Definition of Capital Market
The capital market is a place where people, businesses and governments raise and invest long-term funds. These funds are usually needed for more than one year. The market deals in securities such as shares, bonds and debentures. Each security has its own terms and conditions.
Businesses use the capital market to raise money for expansion. A company may need new machines or a bigger factory. The government may also need funds to build roads, schools and hospitals. The capital market helps them obtain the money they need.
Investors also use this market to grow their savings. Someone who buys shares may earn dividends. A person who buys bonds may receive interest. The market therefore connects those who have money to invest with those who need funds for long-term projects.
Institutions Involved in the Capital Market
Several institutions and groups take part in the capital market. Some regulate its activities. Others help raise funds or invest money. Each has a different role.
1. Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) regulates the Nigerian capital market. It oversees activities involving shares, bonds and other securities. Its work helps keep the market fair and orderly.
The SEC registers market operators and monitors their activities. It also approves public offers of securities where required. Another part of its work is to protect investors from fraud. These measures help people invest with greater confidence.
2. Nigerian Exchange (NGX)
The Nigerian Exchange (NGX) provides a market where listed securities can be bought and sold. Companies that meet its requirements can list their shares on the exchange. This gives investors an organised way to trade those shares.
Investors usually trade through authorised stockbrokers. The NGX also publishes information about listed companies and share prices. Investors use this information when deciding what to buy or sell. However, prices can rise or fall, so investors may lose money.
3. Stockbrokers
Stockbrokers help investors buy and sell securities. They act as intermediaries between investors and the market. They must be properly licensed to carry out these activities.
An investor who wants to buy shares can place an order through a stockbroker. The broker then carries out the transaction on the investor's behalf. Stockbrokers may also provide market information and investment advice. Their services help investors access the market.
4. Investment Banks
Investment banks help companies and governments raise funds through the capital market. They advise them on how to issue securities. These may include shares or bonds.
They can also help prepare the offer and market it to potential investors. For example, a company may want to build a new factory but lack the money. An investment bank can help it raise funds by issuing shares or bonds. The type of security chosen depends on the company's needs and financial position.
5. Investors
Investors are people or organisations that buy securities in the capital market. They provide funds to companies and governments in exchange for possible returns. Some invest for a few years, while others hold their investments for much longer.
An individual may use personal savings to buy shares or bonds. Pension funds and insurance companies also invest in securities. They often manage money on behalf of many people. Investors may earn dividends, receive interest or make a profit when they sell securities at a higher price. However, returns are not always guaranteed.
6. Issuing Companies
Issuing companies are businesses that raise money by selling securities to investors. They may issue shares to raise equity capital. A share gives an investor part-ownership of the company. The company does not repay this money like a loan. However, shareholders may earn dividends.
Companies can also issue bonds to borrow money from investors. They must repay the borrowed amount under the terms of the bond. They may also have to pay interest. The money raised can buy equipment, increase production or fund new buildings. A company may also use it to settle old debts.
Companies must follow the rules when offering securities to the public. Those that want to list on the Nigerian Exchange must meet its listing requirements. These rules help ensure that investors receive the information they need before investing.
7. Government
The government also raises funds through the capital market. One way is by issuing government bonds. People and organisations that buy these bonds lend money to the government.
The government can use the funds to build roads, schools and hospitals. It may also use them to finance other public projects or cover a budget deficit. A budget deficit occurs when government spending is greater than its revenue.
In return, bondholders receive interest according to the bond's terms. They also receive repayment of the principal at the agreed time, subject to the terms of the security. Government securities provide another investment option for individuals and institutions.
Summary
Capital Market
The capital market is where funds needed for more than one year are raised and traded.
It is mainly used to finance long-term investment and development.
Funds are generally required for periods longer than one year.
Institutions Involved
Securities and Exchange Commission (SEC)
Nigerian Exchange (NGX)
Stockbrokers
Investment banks
Commercial and other financial institutions
Investors
Companies
Government
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