FAQs on The Nigerian Capital Market

What is Gross Domestic Product
What is Gross Fixed Capital Formation(GFCF)
What is Gross National Savings (GNS)
What is Consumer Price Index
What is Price – Earning Ratio (P/E)
What is Dividend Yield
What is Trading Value
What is Market Capitalization
What is Turnover Ratio
What is New Issues

What is Gross Domestic Product
The Gross Domestic Product (GDP) is the value of goods and services produced in an economy during a period of time irrespective of the nationality of the people who produce the goods and services. It is calculated without making deduction for depreciation. It is obtained by valuing outputs of goods and services at market prices and then aggregated. It should be noted that only goods used for final consumption or investment goods (capital) or changes in stocks are included.
• GDP at Current Factor Cost (i.e. nominal GDP) equal GDP at current market prices less indirect taxes net of subsidies
• GDP at 1984 Factor Cost (Real GDP) equal GDP at 1984 Market Prices less indirect taxes net of subsidies
• GDP at Current Market Prices equals GDP at Current Factor Cost plus indirect taxes net of subsidies. This is GDP valued at Market Prices which purchasers pay for the goods and services they acquire or use
The GDP is an indicator of state of health of a national economy. Of significant importance is its growth rates which show the direction of the economy. The GDP growth rate in Nigeria has moved from 2.4 percent in 1998 to 3.0 percent in 2000 and further to 3.8 percent as at end of 2001. The relationship between the capital market and the economy is obtained by comparing the market capitalization and GDP.

What is Gross Fixed Capital Formation (GFCF)
Gross Fixed Capital Formation is expenditure on fixed assets (such as building, machinery) either for replacement or adding to the stock of existing fixed assets. Usually the amount of new issues (in the capital market) is used to determine the relationship between the capital market and GFCF. This is discussed later in this presentation.

These show the amount of domestic and foreign investment financed from domestic output comprising public and private savings. It is gross domestic investment plus the net exports of goods and non-factor services.

What is Gross National Savings (GNS)
These show the amount of domestic and foreign investment financed from domestic output comprising public and private savings. It is gross domestic investment plus the net exports of goods and non-factor services.

What is Consumer Price Index
Index number is a weighted average of a number of statistical observations of some economic attribute, as percentage of a similar weighted average calculated for the attribute at an earlier or base period. The most familiar being the retail price index, or cost of living index otherwise known as Consumer Price Index (CPI).

Consumer Price Index (CPI) measures changes in the average level of prices over a period of time. In other words, prices indicator of what is happening to prices consumers are paying for items purchased. With a given starting point or base period which is usually taken as 100, the CPI can be used to compare current period consumer prices with those in the base period. For instance, a CPI of 125 indicate that consumer prices generally have gone up by 25% above the base period for the same basket of items. When many items are included in the construction of an index without taking into consideration the importance of each item, such index is called unweighted chain or aggregate index. This is derived by simply summing the unit prices in the year of interest (current period) and dividing that sum by the sum of the unit prices in the base years: i.e.

where Pit = Unit price for item i in period t and
Pio = Unit price for item i in the base period.
Because of the sensitivity of an unweighted index to one or more high-priced items, this form of aggregate index is not widely used. A weighted aggregate price index provides a better comparison when quantities used differ. Each item in the group is weighted according to its importance. In most cases, the quantity of usage is the best measure of importance so most price index are weighted with quantity.

A weighted aggregate index is computed as follows:
unit prices in the base years:

What is Price – Earning Ratio (P/E)
The price-earnings ratio is a number just like an index. It is derived by dividing the prevailing market price of an equity by the Earnings Per Share (EPS). The earning per share itself is derived by dividing the Profit After Tax (PAT) by the total number of shares outstanding of a Company.

The price-earning ratio depicts how covered by earnings is an equity investment in any Company. It may be based on actual earnings of a Company or on a projected figure. It gives an idea of the period it takes an investor to recoup his/her investment provided the present earning trends of the Company is maintained. The lower the price-earning ratio, the better for the investor. The perceived investment risk of an equity is usually focused through its price-earning ratio. A Company with good and stable financial and dividend payment track record could have a high price-earning ratio while a poorly performing Company would likely record a low price-earning ratio. The average price-earning ratio of the Nigerian stock market is 7.4 as at April 2003. This is one of the lowest in the world. Literarily it means that on the average, an investor can recoup his/her investment within 7 years.

What is Dividend Yield
Dividend is the part of earnings (if declared) that is paid to the shareholders as the share of the profit of the Company. Dividend is not compulsory to be paid. The entire profit after tax can be ploughed back for the growth of the Company. Dividend Yield (DY) is the ratio of dividend per share to the market price of an equity. It is however, usually expressed in percentage. For instance, if Company A paid a Dividend of N2.00 per share and market price of the share of the Company is N10.00, then the Dividend Yield is calculated thus:

The usefulness of this, is that it enables one to compare with interest rate on Savings and Deposits in the bank. A high dividend yield will attract investment into the stock market. The average dividend yield in Nigeria has been fluctuating ranging from 8.7 percent in 1997 to 7.3 percent in 2001 but rose to 10.8 percent in 2002. This compares favorably with average interest on savings of between 5.5 and 6.5 in money market.

