CAPITAL MARKET INSTRUMENTS & SECURITIES

CAPITAL MARKET INSTRUMENTS
Capital market instruments are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission.  

Therefore, the capital market instruments fall into four categories such as:  
Treasury securities; government agency securities; municipal bonds; and corporate bonds.

1. Treasury Instruments

All government securities issued by the Treasury department of Govt. are fixed income instruments. They may be bills, notes, or bonds depending on their times to maturity. Specifically, bills mature in one year or less, notes in over one to 10 years, and bonds in more than 10 years from date of issue government securities which confer debt obligations on the government.  

2. Government Bonds and Loan Stocks  
Government securities are sold by the apex banks on behalf of the government to support specific programs, but they are not direct obligations of the treasury department. Mortgage bonds are issued and sold for the purpose of using the proceeds to purchase mortgages from insurance companies or savings and loans; and the home loan which sells bonds and loans the money to its banks, which in turn provide credit to savings and loans and other mortgage-granting institutions. Other agencies are the government banks for cooperatives.

3. State and Local Government Bonds  
These bonds are issued by local government entities as either general obligation or revenue bonds. General obligation bonds are backed by the full taxing power of the municipality, whereas revenue bonds pay the interest from revenue generated by specific projects. These bonds differ from other fixed-income securities because they are tax-exempt. The interest earned from them is exempt from taxation by the government and by the state that issued the bond, provided the investor is a resident of that state. For this reason, these bonds are popular with investors in high tax brackets.

4. Corporate Bonds
Corporate bonds are fixed-income securities issued by industrial corporations, public utility corporations, or railroads to raise funds to invest in plant, equipment, or working capital. They can be broken down by issuer, in terms of credit quality in terms of maturity i.e. short term, intermediate term, or long term, or based on some component of the indenture.

CAPITAL MARKET SECURITIES
These are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission. Instruments issued and traded in the capital market differ in certain characteristics, such as: term to maturity; interest rate paid on the nominal value; interest payment dates; and nominal amount in issue.  

1. Interest Rate Securities

The interest paid on the nominal amount of capital market securities (called the coupon rate) appears on the certificate received by the holder (the investor) of such a security. This coupon rate is one of the parameters used to determine the consideration paid for the security when traded in the secondary market. Most securities are issued at a fixed coupon rate.  

Capital market securities are physical certificates and the issuer of the security keeps a register of owners. This register is used by the borrower (issuer) to pay interest to the lender (owner of the security) on the interest payment dates indicated on the certificate. When an instrument is sold to a new owner in the secondary market, the buyer is registered as the new owner on the settlement date of the transaction.  

2. Zero-rated coupons
These are long-dated securities with many terms to maturity with zero-rated coupons which are capital market instruments issued by borrowers of money such as blue chip firms. These instruments do not earn interest on the capital amount invested by the lender, and are therefore issued and traded at a discount on the nominal value, similar to discount instruments in the money market such as bankers acceptances and treasury bills.

The market value (nominal value less discount) of zero or nil-rated coupon bonds depends on the yield that the investor (lender) expects on his investment. The redemption amount, which is the only cash inflow for the investor, is equal to the nominal value of the bond, and is thus known to the investor.

3. Asset-backed Securities
Where an asset exists which represents cash inflow stream such as a normal loan or investment, a bond can be issued to fund this asset. The bond income is then derived or backed by the income stream of the asset. The performance on the bond is then dependent on the asset performance.

INSTITUTIONAL PARTICIPANTS IN CAPITAL MARKET
There are a number of financial institutions which are directly involved with real investment in the economy. These institutions mobilize the saving from the people and channel funds for financing the development expenditure of the industry and government of a country.  

The financial institutions take maximum care in investing funds in those projects where there is high degree of security and the income is certain. The main institutional sources of capital market are as follows:

(i) Insurance Companies.
Insurance companies are financial intermediaries. They call money by providing protection from certain risks to individuals and firms. The insurance companies invest the funds in long term investments primarily mortgage loans and corporate bonds.

(ii) Pension Funds.
The pension funds are provided by both employees and employers. These funds are now increasingly utilized in the provision of long term loans for the industry and government.

(iii) Building Societies.
The building societies are now activity engaged in providing funds for the construction, purchase of buildings for the industry and houses for the people.

(iv) Investment Trusts.
The investment trust mobilize saving and meet the growing, need of corporate sector, The income of the investment trust depends upon the dividend it receives from shares invested in various companies.  

(v) Unit Trust.
The Unit Trust collects the small savings of the people by selling units of the trust. The holders of units can resell the units at the prevailing market value to the trust itself.  

