. If it is
convertible, then, it can be exchanged at a future time, either at the
option of the holder or the company, for the company’s ordinary shares.
Preference share earns dividend at a fixed rate. If the company makes
profit, the investor earns the dividend, but if it does not make profit, the
investor does not earn dividend- if it is non-cumulative. However, if the
instrument is cumulative, the investor is entitled to dividend, whether or
not the company makes profit. The preference share is called preferred
stock in USA (Ekiran, 1999:58).
(b) Debt Instruments
This involves borrowing funds from the public or from selected high
net-worth companies or individuals. Debt instruments come in form of
bonds and stocks. The investor is a creditor to the issuing company or
government, who is the debtor to the investor.
The investor is entitled to interest payment at specified periodic
intervals; he/she is also entitled to his principal investment at maturity, if
he/she holds the instrument to maturity.

1. Bond
A bond is a long term debt instrument, which comes in the form of a
legal document, with a promise to pay interest, periodically, over a
period of time; and the principal is to be paid at some specified date in
future. When you buy a bond, you are loaning money to the seller, at a
specified interest rate. Government, companies, and so on, can sell
bonds.
The maturity period ranges from 1-30 years. Generally, bonds are less
risky than shares, but they give lower rates of return. There are different
types of bonds, namely, debenture, convertible bonds, floating rate,
zero-coupon bonds, and so on. The most secured bonds are federal government bonds, which are usually advertised in this form:
4th Federal Government of Nigeria Bond 2017, series 9. Tenor: 10yrs,
coupon rate: 9.35%.
2. Stocks
An example is the Federal Government Development Stocks (FGDS), which are issued for development purposes. They are gilt-edged stocks with fixed interest rates and maturity dates. They are, usually, issued in tranches, and the interests are paid bi-annually.
(c) Funds
Unit Trust/Mutual Fund - this is a kind of collective or pooled investment scheme. The manager of a unit trust combines the money of several investors (mostly small savers), and invests it in stocks, bonds, real estate and money market instruments.
Nnanna, Englama and Odoko, (2004:85) explains that the unit trust
scheme is an important mechanism for mobilising financial resources from small savers and managing such funds to achieve maximum returns, with minimum risks, through efficient portfolio diversification.
In recent times, however, big savers including institutional investors that do not possess the expertise to manage funds make recourse to the scheme.
Two broad categories of the scheme exist, namely- the close-ended unit trusts and open-ended trusts. Under the close-ended fund scheme, managers mobilise resources at the end of a specified period and the subscriptions are invested, and the dividends emanating from the investment are distributed among investors. On the other hand, the open ended fund implies that subscriptions are made in tranches or units and
invested, while returns are shared among holders.
(d) Derivatives
These are instruments derived from existing instruments. They are mere
shadows of underlying securities. Commonly traded derivatives are
rights, options, futures, and swaps. These are common in developed
economies, where they have not only boosted the supply of securities but have helped to activate the market. In Nigeria, the closest instrument in this group is the trading of rights. When a quoted company issues new shares to raise capital, some shares are first issued to existing shareholders in the form of a right issue. It is called a right issue because shareholders have the first right to buy the new shares. The new shares are offered to shareholders in relation to their existing shareholding. For example, XYZ Company is offering, by way of rights, one new share for every three held. It means that shareholders have the chance to buy one new share for every three already owned. They are usually offered at a price below that of the existing share in the market.

SELF-ASSESSMENT EXERCISE 2
Mention the instruments used in the Nigerian capital market
3.3 The Participants in the Nigerian Capital Market
The major participants in the Nigerian capital market are- investors,
operators, facilitators, and regulators.
(a) Investors
They are both the supplier (sellers) and the consumers (buyers) of financial instruments or capital. The investor can be a government, or a corporate body, or an individual. In the secondary market, the investor is
not permitted to go to the market place directly to transact business. He is expected to employ the services of an age nt called a stockbroker, to transact the business on his behalf.
The investor must have a trading or investment account with the stockbroker which is regularly funded. The account also shows all transactions carried out by the stockbroker on behalf of the investor.

(b) Operators
These include brokers, issuing houses, registrars, underwriters, trustees,
etc., that provide various services for investors and borrowers in the
capital market.
1) Stockbrokers
A stockbroker is a licensed member of the stock exchange, who acts as
an intermediary between two or more parties. It is licensed to represent
and trade in securities in the market, on behalf of investors, for a
commission, called brokerage fee. They, among other functions, act as
agent for the public, receiving and executing buy and sell order for
shares, according to the instruction of their clients. They provide
advisory services by giving professional advice on the choice and management of investments; they also assist project sponsor to raise
funds. The Nigerian Stock Exchange regulates their activities.
2) Issuing Houses
An issuing house is a key intermediary of the Nigerian capital market; it prepares prospectus to sell new securities offered to the public by companies and government. They coordinate the entire issue process, bringing together all the other professionals and either underwrites or arrange for the underwriting of the issue. They also help in pricing the issue and advising the issuer on matters relating to the success of the
exercise.
3) Registrars
They are involved in the opening of registers and maintaining the list of shareholders of companies, on the conclusion of public offer. We have
two types of registrars, namely, the in-house and general registrars. The
in-house registrar of the listed company maintains its own register of
shareholders, while a general registrar is employed by the listed
company to keep its register.
Registrars, among other functions, open and maintain register of members, effect transfer of instruments, accept lodgment of document in respect of concluded transaction. They cancel already traded certificates, prepare new certificates, and dispatch annual report and account to members. They also dispatch dividend and interest warrants to investors.

