Capital Market
The Capital market is a market where government and corporate organizations raise medium to long term funds from individuals and Institutions, for the mutual benefits of both parties, under the supervision of the country’s regulatory bodies.
The Nigerian capital market is made up of three markets-non securities, securities and derivatives markets. However, we are going to limit our scope to the securities market in this article.
Securities Market
Securities are documents that give ownership to a claim or income yielding papers, which could be traded on an Exchange floor. Securities include debentures, bonds, shares, futures contracts, bills of exchange, promissory notes, certificates of deposits etc. Which could be issued by government or corporate bodies. The most commonly traded securities on the floor of the Nigerian Stock Exchange (NSE) include ordinary shares, preference shares, debentures and bonds. But this article will limit its scope to the ordinary shares usually referred to as stocks.
Ordinary Shares
Shares represent the mandatory value of your investment in a company. It signifies your ownership in a company. It can be referred to as ordinary shares, common stocks or equities. The more the shares of a company you own, the more your stake in that company. Your stake in a company can be increased by buying more of the company’s shares. All shares of a particular company ranks pari passu (equally) irrespective of the date or price they were purchase.
Being a share holder of a company means that you have a claim (no matter how small) to everything the company owns. The ordinary shareholders of a company are the risk bearers of a company. This is because if the company goes bankrupt and liquidated, the ordinary shareholders are not paid until all the company’s creditors-bond holders and preferred shareholders are paid. On the brighter side, if the company’s earning continue to soar, the ordinary shareholders will partake in it. There are two ways to start investing in shares. You can start either through the primary or secondary market.
Primary Market
This is the form of raising funds from the public outside the trading floor by a quoted company or a company about to be listed (quoted) in the Nigerian Stock Exchange (NSE) in exchange for new shares. It is called primary market because it involves direct dealings between the company and investors, through an arrangement with regulators and operators of the market. It is called direct dealings because the money realized from this market goes directly to the company.
There are different stages a company could raise funds for its operations. Some of these stages are;
• At Corporation
Most companies raise fund at incorporation. Investors at this level are called venture capitalists or ‘angel investors’. At this stage, the companies prefer high networth individual or institutions to invest in their business. This is the stage where the company states in its Memorandum and Article of Association the price (par value), lists its directors and states its business. Although to invest in a company at this stage is worth considering, many people shy away from it because of the fear of the unknown.
• When The Company Is About To Be Listed
Prior to the listing of a company on the exchange floor, most companies embark on private placement in order to raise fund to meet up the requirements. In most cases, Initial Public Offers are done.
• When A Company Is Listed
Companies that are listed on the exchange embark on rights issues and public offers as a means of raising funds from the public
Private Placement
A private placement is a sale of securities of a privately held company which is not permitted under the regulations of company law and the Securities and Exchange Commission (SEC) to offer securities to the public. It is usually the last opportunity created for existing shareholders to increase their stake in the company and new high networth individuals or corporate institutions to buy into the company before it is listed on the Stock Exchange. In private placement, limited liability companies raise additional funds by issuing new shares to few investors at a cheap and attractive price compared to price at listing in the Exchange floor.
Factor To Consider Before Investing In A Private Placement
1. Nature Of Business
Check the nature of the business, market prospects, products, services as well as its competitors.
2. Purpose Of The Placement
The future of the company is determined by the purpose of the placement. What percentage of the proceed would be used for expansion, provision and upgrade of Information Technology (IT) facilities, working capital and payment of debt.
3. When Will The Company Be Listed
Have an idea on when the company will be listed and ensure that it tallies with your investment plan. Companies that will be listed soon are better for short term investment rather than the once to be listed in three years time.
4. The Debt Profile Of The Company
It is better to invest in a company with little or no debt as the available fund would be channel into more productive ventures
5. Institutional Ownership
Companies that have institution as their majority shareholders are more stable after listing than those that have individuals as their majority shareholders. They are usually long term investors and may not sell at listing regardless of the price.
6. Par Value
The par value of a private placement determines how much the investor gets after listing. The higher the par value, the better the private placement investment for the investors.
7. The Average Price Of Equities In The Same Industry
For private placement to be advantageous to the investor, it must sell below the average price of equities in the same industry in the secondary market.
8. The Company’s Financial Statement
Check the company’s financial statement to access the key performance indicators (KPI) i.e. turnover, profit after tax (PAT), earning per share (EPS), return on equity (ROE), shareholders funds e.t.c. These when compared to the previous years be in a progressive forms rather than retrogressive forms.
9. Private Placement Marketing
Watch and understand how the private placement is being market. It is usually for few high networth individuals and corporate bodies. This will ensure that when it is listed, the public buy into it to make the price go up. But when the private placement is market in a way that the public buys into it, they will sell at listing thereby putting the price under pressure.