(vi) Saving Banks.
The saving banks collect the savings of the people. The accumulated saving is invested in mortgage loans, corporate bonds.

(vii) Specialized Finance Corporation.
The specialized finance corporations are being established to help and provide finance to the private industrial sector in the form of medium and long term loans or foreign currencies.

(viii) Commercial banks.
The commercial banks are also now activity engaged in the provision of medium and long terms loans to the industrialists, agriculturists, specialist finance institutions, etc., etc.

(ix) Stock Exchange.
The stock exchange is a market in existing securities (shares, debentures and securities issued by the public authorities). The stock exchange provides a place for those persons who wish to sell the shares and also wish to buy them. Stock Exchange, thus helps in raising equity capital for the industry

The capital market

Having discussed what financial system is, then there is the need to go further by touching the various components of the system. Therefore this post will be focusing on capital market which together with the money market makes up the important component of the financial system known as financial market.

Therefore, capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long term productive use, such as companies or governments making long-term investments In another perspective, capital market is a market in which financial securities such as stocks, bonds and government loan instrument are bought and sold. Corporate entities and governments therefore, use capital market to raise funds for their operations and programmes respectively. For example, a company may float an initial public offer while a government may issue bond or development loan stock to raise funds for new projects or ongoing public programmes Investors purchase securities (stocks or bonds) in the capital markets in order to extract some returns or earn profits on their investment. Capital markets include primary markets, for the initial public offers of securities that are placed with investors through issuing houses and underwriters, and secondary markets, in which all subsequent trading on existing securities takes place.  

Financial regulators, such as the UK's Bank of England (BoE) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties. The Nigerian Securities and Exchange Commission also perform the same function


Transactions in modern capital markets are almost invariably carried out based on computer-operated electronic trading systems; most can be accessed only by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public.  

There are many thousands of such systems, most only serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated in financial hubs or centres such as Lagos, London, New York, and Hong Kong, among others  

There is an important division between the stock markets mainly for equity securities, in form of shares, which investors purchase for the purpose of having ownership interest in the companies that float such securities. The other is the bond markets which cater for creditors when they subscribe to the securities floated by companies for raising funds on the basis of debts that have maturity dates before they are repaid back to the holders.  

Operations of a Capital Market
In respect of the operations of the capital market, there are different players that are active in the secondary segment of the market. Such players include the following.

Regular individual investors
These participants in the market account for a small proportion of trading, though their share still plays some significant role in the market. A few wealthy individuals who could afford an account with a broker, but transactions are now much cheaper and accessible over the internet.  

Traders
These are the jobbers and stock brokers. The jobbers in highly developed capital markets operate by buying securities with the intention of making profits. The do not transact business on behalf of any investors but behave like real traders who engage in buying and selling of capital market securities.

The profit earned by the jobbers is called the jobbers turn. On the other hand, the stock brokers transact business on behalf of investors who pay commission on volume of transactions done for them by the stockbrokers. There are numerous small traders who can buy and sell securities on the secondary markets using platforms provided by brokers which are accessible through electronics means such as with web browsers. When such an individual trades on the capital markets, it will often involve a two stage transaction.  

First they place an order with their broker, on the strength of which the broker executes the trade. If the trade can be done on an exchange, the process will often be fully automated. If a dealer needs to manually intervene, this will often mean a larger fee.  

Investment banks
Traders in investment banks will often make deals on their bank's behalf, as well as executing trades for their clients. Investment banks will often have a department called capital markets. Staff in such department try to keep abreast of the various opportunities in both the primary and secondary markets, and will advise major clients accordingly.  

Pension and Sovereign Wealth Funds  
These players tend to have the largest holdings, though they tend to buy only the highest grade securities which are safest types of bonds and shares, and often don't trade all that frequently.  

Hedge funds  
These are increasingly making most of the short-term trades in large sections of the secondary markets of advanced economies such as the UK and US stock exchanges, which is making it harder for them to maintain their historically high returns, as they are increasingly finding themselves trading with each other rather than with less sophisticated investors.

Divisions in the Capital market .
The capital market is divided into two sectors depending on the type of issues they deal in and they are as follows,

Primary market
The capital market is operated in two main segments such as the primary market and the secondary market. The primary market is used for transactions on new stocks or bond issues, which are handled by issuing houses and underwriters.  

The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be local, state or federal) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds.  

The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf.  

