Capital Markets and the Stock Exchange

A company that wants to build a factory over ten years cannot fund it from a three-month overdraft. It needs money that stays in the business for years. The place where that money is raised from the public and then traded between investors is the capital market, whose best-known part is the stock exchange.

A share that can be sold quickly at a fair price is much easier to buy in the first place, so the exchange lowers the cost of equity for companies that list on it. But a listing also brings rules, disclosure, costs and the loss of some control.

This topic covers the primary and secondary markets, the functions of a stock exchange, the boards of the Nigerian Exchange and their free float rules, why a company seeks a listing and what it costs, and how the issue price of new shares is set, with worked figures. The next topic covers the bond market and technology in financial markets.

The listing decision appears in the scenario questions: in May Diet, 2026, Question 5 (15 marks), a private manufacturer was considering a full listing on the Nigerian Exchange, and the question asked for the advantages and disadvantages (10 marks) and the factors in setting the issue price (5 marks). Read money markets, banks and money market instruments first, to see what the capital market is being contrasted with.

Capital markets: primary and secondary

Capital markets are financial markets for primary issues and secondary trading in long-term investments: shares and bonds. They are both national and international. Most countries have at least one stock market, whose main purpose is to trade the shares of companies.

• The primary market is where companies sell shares to investors for the first time, for example a new issue to raise cash. It is a source of new long-term capital for companies, governments and other organisations.
• The secondary market is where investors sell shares they own or buy shares already in issue.

A successful primary market relies on a large and liquid secondary market, because investors who buy new shares want to know they can sell at any time at a fair price.

The stock exchange

A stock exchange is a marketplace for buying and selling the shares of companies that apply to have their shares traded and whose application is accepted. It acts as both a primary and a secondary market. In Nigeria a company must obtain a listing for its shares and apply for them to be traded on the exchange, the Nigerian Exchange.

Exchanges mainly trade the shares of domestic companies and some foreign ones. The main functions are to:

• provide a system in which shares can be traded in a regulated manner;
• enforce rules of conduct on market participants, to ensure fair dealing;
• ensure an efficient system for providing new information about companies to investors; and
• record the prices at which shares are bought and sold and provide price information to participants.

The boards of the Nigerian Exchange

The Nigerian Exchange has three boards for equities:

• the Premium Board, for the largest companies meeting the most stringent governance and listing standards
• the Main Board, for well-established companies with a track record
• the Growth Board, for smaller and growing companies

Each has its own admission rules, including free float, the part of the shares held by the public.

For the Main and Premium Boards the rule is a free float of at least 20% of the issued shares held by at least 300 shareholders, or a free float valued at ₦20 billion (Main Board) or ₦40 billion (Premium Board); for the Growth Board a lower threshold applies.

The Exchange and the Securities and Exchange Commission have been reviewing the free float rules in 2026, so the current rulebook should be checked before advising a company.

Why a company seeks a listing, and what it costs

A privately owned company that wants finance for expansion may consider a full listing. The advantages are:

• Access to capital from a large pool of institutional and individual investors, at the time and in the amounts it needs.
• Liquidity: existing shareholders can sell more easily and new investors are readier to buy.
• Reputation: greater visibility and credibility with customers, lenders and suppliers.
• A market valuation, useful in takeovers and in setting share-based pay.
• Employee incentives through share options, and a wider and more stable base of shareholders.

The disadvantages are:

• Loss of control as ownership is dispersed.
• The regulatory and disclosure burden of the exchange and the Securities and Exchange Commission, including quarterly reports and governance statements.
• Short-term pressure to meet quarterly results, which may conflict with long-term plans.
• Takeover risk, since a widely held company can be bid for.
• Costs: flotation costs (advisers, underwriting, regulatory fees) and the continuing cost of compliance.

