STOCK MARKET AND MACROECONOMIC INDICATORS: EVIDENCE FROM NIGERIA

CHAPTER ONE

1.0   BACKGROUND OF STUDY

It is a known fact that the investment that promotes economic growth and development requires long term funds, far longer than the duration for which most savers are willing to commit their fund. Capital market is a collection of financial institutions set up for the granting of medium and long term loans. It is a  market for                                                                                                       government security, for corporate bonds, for the mobilization and utilization of long-term funds for development-the long term end of the financial system. In this market, leaders (investors) provide long term funds in exchange for long term financial assets offered by borrowers. This market embraces both the new issues (primary) market and secondary market. Such securities might be raised in an organized market such as the Stock Exchange. In this sense, it involves consortium under writing, syndicated loans and project financing. Thus, it is a mechanism whereby economic unit desirous to invest their surplus funds, interact directly or through financial Intermediaries with those who wish to procure funds for their businesses. In the Nigerian context, participants include Nigerian Stock Exchange, Discount Houses, Development banks, Investment banks, Building societies, Stock Broking firms, Insurance and Pension Organizations, Quoted companies, the government, individuals and the Nigerian Stock Exchange Commission (NSEC) The capital market is therefore very important to any economy because it encourages savings and real investment in any healthy economic environment. Through the market aggregate savings are channeled into real investment that increases the capital stock and therefore economic growth of the country.

Moreso, the capital market synchronize the divergent preferences for portfolio managers and financial institutions  and those of savers by mobilizing long - term funds for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market, without affecting the operation of the firm, their savings had earlier financed. In other words through the secondary market the capital market converts long- term or perpetual investment enlarged and economic growth accelerated.

By far the greatest achievement of -the Central Bank of Nigeria since it was established on July 1st, 1959 has been the gradual development of the Nigerian financial system.

The system consists primarily of the money for short term lending and borrowing. The Nigerian Stock Exchange (formally called the Lagos Stock exchange) is the pivot or the fulcrum around which the entire capital market rotates. It is the market for the sale and purchase of the securities, stocks and shares; a market in which those institutions and governments who have funds surplus to their immediate requirements can employ them profitably. Its major significance is that it is the machinery for the mobilization of the countries resources for economic growth and development. Since its establishment in 1961, a major local investment outlet has been provided for Nigerian investors. As a marketplace where securities (stocks, bonds, shares) are bought and sold openly with relative ease, the stock exchange is very important to the investors. The existence of a stock exchange in a capital market helps to broaden the share ownership base of firms and evenly distribute the nation's wealth by making it possible for people in different locations to own shares in a firm in another location by purchasing the shares, bond /stock through the simple mechanism of the stock market.

For the government therefore, the stock exchange provides the mechanism for exchanging the mobilization of capital for creating goods and services for the satisfaction and well being of the citizens. The stock exchange is not only crucial but also central to the entire mobilization process . This is because it offers an opportunity for continuous trading in securities.

1.2 PROBLEMS OR STATEMENT OF PROBLEM

The capital or stock markets are feature of the economies of western Democracies. They do not exist in communist or socialist countries  for they have no business doing there, In the western capitalist countries, they constitute the most institution for massive capital formation geared towards the complexity of capitalist ideology resulted in the  control and measures   to put the economy in equilibrium state. Factors such as capital market capitalization rate, government stock rate, rate of interest charged on financial instruments amongst others exert same impact on the development and growth of the economy.

Bakare (2000:58) defines capitalization rate as the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange The size of the market capitalization and its growth rate pose a major influence on the growth and development of the economy. The determination of this rate is based on the forces of demand and supply of securities. On the other hand, interest rates along with monetary aggregates form targets of monetary policy in Nigeria.

Within the period chosen for this study, interest rates in Nigeria were directly managed by the monetary authorities- the Central Bank-of Nigeria. This control of rate of interest was based on the expert advice from financial gurus who perceived that the economy, as at that period, lack a well developed financial market.

Under this regime control, the federal government of Nigeria did set the deposit and lending rates of the financial intermediaries at their prevailing levels. In addition, the government did set the rates for lending to specified sector of the economy With a view to encouraging (or discouraging) lending to these sectors. If the rate of interest paid by banks to depositors is increased, investors will patronize the bank the more and fewer investors will invest on the capital market. This will lead to a decrease in capital investment in the economy. Hence, economic growth and development will be lowered, because the allocation of capital resources plays a crucial role in the determination of the rate of the nation’s output. If capital resources are not provided to those in the industries, or if capital is not made available to sectors which are capable of increasing production and productivity, the rate of the country’s expansion (growth) will be retarded. Thus, the disparity in the determination of interest rate, capitalization rate by different forces must have influenced the development and growth of the economy. The variation in the interest rate might cause investors also to either go to the bank or buy government development stock (bond), thereby helping in the development of the economy.

