Project Materials

AN ANALYSIS OF THE ECONOMIC IMPACT OF STOCK MARKET ON NIGERIAN ECONOMY (1986-2010)

Chapter one

INTRODUCTION

1.1 Background of the Study

The stock market is expected to play an important role in the economy by mobilising domestic resources and directing them towards productive ventures. However, in order to fulfil this duty, it must have a major interaction with the economy.

The government has inspired the development of the stock market in Nigeria, as well as in other emerging countries. Prior to the foundation of the Nigerian stock market, there were several less formal market arrangements in place to facilitate stock market operations.

It was not well-known until 1959, when Mr. J.B. Lobynesion visited on behalf of the federal government to advise on the role the central bank may play in the development of the local money and stock market.

As a result, the government commissioned and established a Barback committee to investigate and give suggestions on how to formalise Nigeria’s stock market. (Alile & Anao 1990)

Capital markets are critical components of a modern market-based economic system because they facilitate the transfer of resources from capital savers to capital borrowers. Efficient capital markets are therefore critical for economic growth and prosperity.

With the globalisation of economies, worldwide capital markets are becoming more linked. While such interconnectedness is beneficial to global economic growth, the downside risk is the contagion impact of a financial crisis, particularly if it originates in the larger markets.

In terms of the impact of macroeconomic variables such as money supply and interest rates on stock prices, the efficient market hypothesis indicates that competition among profit-maximizing investors influences macroeconomics.

factors on the stock market will ensure that all important information regarding changes in macroeconomic factors is completely reflected in the current stock market, preventing investors from making excessive profits by predicting future stock market investments. (Chong and Koh, 2008).

As a result, without access to employer insider knowledge, investment advisors would be unable to regularly help investors generate above-average returns.

The stock market is a critical cog in the wheel that facilitates the transfer of cash for economic growth. In general, stock exchanges are supposed to boost economic growth by improving liquidity of financial assets, facilitating global diversification for investors, and encouraging better investment decisions.

In principle, a well-functioning stock market can aid economic growth and development by increasing savings, allocating investment resources more efficiently, and attracting foreign portfolio investments.

The stock market stimulates saves by providing households with investable money, which are extra financial tools that better fit their risk preferences and liquidity demands. It also provides individuals with reasonably liquid options for risk sharing in investment projects. (Agrawalla 2006).

The stock market’s ability to contribute to economic progress has been significantly hampered by a number of deficiencies. Over the years, the market has been characterised by a lack of depth with few securities and insufficient liquidity, which is partly attributed to inefficiency.

-Inadequate infrastructure for secondary market operations-Essentially an equities market with a mostly dormant bond market-High transaction costs-Lack of sophisticated product investments and instruments.

The market is primarily dominated by traditional securities such as bonds and equity, with minor derivatives. Unfavourable tax regime -Unstable and generally appropriate in the macroeconomic situation.

1.2 Statement of the Problem

The capital markets in Nigeria have long played a traditional role. However, its efficiency and effectiveness in this regard have been severely limited by a number of factors, including the price level and the structure of the economy, which is dominated by oil production, despite the fact that oil producing companies are listed on the stock market; the lack of long-term capital in the business sector; and the business sector’s reliance on short-term financing, such as overdrafts, to finance even long-term capital.

The federal government’s economic reforms, notably those implemented in the financial sector, are designed to achieve, among other things, the following objectives. The purpose of this study is to examine the stock market and its impact on the Nigerian economy.

As a result of the foregoing, the market has not been in the best position to contribute fully to economic growth and the real sector.

These shortcomings have made the improvements that have occurred over the years necessary. Recent stock market reforms include the enactment of the Investments and Security Act (ISA) No. 45 of 1999, which replaced the SEC degree from 1986. Other stock market reforms include the following:

-Review the minimum capital requirements for operators.

-A reduction in transaction expenses.

-The introduction of the corporate governance code.

-Re-activation of the bond market.

-An introduction to market makers.

-Introduction to self registration.

-The development of a commodity market.

Many emerging stock markets are hampered by numerous complaints, which inhibit the capital market’s role as a stimulus for economic growth. Such problems include:

A.Unquoted companies: Many businesses are not quoted due to a perceived loss of control. They are afraid of sharing company ownership with others, so they prefer to rely on funds provided by family and friends, and as a result, they are unable to respond to unexpected challenges on time.

B. Domination of the public sector: The dominance of the public sector, such as governments, has stifled capital market growth because many of them have yet to be privatised (particularly public utilities), which would broaden the market very instantly.

C. There are many sharp practices in the flow of the exchange that encourage incorrect disclosure of information, unfair pricing, insider dealings, and so on.

Currently, the performance of the Nigerian stock market during the last month surged 118 points or 7.3%. May 2013, the Nigerian stock market average 1106 index points achieving an all time-high of 1718 index point in may 2013 and a record of 848 index points (NSE 30).

The rise and fall of the Nigerian stock market index point has caused a creeping collapse of the capital market. This financial market breakdown could lead to economic imbalances.