Public Offerings
After the private placement, on order to raise additional fund from the public before listing, most companies issue new shares to the public. Unlike private placements, these offers are open to any class of investors (the general public) and usually advertised extensively through the print media, electronic media and road shows. When the company is offering new shares to the public for the first time, it is known as Initial Public Offer (IPO). Subsequent offers of new shares by the company to the public are called public offers.
During IPOs and public offers, the shares are offered to the public at a fixed price per unit with a stipulated minimum number of units. For quoted companies, the offer price is usually at a discount compared to the current market price. These offers have opening and closing dates.
Whenever a quoted company is going to the public to raise funds, the Nigerian Stock Exchange places a technical suspension (put a hold) on the current market price. This is to enable the company submit its documents for inspection and also give the issuing house(s) time to prepare the prospectus for the offer. The suspension is usually lifted 3 weeks after the closing date of the offer.
Initial public offers and public offers always comes in two forms. These are offer for sale and offer for subscription.
• Offer For Sale
Offer for sale is a type of public offer where existing shareholders offer their holdings or part of them for public subscription. The proceeds of the offer goes to the selling shareholders and not the company. The company only plays a passive role in the issue.
• Offer For Subscription
Offer for subscription is the direct issue of new shares to the public. The money realized goes directly to the issuer (the company)
Rights Issues
This is another way in which a company can raise funds from the public at the stock exchange. It is usually referred to as a way of rights. Right issues are new shares offered to existing shareholders in proportion to the number of shares held in a company. The right issues is usually at a discount when compared to the public offer price (in case of a hybrid offer) or to the current market price. This is usually a way by which companies raise interest-free funds from their shares instead of expensive bank loans. It could also help the company to avoid the dilution of its existing shareholding structure by issuing new shares to the general public.
When rights are issued, a shareholder can either buy or sell all or part of his/her right. When rights are sold, funds are generated by multiplying the number of renounced rights by the margin between the right offer price and the current market price. The offer/bid price of a right on the secondary market should range between the price of the rights issue (subscription price) and the current market price of the stock, which is on technical suspension. The buyer of the renounced rights pays the expected financial contribution to those rights to the company that issue the offer. The shareholder may sometimes renounce and sell the funds to exercise the remaining parts of the rights.
Secondary Market
The secondary market is a market where existing equities are traded between investors. Buying and selling of shares (equities) here is just a matter of trading shares ownership between investors. This creates prices and allows for liquidity. As a result of the deregulation of the Nigerian Capital Market in 1993, prices of issues (Public offers, initial public offers & rights) are determined by issuing houses and stockbrokers. While market prices are determined by stockbrokers in the secondary market. Without the secondary market, there will be no place for investors to sell their shares. And without liquidity, many people would not bother to invest.
The Stock Exchange
This is an institution that provide an organized platform where buyers and sellers of securities carry out their transactions through dealing members (stockbrokers). These transactions take place under the supervision of the country’s regulatory bodies. The Nigerian Stock Exchange (NSE) is the institution that provides these facilities to investors in Nigeria.
The Stock Exchange was incorporated in 1961 as the Lagos Stock Exchange but was later changed to the Nigerian Stock Exchange in 1977. The NSE has about 10 branches in 10 states as at January 31, 2010.
The year of inauguration of the NSE in the various states are; Kaduna (1978), Port Harcourt (1980), Ibadan (1990), Onitsha (1990), Ibadan (1990), Abuja (1999), Yola (2002), Benin (2005), Uyo (2007) and Ilorin (2008). The Exchange operates from its headquarters in Lagos and is interlinked through computer networks to all of its branches.
The mode of operation of the NSE is the auction market. In this mode, listed securities (shares) are bought and sold in the presence of several stockbrokers, at a price established by competitive bidding and under the rules established by the council of the exchange. On the trading floor, the stockbrokers enter the offers (supply) and bids (demands) in their computer systems and are matched. In other words, there must be a seller from one end before buying can take place at the another end. Stockbrokers carry out these purchases and sales orders for investors at a fee (commission) for every buy and sell.
The NSE provides a central meeting place for members to trade in existing shares and offers facilities whereby the public can be informed of the prices of equities dealt on by its members. Through its rules, regulations and operational codes. It protects the public from shady deals in quoted securities with the aim of ensuring equities and fairness. The NSE facilitates dealing in government securities and also acts as a channel for foreign firms to offer their shares to Nigerians for subscription. The NSE provides opportunities to raise fresh funds, by issuing shares to the public. Finally, the NSE and other regulators investigate irregularities or alleged irregularities in the market involving stockbrokers and their clients.
