DYNAMIC PORTFOLIO LIMITED (Member of The Nigerian Stock Exchange) Registered by Securities and Exchange Commission INVESTING IN THE CAPITAL MARKET: BENEFITS & PROSPECTS INTRODUCTION Unlike other types of market structures, the capital market is unique in both features and operational fundamentals. The Market has therefore come to be recognized as the pillar in every strong and dependable economy all over the world owing to its vital role in creating avenues for investors and companies to raise long-term funds for their investment purposes. Apart from serving as a source of raising long-term funds, investors also approach the market to create wealth through investment in instruments traded in the market. Hence, for individuals with early retirement in mind or having the intension to undertaking a long vacation, the capital market can serve as platform to raise the needed finance. One would then say that every government, corporate entities or private individuals requires capital (funds) to finance their operations and to engage in long-term investments. To achieve this, a company raises money through the sale of securities stocks, debentures and bonds in the company's name. These are bought and sold in the capital markets. In this write-up, we ll take readers through the various opportunities open to investors in the market and how they can take advantage of same to grow their wealth. The capital market is divided into two segments; the primary market and the secondary market. While the primary market is the avenue to raise fresh issues (by companies known as the issuers) for subscription by investors, the secondary market is in place for the trading on securities earlier issued in the primary market. REGULATORY AUTHORITIES/FUNCTIONS The daily activities or transactions carried out at the capital market are regulated by institutions set up by government to efficiently manage the affairs in the market. The Securities & Exchange Commission) with its sister regulatory institutions (The Nigerian Stock Exchange, a self regulatory organization and the Central Securities Clearing System) are vested with the responsibility of ensuring the proper functioning of the capital market through the formulation and implementation of guided policies. With the necessary regulatory frame work in place, investors in the market are well protected of their investments.
SECURITIES AND EXCHANGE COMMISSION Set up by Government, the Securities and Exchange Commission (SEC) is the apex regulatory institution of the Nigerian capital market. It is a statutory body supervised by the Federal Ministry of Finance. The Commission has evolved over time, having started with the establishment of the Capital Issue Committee in 1962 as an essential arm of the Central Bank of Nigeria. This was purely a nonstatutory committee, which later metamorphosed into the Securities and Exchange Commission (SEC) in 1978. This followed a comprehensive review of the Nigerian financial system, with the promulgation of the SEC Decree Number 71 of 1979. The Decree has been reviewed several times. The last review was in 1999 which paved way for the promulgation of the Investments and Securities Act (ISA) Number 45 of 1999. The ISA vastly enlarged the powers of the Commission, and also saddled it with the dual responsibilities of: Regulating the capital market with a view to protecting the interest of all investors in the market; and Developing the capital market in order to enhance its efficiency, and to pave the way for a private-sector-led economy. The SEC is vested with various functions among which are: Regulate investment and securities business in Nigeria; Register and regulate all types of Securities Exchanges, Capital Trade Points and central depository and clearing companies; Ensure investors protection in the market; Registration of market operators; Register securities that are to be offered to the public. Maintain surveillance over the securities market to ensure orderly, fair and equitable dealings. Register and regulate Securities Exchange; Capital Trade Points; Futures, Options and Derivatives Exchanges; Commodity Exchanges and any other recognized Investment Exchange Keep and maintain separate registers of foreign direct investment and foreign portfolio investments; Approve and regulate Collective investments including all collective investment schemes such as unit trusts, esusu schemes, pension funds and other such schemes; Approve and regulate Mergers, acquisitions, take-over and other forms of business combinations under the Act. 2
THE NIGERIAN STOCK EXCHANGE (NSE) On the other hand, a self-regulatory organization set up by a group of individuals, The Nigerian Stock Exchange (NSE) basically provides market place and facilities for trading (buying and selling) of securities in the secondary market. Established in 1960 as an organ of the Nigerian capital market, The NSE was originally know as the Lagos Stock Exchange at inception, it was later reconstituted into The Nigerian Stock Exchange in 1977. Vetted with the responsibility to control and regulate quotations on the Exchange as well as correlating the stockbroking activities of members, The Exchange presently has eight (8) branches in the main cities in Nigeria; they include Abuja, Kaduna, Port-Harcourt, Kano, Onitsha, Ibandan, Yola and Benin. Functions of the Exchange include, among others: Provide appropriate machinery to facilitate further offerings of stocks and shares to the general public. Promote the increasing participation by the Public in the Private sector of the economy Provide opportunities for raising new and fresh capital. THE CENTRAL SECURITIES AND CLEARING SYSTEM (CSCS) To aid effectiveness in transaction on the floor of the Nigerian Stock Exchange, the Central Securities and Clearing System (CSCS), was set up in April 14, 1997 with the main purpose of clearing and settlement of trades for the NSE. It is also known as the Central Securities Depository (CSD). Consequently, the settlement cycle reduced with effect from March 2000, from T+5 to T+3 (T+5 i.e. transaction day plus 5 working days, T+3 i.e. transaction day plus 3 working days). MARKET INTERMEDIARIES Of course, there are a number of market facilitators which include the Issuing Houses, Stockbrokers, Investment Advisers, Portfolio Managers, Registrars, Trustees, Receiving Agents, Reporting Accountants and Solicitors, among others with various roles to play in the market. INVESTMENT BASICS Many private investors' first foray into financial trading in the capital markets is via the stock market. It is relatively easy to understand, offers a wide selection, features many recognizable companies and products, is readily accessible, and its high trading volume creates liquidity that allows investors to "get out" with relatively little hassle. MARKET TRADING INSTRUMENTS The capital market instruments for trading include; Equities, Preference Stocks, Bonds, and Debentures etc. 3