Characteristics  of primary market
The characteristics of a primary market include the following.

i ) This is the market for new long term capital. The primary market is the market where the securities are sold for the first time.Therefore it is also called New Issue Market (NIM)

ii) In a primary issue, the securities are issued by the company directly to investors

iii) The company receives the money and issue new security certificates to the investors

iv) Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business

v) The primary market performs the crucial function of facilitating capital formation in the economy

vi) The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’


Methods of getting new issues into the market  
The major issuers of securities particularly the shares are the corporate entities. Government bonds are commonly referred to as "gilt-edged" securities. Intermediaries such as brokers and banks (especially merchant banks) are often used by borrowers to administer the issuing of new bonds. Bonds can be issued in the primary market using several different methods. Both equities and bonds can be issued through the following ways:   

a) Public Subscription  
This presupposes that a prospectus is issued. The document contains details of the company issuing the security such as bond or shares, and of the securities themselves. Members of the public can then subscribe to the security, and the borrower or an intermediary on behalf of the borrower will allocate the securities to subscribers on issue date by means of a certain process.

b) Private Placing
The securities (e.g., shares or bonds can also be issued through private placing. This method is used when the borrower (or an intermediary on behalf of the borrower) places bonds or shares with certain investors selected by the borrower. The selected investor would then receive a certain amount of bonds or shares at issue date and pay the borrower the issue price for the bonds received.

c) Tender Method
A third method used to issue bonds or shares is known as the "tender" method. The borrower or intermediary will issue a media statement that bonds shares will be issued in the market on a certain date.  

The details of the bonds shares and the capitalisation of the issue (total nominal amount to be issued) will also be communicated. Interested parties are then invited to tender before a certain date for these bonds. Tenders from interested parties would normally consist of the nominal amount plus the percentage of the nominal amount that the interested party is willing to pay for the shares or bonds at issue. The company or borrower usually allots the shares or bonds in order of highest tenders first, but it is in his power to decide who will receive the securities at issue date.

d) Tap Method
Another method that is used to issue new instruments is known as the "tap" method, whereby not all the shares or bonds are allocated at the first issue through any of the above three methods. If, for instance, the company or borrower wants to issue N100 million worth of shares or bonds he can choose to issue only N70 million at the first issue. The borrower or intermediary then starts creating a secondary market for these instruments by buying and selling the issued instruments in the secondary market. This process, where one party buys and sells the same instrument in the market, is known as market making.  

The market maker thus has a bid (to buy) and an offer (to sell) in the market for the same instrument, trying to create an active and liquid market in this instrument. The "tap" method is then used by the borrower or intermediary, whereby more instruments are sold in the market than that bought back. By using this method, the amount of the issue is increased, often without the market realising it.  

This method can also be used in inverse form to decrease the total outstanding loan. The ultimate user of the funds from the securities in the capital market can use the tap method, because the company is allowed to trade in its own securities. This is possible in the equities market because a company is allowed to buy its own shares.

Secondary Market

In the secondary markets, existing securities are sold and bought among investors or traders, usually on a stock exchange, characterized by over-the counter, or operated electronically in highly developed economies.  

The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. Transactions in secondary markets: Most capital market transactions are executed electronically, but in less developed stock exchanges sometimes traders are directly involved and sometimes unattended computer systems in highly developed stock exchanges execute the transactions, such as in algorithmic trading system. Most capital market transactions take place on the secondary market. On the primary market, each security can be sold only once, and the process to create batches of new shares or bonds is often lengthy due to regulatory requirements.  

On the secondary markets, there is no limit on the number of times a security can be traded, and the process is usually very quick. With the rise of strategies such as highly frequency trading, a single security could in theory be traded thousands of times within a single hour.  

Transactions on the secondary market don't directly help raise finance, but they do make it easier for companies and governments to raise finance on the primary market, as investors know if they want to get their money back in a hurry, they will usually be easily able to resell their securities.  

Sometimes secondary capital market transactions can have a negative effect on the primary borrowers - for example, if a large proportion of investors try to sell their bonds, this can push up the yields for future issues from the same entity. In modern time, several governments have tried to avoid as much as possible the penchant for borrowing into long dated bonds, so they are less vulnerable to pressure from the markets.  

A variety of different players are active in the secondary markets. Regular individuals account for a small proportion of trading, though their share has slightly increased; in the 20th century it was mostly only a few wealthy individuals who could afford an account with a broker, but accounts are now much cheaper and accessible over the internet.  

These days there are now numerous small traders who can buy and sell on the secondary markets using platforms provided by brokers which are accessible with web  browsers. When such an individual trades on the capital markets, it will often involve a two stage transaction. First they place an order with their broker, then the broker executes the trade. If the trade can be done on an exchange, the process will often be fully automated. If a dealer needs to manually intervene, this will often mean a larger fee.  

