The capital market is the pulse or the heartbeat of the nation’s economy. It reflects the underlying performance and strengths of companies operating within the economy.
The capital market is where shares and long-term debt instruments are traded. The capital market is often called the stock market. A stock market is run by stock exchange.
The Capital Market is a vehicle through which companies can raise funds to expand their businesses and satisfy their financial needs.
What happens in the stock market affects every one of us. It is the guage used in measuring the overall performance of the economy. If you are an insurance policyholder or a contributor to pension fund, what happens On the stock exchange affects you because insurance and pension funds managers invest your contributions in the stock market via the Stock Exchange.
A COMPANY
An individual who decides to engage in some form of business activity could provide all the money required for the business. That business would be called a sole proprietorship.
If he decides to pool funds with other people to fund the business, the business is jointly owned by them and the liability of each contributor is limited to the amount he contributed to the business, the business is called a limited liability, or joint stock, company.
Each person’s contribution is divided into units called shares (for easy transferability) and the owner is a shareholder.
The stock market allows a shareholder to divest from a company without collecting his money back from the company. He collects money from another person interested in becoming a shareholder in the company.
A company could be public or private. A public company has more than 50 shareholders. A public company could be quoted or unquoted.
THE STOCK EXCHANGE
A stock Exchange provides a market which facilitates the buying and selling of shares of quoted companies. This creates the much-needed liquidity in the stock market. There are both small and big investors who buy and sell shares.
THE PRIMARY MARKET
The primary market is the market for new or fresh issue of shares to the investing public. Before securities can be offered to the public, the issuer must obtain approval from the Securities and Exchange Commission (SEC) which is the apex regulatory body of the Capital Market. The proceeds from shares sold to the public go to the company if it’s an offer for subscription but to the existing (usually large) shareholder if it is an offer for sale.
THE SECONDARY MARKET
The secondary market is the market for shares that are already listed in the exchange and are held by shareholders.
Companies source for funds by selling their shares to investors through the primary market. The Stock Exchange makes it possible for investors to trade in the shares already issued.
Purchase and sale of shares in the secondary market have no effect on the issued share capital of the company.
SHARES, STOCKS, EQUITIES,
Shares, stocks, equities or ordinary shares are all synonymous definitions of shares of a company. When you buy shares of a company, you become a part owner of that company proportionate to the amount of money you invested. Being a part owner or shareholder means that you share in the profits of the company.
DIVIDEND
Dividend is a slice or proportion of profit paid to the shareholders. Dividend is not a fixed amount but it varies from company to company and from year to year. The dividend a company declares each year depends on the profit made by the company and the recommendations of the Directors of the company. The directors recommend the proportion of profit to be kept in reserve for future expansion and modernization and they recommend the portion of profit the company pay out to it shareholders. Dividends must be approved by shareholders at a general meeting.
BONUS/SCRIP ISSUE
This is the issuance of shares by a company to its shareholders in proportion to their existing holdings. This is done by capitalizing existing reserves of the company, which already belong to the shareholders, and it is merely the formal recognition of the increase in the capital invested by those shareholders through the ploughing back of previous profits.
DEBENTURES
Debentures, like bonds, have agreed interest rates (which could be fixed or floating) and a set maturity date. Debentures are debt securities issued by companies to long time obligations Debenture holders are creditors to these companies.
RIGHTS ISSUE
Rights issues are exclusive to existing shareholders only. When a company wants to raise additional funds it gives existing shareholders the opportunity ahead of others, to buy new shares in proportion to their holdings usually at a concession price. Existing shareholders are sent Right circulars stating the number of shares provisionally allotted to them and the opportunity to apply for additional shares. Rights, ordinarily have a market value of their own and are actively traded in most cases, they must be exercised within a relatively short period. Failure to exercise or sell rights may result in actual loss to the holder.
EARNINGS PER SHARE (EPS)
Earnings per share show how much income after tax a unit of share has generated.
DIVIDEND PER SHARE (DPS)
Dividend per share is the naira amount paid to shareholder of a company’s common stock. Dividend is an appropriation of profit.
DIVIDEND WARRANT
Dividend warrant is an order to release a company’s dividend to bonfire shareholders.
EX-DIVIDEND (XD, EX-DIV)
This means without current dividend. The buyer of stock is not entitled to the current dividend. The seller gets the dividend. Shares purchased during the without dividend period will not earn a dividend declared in that period for the new owners.
EX-SCRIP
This simply means without scrip or bonus .The buyer of shares is not entitled to the scrip or bonus. It goes to the seller. Shares purchased during the without scrip period will not earn a scrip declared in that period for the new owner.
EX-RIGHT
This simply means without the rights. Companies raising additional money may do so by offering their existing shareholders the right to subscribe to new or additional shares, usually at a discount on the prevailing market price.
