AN ASSESSMENT OF THE ROLE OF FINANCIAL MARKET IN THE ECONOMY A CASE STUDY OF NIGERIAN STOCK EXCHANGE
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AN ASSESSMENT OF THE ROLE OF FINANCIAL MARKET
IN THE ECONOMY A CASE STUDY OF NIGERIAN STOCK EXCHANGE
1.1 BACKGROUND OF THE STUDY
The
Financial market is divided into two main divisions, namely (i) the Money
Market, and (ii) the Capital Market. The Money Market is quite different from
the Capital Market in the sense that, unlike the Capital Market, one cannot
raise long-term capital from the Money Market.
The
existence of money markets facilitate trading in short- term debt instruments
to meet short-term needs of large users of funds such as governments, banks and
similar institutions. Government treasury bills and similar securities, as well
as
company
commercial bills, are examples of instruments traded in the money market. A
wide range of financial institutions, including merchant banks, commercial
banks, the central bank and other dealers operate in the money market. Public
as well as private sector operators make use of
various
financial instruments to raise and invest short term funds which, if need be,
can be quickly liquidated to satisfy short-term needs Unlike the Money market,
the Capital
market is
that constituent of the Financial Market that facilitates the mobilization of
long-term investment capital for the financing of business enterprises as well
as Government long term investment projects. In other words, the term Capital
Market refers to a specialized financial institution that provides a channel
for the borrowing and lending of long-
term funds
(i.e.over one year). It is a well organized financial institution that
facilitates the transfer of financial resources from those that have surplus
funds (savers) to those that needed the use of these funds (i.e. Government and
private sector businesses) to undertake long-term investment. Thus the Capital
Market offers an opportunity for both private business people and Government to
mobilize huge amounts of financial resources from the general public through
the sale of financial securities The Capital Market is divided into two areas;
the Primary Market and the Secondary Market. The Primary Market deals with the
trading of new securities.
When a
company issues securities for the first time (i.e. IPO) , they are traded in
the Primary Market through the help of issuing houses , Dealing /Brokerage
Firms, Investment Bankers and or Underwriters. The acronym IPO stands for
Initial Public Offering,which means the first time a company is offering
securities to the general public for subscription. The amount of money raised
in the Primary market goes directly to the Issuing Company/Firm to finance its
operations. Once
the
securities (shares) of a company are in the hands the general public, they can
be traded in the Secondary Market to enhance liquidity amongst holders of such
financial securities. Thus, the Secondary Market facilitates the buying and
selling
of
securities that are already in the hands of the general public (investors).
Here, the term investor is used to refer to an individual or an institution
that buys the securities (Shares) of a Company with the intent of making some
financial returns. The Stock Exchange therefore is an organized financial
platform that deals in transactions involving the buying and selling of
financial securities in the Secondary Market. In short, the Stock Exchange does
the work of a Secondary Market by facilitating a formal trading arrangement for
financial securities.The research therefore seek to investigate the role of
financial market in the economy with a case study of the Nigerian stock
exchange
1.2
STATEMENT OF THE PROBLEM
The
Financial market consist of the Money Market, and the Capital Market. The Money Market is quite
different from the
Capital
Market in the sense that, unlike the Capital Market, one cannot raise long-term
capital from the Money Market.
The
existence of money markets facilitate trading in short-
term debt
instruments to meet short-term needs of large users of funds such as
governments, banks and similar institutions. Government treasury bills and
similar securities, as well as
company
commercial bills, are examples of instruments traded in the money market. A
wide range of financial institutions, including merchant banks, commercial
banks, the central bank and other dealers operate in the money market. Public
as well as private sector operators make use of
various
financial instruments to raise and invest short term funds which, if need be,
can be quickly liquidated to satisfy short-term needs Unlike the Money market,
the Capital
market is
that constituent of the Financial Market that facilitates the mobilization of
long-term investment capital for the financing of business enterprises as well
as Government long term investment projects. In other words, the term Capital
Market refers to a specialized financial institution that provides a channel
for the borrowing and lending of long-
term funds
(i.e.over one year). It is a well organized financial institution that facilitates
the transfer of financial resources from those that have surplus funds (savers)
to those that needed the use of these funds (i.e. Government and private sector
businesses) to undertake long-term investment. Thus the Capital Market offers
an opportunity for both private business people and Government to mobilize huge
amounts of financial resources from the general public through the sale of
financial securities The Capital Market is divided into two areas; the Primary
Market and the Secondary Market. The Primary Market deals with the trading of
new securities.