Traders in investment banks will often make deals on their bank's behalf, as well as executing trades for their clients. Investment banks will often have a department called capital markets: staff in this department try to keep aware of the various opportunities in both the primary and secondary markets, and will advise major clients accordingly. Pension and Sovereign wealth funds tend to have the largest holdings, though they tend to buy only the highest grade (safest) types of bonds and shares, and often don't trade all that frequently

Nigeria Bourse Seeks to Start Trading Local Currency Futures

Nigeria Bourse Seeks to Start Trading
Nigeria Bourse Seeks to Start Trading Local Currency Futures

‘Demutualisation central to NSE, stockbrokers’ value creation’

‘Demutualisation central to NSE, stockbrokers’ value creation’

What are Financial Assets ?

The financial assets are the financial instruments that are traded in the financial markets such as money market and capital market. These financial assets constitute the documentary evidence of the funds raised from the investors and savers who have surplus to part with for the use of corporate entities and government. The financial assets are inherently products of transactions in both the money market and the capital market. Such markets are well established in some economies while they are just being entrenched in some other economies.

The financial assets as products of transactions in the financial markets can be denominated in various currencies particularly the local currencies of various economies around the world. There are those financial instruments that are traded across international boundaries in some countries especially in highly developed capital markets in US, UK, Japan, France, and South Africa, just to mention but a few. Such financial assets are usually denominated mainly in American dollars and any other international money that is acceptable around the world.

Financial assets are normally issued in units such that the number of subscribers can be in threshold of thousands. For instance, a State Government Bond can be a total sum of N30 billion but in the denomination of N1,000 per unit of subscription. Therefore, the total amount of the amount has to be subscribed by many if not numerous investors at the end of the subscription period. This arrangement of raising funds through the financial markets is applicable to all financial instruments (e.g., Federal Government Loan Stock, shares, debentures, treasury bills, treasury certificates, etc) being used in such markets.

TYPES OF FINANCIAL ASSETS
The financial assets can be grouped into two main categories such as debt instruments and equity instruments. These are explained below.

i) Debt Instruments 
These are the financial instruments that are normally used by corporate entities and government to raise funds on the basis of debt obligations. This implies that such financial instruments are repayable by the organizations issuing them for raising funds from the financial markets from their operations.   The holders, therefore, are entitled to the funds at maturity dates in addition to the regular income accruing to them on them on the basis of interest payments by the corporate entities and government. Some of such instruments can be redeemed before their maturity dates as agreed to by the parties involved in the transactions. Such financial assets or instruments are also negotiable, being capable of being traded for cash before their maturity date. The various debt instruments being used for financial transactions in money market include the following:


> Treasury Bills;
> Treasury Certificates;
> Trade Bills; Commercial Papers; and
> Certificate of Deposits.

The above list is not exhaustive since there are new ones which are being developed and there are various ones that are peculiar to some specific economies that may not be available in some other economies.  The various debt instruments being used for financial transactions in capital market include the following:

> Development Loan Stocks;
> Debenture Stocks;
> Bonds;
> Mortgage Loan Stocks;
> Leases;
> Preference Shares; and
> Hire Purchase Contracts.

The above list is not exhaustive since there are variations in various world economies while there are new ones that are being developed. There are various ones that are peculiar to some specific economies that may not be available in some other economies.

ii) Equity Instruments
There are some financial instruments that are being used in the financial markets to raise equity funds by corporate entities. Such financial instruments are essentially Ordinary or Common Shares being used to raise funds to enhance the capital base of corporate organizations.

The Bulls, And The Bears Of The Stock Market.

There are two basic market descriptions used to determine  the general direction of the market most times.The terms are used to describe general actions and attitudes, or sentiment, either of an individual ( bear and bull) or the market.


Bull Markets
The first one is known as the Bulls
market which is used to refer to the market when it is generally rising, typically signaling a strong economic state of the market where gains are the order of the day. A bull market is typified by generally rising stock prices, high economic growth, and strong investor confidence in the economy. A bull market is therefore a financial market where prices of instruments (e.g., stocks) are, on average, trending higher. A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy ! Picking stocks during a bull market is easier because everything is going up.

Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook". A news item is considered bullish if it is expected to result in higher prices. Bull markets are generally characterized by high trading volume.

Bear market
Bear market is the exact opposite of the bull market . A bear market is when the economy is bad, recession is looming, stock prices are falling and low investors confidence in the economy. Bear markets make it tough for investors to pick profitable stocks.
What this means is that there is
economic downturn, coupled with
rising unemployment figures and of course inflation. A bear market tends to be accompanied by widespread pessimism.

