CAPITAL MARKET Lesson Note
This SS3 ACCOUNTING lesson note covers CAPITAL MARKET for First Term, Week 2.
Learning Objectives
- At the end of the lesson, students should be able to:
- Write a short note on capital market.
- Explain the meaning of capital market.
- Distinguish between the types of market.
- State reasons for regulating the capital market.
- Explain the conditions for enlistment in the capital market.
- State the importance of the capital market.
Lesson Note
A. MEANING OF CAPITAL MARKET
A capital market is a financial market where people, companies and governments can raise and invest long-term funds.
It is a market for buying and selling financial securities such as shares, bonds and debentures that are usually held for a long period.
For example, when a company needs money to expand its business, it may raise the money by selling shares or bonds through the capital market.
B. TYPES OF CAPITAL MARKET
There are two main types:
1. Primary Market
The primary market is where new securities are sold to the public for the first time.
For example, when a company offers its shares to the public for the first time, the transaction takes place in the primary market.
2. Secondary Market
The secondary market is where securities that have already been issued are bought and sold among investors.
For example, when an investor sells shares that he already owns to another investor, the transaction takes place in the secondary market.
DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKET
The primary market deals with new securities, while the secondary market deals with existing securities.
In the primary market, money goes directly to the company or organisation issuing the securities.
In the secondary market, money usually passes from one investor to another.
The primary market helps companies raise new capital, while the secondary market provides a place where investors can easily buy and sell securities.
C. REASONS FOR REGULATION OF THE CAPITAL MARKET
The capital market is regulated to:
Protect investors from fraud and dishonest practices.
Ensure that companies provide correct information to investors.
Prevent manipulation of share prices.
Promote confidence in the market.
Ensure that companies follow the rules of the market.
Encourage fair dealing among investors.
Prevent illegal activities in the market.
Maintain an orderly and efficient capital market.
In Nigeria, the Securities and Exchange Commission (SEC) is the major regulatory body responsible for supervising and regulating the capital market.
D. CONDITIONS FOR ENLISTMENT IN THE CAPITAL MARKET
Enlistment means the process of having a company’s securities officially accepted for trading on a recognised securities exchange.
Before a company can be enlisted, it is generally expected to:
Be properly registered as a company.
Meet the requirements of the relevant securities exchange.
Provide accurate information about the company.
Prepare and submit its financial statements.
Have a good record of business operations.
Meet the required shareholding and financial conditions.
Pay the required registration or listing fees.
Comply with the rules and regulations of the capital market.
Provide necessary information to investors.
Obtain approval from the appropriate regulatory authorities.
E. IMPORTANCE OF CAPITAL MARKET
The capital market is important because it:
Helps businesses raise long-term funds.
Provides investment opportunities for individuals and organisations.
Helps government raise money for development projects.
Encourages savings and investment.
Creates opportunities for buying and selling securities.
Supports the growth and development of businesses.
Helps in the proper allocation of funds in the economy.
Evaluation
OBJECTIVE QUESTIONS
The capital market deals mainly with ______ funds. A. short-term B. long-term C. daily D. petty cash
Which of the following is traded in the capital market? A. Shares B. Bread C. Food D. Clothes
The market where new securities are issued is called the ______ market. A. secondary B. primary C. retail D. local
The secondary market deals with ______ securities. A. new B. existing C. damaged D. expired
One major reason for regulating the capital market is to ______. A. increase fraud B. protect investors C. stop investment D. reduce savings
Which body regulates the Nigerian capital market? A. SEC B. NAFDAC C. FRSC D. WAEC
A company may raise long-term funds through the sale of ______. A. shares B. groceries C. stationery D. uniforms
Enlistment means ______. A. closing down a company B. accepting a company’s securities for trading on a recognised exchange C. borrowing money from friends D. buying office furniture
The secondary market provides investors with an opportunity to ______ securities. A. destroy B. buy and sell C. manufacture D. hide
The capital market encourages ______ and investment. A. savings B. waste C. fraud D. borrowing only
Theory Questions
1a. What is a capital market?
1b. Explain the primary market.
2a. State four differences between the primary and secondary markets.
2b. Give five reasons why the capital market is regulated.
2c. State five conditions a company should meet before enlistment in the capital market.