EFFECT OF CAPITAL MARKET IN THE PERFORMANCE OF NIGERIA STOCK EXCHANGE (A CASE STUDY OF NIGERIA STOCK EXCHANGE)

CHAPTER ONE

INTRODUCTION

• Background of the study

The Capital market in any country is one of the major pillars of long-term economic growth and development. The market serves a broad range of clientele, including different levels of government, corporate bodies and individuals within and outside the country. Capital formation entails accumulated savings out of the current incomes of either organization or individual. It is investment in fixed assets which in part is financed with monies raised through the capital market (Al-Faki, 2006). The Capital market has been one of the major means through which foreign funds are injected into most economies and the tendency towards a global economy is more visible there than anywhere else. It is therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring the overall economic growth of a nation (Emenuga, 1998).

According to Alabede (2004) the role played by the stock market in the economic growth and development of a nation is recognized the world over. Through that role long term funds are not only mobilized but channeled for productive investments. The stock market provides the fulcrum for capital market activities and it is often cited as a barometer of business direction. According to Obadan (1998), an active stock market may be relied upon to indicate changes in general economic activities as mirrored by the stock market index. The indispensable nature of the capital market in any economy arises from the two major functions it performs: – mobilizing and channeling of long term investible funds from the surplus sector to the deficit sector of the economy, Usman, (1998). As a result of this role, governments place due emphasis on the regulation and control of the capital market in general and the stock market in particular. In recent times, there has been growing concern over the role of the stock market in economic growth; hence the market has been the focus of economists and policy makers. According to Anyanwu (1993), the financial market is a complex mechanism made up of procedures, instruments and institutions through which deficit economic units and the surplus economic unit are brought together to transact business with one another. In his own contribution; Ibenta (2000), defined the financial market as a network of institutional arrangements through which financial resources accumulated by savers of funds are transferred to ultimate users who may be individuals or households, corporate bodies or governments for investment in economic activities, which include both the production and distribution of goods and services. Ever since government policy began shifting in the direction of limiting the role of the public sector in business activity, the need for reform of the capital market became a critical requirement for creating a viable private sector. The need for promoting balanced financial intermediation in a system significantly short of long term funds has been a strong signal that the domestic capital market in Nigeria was overripe for a major change (Uzor, 2007). The financial market has two major segments namely the money and capital markets. Ekoko (2007) describes the financial market as a “market where institutions exchange financial assets and liabilities through a process described as intermediation.

The impact of the capital market performance is determined by a number of elements, which include how financial assets are priced, such as the size of the stock market, market capitalization, number of listed equities, transactions in buying and selling of securities (liquidity) which in this case refers to the volume of transactions and new issues of securities.