The capital marker is a title given to the market where long-term finance is raised by firms and by local and national governments.
Companies raise their long-term finance through the issue of shares and loan stocks to members of the public and to institutional investors. The stock markets are therefore vital to firms wishing to raise long-term finance. Moreover, the stock markets offer the opportunity for equity (shares) or debt (loan stocks) holders to transfer their holdings from one investor to another.
Africa is a latecomer to the stock markers, but by 1995 there were stock markers in Botswana, Egypt, Ghana, Cote d'Ivoire, Kenya, Malawi, Mauritius, Morocco, Namibia, Nigeria, South Africa, Sudan, Swaziland, Tunisia, Zambia and Zimbabwe.
Egypt had the largest number of quoted companies (718) by 1995, whilst Zambia had the lowest number (18). But the world's best performing stock market in 1995 was Core d'Ivoire where the market price index rose by 140%.
The stock market is widely seen as an engine for economic growth. By channelling funds into African companies, stock markets can increase the volume of investment earmarked for harnessing the continent's economic potential.
A potential investor will not generally be prepared to take up issues of shares or loan stocks, unless the opportunity exists to liquidate his investments at any time. This investor will also be interested in whether his investment is efficiently priced. Market efficiency in the context of pricing implies that, at all times, all available information about a firm's prospects is fully and rationally reflected in that firm's security prices.
Despite the benefits of the capital markets, problems exist in many African countries. First, the stock markets are still in their infancy, and the infrastructure required to run an efficient stock market has only been partially introduced.
Second, the size of the African stock markets is very small. In 1995, Egypt and South Africa had 718 and 646 quoted companies respectively. On the other hand, Ghana, Botswana, Zambia and Swaziland had 18, 12, 8 and 4 quoted companies respectively.
While the New York and London Stock Exchanges, for example, channel huge amounts of capital to their home countries, smaller exchanges in Africa cannot.
In 1995, the total value of all the shares listed on all the African stock exchanges was $309 billion. Out of this, South Africa's share was $281 billion, leaving the rest of Africa with a total market capitalisation of only $28 billion. But we must not forget that both the New York and London Stock Exchanges took centuries to develop (in terms of New York, 200 years). So the Africans must not give up, despite the current teething problems.
Third, most of Africa's capital markets lack liquidity. Shareholders find it difficult to sell their shares as buyers are difficult to find. Added to this, is the time-consuming administrative procedures involved in purchasing and delivering shares.
Fourth, there is the problem of poverty. There has been a decline in savings in most parts of Africa. Between 1975 and 1984, sub-Saharan Africa's total savings was about 18% of the region's gross national product and the figure reduced to 11% between 1990 and 1997. …