Role and functions of Capital market in economic development

Role and functions of Capital market in economic development

The establishment of the Nigerian Capital market is a significant milestone in the history of our country’s development. However, a lot of people still don’t understand the meaning of this entity for our economic system. If you’d like to learn the role and functions of the Capital market, continue reading below!

Capital market

What is Capital market?

Before we can talk about the specific attributes of the Capital market, we have to define its meaning. In its core, the Capital market represents a marketplace designed for potential investors and shareholders to conduct trade operations. The main currencies here include stocks, bonds, etc. The primary purpose of the CM is to distribute extra funds to various institutions that invest them into specific projects.

Unlike other kinds of markets, the Capital market deals with long-term financial assets. This is achieved thanks to the agreement between all parties to conduct their operations this way. A financial asset gains “maturity” after being on the market for over a year.

Interesting fact: You can enter the Capital market both as an individual or a part of an organization or company.

Stock Exchange in Nigeria

There are two main types of Capital market:

  1. The Primary market
  2. The Secondary market

The first kind of Capital market involves trading of newly-developed stocks. Meanwhile, the Secondary market conducts trades of already existing securities. It gives the investors a chance to resell their purchased shares and keep the money moving. The second crucial distinction within the Capital market is the difference in the nature of the exchanged financial assets. Thus, we have both a stock and a bond market.

The size of the Capital market is determined by the status of the nation’s economy, as one is closely tied to the other. Now that you have all the essential information let’s talk about the functions of the Capital market.

Functions of Capital market

Functions of Capital market

READ ALSO: Functions of Federal Mortgage Bank of Nigeria

As we already stated above, the Capital market plays a huge part in the economy of any country, and Nigeria isn’t an exception. A well-oiled CM can significantly increase the rate of economic development. So let’s learn the primary functions of the Nigerian Capital market:

  • It creates connections between savers and shareholders

The Capital market oversees the trading process between the two parties. If it functions effectively, surplus funds from one area can be transferred to industries that need them more.

  • It activates dormant savings

The Capital market has a major role in mobilizing passive funds from the economy. It makes use of the inactive savings by investing them in promising projects and initiatives.

  • It helps form the nation’s capital

Thanks to the mobilization of the funds, the Capital market can utilize them by bringing new life into different industries such as agriculture or energy.

Capital market investor
  • It provides a venue for organizations that want to make long-term investments

This is a win-win situation for both parties. Investors receive marginal interest gains, while the country’s economy becomes more stable. With different financial assets including bonds, stocks, and equities, the businesses have a large pond to fish from.

  • It increases the economy development speed

The Capital market provides the necessary funds for new business enterprises, allowing them to elevate their productivity to the next level. This function secures both economic growth and a decrease in unemployment.

  • It helps to allocate funds

Not only does the Capital market help mobilize dormant finances, but the competency of the shareholders makes sure that the available funds are invested into the right causes.

  • It provides services

The Capital market offers loans to all the big industries, as well as consulting services, etc.

Capital Market in Nigeria
  • It makes sure that money is always circulating

A passive economy is a dying economy. And the Capital market helps funds to remain constantly available for potential investments.

  • It offers numerous advantages to investors

Shareholders can enjoy high rates and the gratifying feeling of helping the national economy. The SECF also compensates their investments in case of fraud. Even more so, the shareholders can easily keep track of all their financial assets and have complete freedom to change their securities.

This pretty much covers the functions of the Nigerian Capital market. Now let’s talk about its role in the activities of our country.

The role of Capital market in Nigeria economy

Nigeria stock exchange

Every country is continuously concerned by two types of funds – the short-term and the long-term capitals. While the first consists of treasury bills, the latter mostly exists in the form of the Capital market with such financial assets like shares, bonds, etc. Logically, you can come the conclusion that without a properly working CM, Nigeria won’t have any money for the long haul.

Another role that the Capital Market has is that it provides investment opportunities for the Nigerian community. It also serves as the barometer of the country’s economy, and has several national institutions:

  • The Securities and Exchange Commission;
  • The Nigerian Stock exchange;
  • Merchant and Development banks;
  • The lower tier financial assets market.
Capital Market symbol

All of these organizations serve to conduct and control the activities on the Capital market and offer an opportunity for international business investments.

Now you know the role of Capital market and its top functions. Feel free to share this article with your friends and colleagues to deepen their understanding of the Nigerian economy system.

READ ALSO: Nigerian Government structure

Source: Naij.com

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