The relationship between interest rate and government stock rate will also be generated in the course of this work. The capital market is often accessed to strengthen a company's capital base, diversify it shareholder's base, improve the debt equity ratio and in some cases raise money to retire existing short-term liabilities.

However, in spite of the myriad of ways through which corporate entities and government may raise debt, preference or equity capital, all of which have their merits and limitations, it becomes rather paradoxical that small scale investors are not often counseled enough or exposed to the inherent, derivable benefits and associated risks in electing to go for either equity financing or debt financing in the capital market.

Anyanwu (1993:204) identified ignorance as one of the problems of Nigerian Securities and Exchange Commission (NSEC) and the capital market is still very low. Not many of the small scale business or family-owned business, state and local governments are aware or properly counselled by the issuing houses about the procedural formalities of actualizing their full involvement in the capital market activities.

The problem of inability to expose the small-sca1e businesses, state and local governments to tap the huge savings in the capital market to raise funds to start, expand consolidate and modernize business has been the chief indictment of issuing houses that play the intermediary role between issuers and investors.

The Nigerian Stock Exchange still has a long way to geo when compared with those in some developed countries.  For example, up till date it has 7 branches (Lagos, Kano, Kaduna, Ibadan, Port Harcourt, Onitsha and Abuja) with about 183 companies listed-on it. As at July, 1996, about 20 companies were listed on the second-tier securities market. This looks shallow when compared with Indian Stock Exchange with about 4,344 companies or The London Stock Exchange, with about 5,085 listed companies. It may seem unfair to compare Nigerian Stock Exchange at 42 with those of Indian and London that has existed for decades. All The same, it suggests the need for accelerated development of the market.

1.3   OBJECTIVE OF STUDY

The general objective of this study is to present an overview of the nation's capital market in terms of raising finance to assist companies and government on long term basis. The specific objectives of this study are:

1.  To critically examine the relationship between stock market capitalization rate and interest rate
2. To identify the type of relationship between stock market capitalization rate and government development stock rate.
3. To examine the relationship between government development stock rate and interest rate.

1.4 HYPOTHESES

   i.        There is a negative relationship between stock market capitalization rate and prevailing interest rate.

 ii.        There is a negative relationship between stock market capitalization rate and government development stock rate.

1. There is a negative relationship between government development stock rate and prevailing interest rate.

1.5 SIGNIFICANCE OF STUDY

This study should be of immense benefit for companies to raise money. This allows businesses to be publicly traded, or raise additional financial capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities.

Central banks tend to keep an eye on the control and behaviour of the stock market and, in general, on the smooth -operation of financia1 system functions. Exchanges also act as the clearing house for each transaction which means the collection and delivery of the shares and payment guaranteed to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.

1.6 SCOPE OF STUDY

This study makes the Nigeria Financial system more efficient by making funds available where they are needed. The study also covered such securities which might be raised in an organized market such as stock Exchange which is very important to the investors.

1.7 LIMITATION OF STUDY

This study in the Nigeria context basically needs public enlightenment which should be carried far and wide to arouse  the Interest of potential investing public who reside outside these major cities and wish to avail themselves of the opportunities of investing in the companies through shares and stocks.

Infrastructural inadequacies are major hindrances affecting the pace of investment growth in Nigeria simply because the dissemination of information as regards the operations of (NSE) Nigeria stock Exchange is tactically low when compared to developed countries.

1.8 OPERATIONAL DEFINITIONS OF TERMS

Stock market: Also know as -equity market. A public entity (a loose net work of economic transaction) of company stock (shares) and derivatives are traded at an agreed price. Are securities listed on a stock exchange.

Market capitalization: A representation of the aggregate value of a company or stock. It is obtained when the number of shares outstanding is multiplied by their current price per share.

Stock Exchange: The most important component of stock market and are part of a global market for securities. Such securities to be traded are shares, issued by company, unit trust, derivatives, pool investment products and bonds.

Nigeria stock Exchange: A machinery for mobilization of the countries resources for economic growth and -development It was formally created on the 2nd of December 1977 with three trading floors at Lagos, Kaduna & PortHarcourt. Two additional branches/trading floors have since commenced operations at Onitsha and Kano. It offers an opportunity for continuous trading in securities.

Nigerian securities and Exchange commission (NSEC): The apex regulatory body which is empowered to regulate the Nigeria stock Exchange and its branches to which it is also at liberty to delegate powers. NSEC registers all securities proposed to be sold in the market.

CBN: Central Bank of Nigeria serves as bank of issue. It enhances the development of money and capital market. It helps to establish money, capital market institutions, development banks in Nigeria and stock Exchange. Also introduces new money and capital market instruments.

NDIC: Nigeria Deposit Insurance Corporation, is an independent agency the federal government of Nigeria. They protect depositors, and guarantee the settlement of insured funds thereby helping to maintain financial system stability.

Capitalization: The conversion of a company's cash reserves into new shares and issues them to existing shareholders, which is also known as scrip issue or Bonus issue.