COVENANT UNIVERSITY, OTA.

ENTREPRENEURIAL DEVELOPMENT
STUDIES
COLLEGE OF BUSINESS AND SOCIAL
SCIENCES
ENTREPRENEURIAL DEVELOPMENT
STUDIES: EDS 111

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INVESTING IN THE CAPITAL MARKET

Definition: Capital market is the arm of the financial market that deals
in the purchase and sale of long-term financial instruments. It is the
market where long-term funds are bought and sold.

The capital market exists to bridge the gap between the users and

providers of long-term funds. Though the providers may not be willing to

provide the funds on long-term basis, but the market ensures a long-term
provision of such funds made available on the market by ensuring liquidity
(the ease of selling a financial asset) of the funds provided. The basic needs
of the investors (suppliers of funds) and companies (users of funds) in (a)
return, (b) size of investment and (c) term of such investment are
matched by the capital market. Thus the market is important for both the
suppliers and the users of long-term funds or finance.

Capital market is not a place (though there is a geographical location) but

arrangements where buyers and sellers of long-term security agree to
exchange financial assets and liabilities. Institutions or organizations are set
up to perform as operators and regulators. Some of these are:
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Participants
Security Exchange Commission

- Regulatory

institution
Nigeria Stock Exchange (provides floors)

- Operator

Institution
Stockbrokers

Participants
Issuing Houses

Participants
Security Analysts
Registrars
Investors
Banks
Non Bank financial institutions
Corporate bodies .etc

Products
Debenture/ Bonds
Ordinary Shares
Preference Shares

Bonds
These are debt instruments. They are long term loans raised on the
market for government through bonds. Debenture or bonds is the
financial instrument used to channel funds to companies and governments
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respectively. Returns from these instruments are in form of interest,

which is fixed when issued and would be the interest that is paid
throughout the life of the bond or debenture. Interest on bond issues
are payable irrespective of the performance and the profit position of
the company.

Ordinary Shares
These are ownership instruments, which have been defined as a unit of
control and ownership in a company for the purpose of income in the fist
instance and control in the second. Returns from the instrument are
variable: that is dividend and capital growth (the return on shares) paid
can move up or down depending on the performance of the company and
its dividend policy. This is important in evaluating the price or worth of
shares.

Preference Shares
This is a hybrid instrument, which has close resemblance to ordinary
share and debenture. It earns a regular income in that the dividend is
fixed and not variable. Preference returns are known as dividends
because they are paid out of after tax profits. They are dealt with in
the appropriation accounts. Preferences shares are so called because
they are preferred in the appropriation of dividends before payment of
the ordinary shareholders is considered.

Trading on the NSE

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Stock Exchange offices where trading takes place are called floors.
There are 8 other floors apart from the one in Lagos. They are located
in Port Harcourt, Abuja Ibadan Benin Yola, Onitsha, Kaduna and Kano.
Most of the transactions take place in Lagos. The most popular
instruments traded on the NSE are ordinary shares or common stock.
Preference shares are sold infrequently and debentures are rarely sold.
Most trades/deals are in the ordinary shares quoted companies.\]

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Dealings on the Stock Market
For an investor the primary reason for investing in the capital market is
to store and increase his wealth. One of the objectives of a subsisting
firm is to increase wealth of its shareholders. This view is more refined
than the one held in the 20th century that the purpose of investing is to
receive dividends. The only way to become a shareholder in a company is
to buy shares of such a company. Since returns from investment does
not consist of dividends alone, the receipt of other form of increase in
capital and growth enables the wealth of the shareholder to increase
faster than when dividends are paid if the company is performing.
Investing in the capital market can come in two ways: through the
primary market, when companies come into the market and stocks
become available to the general public for the first time, is when they
become Public Limited Companies. This enables the shares of the
company to become available to the general public. This is called IPO
(Initial Public Offering). Examples of the current ones are Transcorp Plc
selling at N7.50 and Dangote Sugar Refinery Plc sold at N18.00, of
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recent. Shares of already listed companies are equally bought on the

floor of the NSE in the secondary market. The primary sector involves
buying the shares from an accredited agent, usually from banks and
stock broking firms, where the intending investor pays the money for
the required number of shares and await the allotment and the issue of
certificates. (I belief these will soon be electronically stored with time
and investors will no longer be required to carry certificates!). Once
certificates have been issued the investor can trade inn shares
registered there in the certificates. This is when it gets into the
secondary market. Investors can enter into the market through this
avenue when he appoints a stockbroker to purchase shares of companies
he is interested in for him. The secondary market allows investors to enter
into the market anytime while he/she may have to wait for companies to
become Plcs before investing through the primary market. As companies
perform and make profit the values of the shares of such companies
increase and investors wealth become maximized or increased.

About 291 stocks are listed on the NSE as 31 st Dec 2006. With 28 sectors
starting from agriculture and airlines through banking, conglomerates, food
and beverage, petroleum to real estates and textiles. There is the Emerging
Markets where the low capitalized companies are quoted. There is also a new
sector for foreign stocks. Also there is a section for authorized unit trusts
called memorandum quotations (authorized unit trust invest in shares for
investors that units in them).

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As mentioned earlier there are risks attached to buying shares of companies

but the risks are easily eliminated through diversification by buying stocks
or shares of different companies such that there is only market or
systematic risks (risks that affect all companies) left. Risks peculiar to a
company stock or shares or even sector are known as unique or alpha risks.
This means that the more diversified the stocks (portfolio) of an investor is
the better, because he avoids risk peculiar to a particular company or
sector. This is important in investing in the capital market to ensure safety
and lower downside limit in the wealth of the investor.