CHAPTER ONE

1.0    INTRODUCTION

1.1       BACKGROUND OF THE STUDY

11

The stock market is supposed to play an important role in the economy in the sense that it mobilizes domestic resources and channels them to productive investments. However, to perform this role it must have significant relationship with the economy.

The development of stock market in Nigeria, as in other developing countries has been induced by the government. Though prior to the establishment of stock market in Nigeria, there existed some less formal market arrangement for the operations of the stock market. It was not prominent until the visit of Mr. J.B. Lobynesion in 1959, on the invitation of the federal government, to advice on the role the central bank could play in the development of the local money and stock market. As a follow-up to this, the government commissioned and set up a Barback committee to study and make recommendations on the ways and means of establishing a stock market in Nigeria as a formal market. (Alile and Anao 1990)

12

Capital markets are key elements of a modern market-based economic system as they serve as the channel for flow of resources from the SAVERS of capital to the BORROWERS of capital. Efficient capital markets are hence essential for economic growth and prosperity. With growing globalization of economies, the international capital markets are also becoming increasingly integrated. While such integration is positive for global economic growth, the downside risk is the contagion effect of financial crisis especially if itsorigin lies in the bigger markets.

As for the effect of macroeconomic variables such as money supply and interest rate on stock prices, the efficient market hypothesis

suggests that competition among the profit maximizing investor impact of macroeconomics. Variables on stock market will ensure that

all the relevant information currently known about changes in macroeconomics variables are fully reflected in current stock market, so thatinvestors will not be able to earn abnormal profit through

13

prediction of the future stock markets investments. (Chong and Koh 2008).

Therefore, since investment advisors would not be able to help investors earn above average returns consistently except through access to employer insider information.

Stock market is a critical log in the wheel that smoothens the transfer of funds for economic growth. Broadly speaking, stock exchanges are expected to accelerate economic growth by increasing liquidity of financial assets, making global diversification easier for investors and promoting wiser investment decisions. In principle, a well functioning stock market may help the economic growth and development process in an economy through growth of savings, efficient allocation of investment resources and alluring of foreign portfolio investments. The stock market encourages savings by providing the household having investable funds, an additional financial instruments which meets their risk preferences and liquidity needs

14

better, it in fact provides individuals with relatively liquid means for risk sharing in investments projects.(Agrawalla 2006).

The stock markets capacity to contribute to the development of the economy has been largely impaired by various inadequacies. The market over the years have been characterized by-Lack of depth with few securities-poor liquidity, partly due to inefficiency-Poor infrastructural for secondary market operations-Basically, an equity market with largely dormant bond market-High transaction costs-Lack of sophisticated product investments and instruments. The market is mainly dominated by traditional instruments such as BONDS and EQUITIES with limited derivatives-Unfavorable tax regime-Unstable and largely in appropriatein macro-economic environment.

1.2            STATEMENT OF THE PROBLEM

InNigeria, the capital markets have over the years been performing its traditional role. However, its efficiency and effectiveness in this regard

15

have been greatly limited by various factors notable among which are price level and the structure of the economy, which is dominated by oil production, yet, the oil producingcompanies are listed on the stock market, the lack of long term capital in the business, the business sector depends mainly on short-term financing such as overdrafts to finance even long term-capital. The economic reforms of the federal government particularly those that have taken place in the financial sector are therefore intended among other objectives to attain. The

focus of this paper is to examine stock market  impactandon theit’s

Nigerian economy.