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Reason for the Establishment of Nigerian Capital Market

Meaning of the Capital market

While short-term funds are traded in the money market, the capital market is the financial market for long- term funds. Those who need long-term capital for projects of long gestation to be repaid after five years, ten years or more go to the capital market to source such funds. The Capital Market for securities is further sub- divided into two: the primary and secondary market. When new securities like shares, stocks and bonds are issued, they are sold initially in the primary market. But when the holders of these securities want to re-sell them, the securities are re-sold in the secondary market. Thus, the primary market is a market for initial issue while the secondary market is a market for subsequent trading in securities.

The Capital Market refers to a collection of financial institutions set up for the granting of medium and long-term loans. It is a market for long-term instruments which included market for the government securi- ties, market for corporate bonds, market for corporate shares (stocks) and market for mortgage loans. That is a market for the mobilisation and utilisation of long-term end of the financial system. Thus, it is the mecha- nism whereby economic units desirous to invest their surplus funds, interact directly or through financial intermediaries with those who wish to procure funds for their business (Phillips, 1985).

 In the Nigerian context, participants include the Nigerian Stock Exchange, Discount Houses, Development Banks, Invest- ment Banks, Building Societies, Stockbroking Firms, Insurance and Pension Organisation, Quoted Compa- nies, the government, individuals and the Nigerian Securities and Exchange Commission (NSEC) Students Assessment Exercise

Define or explain the term Capital Market.

Reason for the Establishment of Nigerian Capital Market

  1. To introduce a code of Conduct check, abuses and regulate the activities of operators in the market. 
  2. To provide local opportunities for borrowing and lending for long-term purposes. 
  3. To enable the authorities to mobilise long-term capital for the economic development of the country. 
  4. To provide facilities for the quotation and ready marketability of shares and stocks and opportunities and facilities to raise fresh capital in the market. 
  5. To provide foreign business with the facility to offer their shares and the Nigerian public an opportunity to invest and participate in the shares and ownership of foreign businesses. 
  6. Through participation and ownership to provide a healthy and mutually acceptable environment for participation and cooperation of indigenous and expatriate capital in the joint effort to develop the Nigerian economy to the mutual advantage of both parties. 

The following are the functions of an active capital market.

  1. The promotion of rapid capital. 
  2. The provision of sufficient liquidity for any investor or group of investors. 
  3. The creation of a built-in operational and allocational efficiency within the financial system to ensure that resources are optimally utilised at relatively little costs. 
  4. The mobilisation of savings from numerous economic units for growth and development
  5. The encouragement of a more efficient allocation of new investment through the pricing mechanism. 
  6. The provision of an alternative source of fund other than taxation for government. 
  7. The broadening of the ownership base of assets and the creation of a healthy private sector. 
  8. The encouragement of a more efficient allocation of a given amount of tangible wealth through changes in wealth ownership and composition. 
  9. Provision of an efficient mechanism for the allocation of savings among competing productive invest- ment projects. 
  10. It is machinery for mobilising long-term financial resources for industrial development. 
  11. It is a necessary liquidity mechanism for investors through a formal market for debt and equity securi- ties. 
  12.  It is an avenue for effecting payments on debt. 

Students Assessment Exercise


i. Examine fully why the establishment of a capital market is inevitable in Nigeria.