AN INVESTIGATION INTO THE RELATIONSHIP BETWEEN STOCK PRICES AND THE SUPPLY OF MONEY IN NIGERIA

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AN INVESTIGATION INTO THE RELATIONSHIP BETWEEN STOCK PRICES AND THE SUPPLY OF MONEY IN NIGERIA

ABSTRACT

This research report, carry out an investigation into the relationship between common stock prices and the supply of money in Nigeria.

Various early studies provide conflict results as to the relationship between common stock prices and the supply of money, while some study have found an important linkage between the level of common stock prices and the money supply.

This research in this study reveals that there is a strong positive relationship between common stock price and the supply of money that means the supply of money play a considerable role in the determination of the common stock prices.

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The business of buying and selling of share in companies and the place where this happens is the stock market.

When, there is boom it shows that prices of share has increased and crash when process of share fall suddenly, people and companies lose money in the process.

Stock or share at the time of a company formation must carry a nominal value and the nominal value is the quantity of share or stock that is equal to the authorized share capital of the company. For example, if the authorized share capital or the nominal value of a unit of share is 50kobo, then the quantity of share represented by the authorized share capital is 4million units of ordinary share.

The role of common stock prices and the supply of money in the economic development of a nation can not be over emphasized, most economic managers recognize that a well organized capital market is crucial for mobility both domestic and international capital.

In many developing countries, however, capital has been a major constraint to economics development.

The Nigeria economy has over the years been subjected to series of social, political and economic policies and reforms.

In the Pre 1970 era, the economy was basically faring and food security was largely achieved within the various regional government and the need to encourage private capital in development was released long enough with the establishment of the Nigeria stock Exchange with the development of the capital market. (Alole and Anao 1990: pp 104 - 177)

The capital market is a highly specialized and organized as a financial market and indeed is an essential agents of economic development because of its ability to facilitate and mobilize savings and investment to a great extent and the positive relationship between capital accumulation and real economic growth has long been affirmed in economic theories (Anyanwu 1996)

The success in capital accumulation and mobilization for development varies among nations, but its largely depends on domestic saving and inflows of foreign capital and therefore, to set up the current effort an economic recovery, effort must be made toward effective resources mobilization and the realization of this consideration is given to measure the development of capital market as an institution for the mobilization of finance from the surplus sector to the deficit sector.

Undoubtedly, potential invisible fund abound in Nigeria, but the overriding consideration in this project will be examine in the role of the capital market and financial system of any security is the framework within which the capital formations take place and it is the framework within which the saving of some people or member of a society are made possible and investment is the sacrificing of something now for the purpose of something later, this means that either individual as a company or a country for the consumption in future and the essence of investment is risk and time for example, the multinational motor company that go out for money into developing a new car or oil company spread million of Naira for exploration and the government decides it must set up agricultural loan programme and at the same time thinking of buying the lever brother Nigeria Limited ordinary shares and all these are forms of investment saving. (Nwadibia 1998) .

The financial system, therefore, consist of financial intermediaries, financial market, financial instrument, rules, convention and norms that facilitate and regulate the plans of fund through the macro economy.

The system is controlled by the government through, the agency of the central Bank of Nigeria which supervise the collection of financial intermediaries and motors adherence to the government monetary and fiscal polices and the major types of financial intermediaries and commercial Bank, merchant Bank, universal Bank, finances institution, investment trust and mortgage institution.

The placement of new issues on the capital market contributes directly towards increasing Loanable funds and allocating these between economic unit within the economy to close in their or both market of the financial instrument and the capital market is the market issue cease and trading in long term security and chains such as bond, debenture and equity shares. The placement of new issues on the capital market contributes directly toward increasing loanable funds and the types of finances that is desired to suit their preference for long-term, medium term, and short terms in financing investment.

