ABC of Capital Market
(Over 20 years investing experience in Nigeria’s financial markets)
A capital market embraces the entire financial system involved in the provision of long term funds. It is a market for the transfer of funds from the surplus spending units to the deficit spending units. There is no such thing as market for capital; rather there is a group of markets for securities that represent title of claims to capital and other resources owned by government, businesses and individuals.
Capital market refers to a stock market or market for the trading of long term securities. In acknowledgement of the fund mobilized by the deficit spending units in the capital market, bonds, stocks and mortgages are issued.
The stock market is the market for the buying and selling of shares of limited liability companies and other securities. The stock market performs the function of financial intermediation whereby the savings of some members of the society are available to other members of the society for productive investment.
The capital market is divided into two major markets; they are the primary market and the secondary market.
Primary market: this market is concerned with the issuing and selling of new securities. The operators in this market are the issuing houses, stock brokers, legal advisers, financial advisers, investment banks and regulatory bodies.
The primary market is responsible for:
- New issues of a company that is raising funds from the market for the first time.
- Fund raising by a company that is quoted on the stock exchange, which may in the course of time need additional funds for expansion.
Secondary market: this is the market for the sale and purchase of existing shares and securities. The centre of activities for the secondary market is the stock exchange. The stock exchange provides a market in which holders of quoted shares that are willing to sell can make contact with individuals or institutions who are interested in buying the shares. Transactions on the floor of the stock exchange are carried out on behalf of the buyers and sellers by the stockbrokers.
The secondary market provides a platform for trading in securities, such a platform is a necessity because buyers of new securities may eventually want to sell at a point in time.
The primary market is concerned with the issue of new securities, while the secondary market provides facilities for the sale and resale of such securities.
Secondary market is the bedrock of the capital market without which investors would have been unwilling to invest in securities. The secondary market ensures the survival of the primary market. With the secondary market, investors are sure that securities purchased in the primary market can be sold.
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Memorable investment quote
The stock market is not a Casino, but if you move in or out of stocks every time they move a point or two, or if you continually sell short, or deal in option and futures, the market will be your Casino. And like most gamblers, you may lose eventually or frequently. – Sir John Templeton
