Academic journal article Journal of Financial Management & Analysis

Which Game to Play in the Emerging Stock Markets: Diversification or Concentration? the Nigerian Economy in Perspective

Academic journal article Journal of Financial Management & Analysis

Which Game to Play in the Emerging Stock Markets: Diversification or Concentration? the Nigerian Economy in Perspective

Article excerpt

Introduction

Nigeria is making efforts at internationalising its capital market. It has deregulated the market, abrogated the laws which hitherto made foreign participation difficult. The Nigerian Stock Market is one of the important emerging stock markets in the developing world. In 1993, the Federal Government deregulated the Nigerian Capital Market to internatonalise the market. It abrogated the laws which hitherto made foreign participation difficult. Some of the laws were the Exchange Control Act (1962), the Nigerian Enterprises promotion Decree (1989). The government went further to ensure that foreigners and foreign investors could conveniently participate in the Nigerian Capital Market. The ceiling as to the percentage of foreign holding in any company registered in the country was removed. The Stock Exchange has since June 2, 1987, linked up with Reuters Electronic Contributor System for. online global dissemination of the market. The Nigerian Stock Exchange launched its Internet System (CAPNET) as one of the infrastructural supports to meet the challenges of internationalisation and enhanced service delivery Foreign portfolio transactions in 1996 and 1997 stood at U.S.$8.7 million and U.S.$ 9.5 million1. It is expected that as Nigeria democratise, more foreign portfolio managers and investors would be attracted to the Nigerian Stock Market and thus bring about economic growth and development. The bulk of foreign capital inflow is expected to be through the Nigerian Stock Market.

This article therefore specifically examines the game to pay in the emerging Nigerian Stock Market, given these arrays of policy adjustments. What strategy should portfolio investors adopt to ensure optimal return of their investments. Should it be diversification or Concentration? The objective is to strength the data base and analytical base in the market for portfolio investors attracted to the Nigerian Stock Market for decision making. And to give insight to foreign investors of the kind of investment strategy to play in third world stock markets. The paper also examines the process of selecting securities available to well informed and core investors. The paper uses data in the first-tier market.

Conceptual Framework

Many investors - - individual and institutions alike - - believe that outperforming the stock market (both up and down) is a valid performance expectation. Irrespective of market trend, they believe that the combination of good stock selection and/or good timing decision should result in superior (above market) returns. When the market is rising, investments are expected to produce greater-than average gains, and when prices are falling, investments decisions are expected to limit losses to less than the general experience (Cohen et al: 1987)2. This expectation has led to different to stock holdings. Historically, there are two broad categories of investors - - those who prefer to concentrate their holdings and those who would rather diversify. Investors who concentrate their assets in a relatively small number of issues believe that they can better their attention on the stocks.

According to Hagin, concentration approach dominated the scene among managers in the 1960s, especially from those managers with genius for picking stocks (Hagin: 1979)3. This generated so much demand for certain stocks that their recommendations became self-fulfilling prophecy and enhanced their reputations even further. The proponents of concentration diversifying argued that by diversifying broadly the investors missed the large portfolio holding period yield obtained by other managers who have concentrated as well as diversified (Latane, et al: 1975)4. Early contributor to the game of concentration is Adam SmithS. He argued that the characteristics of performance (in investing in financial assets) are concentration and turnover . The group believes that the advantages from concentration are very real. Rather than buy 200 stocks stocks and put them away as a traditional fund might do, the performance fund may buy six stocks and within a year sell them all to buy others. …

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