(BACKPAGE) The stock market as gamblers’ haven

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BY LEKAN SOTE

Uba Group

When told that his plan to promote pools betting as part of the economic plans to raise money for his government if he was elected President of the Federal Republic of Nigeria, is immoral and should be discouraged, Obafemi Awolowo countered that the stock exchange, that the elite engaged in, is equally a gambling, and therefore, an “immoral,” platform.

There was a deafening silence from both the media that raised the query and the political and economic elite, many of whom generally invest in the stock market in a very big way and as a matter of course. They must have thought that somebody was going to take their cash cow away.

The stock market, which the French refer to as the bourse, is the mart where newly launched joint stock companies raise fresh funds through Initial Public Offers, existing or going concerns raise more funds through Public Offers and individuals also exchange extant stocks.

The total number, or volume, and value of stocks issued by the promoters of the business is known as “Authorised Shares,” and the number and value of shares actually paid for at any time is regarded as “Issued Shares.”

Both are separately classified under the capital segment in the Balance Sheet of the financial report of a company. The difference between the two is the volume and value of outstanding shares that are yet to be allocated or acquired.

A former Director General of the Nigeria Stock Exchange was so negligent that a company that was no longer a going concern continued to be listed on the floor of the bourse for a long time. That the stocks of this non-existent company continued to be traded is evidence that the stock exchange is a gamblers’ platform.

As you know, gamblers at America’s Caesars Palace and other gaming resorts bring nothing to the gambling table, except their cash, tokens and insanely robust hope for a win, the stuff that gambling is made of.

As you can see from, “The Wealth of Nations,” the treatise on economics written by Adam Smith, and the trajectory of the Industrial Revolution, the joint stock company, financed by funds raised from the public, many of whom may not even know each other, has become a major vehicle of the economic transformation of modern states.

When a company is raising funds for an Initial Public Offer or a Public Offer, the amount required is divided into units, so that each unit of stock has a value that is referred to as “par value,” which may not necessarily be the actual value.

The shares could be traded at a discount, where the price of exchange is lower than its face value. It could also be valued at a premium, in which case the exchange value is higher than the face value.

For example, a share with N1, 000 face value may either be discounted at N900, if investors are not too keen to buy it. It may also be traded at a premium of N1, 100 if buyers think it is hot and scramble for it.

But the amount that the stock is traded depends on the value placed on it by investors or stockbrokers, many of whom are adept at manipulating information to raise, or lower, the value that the stock will be traded.

This value is determined by hunch, at best, though there are pretenses at statistical permutations or some sort of scientific analysis. But really, the decision to buy or dispose of a stock at a given price depends on non-scientific variables.

Prices of stocks have been known to fall when the Managing Director of a company that is listed on the stock exchange suddenly dies. It could also suddenly rise if a new Managing Director, who ran a successful rival company, joins the company.

The decision to trade the stock at a lower or higher value depends on a value judgement, however pretentiously scientific the speculation may be. This will be the reason for Awolowo’s cynical submission that the stock exchange is a gambler’s delight.

“If Nigeria continues to fail to generate enough revenue in foreign currency, or continues to deplete its foreign reserves to service foreign loans and pay for its foreign imports, its currency will continue to depreciate”

Sometimes the law of demand and supply is used to fix the value of a stock. The law of supply and demand, as you probably know, is based on the understanding that economics and all human transactions are based on the rational allocation of scarce resources.

It assumes that when a good is scarce, relative to effective demand for it, the price shoots up. The opposite, where supply outstrips demand, the price drops. Effective demand is the ability of a customer to muster the cash for whatever he desires to acquire.

“CBN"

The same logic is used to determine the rate of exchange of one currency for another, even though a state agency, like the Central Bank of Nigeria, may arbitrarily fix the exchange rate, based on some assumptions or policy choices.

Multilateral financial institutions, like the World Bank and the International Monetary Fund, that keep pushing Nigeria to allow the Naira to find its “true” value, believe that the law of supply and demand should guide the allocation of forex.

You would have observed that the rapid depreciation of the Naira, in relation to the American dollar, is fuelled by the high demand for the American dollar to fund the profligately import-oriented economy of Nigeria.

Of course, you know that most of Nigeria’s strategic consumer goods –petroleum products, foodstuffs and housing materials– industrial raw materials, manufacturing machinery, spare parts and supplies are imported.

The prices of most of these products are denominated in the American dollar which is practically the international currency for most international trades– until Russia recently used its war with Ukraine to upstage the dollar and almost substitute it with the Russian Rubles.

If Nigeria continues to fail to generate enough revenue in foreign currency or continues to deplete its foreign reserves to service foreign loans and pay for its foreign imports, its currency will continue to depreciate.

The big stock market gamblers are hedge fund managers, like George Soro, who floats Leveraged Buy Overs to acquire, substantially or totally, the shares of going concerns that they figure will either produce further profits. At other times, they expect that the value of their shares will significantly appreciate over time before they can then offload them at a higher price.

Sometimes, institutional investors, like insurance and pension funds, that have amassed a lot of cash, sometimes invest in shares already traded on the floor of the stock exchange, Initial Public Offers, or of subsequent Public Offers of existing companies.

But sometimes share acquisition is used to deliberately oust a powerful shareholder. A most recent and prominent example is the acquisition of majority shares of CNN International television network owned by entertainment and media group, Time Warner Inc.

First, Time Warner retained CNN founder, Ted Turner, as Chairman of the network. When they thought they could do without him, they dropped him from the television network that was a subsidiary of Time Warner. In the end, he retired from the Board of Time Warner.

Some other time, a company could acquire the shares of an existing company, to enter into a new industry, increase its revenue and profitability, or gain access to a source of raw materials as backward integration.

No doubt the stock market enables gambling.