One solution to investment during a bearish market is to invest in small proportions in historically dividend paying companies. Where possible invest in big corporations that have records of gliding through hard economic times successfully. Don’t invest too much on a single stock. You can also diversify your investments into stocks that can never be out of demand. In order words, invest in companies that have long history of survival.

When the stock market slides downwards for a longer time , if market becomes bearish, the money you invest buys more shares and the stocks you possess have less value. Bearish situation gives you opportunity to build up more equity than when the market is soaring.
Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a hull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

Modus Operandi Of The Central Securities Clearing System, (CSCS) In Relation To Stocks And Shares In Nigeria.

Introduction 

The Central Securities Clearing System, CSCS, has become a major operator in the Nigerian stock market, as stock transactions cannot be completed without interfacing with the CSCS. The Central Securities Clearing System's depository, clearing, settlement and delivery functions ensure the speedy and transparent conduct of share transactions on the Nigerian Stock Exchange. For a shareholder, a CSCS account has become a pre-requisite for share transfers, whether buying or selling shares.

The Central Securities Clearing System is a subsidiary of the Nigerian Stock Exchange and is licensed by the Securities and Exchange Commission, Nigeria, as a capital market agent to handle central depository, clearing and settlement services for transactions in the Nigerian stock market. It began operations in April 1997.

By its depository function, the Central Securities Clearing System has created a central depository for the shares of the quoted companies on the Nigerian Stock Exchange. What that means is that shareholding certificates of individual shareholders are captured into the depository, which maintains a record of them. By dematerializing the shareholdings into electronic records, share transactions are expedited. Now, a shareholder can have all his shareholdings in electronic information, domiciled in his CSCS account, a statement of which can easily be obtained. In several respects, that eases the processing of transactions, giving the shareholder better opportunity to respond quickly to market action and take advantage of market trends.

The Central Securities Clearing System controls the clearing process of the share transactions on the Nigerian stock Exchange. Information on the day's transactions is forwarded to the CSCS by the Stock Exchange, enabling the latter to process them for settlement. Settlement is the process whereby the stockbrokers' accounts are charged or given value for the shares they've bought and sold respectively. The Central Securities Clearing System has appointed Clearing Banks, which work with it to complete the clearing process.

Transactionary Processes at CSCS
A stockbroker is required to have a settlement account with at least a clearing bank. Such account is expected to be funded for any share purchase the stockbroker would undertake on a given day.

The stockbroker's account is debited for such trades through the settlement process, while the selling stockbroker's account is credited. Through its settlement procedures and rules, the Central Securities Clearing System ensures the smooth conduct of those
transactions and that parties meet their obligations. In effect, it is not expected that a shareholder, whose shares have been sold by his stockbroker, will fail to receive the proceeds and in good time. The clearing and settlement process is designed to ensure that value is transferred within the stipulated time frame.

Part of that process is the delivery of stocks to a buyer. The CSCS, as an integral part of the clearing and settlement process, ensures delivery of stocks to the party that bought. That is guaranteed by the requirement that shares be deposited in the CSCS depository, prior to the trade. In effect, a stockbroker is not permitted to sell without the availability of the stocks meant for the sale. This protects the buyer as the shares are in the CSCS depository and are transferred to his account as payment settlement is done. By that, there is convergence of payment and delivery. That process is required to be concluded on the fourth day, that is "T + 3" (transaction day plus 3).

Before CSCS, there was the difficulty associated with the transfer of shares and the production of certificates for traded securities between stockbrokers and the registrars. It usually takes several months to conclude, but with the advent of CSCS Plc, transaction circle is now T+3 (Three working days after transactions). The CSCS system operates a T+3 settlement circle for transactions on The Nigerian Stock Exchange floors in conformity with the practice in emerging markets. The T+3 settlement circle is facilitated by the immobilization of share certificates in a central location, which in turn
enables trades to be processed in an electronic book-entry form. In effect, physical delivery of share certificates to fulfill settlement obligations has been replaced by electronic credits and debits to shareholders stock position.

Procedures for using shares in CSCS depository as collateral for loan
In recent years, trading and settlement volumes especially withthe Securities Settlement System (SSS) have soared, as securities markets have become an increasingly important channel for intermediating flows of funds between bor and lenders and as investors have managed their securities port more actively.
Before the global financial crisis eroded the value of stocks on the nations bourse, one of the collateral for assessing loans from financial institutions ishares in the Central Securities Clearing System (CSCS). T currently this trend seems to have fallen but the CSCS still believe investors need to understand how they can use such shares in depository as collateral for loan facility.

1.The first step is for the lender to demand from the borrower, a current statement of stock position issued to him/her/it by CSCS Limited.