What is Trading Value
This is the amount of deals transacted on a Stock Exchange during a given period. The trading value is derived by multiplying number of shares of a particular Company that changed hands by the prevailing price. It should be noted that shares of a Company can be bought at different prices on any trading day. The price at which the last transaction is carried out is the closing price or current market price. The sum of all the transactions in a particular day becomes the total value for the day for such Company. The aggregate or total sum of all transactions from all Companies gives the total value traded on Stock Exchange for a day or a month or a year.

A rapid increase in the trading volume/value of security on an exchange is indicative of interest in the security or the market. The trading volume and value is an important indicator of the level of liquidity, the efficiency of the infrastructural facilities of a stock market and the investment culture of the populace. Liquidity is the ease with which a security is converted into cash. The activities of portfolio managers, pension funds manager, and unit trust managers are capable of stimulating trading and improving liquidity. The level of awareness of investors and the number of listings could have favorable impact on the trading volume. The market float which is the proportion of number of shares available for trading is another influencing factor on trading activities.

The Nigerian stock market has recorded marked improvement in recent years in terms of trading value. Value of equities transaction rose from N10.9 billion in 1997 to N28.15 billion in 2000, N57.6 billion in 2001 and further to N58.9 billion in 2002. As at May 2003, the trading value stood at N33.3 billion. In essence, the trading value rose by more than 440 percent between 1997 and 2002.

The increased trading value in the recent past is partly attributed to improvements in market procedure and infrastructure which have shortened the clearing and settlement period from 2 weeks to about 4 days i.e. T+3. The investment culture has also improved with many more Nigerians owning and trading shares as against the pervasive buy-and-hold attitude of the past.


What is Market Capitalization
Equity market capitalization is perhaps the most important criterion in assessing the size of a capital market. It is a function of market price and size of paid-up capital of listed Companies. For individual Company, the market capitalization is the product of market price and number of outstanding shares i.e. Number of Outstanding Shares X Market Price. The sum total of market capitalization for all listed equities on an Exchange gives the aggregate equity market capitalization of a stock market.

For individual quoted Companies, the size of market capitalization is an indicator of the market value (i.e. investor’s perception or assessment) of the Company. Thus market capitalization does fluctuate with movements in the market price of a Company equity and changes in outstanding shares. For instance, an increase in the outstanding shares of Company with market price either held constant or increased, would enhance the market capitalization of a Company. Generally, the aggregate market capitalization of a stock market would show an upward trend in a bullish market while the converse would happen in a bearish market situation.

To a portfolio investor, the size of market capitalization of a stock market is an important motivating factor for investing in a particular Company or market. In U.S.A. for instance, most institutional investors would expect a Company to have a sizeable market capitalization for them to consider investing in it.

The total market capitalization of the Nigerian Stock Exchange stood at N894.4billion as at 31st May, 2003 out of which equity capitalization accounted for N877.3 billion or 98 percent. The value of equity market capitalization showed substantial appreciation over the years increasing from N276.1 billion in 1997 to N466.1 billion in 2000, N648.4 billion in 2001 and further to N748.7 in 2002.

To assess how big a stock market is within the national economy, the market capitalization is usually compared with the Gross Domestic Product (GDP). The size of the Nigerian Stock Market is relatively small. The market capitalization as percentage of GDP was 12.1 percent and 13.5 percent in 2001 and 2002 respectively. However, there is a high degree of correlation between the market capitalization and GDP in Nigeria. A regression analysis run on market capitalization and GDP between 1990 and 2000 showed a correlation coefficient of 0.95. This depicts the saying that capital market is a barometer with which to measure the state of a national economy.

What is Turnover Ratio
This is the ratio of trading value to the market capitalization and usually expressed in percentage. This is another method of assessing how active or how liquid a stock market is. The portfolio investors and indeed other investors consider how fast or how easy he can buy and sell securities when the need arises before he takes a decision to invest in a stock market. Investor at the primary market also considers as very important, what happens next after he might have bought shares in primary market and later needs his money to do something else or to re-invest in another area. Therefore his decision to participate at primary market would be based on his ability to dispose off the security at secondary market.

In Nigeria, the equity turnover ratio has significantly improved from less than 1 percent in the 1980s to about 4 percent in 1997 and further to 6.0 percent in 2000. As at end of 2002 the turnover ratio was 7.9 percent.

What is New Issues
This is the ratio of trading value to the market capitalization and usually expressed in percentage. This is another method of assessing how active or how liquid a stock market is. The portfolio investors and indeed other investors consider how fast or how easy he can buy and sell securities when the need arises before he takes a decision to invest in a stock market. Investor at the primary market also considers as very important, what happens next after he might have bought shares in primary market and later needs his money to do something else or to re-invest in another area. Therefore his decision to participate at primary market would be based on his ability to dispose off the security at secondary market.
In Nigeria, the equity turnover ratio has significantly improved from less than 1 percent in the 1980s to about 4 percent in 1997 and further to 6.0 percent in 2000. As at end of 2002 the turnover ratio was 7.9 percent.