The term capital market has always been relative. Whenever it is mentioned, there is a high chance of having the imagination of physical stores or a geographical location meant for buying and selling goods and commodities. While that definition of a market is not wrong, there are key factors that are missing in it. The market as a concept has transcended from the traditional belief to an elaborated terrain, embedded with greater responsibilities and consequential roles.
Speaking of greater responsibilities and roles, some markets determine the growth of any economy — locally and internationally, such is known as the capital markets. cand any other financial asset. Bond markets and the stock markets at large are also big players in the operation of the capital market. According to Investopedia, it creates a channel for suppliers, who are the people, institutions with the money to lend or give out to those who need the money. In most cases, business owners, the government and some personalities are usually the receivers.
This implies that the capital market determines, to a large extent, how the global economy moves. Whether it thrives or cascades drastically from the top to the bottom. In the interest of global standards, capital is the groundbreaker and pacesetter for the flowing of money circularly. It also fuels how to generate funds for private business organisations and individuals to have a constant business development which enhances increase in wealth accumulation and expansion. As mentioned earlier, there are some key aspects of the capital market that determine its movement and growth. These key factors are inserted into the two types of capital markets we have.
Types of capital market
The primary capital market:
This was essentially created for the trading of newly issued or acquired securities. It is the market that enables the beginning of public offerings in the market. Through the primary capital market, the companies can raise their funds by receiving the proper right issued to them wherein there are selections of electronic IPOs, made available for private placement. For instance, it is within the horizon of the capital market that the intermediary like an investment bank adds their extra charges to the available shares and ensures there is a materialisation of sales. Immediately the sales are materialised, different firms take their given shares out for the facilitation of their trading among several investors.
Secondary capital market:
Here, there is a difference in the mode of operation, as opposed to the primary one, the secondary involves trading old securities. It is the platform where trades are made on the securities that had earlier been to the primary. The secondary market is also known as the stock market or aftermarket. This implies that the stock market and the other over the counter trades are under the operation of the secondary. We have the New York Stock Exchange, Nigerian Stock Exchange, the London Stock Exchange and others as examples of the secondary capital market.
The capital market in Nigeria
The history of the capital market in Nigeria cannot be completed without tracing it back to 1946, during the colonial era, in which the country had the floatation of 300,000 pounds in the year development plan. Currently, the Nigerian capital market has emerged as an establishment that has evolved over the years to have a bigger say in the Nigerian economy. It is under the regulation of the Securities and Exchange Commission (SEC), which has the topmost control over overall stocks, bonds securities, preference shares, ordinary shares and other financial engagements.
Just like other countries’ stock exchanges, the Nigerian capital market is influenced by the global economy and the tides taken by the macroeconomy. However, one cannot overemphasise the role that the Nigerian economy plays in the market. Given the situation of the economy which is currently in meltdown, there is volatility in the flowing of the Nigerian capital market both in internal and foreign exchange. For example, it is rationally simple that the profitable price to buy a stock at the moment is N 2.50 then one can sell when the price is N4.00 or around N3.80.
As a fortune bearer, to find a better solution to Nigeria’s capital market, the Nigerian Stock Exchange (NSE) has introduced the Exchanged Trust Funds (ETFs) to find diversification to their portfolios. The introduction of ETFs will aid investors in risk management, to optimise their returns. In 2017, the SEC extended its plan by setting a new policy that it can allow investors the choices in the option of fixed income investment. By doing so, the debt management of the office brought in the savings bond to allow investors to operate in the market for as low as N5,000.
With these developments and many more, it has grown to a large extent, however, there is a greater thing to do to actualise proper capitalisation in the Nigerian market.
Importance of capital market
- The capital market provides easy access to trading of securities for investors. It also assists in minimising different transactions and the cost of information.
- It improves economic and national development by providing huge sources of funds for countries and business stakeholders. Since there is no innovation without financial materialisation, it avails the international financial organisation to collaborate with the government to carry out some innovative projects. For example, the world bank usually collaborates with the Nigerian government to generate funds for basic amenities in the country.
- It makes risks worth taking: in the capital market, the higher the risk, the higher the chance of winning big. Buying securities, bonds and stocks might be full of uncertainties, but investors can tap in to win big whenever they take high risk.
Instruments that are traded in the capital market
Equities are parts of instruments in the capital market, they are issued by companies. They can be obtained in primary or secondary markets. If any investors should invest in equities, it translates to ownership of the companies.
These are usually issued by corporate organisations with the scale of preference. This is because every preference shareholder is given special treatment in sharing the dividend ahead of ordinary shareholders. If a company goes bankrupt, it must pay preference shareholders from the capital.
A derivative is an instrument that is active in the capital market, and it is a type of contract, and its value depends on the key asset (like securities, bonds, commodities etc), general asset and benchmark. Derivative as a contract is established among parties involved in trading together.
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