Nigeria: How Nigeria's Newly Launched Exchange-Traded Derivatives Market Can Profit Stock Investors

  • Posted on: 4 May 2022
  • Updated on: 4 May 2022
  • By: radmin

The NGX has lined up seven derivative contracts for the first phase, all of which have gained the consent of the Securities and Exchange Commission.

Now that the liquidity in the Nigerian stock market is worrisomely low when set beside January's and daily size of trade is miles apart from its pre-pandemic level, capital market authorities have launched the first exchange-traded derivatives market in West Africa, marked by Thursday's introduction of two futures contract, NGX 30 Index and NGX Pension Index.

The combined value of the transactions executed on the bourse last year stood at N1.9 trillion, according to NGX Domestic and Foreign Portfolio Investment Report issued January.

That suggests a 12.4 per cent contraction compared to that of the preceding year.

The trend has regressed further this year, with the first quarter transaction value summing up N591.8 billion compared to N676.5 billion a year earlier and a vast portion of smart money deserting stocks for safer havens particularly fixed income securities.

The Nigerian Exchange Limited (NGX) has lined up seven derivative contracts for the first phase, all of which have gained the consent of the industry watchdog, the Securities and Exchange Commission.

Aside NGX Pension Index Futures and NGX 30 Index Futures, there are MTN Nigeria Communications Plc Stock Futures, Dangote Cement Plc Stock Futures, Zenith Bank Plc Stock Futures, Access Bank Plc Stock Futures and Guaranty Trust Bank Plc Stock Futures.

The last five are yet to debut.

By the move, the exchange hopes to deepen "Africa's position in the global financial markets through ETDs, as well as enhancing liquidity and mitigating against price, duration, and other financial risks that may arise from sophisticated financial transactional activities," said Temi Popoola, the chief executive officer.

Understanding derivatives and stock futures

Derivatives are a class of securities, whose value is dependent on the performance of an underlying asset or a set of assets unlike individual stocks, for instance, whose value come directly from activity on their shares in the market.

"You can gain exposure to the NGX Pension Index, the NGX 30 Index without necessarily, for instance, paying the full amount that you would have needed (were you to buy the individual stocks making up the contract)," Ahmed Jinad who heads investment research at broker Meristem Securities Limited told PREMIUM TIMES.

In this way, derivatives' value is subject to fluctuations in the prices of the financial instrument or the basket of assets making them up. The component securities could be bonds, stocks or currency.

They come in the form of a contract executed between two parties who have come into the understanding to either buy or sell an asset at an agreed date and time among other terms and conditions... Read more on All Africa

Source: All Africa