4) Underwriters
They help to facilitate the success of the offer for subscription. They are
of three categories. The first is the stand-by underwriter who, at the time
of subscription, makes a promise to make money available in the event
of under subscription. A commission is paid to him at the point of
agreement.
The second category of underwriters negotiates the price of the offer,
add their own margin, pay off the issuer, and then market the offer. This is called firm underwriting.
The third category refers to those that do not commit any financial assistance, but rather, promise to make the best effort to market the security. Major underwriters of public offers are banks and insurance
companies.
5) Trustees
A trustee holds and manages properties or assets, on behalf of individuals or institutional investors.
(c) Regulators Regulators in the capital market in Nigeria are- Securities and Exchange Commission (SEC), Nigerian Stock Exchange (NSE), and Central Bank of Nigeria (CBN).
1. Securities and Exchange Commission (SEC)
This is the apex regulatory body in the capital market. It regulates the issue of securities and the conduct of operators in the market, as well as sales practices. It is vested with the power to suspend or revoke the registration of any person/body involved in price manipulations, unjust or inequitable practices, after an opportunity for hearing has been granted.
2. Nigerian Stock Exchange (NSE)
Following the favourable report of the Barback committee, which was set up in May 1958, the Lagos Stock Exchange was established. It commenced operations on 2nd June, 1961. In order to meet the aspirations of the users of its services, the Lagos Stock Exchange was transformed into the Nigerian Stock Exchange (NSE) by the federal government on 2nd December, 1977. Presently, it has eight exchange offices outside Lagos-Abuja, Kaduna, Port Harcourt, Kano, Onitsha,
Ibadan, Yola, and Benin.
The Nigerian Stock Exchange is a ‘self- regulatory’ organisation. It ensures that companies comply with requirements of the exchange and adhere to international accounting standard in the preparation of their financial statements. The exchange provides a means for trading in new and old securities.
3. Central Bank of Nigeria (CBN)
As with the money market, the Central Bank of Nigeria is the major player in the capital market. It actively participates by issuing and underwriting all federal government loans stocks. The CBN enhances resilience and stability of the market by buying up all issued stocks, which are not taken up by other investors.

SELF-ASSESSMENT EXERCISE 3
Mention the various participants in the Nigerian capital market.
3.4 Structure of the Nigerian Capital Market
The Nigerian Capital Market is, broadly, segmented into the
commodities and stock markets. The commodities market is a part of the
capital market where commodities and contracts are bought and sold.
Examples of commodities traded are cocoa, gold, groundnuts etc.
The stock market is a part of the capital market that facilitates the
buying and selling of shares, bonds, funds, and so on. The stock market
is divided into two segments, which are the primary and secondary
markets. The primary market is the segment of the stock market that
deals with the trading of new or fresh securities, while the secondary
market is a market for the purchase and sale of already issued securities.
There are two broad categories of the secondary market. They are the
dealers market and centralised auction market. The dealers market is
characterised by the absence of a centralised location for transacting business in securities. Securities that are not listed on any stock exchange are traded on the dealers market, while the Centralised Auction Market is an organised market where rules, regulation, and procedures for buying and selling of securities are put in place.
These securities are bought and sold through brokers on the stock market. The stock market is a major operator at the capital market. The stock exchange operates two-tier market - the first tier market where securities of big companies are listed, and the second tier market, where
securities of small companies are listed. The instruments traded on the
Nigerian stock market are ordinary shares, preference shares, bonds, and
federal government development stock.
The structure of the capital market in Nigeria is, diagrammatically, presented below.

Fig. 3.1: The Structure of the Capital Market in Nigeria

Source: Nnanna, Englama and Odoko (2004)
SELF-ASSESSMENT EXERCISE 4
With the aid of a diagram, explain the structure of the Nigerian capital
market.
4.0 CONCLUSION
The capital market is a segment of the financial market that provides medium and long term capital for development purposes. The major Capital Market
Commodities Market Stock Market
Agricultural
Product
Mineral Product
Primary Market Secondary
Market
Government
Stock/Bond
Industrial
Loans/
Corporate
Bond
Market
Unlisted
Corporate
Loans
Advances
Dealers
Market
Centralised
Auction
Market
Settlement and
Clearing System
Nigerian
Stock
Exchange participants in the Nigerian capital market are- investors, operators,
facilitators, and regulators. The instruments traded in the capital market
are- shares, debt, unit trust/mutual funds, and derivates. These are all part of the economic indices of a nation.

Next Unit 4 Nigerian Securities and Exchange Commission

5.0 SUMMARY
In this unit, you are now conversant with the structure of the Nigerian
capital market. You have grasped the meaning of capital market and the
instruments of the capital market. You are now aware of the major
operators of the capital market.
In the next unit, your focus will be on the Securities and Exchange
Commission.
6.0 TUTOR-MARKED ASSIGNMENT
1. Describe the instruments of the Nigerian capital market.
2. Describe the activities of participants of the Nigerian capital
market.
7.0 REFERENCES/FURTHER READING
Anyanwu, J.C. (1993). Monetary Economics: Theory, Policy and
Institutions. Onitsha: Hybrid Publishers Ltd.
Ekiran, O. (1999). Basic Understanding of Capital Market Operations.
Lagos: The CIBN Press Limited.
Ekoko, O.J. (2007, January/March). Developments in the Nigerian
Capital Market: Opportunities for the Accounting Technician.
ICAN Student Journal. ICAN. 11, (1), p.16.
Jhingan, M.L. (2004). Monetary Economics. (6th Ed.).Delhi: Vrinda
Publications (P) Ltd.
Nnanna, O.J., Englama, A. & Odoko, F.O. (Eds). (2004). Financial
Markets in Nigeria. Abuja: Kas Arts Service.

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