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AN ANALYSIS OF THE ECONOMIC IMPACT OF STOCK MARKET ON NIGERIA ECONOMY (1986-2010)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

The stock market is supposed to play an important role in the economy in that it mobilizes domestic resources and channeling them towards productive investments. However, to fulfill this role, it must have a significant relationship with the economy. The stock market development in Nigeria, as in other developing countries has been driven by the government. Long before the creation of the stock market in Nigeria, there was a less formal arrangement for market operations at the bourse. It was not important until the visit of Mr. JB Lobynesion in 1959, at the invitation of the federal government, to advise on the role of the central bank may play in the development of the money market and local stock. Following this, the government has commissioned and set up a committee to study Barback and make recommendations on ways and means to establish a stock market in Nigeria as a formal market. (Alile and Anao 1990) The capital markets are key elements of a modern economic system based on the market as they serve as channel for the flow of capital resources for capital investors borrowers. 

Efficient financial markets are essential for economic growth and prosperity. With the increasing globalization of economies, international capital markets are increasingly integrated. Although integration is positive for global economic growth, the downside risk is the contagion effect of the financial crisis, especially if it originates in major markets. As for the effect of macroeconomic variables such as money supply and interest rates on stock prices, the efficient market hypothesis suggests that competition between the impact of profit maximization investors of macroeconomics. Variables on the stock market will ensure that all the relevant information currently known about the changes in macroeconomic variables are fully reflected in the current stock market, so thatinvestors will not be able to earn abnormal profit by predicting future investments in the stock markets. (Chong and Koh 2008). Therefore, since investment advisors would not be able to help investors earn higher returns than average, except through constant access to insider information employer. 

Exchange is a critical newspaper in the wheel that smoothens the transfer of funds for economic growth. In general, scholarships should accelerate economic growth by increasing the liquidity of financial assets, which makes it easier for investors global diversification and promotion of wise investment decisions. In principle, a well-functioning stock market can aid economic growth and development process in an economy by the growth of savings, the efficient allocation of investment resources and alluring foreign portfolio investment. The stock market encourages savings by providing household with investable funds, an additional financial instrument that meets their risk preferences and liquidity needs better, it provides for individuals with relatively liquid means risk sharing in investment projects. (Agrawalla 2006). The ability of stock markets to contribute to the development of the economy was largely marred by various inadequacies. The market over the years have been characterized by lack of depth with some illiquid securities, partly due to the inefficiency of the poor infrastructure for operations Basically, the secondary market, a stock market for transactions up bond market largely dormant cost Lack of sophisticated investment products and instruments. The market is mainly dominated by traditional instruments such as bonds and equities with limited adverse tax-derived unstable regime and largely inappropriate in a macroeconomic environment.

1.2   STATEMENT OF THE PROBLEM

In Nigeria, the capital markets have over the years been performing its traditional role. However, its efficiency and effectiveness in this regard 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 producing companies 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 and it’s impact on the Nigerian economy.

As a result of the above, the market has therefore not been in the best position to contribute maximally to economic growth and the real sector. These inadequacies have made the reforms that have taken place over the years imperative. Recent reforms in stock market with the enactments of the Investments and SecurityAct (ISA) no 45 of 1999 which replaced the SEC degree of 1986. Other reformsthat have been taken place in the stock market include:

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