The capital market is a market that is used primarily for raising medium-term and long-term funds to finance capital-intensive projects the federal, the state, the local and corporate bodies. The institution of the capital market in Nigeria can be traced back to the colonial times, although during that time it operated lightly. The Capital was used to regulate activities in the economy helping majorly farmers in the production of crops for exports, since then, the capital has been used to regulate the economy. The capital market helps in channeling funds from surplus units to deficit units. The process of channeling is done through the issuance of instruments, which are documents (or certificates) showing evidence of investments. These instruments can be gotten directly from corporate bodies, federal, state and local government (primary market) or from the Nigerian Stock Exchange market (secondary market). The stock exchange market is also a medium where investors can make money, shares can be bought, sold and profits can be made.
INSTITUTIONS INVOLVED IN THE CAPITAL MARKET
Financial institutions have used and are still using this medium to raise capital for themselves to finance capital-intensive projects and run the overall affairs of their companies. The institutions the capital market to get funds to finance projects include;
- Commercial Banks.
- Mortgage Banks.
- Nigerian agricultural, cooperative and rural Development banks (NACRDB).
- Insurance companies.
- National Economic Reconstruction Fund (NERFUND).
- Nigerian Social Insurance Trust.
- Stock Exchange.
- Quoted companies on the Stock Exchange.
- Merchants Banks.
- And any other company licensed by the security and exchange commission
SOURCES OF FUNDS FOR THE CAPITAL MARKET
DEBT INSTRUMENTS: A debt instruments can be used by either the government or companies to generate funds to finance projects that are of a capital-intensive nature. The borrower of a debt instrument is not entitled to own any share in the company. Debt instruments are low risks investments, they range from 3-25 years and has low yield returns. Investors in this category get top priority in the event of liquidation of a company.
When these instruments are issued by the federal government it is called sovereign bonds, when they are issued by the state, it is called state bonds, when issued by local governments, it is called municipal bond and when issued by corporate bodies (companies) it is called Industrial loan or corporate bond.
ISSUE OF PREFERENCE STOCK OR SHARES: These instruments are issued by corporate bodies, they can be obtained directly from the primary market or from the stock exchange market which is also known as the secondary market. Financial institutions and companies choose this method to raise capital. When a company has a financial trouble they offer to sell share on the exchange market. The buyers of this type of shares get special status and are high priorities than owners of common shares for example when a company makes little profit after other debts payment is made to holders of preference share before the holders of common shares are considered.
EQUITY (COMMON STOCK): A stock also known as shares is a unit of ownership in a corporation or financial asset. Investment in this form of business translates to ownership of the business. Holders of these shares a company are entitled to vote and contribute to decisions during meeting sessions. The risk factor in this instrument is high, in the case of loss or liquidation holders of this type of shares also bear the loss too. The word shares can also refer to ownership in mutual funds, limited partnership or real estate investment trust. They can also be regarded as common shares, holders of this type of shares are mostly company officers.
BORROWING: Companies and the financial institution can raise short-term capital by getting loans from banks or other sources.
ROLES OF THE CAPITAL MARKET
REDUCTION ON OVER RELIANCE ON THE MONEY MARKET: Investors can get money from the capital market to start their businesses and rather than relying on the money market for funds. There is flexibility, investors can leverage their options.
GENERAL RUNNING OF THE ECONOMY: The existence of the capital market helps to encourage the general public in the running of the economy. Capital can be gotten from the capital market to run high intensive projects like developmental projects which can help bring in more revenue.
AVENUE FOR LENDING AND BORROWING: The capital market provides local opportunities for lending and borrowing for long-term purposes.
MOBILIZATION OF LONG TERM FUNDS FOR LENDING: The capital market enables the long-term fund to be mobilized for lending which can lead to overall development of businesses. Long-term loans like Debt equity is possible in the capital market. Creditors will have enough time to carry on activities that will bring revenue and then pay back the loan
CHANNELLING OF FUNDS TO PRODUCTIVE INVESTMENTS: Capital market helps to channel funds through appropriate channels for productive investment that will yield high returns and benefit the overall economy of the Nation. The capital market channels funds from surplus units to deficit units.