BUYING & SELLING OF SHARES As stated earlier, there are two (2) major avenues through which investors can buy and sell shares; they are the primary and the secondary markets. The primary market provides for only buying of shares or other capital market instruments directly from the issuing company which could be through Initial Public Offer (IPO), Offer for Subscription, Rights Issue, and Private Placement etc. The price at which shares are bought in this segment of the market is usually lower than that of the secondary market. This means that potential investors can buy shares of Company XXX through a Receiving Agent, when its shares are being flouted in the market. On the other hand, the secondary market enables investors to trade in securities which had earlier been issued in the primary market symbolized by the Stock Exchange. Thus, this market provides a mechanism which enables investors to buy and sell existing securities. The investors can therefore buy and sell shares through a Stockbroker who trades on these shares on the floor of The Nigerian Stock Exchange with the provision of market facilities by the Exchange. INVESTMENT BENEFITS/PROSPECTS The primary aim of any investor is to get a good return on his or she investment. Investing in the capital market goes with a lot of benefits and prospects, if investment decision is wisely taken putting into consideration the viability of the company which an investor wishes to invest, critically analysis of its fundamentals, past financial performance, management structure, business environment, market competitiveness, economic environment and of course political environment, among others. The benefits/prospects therefore which investors derive from investing in the capital market can not be overemphasis, such include; Capital Appreciation: It entails the difference between the price at which a share of a company is bought and the price at which it is sold. If for instance, an investor bought the shares of Company XYZ at N2.00 per share, and after three (3) months he sold the shares for N3.50 per share, the investor is said to have made a capital appreciation of N1.50 or 75 percent. Dividend Payment: Shareholders are entitled to dividends, if declared. It is a sum of money agreed upon by the directors of a company to be paid to its shareholders from the company s profit in a given financial year. Dividend is proportionally based on per share which means as much shares an investor has, more dividends are expected. In the case of investment in Bond however, interest payment is made to the bond holder on monthly basis as the case might be while the principal will be paid back to the investor on the expiration of the bond tenor. Bonus Issue: Shareholders are also entitled to bonus issue, if declared. Depending on the rate declared, it enables a shareholder to acquire additional shares from the company where he invested in, without necessarily paying for these shares. 4
Participate In Rights Issue: Shareholders are opportune to participate in Rights Issue of the company where they invested. Although Rights Issues are paid for by the investors but the price is usually lower than the prevailing market price. Participate In Decision Making: Shareholders have the right to attend Annual General Meeting (AGM) of the company which they invested in, participate in its decision making and exercise voting right. Collateral For Obtaining Loan From the Bank: It will interest investors that they can use their share certificates as collateral to obtain bank loans for individual use or business development. Preparation Towards Personal Pension Plan: Buying of stocks could be used as individual preparation towards personal pension plan. This, in the sense that an investor who is opportune to invest considerably in the stock market during his earlier age, could completely rely on his investment as a means of income at old age (when he becomes unproductive). CONLUSION The high private investor participation, varied product offerings, limited margin and extensive government regulation all combine to make the capital markets relatively safe for non-professional traders. The capital markets generally offer ease of access and encouragement to private investors, limited leverage opportunity and, as a result, limited upside potential. Investors are safer when they engage the services of a professional in managing their portfolios. Stockbroking firms as well as portfolio managers are well on ground to render these services. Investors are advised not to be scared about the professional service charges placed on their investments, rather they should be concerned with the benefit they will derived when their investments are professionally handled. The risk associated in investing without engaging a professional is more costly that the charges you are to pay to experts to guild you through your investments. There is therefore no doubt that investing in the capital market is of immense benefit to investors who most importantly invested in well analyzed and viable stocks with good prospect in terms of investment returns, and these as indicated earlier could only be well handled by professionals. DYNAMIC RESEARCH DYANMIC PORTFOLIO LIMITED 20, CAMPBELL STREET LAGOS ISLAND LAGOS. For more enquiries, please contact us or call 234-2702508, 07028185437 and 08052230864. 5