2. The lender can confirm from CSCS, the statement of shareholding issued to a shareholder/prospective borrower by CSCS (status report) on payment of a fee of N100.00kobo. The lender must obtain from the borrower/shareholder a letter of authority to the effect that the borrower/shareholder has mandated the lender to collect the stock position on his/her/its behalf.

3.(a) Thirdly, a memorandum jointly, signed by the parties requesting CSCS to place a lien on specific quantity of the stock(s), should be forwarded to CSCS Limited.
Also, an undated letter signed by the borrower, authorising the lender to sell the stocks in the event of default at the expiration of the loan due date, must be given to the lender upon which CSCS would act when the lender so instructs.

(b) It is essential that the Joint Memorandum be registered at the Stamp Duties Office or sworn to before a Commissioner for Oaths in any Court of Law. Note that the Joint Memorandum must have been completed on the front and reverse sides as directed thereon and explicit therefrom, before same is stamped or sworn to by Authorised Signatories of the Lender (and /or the Borrower).

(c) It is in the interest of the lender not to disburse funds until a letter advising lien placement has been received from CSCS Limited.

(d) The lender, the borrower and the stock-broking firm (s) may be required to confirm and/ or consent to the lien agreement. The stock broking firm(s) in particular is required to expressly ascertain/ confirm in writing that the Shareholder is the genuine owner of the stated stock(s) and that they therefore have no objection on Lien being placed on the stated stock(s) by CSCS Limited.
Furthermore, The stock broking firm (s) must write the letter as earlier referred and addressed to CSCS of which same is expected to accompany the Joint Memorandum when forwarded to CSCS limited. Any insertion/alteration on the Joint Memorandum may be a ground for rejection of the application. The draw down date and duration of the lien agreement must be specifically stated (filled out) in the Joint Memorandum.

4. Upon the receipt of the executed Joint Memorandum and after the lien processing at CSCS have been completed, the shareholding of the shareholder would be moved into a CSCS Reserved Lien Account with the interest of the lender noted. This will be communicated to the parties, thereafter.

5. The lender (and no other party) should advise CSCS to remove the lien placed on stocks en bloc when the Borrower has discharged his/her/its obligation under the contract.
The stock(s), which should be listed on the letter of instructions from the Lender, is/are moved back to the original stock-broking firm(s) from where the stock(s) was taken.

6. When the borrower defaults and/or fails to discharge his/her/its obligation under the contract, the Lender at the expiration of the loan due-date shall:

(i) Inform the borrower of his /her default and this will put the borrower on notice that the lender can exercise his option to sell the stocks to realize the benefit of the contract.

(ii) Inform CSCS of the default by the Borrower and advise CSCS to remove the lien to enable sale to be effected. With a copy of the undated letter written by the borrower to the lender further give instructions/directives to CSCS for the purpose of the release and sale of the totality of the holdings through a mandated or named stock-broking firm, which is a member of The Nigerian Stock Exchange. CSCS, if satisfied that the procedure has been complied with, will be obliged to remove the lien on the stock(s) upon such information/ instructions from the Lender after the expiration of the loan due-date without recourse to the Borrower, moreso when evidence of Notice of Default from Lender to Borrower is received/sighted by CSCS Limited. If the Debtor/Shareholder refuses to acknowledge receipt of the Notice of Default, write a letter to CSCS affirming such position/situation which may suffice for CSCS to release the stock(s) without recourse to the Debtor/Shareholder.

What are the characteristics of financial assets ?

There are peculiar characteristics that are inherent in financial assets that are normally used partly to determine their pricing in the financial markets. These characteristics are identified and discussed below.

1 Moneyness
The moneyness of the financial assets implies that they are easily convertible to cash within a defined time and determinable value. The cost of transactions involved in securing funds from them before the maturity date can be likened to agency cost besides the cost of discounting some of them, which reduces their face value.  Therefore, these financial instruments are regarded as near money because of the ease with which they can be traded for cash. Examples are Treasury bills, Treasury certificates, Trade bills, Commercial papers, and Certificate of Deposits, among others.

2 Divisibility & Denomination
The financial assets are usually made out in denominations depending on the face value that the corporate organizations and institutions that are using them to raise funds from the financial markets. The divisibility of such near money refers to the minimum monetary value in which a financial asst can be liquidated or exchanged for money by the holder.

Divisibility for financial assets is imperative so as to enable both suppliers and borrowers to understand the magnitude of funds involved in each of them; the borrowers have certain amount to source and the suppliers will like to know the amount that is required of him to part with for the transaction. It is also necessary so that a limit cab set for the minimum amount of subscription for each instrument and the overall amount of subscription that may accrue to a particular investor. For instance, many bonds can denominated like N1,000 denomination while that of certificate of deposits are denominated form N500,000.  