The Nigeria financial system consist of the following

A. The Central Bank of Nigeria and Commercial Bank and Universal Banking under the banking system.

B. The saving institution e.g. federal saving Banking

C. The public sector

D. The security market e.g. Nigeria Stock Exchange.

E. Insurance and provident fund.

F. The specialized/development banking institution e.g. Nigeria industrial Development Bank (Nigeria Stock Exchange 1999 – 2002 pp: 63-71)

1.2 STATEMENT OF RESEARCH PROBLEMS

Since change in the supply of money and common stock prices have various effect on the economy and some of problems set out to resolute in this study is as follows

What are the relationship between the supply of money and level common stock prices in the Nigeria economy.

What are the challenges facing common stock prices and the supply of money in the capital market.

How to evaluate the performance of the common stock and the supply of money in relation to the economic growth in Nigeria

How to examine the rate at which new stock are issued on the capital market

5 How to improved the market and behaviour of members in the market, so as to further enhance better performance of the Nigerian Stock Exchange (Alile 1986).

6 What are the difficulty in keeping proper and adequate record of transaction of exchange on the past?

OBJECTIVES OF THE STUDY

To establish the relationship between the supply of money and common stock prices and them to evaluate the usefulness of this relationship as a forecasting tool in the implementation of investment strategies and some objective include in the following.

To evaluate the performance of the common stock and the supply of money in relation to the economic growth in Nigeria.

To identity the challenges facing common stock prices and the supply of money in the capital market.

To examine the rate at which new stock are issued on the capital market.

1.4 STATEMENT OF HYPOTHESE

HO: There is relationship between the supply of money and common stock prices in Nigeria.

HI: There is on relationship between the supply of money and common stock prices in Nigeria.

HO: Given a certain level of money supply, It is possible to predict common stock prices for a given period.

HI: Given a certain level of money supply, it is not possible to predict common stock prices for a given period.

1.5 SCOPE OF THE STUDY

Though, there will be a brief mention of other determinants of the average level of common stock prices in Nigeria, the study will only focus mainly on the relationship between the supply of money and the average level of common stock prices In Nigeria between 1998-2008 which is 11 years.

1.6 SIGNIFICANCE OF THE STUDY

The study is very relevant to stock market operators, because accurate forecast of the average level of stock prices are often obvious and practical value for determining the stock market investment strategies. Also the study is relevant to other students that intend to carry out research work in a similar area, for it is hoped that the result that will be presented here will provide a basic for the development of move complete and structural specification of the monetary and expectation variable that determine the average level of common stock prices

LIMITATION OF THE STUDY

Its is virtually impossible for limitation not to be encountered in the course of any research.

These limitations affect both the quality and quantity of the research work and some of those limitation affect the course of this research are floured.

Time constraints, which hinder an in depth study of the research work

The inadequacy of finance in carrying out the research in the manner and magnitude that one would have desired.

The reluctance of the Nigeria Stock Exchange to disclose vital information, which cannot be found on the Nigeria capital market.

DEFINITION OF TERMS

PRIMARY MONEY:- This is currency that the bank can get hold of i.e. paper money and coins (Pita Akhere Akhator 2008)

SECONDARY MONEY:- The money created by the commercial bank i.e deposit with commercial banks especially demand deposit (Pita Akhere Akhator 2008)

EQUITY:- This is the residual of ownership over the asset of a company e.g. creditors (Austin O. Okolie 2004)

MARKET CAPITALIZATION:- This is the total volume of funds, which the stock market is able to raise and made available for investment purpose at a particular time (Nwadibia 1998)

THE PRIMARY MARKET:- The primary market provides the avenue through which government and corporate bodies raise fresh funds through the issuance of securities for sale to the public. (Amos O. Arowoshegbe 2008)

THE SECONDARY MARKET:- The secondary market provides investors the opportunity to buy or sell securities that were earlier issued in the primary market. The secondary market can be organized or unorganized. An organized market is a stock market with physical location trading in designated (quoted) securities. Example of this, is the Nigerian Stock exchange. And unorganized market has no physical trading location but transactions are conducted mainly through telephone calls and the computer. (Amos O.Arowoshegbe 2008).

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