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THE GROWTH OF CAPITAL MARKET AND ITS CONSEQUENCES ON A DEVELOPING ECONOMY
ABSTRACT
The development of the stock exchange market is a pre-requisite to the growth and development of any economy. The capital marked comprises the primary market and secondary market.
The primary market is the market for new issues. It is a platform where a company or government can raise money for investment quoted companies can also raise funds. Both SEC and NSE are involved in the primary market activities. While the secondary markets are vehicles for providing liquidity to investors where existing securities are traded openly, the stock exchange provide free entry and exist for investors, through trading in secondary market. The establishment of the second tier security market in April 1985 for companies that cannot meet up with the listing requirements of the first-tier (main) security market, has encouraged the small and medium scale enterprise to raise money through the stock exchange market.
However, the industrial development of any country remains vital as it affects directly her economic growth and subsequently the standard of living of her populace. The industrial sectors of any country car only develop when the country has an efficient capital market (stock exchange). The efficient stock exchange market will give rise to capital formation, which is needed for investment in the country’s industries.
Hence, the growth of capital market and its consequences on a developing economy cannot waved aside, because it has play a significant role in the economic growth and development of Nigeria. Thus, it has helped in contributing more to corporate tax revenue, capitalization of industries, capital formation, and the growth of gross domestic product (GDP).
There are two pivotal roles that the capital market plays:
1 It signals the state of health of the national economy.
2 It provides a measures of the resilience of the rational economy by the extent to which economic activities rely on it.
In the first role, the trends in the market indicate in clear terms whether the economy is headed in the right direction or not, since its vagaries reflect the level of confidence in polices, their implications and implementation. In the second role, the market serves as an active and effective balance against the more regulated money market.
CHAPTER ONE INTRODUCTION
1.1BACKGROUND TO STUDY
The capital market is a sub-set of the financial system that serves as the engine of growth in modern economies. The capital market is the segment of the financial market where medium to long-term financial instruments 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 is will contribute to the process of economic growth and development.
Relative development of and reliance of economic activities on the capital market have been offered as important explanations of the interrelationship between macro-economic stability and soundness of the financial system. When national policy formulation ignores this, a major plank of opportunity for stabilizing the economy and fast tracking its growth would be lost or vitiated.
However, the market place in question, where this kind of transaction could take place in the Nigerian stock exchange.
The stock exchange provides the trading ground for the sale and purchase of securities thereby mobilizing funds for medium and long-term financing, the stock market is regarded as the most visible sign of the capital market, hence it naturally (as an operator) derive its role from the capital market.
Therefore, it the general belief if that capital market provides the capital, it does so through the help of its authorities and regulators, which are the ministry of finance, the Central Bank of Nigerian (CBN) the Nigerian Stock Exchange (NSE) and the Securities and Exchange Commission (SEC). Above all, the Nigeria Stock Exchange is seen as the most viable because it provides the market place for the re-sale of the transferable securities, thereby mobilizing the needed capital.
However, I believe the outcome of this reserve with be to explore the basis of the growth of capital market and its consequences on a developing economy of this nation Nigeria
1.2 IMPORTANCE AND RELEVANCE OF THE RESEARCH
This research is of importance because as a future manager it is useful to serve as a guide to practitioners and individual corporate organizations associated with security markets, educate policy makers and the organized private sector on the contributions of the capital market to the capital formation process and disclose the need for more small and medium enterprises to make use of the second- tier security market of the stock exchange. The research will be practical guide to perspective investors. The study will provide a ready source of information for all person (s) interested in knowing about the capital market.
1.3 RESEARCH PROBLEM (S)
The capital market has improved significantly terms of market capitalization volume of long-term debt stock sold, volume of transactions and the number of operators (eg stock brokers). It however remains a relatively small source of long-term finance.
It is argued this background that in the course of this study, some problems associated with the capital market have been identified.
These are:
1. The constraining regulatory environment of the securities and exchange commission affects the volume and value securities offer.
2. The stock market is yet to contribute and provide the needed amount of investment that will boost the percentage of the manufacturing sector is the growth rate of GDP.
3.The educational disparity among the populace maintain it out most impossible for some people to understand investment possibilities.
4. The ineffectiveness of the second-tier security market is due to the poor response and lack of interest of the indigenous companies to get quoted on the Nigerian Stock Exchange.
1.4 RESEARCH OBJECTIVE/QUESTIONS
The main objective of the proposed research is as follows:-
(a) To examine the role of the capital market in economic development.
(b)To evaluate the performance/growth economic contributions of the capital market in the Nigerian economic development process
(c) To point out problems confronting the Nigerian capital market in national policy formulation.
(d) Need for paradigm shift in the development process.
The main research question to be addressed are:
(i) What is the depth of the market?
(ii) What are the percentages of the market capitalization to the rate of GDP from 1992-2002
(iii) How many companies and stock brokerage firms operates on the capital stock exchange
1.5 GUIDE TO SUBSEQUENT CHAPTERS
As a final part to the introduction, a guide to subsequent chapters is briefly reviewed.
Chapter two provides evidence of the research done and criticize it constructively. There are prior research stating the economic roles and contribution of the capital market and its consequences on a developing economy. Capital market in national policy formulation, fiscal measures in capital market development, the micro-economic objectives, and the growth of the capital market and its consequences the structure of the capital market.
In the chapter four the particular approach used in the entire process of this research study is provided. The probable methodology, with particular reference to a unit of analysis, this approach enables one to understand the dynamics present within a single setting. The unit of analysis is the Nigeria capital market (the Nigerian Stock Exchange). This section starts with an introduction describing briefly the main features of the methodology and how appropriate it is to the research topic, area of study and, the population of study, sample and sampling techniques, sources of data collection and instrument for data collection and date analysis is described along with its strengths and weaknesses stating its validity and reliability.
Data is collected from different sources such as books, journals, seminar papers presentation, the Nigerian Stock Exchange fact book, CBN Bullion, dictionaries and from online databases such as the internet. Conclusion drawn form this research work is that the initial role play by the capital market was just the beginning of the economic development simultaneously. Data were collected prior to the research study, and the data is analyzed based on the non-quantifying method of analysis using a general analytical procedure.
Chapter four shows the different data collected which is directly related to the analysis carried out, it also show market capitalization, value of transaction GDP and Gross Fixed Capital, also contribution of newly created capital to GDP and Gross Fixed Capital, table show debt of market (value of transactions) and turnover rate securities transaction (value), number of listed companies, share price index. Also included is the presentation and analysis of regression result and decision rule.
Finally, the summary and conclusion summaries the research work done, with recommendation.
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