When a
company issues securities for the first time (i.e. IPO) , they are traded in
the Primary Market through the help of issuing houses , Dealing /Brokerage
Firms, Investment Bankers and or Underwriters. The acronym IPO stands for
Initial
Public Offering,which means the first time a company is offering securities to
the general public for subscription. The amount of money raised in the Primary
market goes directly to the Issuing Company/Firm to finance its operations.
Once
the
securities (shares) of a company are in the hands the general public, they can
be traded in the Secondary Market to enhance liquidity amongst holders of such
financial securities. Thus, the Secondary Market facilitates the buying and
selling
of
securities that are already in the hands of the general public (investors).
Here, the term investor is used to refer to an individual or an institution
that buys the securities (Shares) of a Company with the intent of making some
financial returns. The Stock Exchange therefore is an organized financial
platform that deals in transactions involving the buying and selling of
financial securities in the Secondary Market. In short, the Stock Exchange does
the work of a Secondary Market by facilitating a formal trading arrangement for
financial securities.
However the activities of the secondary market is
fast not impacting on the general public and on the economy at large.the
effectiveness of investing in shares is fast depleting in the economy.many
stock exchanges in Nigeria are no longer playing efficient roles in capital
mobilization through the sale of shares. Therefore the problem confronting this
research is to profer an assessment of the role of the capital market in the
economy with a case study of the Nigerian stock exchange.
1.3 RESEARCH QUESTION
1 What is
the nature of the capital market
2 What is the
role of the capital market in the economy
3 What is the nature and role of the Nigerian
stock exchange in the economy
1.4 OBJECTIVE OF THE RESEARCH
To determine the nature of the capital
market
To determine the role of the capital market
in the economy
To determine the nature and role of the
Nigerian stock exchange
1.5 Significance of the Research
The research
shall provide an assessment of the nature and role of the capital market in the
economy
It shall
elucidate the nature and role of the Nigerian stock exchange
It shall
also serve as a source of information to managers and financial experts.
1.6 STATEMENT OF THE HYPOTHESIS
Ho sale of shares in the Nigerian stock
exchange is low
Hi sales of shares in the Nigerian stock
exchange is high
2 Ho capital formation in Nigerian stock exchange
is low
Hi
capital formation in Nigerian stock
Exchange is
high
3Ho impact of the Nigerian stock exchange
On the
economy is low
Hi impact of
the Nigerian stock exchange on the economy is high
Scope of the study
The study
shall focus on the assessment of
The role of
financial market in the economy
With a case
appraisal of the role of the Nigerian stock exchange
Definition of terms
FINANCIAL
MARKET DEFINED
Financial
Market is a specialized market that is responsible for channelling financial
resources from the surplus units ( savers) to the deficit units ( those who
needed additional funds) to carry out some form of economic activities. The
Financial Market therefore constitute of all financial institutions that
receive financial resources from the surplus units of the economy in the form
of savings and transfer them to the deficits units through lending activities.
STOCK
EXCHANGE DEFINED
Stock
Exchange therefore is an organized financial platform that deals in
transactions involving the buying and selling of financial securities in the
Secondary Market. In short, the Stock Exchange does the work of a Secondary
Market by facilitating a formal trading arrangement for financial securities.
MONEY MARKET
The
existence of money markets facilitate trading in short-
term debt
instruments to meet short-term needs of large users of funds such as
governments, banks and similar institutions. Government treasury bills and
similar securities, as well as
company
commercial bills, are examples of instruments traded in the money market. A
wide range of financial institutions, including merchant banks, commercial
banks, the central bank and other dealers operate in the money market
CAPITAL MARKET
Capital
Market refers to a specialized financial institution that provides a channel
for the borrowing and lending of long-
term funds
(i.e.over one year). It is a well organized financial institution that facilitates
the transfer of financial resources from those that have surplus funds (savers)
to those that needed the use of these funds (i.e. Government and private sector
businesses) to undertake long-term investment. Thusthe Capital Market offers an
opportunity for both private business people and Government to mobilize huge
amounts of financial resources from the general public through the sale of
financial securities
SECONDARY
MARKET DEFINED
Secondary
Market facilitates the buying and selling
of securities
that are already in the hands of the general public (investors).
PRIMARY
MARKET DEFINED
Primary
Market deals with the trading of new securities.
When a
company issues securities for the first time (i.e. IPO) , they are traded in
the Primary Market through the help of issuing houses , Dealing /Brokerage
Firms, Investment Bankers and or Underwriters.
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