3 Reversibility
The financial assets are highly reversible in the sense that they are like deposits in accounts of customers with the banks. This implies that the cost of investing in the financial assets and getting them back into cash is negligible. Hence reversibility of financial assets is often regarded as turnaround cost or roundtrip cost.

The most relevant part of the roundtrip cost as associated with financial assets constitutes what is known as the ‘bid-ask spread’ in which commissions cost of delivery an asset is entrenched. In the well-organized financial market there are market makers who take responsibility of assuming risk in associated with the financial assets while making the market or carrying inventory of financial assets.

Therefore, the spread being charged by the market makers varies in line with financial assets that are traded.  Some financial assets carry less risk than others; for instance, marketable securities that can easily be converted into liquid cash with little or no hassles because they are more liquid than other financial assets. The risk involved in marketable securities or mortgage loan stock cannot be comparable with risk inherent in bond issue of a fledgling company.

The risk involved in market making is related to market forces that are twofold such as: Variability of the price; and Thickness of the market.

a) Variability of Price of financial asset 
 This is determined by some measure of dispersion in the price. It implies that the greater the variability in price, the greater the probability that the market maker may loose in the bargain. For instance, a speculative stock such as shares will be fraught with much larger short-run variations. On the other hand, Treasury bills, which government securities (or gilt-edged securities) exhibit stable price with less short-run variation.        

b) Thickness of the Market for financial asset 
The thickness of the market implies the frequency of transactions on a given financial asset. A thin market reflects a financial asset that has few trades on a regular or continuous basis, hence the greater the order flows on it the shorter the time that the asset will be held in the inventory of market makers. Therefore, such financial asset will exhibit smaller probability of an unfavourable price movement while it is in the inventory of market makers.    A thick market is associated with market where frequent transaction on financial assets is being exhibited and this varies from market to market. Hence a particular market for a financial asset such as shares may be thick while in another such financial asset may be thin. For instance, the shares of blue-chip firms will exhibit thickness in transactions while the shares of small companies may exhibit thinness in transactions in a given market situation.


4 Cash
Flow This refers to the return that an investor will derive from holding a financial asset, which invariably depends on all the cash distributions that the asset will pay holders. This is expressed in terms of the dividend on shares or coupon yield payments that are associated with bonds.
The return on investment in a financial asset is also affected by the repayment of the principal amount for a debt instrument and any expected price variation of the stock. In calculation of expected returns on a financial asset, factors that should be considered include non-cash payments in form of stock dividend yield and options to purchase additional stock or the distribution of other securities that must be factored in the  consideration. The issue of inflation implies that there is difference between normal effective return and real effective return on financial assets.  Therefore, the net real return on financial assets is the amount of cash returns that are accruable after adjusting the nominal returns against inflation.  

5 Maturity Period 
In financial parlance, the maturity period refers to the length of time within which the corporate entity or institution that employs a financial instrument to raise funds will use the funds before its payment back to the holders of such instrument. For instance, a bond can be held by a corporate entity for a period of thirty (30) years while that of government can extend to a period of ninety-nine (99) years before their repayment to the holders.  

There are some financial instruments being traded in the financial markets that may not reach the stated maturity dates before they are terminated by the corporate entities that use them to raise funds. There are reasons that may be responsible for such situation which include the following:

Bankruptcy:- a situation in which the company is being unable to meet its external financial obligations  and therefore, declared bankrupt;

Reorganization:- a situation in which the company is restructuring its ownership structure and operations; and

Call Provision:- the financial instrument being associated with call provision.

The case of call provision implies that the company as the debtor or user of the funds takes responsibility of setting aside sinking funds with which to redeem the instruments eventually.
The sinking fund is normally made as one of the contractual obligations that are established in the agreement or indenture regulating the usage of the funds from the financial instrument.

 6 Convertibility
This characteristic implies that a financial asset or instrument can be converted into another class of asset which will still be held by the corporate entity has original used to raise funds for its operations. The conversion can take a form of bond being converted to bond, preference shares being converted to equity shares, and a company bond being converted into equity shares of the company.

 The opportunity for convertibility of financial instruments into another financial assets has to be entrenched in the covenant which has been written to guide the contractual agreement on the instrument or to regulate the behaviour of the company using the funds from the instruments. Nevertheless, such a provision can be negotiated in the course of the usage of the funds by a company especially when the holders discover that the company is manipulating its operational and financial records to shortchange them.  

