Nigerian stock exchange investment on trading at margin

CHAPTER ONE

INTRODUCTION

1.0.          BACKGROUND TO THE STUDY

Mobilization of resources for national development has long been the central focus of development economist. As a result, the centrality of savings and investment in economic growth has been given considerable attention (Aigbonkan, 1995, Soyode 1990, Samuel 1996).

For sustainable growth and development, funds” most be effectively mobilized and allocated to enable business and the economy to harness their human, material and management resources for optional output.

The stock market is an economic institution, which promote efficiency in capital formation and allocation. The market enables government, banks and industries to raise long-term finance for new projects, expanding and modernizing commercial concern if capital are not provided to the key economic areas; especially industries where demand is governing and where they are capable of increasing production and productivity of all sectors of the economy, the rate of expansion of the economy of ten suffers.

A unique benefit of stock market to banks and corporate entities is the provision of long-term, non-debt financial capital. Through the issuance of equity securities, companies arid banks acquire perpetual capital for development through the provision of equity capital, the market also enable banks to avoid over reliance on debt financing thus, improving corporate debt-to-equity ratio.

The existing literature clearly shows that developed economy has explored the two channels through which resources mobilization affects the economic growth and development, money and capital market (Samuel 1996).

However, not the case in developing economics where emphasis was placed on money market with little consideration for capital market (Nyong 1997).

Since the introduction of the Structural Adjustment Programme (SAP) in Nigeria; the country’s stock market has grown very significantly (Allie 1996, Soyode 1990).

This is as a result of deregulation of the financial sector and the privatization exercise as well as the directive of the Central Bank of Nigeria (CBN) requesting bank to increase their asset base, which exposed investors and banks to the significance of the stock market. Equity financing from the capital market became one of the cheapest and flexible source of finance from the capital market and remains a critical element in the sustainable development of the banking sector.

Through the stock market is growing, it is however characterized by characterized by complexities. These complexities arises from trend in globalization and increased variety of instruments being traded, equity option, derivatives of various forms, indeed futures etc. However, the central objectives of the stock exchanges worldwide remain the maintenance of the efficient markets with attendant benefit of economic growth. The link between Stock Market performance and Trading at Margin (economic growth) has often generated strong controversy among analysts based on their study of development and emerging market.

As economist develops, more funds are needed to meet the rapid expansion. The stock market serves as an irresistible tools in the mobilization and allocation of savings among competing uses, which are critical to the growth and efficiency of the banking sector. The determination of the other growth of the banking sector depends on how efficiently the stock market performs its allocation functions of capital.

As the stock market mobilizes savings, concurrently it allocates a large portion of it to the firms with relatively high prospects as indicated by its rates of returns and level of risk.

The importance of this function is that capital resources are channeled by the mechanism of the forces of demand and supply to those firms with relatively high aid increasing productivity thus, enhancing the expansion and growth of the banking sector.

1.1.     STATEMENT OF PROBLEM

It is no longer news that the per-capital income of Nigeria is low, compared with other countries having potentials and resources both natural and manmade. As a result of low per-capital income, bank has low capacity utilization due to the inability of the people to save and thus, make it difficult to accumulate fund which could be borrowed or lent to industries of relatively high prospects in order to increase the growth of the banking sector.

Therefore, my statement of problem lies on: What Role Can Nigerian Stock Exchange Play in Fund Mobilization / Raising for Individuals in Banking Industries.

1.2.    RESEARCH QUESTION

1. Does Trading at Margin IS a poor strategy for capital market investment activity?
2. What are the impacts of trading at margin on the Nigerian Stock Exchange?
3. Does the stock market promote borrowing from the banking sector?
4. Does the Nigerian Stock Exchange provide an additional channel for engaging and mobilizing domestic saving for productive investment?

1.3.     RESEARCH HYPOTHESIS

Ho:     Trading at margin is not a poor strategy for capital market investment activity.

Hi:       Trading at margin IS a poor strategy for capital market investment activity.

Ho:     There is no positive impact of trading at margin on the Nigerian stock exchange.

Hi:       There is positive impact of trading at margin on the Nigerian stock exchange.

Ho:     The stock market does not promote borrowing from the banking sector.

Hi:       The Stock market promotes borrowing from the banking sector.

1.4.     OBJECTIVES OF STUDY

The aim of the research work is to investigate the importance of the Nigerian Capital Stock Exchange (NSE) in the Nigerian capital market, which tends to improve the efficiency of capital of banks, which serves as a contributing factor for the development of the banking sector in terms of their returns as compared to the administrative of public sector corporations.

Apart from the fact that the stock exchange market has an impact on the economic development in terms of how it helps stimulate industrial as well as financial growth and development of the Nigerian banking sector, other objectives of this study includes:

1. To assess the role of the stock exchange in a developing economy like Nigerian
2. To investigate the problems faced by the stock exchange
3. To suggest ways the Nigerian stock exchange can be made more efficient and effective.

1.5.     SIGNIFICANCE OF THE STUDY

The target of this research work is to establish the existence of a positive link between trading at margin and the Nigerian stock exchange market. Also sectors of the economy tend to act in a collaborative manner such that optimum benefit of linkage between the stock market and financial growth can be realized in Nigeria.

The proposed study will help in suggesting ways the Nigerian stock exchange can equip itself to face the challenges of the future thereby taking its rightful place as a major wheel In Nigeria’s march towards financial prosperity and stability.

1.6.     SCOPE AND LIMITATION OF STUDY

The scope of the research work will be limited to Lagos and its environs, Lagos being the centre of financial activities in the Nigerian economy, the Lagos floor of the Nigerian stock exchange in general. However, there are some uncontrollable elements, which will affect the effective carrying out of the study, which are:- Limited time is utilized to cut between lecture and time to go on research; This is an important factor as the research is a student; we have no personal source of income to fund the research. This also includes the high cost of transportation to Lagos and movement around the metropolis and all other incurable expenses to be incurred.

1.7.    DEFINITION OF TERMS

N.S.E: The Nigerian Stock Exchange.

STOCK EXCHANGE: A market where those intending to buy and sell of shares and stocks meet to transact business

CAPITAL MARKET: This is a long-term and of the financial market. It is made up of markets and institutions which’ make the issuance and secondary trading a long term instruments.

EQUITIES: This is also known as ordinary shares. This is the most common type of shares issued by limited liability companies. Holders own a positive of such company.

MONEY MARKET: This market mainly provides short ­term funds using short-term instrument such as treasury bills, commercial papers etc.

SECURITIES: This is defined as a documentary evidence of ownership or entitlement of chain upon the asset of the issuing organization, which may be a business firm, government institutions.

HARE OF STOCK: These are financial instruments that give the shareholder a share (state) in a firm ownership and therefore, grant him the right to share in the firms profit in of dividend.

TREASURY BOND: These are promissory note issued by the government when they need money for capital financing.

CORPORATE BOND: These are promissory note issued by large companies when they bond money (mobilize funds).

MANICIPAL BOND: These are issued by the local government bodies for rural development before independent and shortly after independent.

INCOME BOND: This is the interest paid on this bond depend on the earning guaranteed from the project.

MORTGAGE BOND: It is a lien given the bondholder a prior right to some assets of the borrower. It represents a conditional transfer of the pledged property from the borrower to the lender.

MARKET CAPITALISATION: This is defined as the market mechanism that determines the growth rate of funds and availabilities of fund in the stock market.

GUARANTEED BOND: This is where guarantee may be requested in additional to the pledged assets.