CAPITAL MARKET - Definition, Importance, Classification, and Roles

CAPITAL MARKET – Definition, Importance, Classification, and Roles

INTRODUCTION

The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed countries (economies). This is made possible through it vital role in intermediate process in those economies. Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long term growth capital formation.

The Nigeria capital market provides the necessary lubricant that keeps turning the wheel of the economy. The functioning of the capital market affects liquidity acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu, 1998). Therefore, by a tiring the quality of these services, he functioning of stock market can alter the rate or pace of economic growth (Equakan, 2005). Okereke-Onyuike (2000) posite that the cheap source of funds from the capital remain a critical element in the sustainable development of the economy.

IMPORTANCE OF CAPITAL MARKET

The capital market plays an important role in mobilization saving and channeling them with productive investments for capital formation and economic growth of the country rational allocation of resources. They do so by converting financial asset into productive physical through the private and public sectors, thereby, including economic growth. In under developed country that capital is scarce the absence of developed capital market is a great hindrance to capital formation and economic growth, even though the people are poor, they do not have any inducement to save, and others who save invest their savings in wasteful and unproductive channel. Nigeria can induce people to save money by establishing banking and non-banking financial institutions for the existence of the capital market.

CLASSIFICATION OF CAPITAL MARKETS

Capital market is categorized into two:

Primary Markets: This is new issues market, it is a mechanism in which new securities are traded on. The operation in the market is the issuing houses, such as stock brokers, commercial and government.

Secondary Market: On the other hand secondary market is concerned with the sales and stock. The center of activities for the secondary market is the stock exchange, which provides a market in which holders of existing quoted share wishes to sell such shares can make contact with individuals and institutions that are interested in buying them. Hence, the secondary market is dominated by stock exchange, which provides a forum for trading securities, such forum is necessary since many of the buyers of new securities will eventually resell them.

THE ROLE OF CAPITAL MARKETS

Capital market include not only the infrastructure to buy and sell securities, the stock exchange and electronic trading system, but they also include the applicable rules (formal and informal) and the market participating that buy and sell or own such instrument and advise on corporate control transaction (Spur, offs, take over, management buyout mergers, acquisition and so on).

Most capital market activity in Nigeria is secondary market transactions, that is transfer of ownership of existing shares.

Primary market activity, the mobilization of investment finance through the sale of new shares or other securities is likely to remain comparatively small. While the opening of stock exchange has much attention, these efforts were largely symbolic.

The most important steps towards creating capital markets lie elsewhere. These include:

(i) Adoption of legal infrastructure for private sector activity; this including a company law that out standard contractual arrangement for limited liability companies owned by many small investors.

(ii) Incorporate of state enterprises as joint stock companies.

(iii) Transfer of ownership to private individuals most important step is the removal of government from commercial activities, that is the transfer of all state enterprise to private owners, since most state enterprises are large joint stock corporation or public limited liability companies owned by individual shareholders remain the most promising vehicles for fostering rapid economic growth in Nigeria.

References

Alile, H.J. D.G, NSE, (1985): The Nigeria Capital Market Work Presented for Nigeria Economy.

Alile, H.J (1997): Making the Capital Market Investing Friendly, Business Times, September , 1996 (P5).

Anyanwu, J.C. (1993) Monetary Economy Theory, Policy and Institutions. Uyo: Hybrid Publishers Limited.

Gerhard, P.G. etal (1989): Creating Capital Market in Central and Eastern Europe Published in Embrown House, 195 Palm Groove Lagos.

Loynes, J.B (1957): The Role of Central Bank in the Development of a Local Money and Capital Market.

Mbat, D.O. (2001). Financial Management Uyo: Domes Associates Publishers.
Nwankwo, G.O. (1988): The Nigeria Financial System. Macmillan Publisher.