7 Currency 
Financial assets are normally denominated in currencies of the various countries around the world. This implies financial assets of the Nigerian financial system are denominated in Naira such as Federal Government Loan Stock, Treasury Bills, Treasury Certificate, Shares and Corporate and State Government Bonds. Those financial assets in Japan are denominated in Yen, those in the United States of America are in Dollars, those in United Kingdom are in Pounds Sterling while those in China are in Yuan, etc.

You have also learned from the initial section of this study unit that financial assets as products of transactions in the financial markets can be denominated in various currencies particularly the local currencies of various economies around the world. Nevertheless, there are those financial instruments that are traded across international boundaries in some countries especially in highly developed capital markets in US, UK, Japan, France, and South Africa, just to mention but a few. Such financial assets are usually denominated mainly in American dollars and any other international money that is acceptable around the world.

Furthermore, it is important for investors to know the currency in which certain financial assets are denominated when buy them. For instance, the recent ECO Bank shares were denominated in US dollars when they were offered to the public for subscription. These shares were floated across international boundaries many countries in Africa. Therefore, the use of an international currency such as the US dollars made it easier for the bank to handle the transactions in the stock seamlessly. Nevertheless, subscribers were made to pay the equivalent of their total amount of subscription in their local currencies. The dividends for these shares are also being paid in US dollars.

Dual currency securities may be issued in some instances. For instance, the EURO Bonds are issued in dual currencies for ease of transactions by multiple subscriptions by various investors around the world. Therefore, it is the policy on EURO Bonds to pay interest in one currency while the principal repayment is effected in another currency.

8 Liquidity
You have learned from above that one of the main characteristics of financial assets is the moneyness of such instruments which implies that they are easily convertible to cash within a defined time and determinable value. The cost of transactions involved in securing funds from them before the maturity date can be likened to agency cost besides the cost of discounting some of them, which reduces their face value. Hence, these financial instruments are regarded as near money because they are highly liquid in terms of the ease with which they can be traded for cash. Good examples of highly liquid financial instruments include Treasury bills, Treasury certificates, Certificate of Deposits, Bills of Exchange, and shares of blue chip companies, e.g., Shares of Cadbury, First Bank, Guaranty Trust Bank, etc.

However, there are some financial instruments that cannot be easily converted to cash whenever the holders need money. Therefore, they are illiquid because the holders may have to retain them till they are matured; alternatively they can only trade them for very insignificant value in capital markets where there are jobbers that may be willing to carry them in their stock of securities. Presently there are no jobbers operating in the Nigerian Stock Exchange, and hence the stock brokers in the Exchange are usually not willing to trade in financial instruments of weak corporate entities.

 9 Predictable Returns 
The return on financial assets must be predictable for the purpose of their being patronized by investors. For instance, the investors should be able to know the percentage of interest that are attached to certain debt instruments before they will be prepared to stake their funds on them. This is because performance of a company cannot be taken for granted due to the mere fact that top management and the boards of directors are known to be manipulating the accounting records of their companies these days.  This is more reason why investors are always very skeptical in patronizing financial instruments of some corporate entities due to their antecedents in manipulating their accounting records. The cases of Cadbury in Nigeria and Enron in the US are classical testimonies to the unwholesome accounting practices in the operations of companies around the world.

However, the returns on bonds, development loan stocks, and preference shares are determinable so that the investors are aware about the expected returns on their investment. There other government securities such as Treasury bills and Treasury certificates which are traded in money market that command fixed returns. The apex bank has the responsibility in their issuance and also their repayment as well as the payment of their returns to the subscribers. Therefore, State government bonds, Federal Government development loan stocks, Treasury bills and Treasury certificates are regarded as gilt-edged securities because their returns as well as principal amount of investment in these securities must be paid as at when due for settlement.  

The issue of unpredictability of future returns on some securities such as equity shares results from volatility in earnings by the companies in their operations. However, the unpredictability to future returns can be measured on how it relates to the level of volatility of a given financial asset. The returns on equity shares like dividends are the residual payments from the earnings of corporations. Nevertheless, the attraction in these shares is the possibility of capital appreciation in their value but subject to the performance of their corporations and capital market operational forces.

10 Tax Status of Returns 
The returns on various financial assets are subject to tax status because they are taxable earnings. The tax authorities are interested in collection of taxes on earnings from financial assets as securities which are regarded as incomes for investors. However, the tax status on financial assets varies from one economy to another.

The rate of such taxes on financial assets is also subject to variation from time to time depending on the interest of the government which must be adhered to by the tax authorities. The tax status on financial assets also differs from one type of security to another depending on the nature of the issuing companies or institutions such as Federal, State, or local government.