A Eze Nwagbaraji
1 December 2008
Function and Purpose - Role for Uncompromised Oversight The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities.
This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.|
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption.
Therefore, Central Banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'être of Central Banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counter party could default on the transaction.
The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.
The Nigerian Securities and Exchange Commission (the SEC) like their counter parts in western countries have tough jobs in policing the conduct and character of Stock Market operatives and brokers.
The importance of the SEC in the United States, for example, is well known to all market players and their efficiency sustains the credibility of the market. This is the primary reason why the United States stock markets are the most robust and largest of all markets. As an emerging economy, Nigeria cannot afford to create a situation where the SEC operatives are viewed from the same prism with which other government institutions are viewed - havens of inefficiencies.
To pull Nigerian corporations into the 21st century financial environments, the SEC must adopt a zero tolerance posture in dealing with all participants in the market. Corporations listed on the Stock Exchanges must be held to the highest accounting principles and information dissemination mechanisms must be iron clad. The SEC should not hesitate to delist firms from the Exchanges should they fail to meet their fiduciary responsibilities to market participants.
A publicly traded corporation is a public trust. Insider dealings and trading by both corporate operatives and their outside collaborators must be dealt with swiftly to avoid loss of public confidence.
Relationship between the Stock Market and Modern Financial Systems
The financial system in most western countries has undergone a remarkable transformation. One feature of this development is dis-intermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations.
The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries.
In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 per cent of households' financial wealth, compared to less than 20 per cent in the 2000s.
The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.
The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries.
In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another. Emerging economies of Africa are no exception. As the middle class continue to expand, the tendency is for an increase in retirement vehicles - and in this, stocks remain the most liquid compared to real estate.
The Stock Market, Individual Investors, and Financial Risk
Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds.
This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular.
This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables). Over the past three years, all the restructured Universal Banks in Nigeria have not had any difficulties having stocks put in the market over-subscribed. Some non-bank business, such as Dangote have also met the same public acceptance. These are signs of an emerging middle class. A combination of stock appreciations and dividend payments can actually create a class of millionaires.
Warren Buffet, one of the world's most seasoned investors is known to have began his career as an investor with $100.00. Over the years his biographers say, he built that same initial $100.00 into a multi-billion dollar empire with holdings in various business segments of the American economy. Over the past 15 years, Buffet has consistently been ranked by Forbes Magazine among the top five wealthiest people on earth.
NOTE: In the final part of this series, we will look at Market and individual Behaviors
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