For example, a company raises ₦6bn. Flotation costs of 4% are ₦240m, so the net proceeds are ₦5.76bn, before the annual cost of listing and compliance. The owners must also accept a lower share of the company: if they sell new shares equal to 30% of the enlarged company, their holding falls from 100% to 70%, which still gives control, but a larger issue might not.

Setting the issue price

The price at which new shares are offered must be high enough to raise the money without selling too much of the company, and low enough to attract investors and leave a successful after-market. The factors are:

• Profit record and growth prospects: the strength of past earnings and the plans for expansion.
• Dividend policy: investors look at the expected dividend yield.
• Comparable companies: the price–earnings ratios and dividend yields of similar listed companies are the usual guide.
• Net assets: asset values give a benchmark, especially where growth prospects are modest.
• Market conditions: the general state of the stock market and investor appetite for new issues.
• The level of subscription wanted: too high a price risks an undersubscribed issue; too low a price gives away value.
• Advisers’ guidance: issuing houses and underwriters test the market and recommend a price.
• Reputation: a slightly conservative price from a first-time issuer can build goodwill and support the shares afterwards.

Example: Omega Industries has profit after tax of ₦450m and 600 million shares, so earnings per share are ₦0.75. Comparable listed manufacturers trade at a price–earnings ratio of 12, which suggests a value of 12 × ₦0.75 = ₦9.00. Allowing a 10% discount to attract investors gives an issue price of ₦8.10.

It issues 200 million new shares, raising ₦1,620m. Flotation costs of 4.5% are ₦72.9m, so net proceeds are ₦1,547.1m. After the issue there are 800 million shares, the public holds 200 ÷ 800 = 25% (above the 20% free float rule, if spread over at least 300 shareholders) and the founders hold 75%.

Earnings per share on the enlarged capital, before using the proceeds, are ₦450m ÷ 800m = ₦0.5625, so at ₦8.10 the price–earnings ratio is 14.4 times. The new money must therefore earn enough to restore earnings per share.

The ideas in more depth

Why liquidity lowers the cost of capital

Investors will accept a lower return on an investment that they can sell quickly at a fair price. A company with a listed share therefore finds it cheaper to raise equity than one whose shares cannot be sold. This is one of the main reasons companies accept the cost of a listing.

Why the issue price is not the market value

The issue price is a negotiated offer, usually set a little below the expected market value so that the issue is fully subscribed and the shares do not fall straight away. The discount is a real cost to the existing owners, because the new shareholders buy at less than the value, so the size of the discount is itself a decision.

Sources and references

• The Rulebook of the Nigerian Exchange (listing requirements and free float rules); the Securities and Exchange Commission rules and the Investments and Securities Act 2025 for public offers.

These points are stated as at 5 November 2026.

Worked examples

1. Costs.
   4% × ₦6,000m = ₦240m.
2. Net.
   ₦6,000m − ₦240m = ₦5,760m.

1. Value.
   12 × ₦0.75 = ₦9.00.
2. Price.
   ₦9.00 × 0.90 = ₦8.10.

1. Total shares. 800 million.
2. Founders.
   600 ÷ 800 = 75%.

How to answer in the exam

• Link the market to the company’s need: long-term capital, liquidity, valuation.
• For a listing, give advantages and disadvantages tied to the facts of the company and its owners.
• For the issue price, list the factors and show an earnings-multiple calculation if figures are given.
• Quantify the costs and the dilution of control.

Common mistakes in the exam

• Confusing the primary and secondary markets.
• Giving only the advantages of a listing.
• Forgetting that the owners’ holding falls.
• Setting the issue price from assets alone for a growing company.
• Ignoring market conditions and the level of subscription.
• Listing factors for the price without saying which matter most to this company.

Quick revision

• Primary: new issues. Secondary: trading. Each needs the other.
• Exchange: regulated trading, conduct rules, information, price records.
• Listing: capital, liquidity, status against disclosure, control and cost.
• Issue price: comparable price–earnings ratios, profits, dividends, assets, conditions.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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