CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In an emerging and competitive economy like Nigeria, the decision to invest is taken because of the apparent or perceived benefits, which the investor hopes to get. Investment in securities is therefore primarily for the purpose of earning income, which could be in form of dividend, profit or/and capital gains. Though some other reason such as prestige, power and control also be adduced but the primary motive to earns some form of return. This investment in securities is carried out through a market called the stock exchange. Alile (1991) suggest that the stock exchange is the hallmark of the of the capital market. While Osaze (1991) defines that the stock exchange “basically as a market where buyers and sellers of securities operate through brokers to eect transaction in securities that have been admitted for listing on the exchange”. Famnia (1970) “theory of eicient market hypotheses suggests that stock markets are eicient because they reflect the fundamental macroeconomic behaviour. This eiciency implies that a financial market incorporates all relevant information (including macro-economic fundamentals) in the market, in which the outcome is the best possible under the circumstances. Ibru (2000) said “it helps in the mobilization of domestic and foreign savings for productive investment which is vital for capital formation for economic growth and development. It’s also assists in transmitting information on share price and trading volume to the public (Olowe, 1997). Like other markets, stock exchange facilities communication is between buyers and sellers. According to Osaze (1991), securities traded in the capital market can be categorized into fixed securities, variable income securities and others. Ibru (2000) puts it specifically to include ordinary share, preference share, debenture or cooperate bond, gis and state government bond.
This study will concentrate on the variable income securities with emphasis on common stock, which is the major type of income securities. Besides the various activities in the stock exchange as depicted by the movement and behaviour of stock price and volume of trading recorded is a measure of performance of the economy. The stock exchange as a market shows the price of securities fluctuating daily as can be seen from daily official list of the exchange although this fluctuation is not peculiar to Nigeria. A tremendous surge in price of stock has been accompanied by large daily fluctuation and historically high trading volume, so it is not surprising that such activities have generated new interest in the question of what are the bases for these movements in the stock prices. The reasons behind movement of prices have been subject to many research works though there has been consensus as to what accounts or determines this movement. However, Omolehinwa (2001) said, it may be caused by company’s sensitivity to general economic factors (systematic note), information organize through efficient and determine way, or factors specific to the company (unsystematic note), information not organize through efficient and determine way. Also, Osaze (1991) identified three categories of factors as fundamental factors, technical factors, and eicient market hypothesis. The fundamental factors are further categorized into company related, industry related, political, volume of trading, earnings and dividend. Therefore it makes sense, that to make money in stock market, we need to understand what causes price to change. By having appreciation for things that motivate stock price changes we can be better at anticipating the direction and velocity of price moves (Stocks–core.com (http://Stocks–core.com), 2002). Having said all these, it is obvious that the economic environment, which a company operates affects it, hence economic related factors will be examined.