CUM-DIV This means with dividend. The buyer of shares is entitled to the current dividend.
CUM-SCRIP
This means with scrip or bonus. The buyer of shares is entitled to the current script or bonus shares.
A STOCKBROKER
A stockbroker is a dealing member of the Stock Exchange, licensed after due process, which buys and sells securities on behalf of investors for a commission called “brokerage”.
The commission charged is regulated by the Stock Exchange. Stockbrokers provide personalized services.
WHICH SHARES TO BUY
This depends on what you want from your investment and your financial situation. The stocks quoted or listed on the Stock Exchange vary from Government stock to loan stock to ordinary shares and their dividends vary from low to high. The important thing is to determine your own objective and invest accordingly.
When you mandate your stockbroker to buy or sell your shares on your behalf, he strives to buy or sell at the best price in the market at that time.
WHEN DO YOU PAY
You ought to pay for the shares before your stockbroker can buy them on you behalf. Never pay cash for securities transactions. Always issue a cheque in the name of the company acting on your behalf.
Your stockbroker normally opens a shares account for you as soon as you are ready to commence buying and selling of shares. All payments, purchases and sales of shares are processed on your account. You can request for a printout of your statement to ascertain the status of your account at will.
CHARGES FOR PURCHASES
Following are the costs of acquiring shares:
*Consideration which is the unit multiplied by the purchase price of the shares. Plus: *Brokerage commission, which is 1.575% of the value of the shares. *SEC FEE payable to Securities and Exchange Commission, which is 0.6% of the value of the shares. *Stamp duty, which is 0.075% of the value of the shares. *Value added tax (VAT), which is 5% of the 0.1% on CSCS.
SELLING SHARES
Give certificate to your Stockbroker along with a signed transfer form. The certificate will be forwarded to the company’s registrar for the verification of your signature. If all is well, the registrar will forward the verified certificate to the Central Securities Clearing System (CSCS).
CSCS generates an investor’s account if you are a new client and advises your stockbroker accordingly. Remember that you cannot have the original certificates after they are verified and forwarded to the CSCS.
Armed with your CSCS account number and your sale mandate, your stockbroker will sell the shares at the best market price and pay you as soon as his trading account is credited a few days after the transaction.
CHARGES FOR SELLING
Following charges are deductible from the proceeds of sale. What is paid to the shareholder is consideration, which is the unit multiplied by the sales price of the shares, less: *Brokerage commission, which is 1.575% of the value of the shares. *CSCS/Stock exchange fee payable to the stock exchange and the CSCS Commission, which is 0.47255% of the value of the shares. *NSE fee is 0.525% of the value of the shares. *Stamp duty, which is 0.075% of the value of the shares.
CSCS
The Central Securities Clearing System (CSCS) commissioned April 8, 1997 as part of the effort to make the Nigerian Stock market more efficient and investor friendly. It commenced operation April 14, 1997.
FUNCTION OF CSCS
*Central Depository for certificates of companies quoted on the stock exchange. *Sub-registry for quoted securities (in conjunction with registrars of quoted companies) *Issuer of central securities identification numbers to stockbrokers and investors. *Clearing and settlement of transactions. *Safekeeping \Custodian
BENEFITS OF CSCS TO INVESTORS.
*Investor’s statements of stock position are issued half-yearly free of charge or on demand for N100.00 *Use of stock position as collateral for loan facility after T +3 settlement cycle, i.e., four working days. In effect, a statement of stock position is obtainable from CSCS four days after transaction. *Investors can speculate more and take and take advantage of capital appreciation in their investment because of T+3 settlement cycle. *Eliminates risk of loss of certificates.
ATS
Automated Trading System is the system whereby buying and selling of shares is done electronically. Dealers enter buy and sell orders for shares into an electronic trading system on a computer. The trading engine automatically matches the buying and selling orders at the buying and selling prices.
RIGHTS OF SHAREHOLDERS *Dividend *Bonus\Scrip *Rights exclusive to existing shareholders *Capital gains *Right to attend Annual General Meeting *Confidentiality *Certificate of shareholding could be used as collateral *Access to Annual reports\Accounts *Voting Rights at Annual General Meeting
WHY INVEST IN NIGERIAN STOCK MARKET
Every discerning investor have come to realize the abundant potentials in the Nigerian stock market with the new dispensation in the Nigerian polity-the successful return of the country to Democracy.
According to International Finance Corporation (IFC) report of 1998 the Nigerian stock market had one of the highest rates of dividend return of between 12.5-16% in the world.
With the relative stability in government, the inflow of foreign investments into the country will increase substantially as many foreign investors have stated their willingness to avail themselves of the enormous untapped potentials that abound in Nigeria’s market. This is no doubt one of the major dividends of the nascent democracy.
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