THE IMPACT OF STOCK MARKET PERFORMANCE ON THE ECONOMY OF NIGERIA

CHAPTER TWO

LITERATURE REVIEW

The capital market, as a strong avenue for wealth creation, plays a key role in economic growth and development. The distribution of the wealth is also more equalitarian because the system does not discriminate between investors and the rate of return. What each investor gets out of the system is a matter of what he invests.

 The capital market is the segment of the financial market where medium to long term financial instrument are created and/or traded to meet the long term funding needs of economic activities. The degree of effectiveness and efficiency of the market will determine the extent to which it will contribute to the process of economic growth and development. Adedipe (2004)

 The capital market can also be defined as the aggregation of institutions and mechanisms through which long term funds are mobilized and used for development purposes (Obadan 1998)

 The capital market, given the long term horizon and liquidity offered by its secondary market, provides the best framework for the mobilization of resources – G. Onosode (1998)

 According to K.S. Adeyemi (1998), the capital market is the aspect of the financial system which mobilizes and channels long term funds for economic development.

 “The capital market provides another option for government and companies to raise long term funds for the execution of capital projects such as construction of bridges, schools, factories, and purchase of vehicles, facilities, and equipment. This compares with the money market, which represents the short- end of the financial system that provides facilities for claims and obligations whose maturity vary from one day to one year.” (Okereke- Onyuike 2000).

 Ndanusa, S.A (2004), defined capital market as the collection of financial institutions set up for the mobilization of medium or long term loans. It is a market for long term instrument which include; market of mortgages of loan that is the market for mobilization and utilization of long- term loans. It is a market for long term funds for development.

 Osondu(1993) within the capital market are the primary and secondary market which includes issuing houses and the securities authorities for issuing of corporate bonds, shares and market of mortgage, this concern and its activities regulations rest in the hand of the stock exchange.

 Hence, capital market could be referred to as the mechanism whereby economic units desire to invest their surplus funds, interact directly through financial intermediaries with those who wish to procure funds for their business through the issuance or sale of shares stocks, bonds e.t.c Uzoagu (2002)   .

 In the Nigeria context, participants includes; the Nigerian stock exchange, discount houses, development banks, investment banks, stock broking firms, quoted companies, the government, individuals and the Nigeria Securities and Exchange Commission. However, the Nigerian stock Exchange operates and manages the activities of the capital market.

 The capital market embraces trading in both new issues (primary) and old issues of stocks (secondary).

 Effective development of the capital market is necessary for the following reasons.

The mobilization of savings from surplus economic units for channeling into national economic growth;

The broadening of the ownership base of assets and, this, the creation of a healthy private sector through the empowerment of asset ownership.

The promotion of rapid capital formation and real investment culture as against short term portfolio investments.

The economic theory ‘growth’ is essentially a long term concept. It ignores short-term fluctuation in actual national income and emphasizes the impact of investment on raising expected income. Investment in the long run creates more and better capital equipment. The addition to the economy’s stock of capital raises the potentials of national income. The long-term increases in the growth theory rather than the short term fluctuations are found in Keynesian theory of income determination.

 Keynes (1978) said, from the earliest time- there was a very great change in the standard of life of the average person. This slow rate of progress or lack of progress was due to two reasons, the remarkable absence of important technical improvement and the failure of capital accumulation.

 Baran (1978) observed that the principle obstacles to rapid economic growth in the backward countries are the way in which their potential economic surplus is utilized.

 From the above elucidation, it could be seen that the capital market is paramount for economic growth in any economy.

2.1.1   Brief history of Nigerian stock market

 The Nigerian capital market (NCM) first came into existence in 1960 though it was then the Lagos Stock Exchange. It began operations in 1961 with 19 securities listed for trading. It had an authorized share capital of 10,000 Naira of 500 shares at 20 Naira each. The exchange was incorporated under the company ordinance as an associated company limited by guarantee and formed to promote commerce in Nigeria. The Lagos Stock Exchange was given initial financial backing by the Central Bank of Nigeria (CBN).

In December 1997, following the recommendation of the government financial system review committee of 1976 headed by Pius Okigbo, the Lagos Stock Exchange was renounced and reconstructed into the Nigerian Stock Exchange.