SINCE the recent stock market crash and the implosion at the top echelon of the Nigerian Stock Exchange (NSE), there has been a matrix of misinformation, misperception and misplaced aggression against the erstwhile director general of the NSE, Professor Ndi Okereke-Onyiuke, arising from an orchestrated political shenanigan by a cabal in a typical demonstration of the ‘PHD’ (Pull Her Down) syndrome. As noted by Professor Chukwuma Soludo in a recent publication ‘as every one holding public office knows, once you leave, there is often a tendency for your record to be rubbished and, if care is not taken, for you to be treated as a common criminal’. Though the issue of her removal from office is a subject of litigation, it must be noted that the capital market abhors high wire politicking and the exhibition of a cantankerous propensity because of its very sensitive nature and strategic importance in national economic development.
It is on record that the Nigerian stock market came to global reckoning during Okereke-Onyiuke’s tenure, just as there was a heightened awareness among local investors as a result of her technical expertise and dynamism in propagating the ideals of the capital market. Under her leadership, the good times rolled as the stock market became the toast of investors who scooped great returns by way of capital gains and dividend accruals until the melt down occurred, and her vilification began.
For the purpose of keeping the record straight, the stock market melt down had nothing to do with the alleged actions or inactions of Okereke-Onyiuke as bandied in some quarters. The market crash occurred in accordance with the nature of stock markets world wide. The Nigerian stock market crashed because of a massive out flow of local hot money which had earlier streamed into the market in the form of margin loans that were granted by banks to stockbrokers. Hot money is short term funds usually held by speculators. It is volatile and the influx into the stock market creates the bubble with share prices shooting north ward, while its outflow creates pandemonium and the accompanying slide in share prices because of the supply glut.
The banks invaded the stock market after the banking consolidation exercise. In capturing the scenario, the then Finance Minister, Shamsudeen Usman in his address to the Bank Directors Association quarterly meeting in 2008 was reported to have said that “the result of the banking consolidation is increased involvement of banks in stock market operation to generate increasing returns to shareholders’’, adding “analysts insist that 18 per cent or about N2.5 trillion of depositors’ funds are used in margin trading acting as a factor driving prices in the stock market’’.
Also in its publication titled Chronicles of 2008 - The Nigerian Economy and Capital Market, Vetiva Equity Research noted that “there was a rumoured ban on margin trading by the CBN and SEC that they had given a clear directive to the banks via moral suasion to stop the extension of loans to stockbroking for stock market trading. This led to a glut of sell orders by brokerage firms who had to repay their debt balances to the banks. This singular action was a major factor that facilitated the decline of the Nigerian Stock Exchange All Share Index. (NSE ALSI) as margin facilities given by banks to stock brokers had funded significant volumes traded in the capital market’’.
Though margin trading is a normal stock market practice, it must be noted that it is very risky as it has the potential to destabilize stock markets especially the mono-product types such as ours because it takes quite a long time for mono-product markets to rebound upon destabilization due to the absence of alternative investment instruments where investors could migrate to.
In the wake of the stock market crisis, Okereke-Onyiuke intervened to arrest the continuous slide in share prices though she met with little success because of the automation of the market and the absence of market makers who would have mopped up the glut in the market and stabilize share prices.
World wide stock markets exhibit similar characteristics. They are cyclical in nature, guided by the Random Walk theory, driven mainly by emotion just as they have their high and low periods and are also prone to crash in extreme cases depending on the interacting  environmental variables.
The capital market is the axle on which the wheel of capitalism revolves. It is ruled by two factors which are constant in the market namely, greed and fear. While greed breeds the bubble, fear creates panic and dumping of shares which culminates in a crash.
There is a need for the regulatory authorities to intensify investor education in order to create a proper perception of the stock market. Because the Nigerian stock market had always been an example of a classic bull market, investors find it hard to accept the reality of the crash.
The bitter truth however is that stock markets do crash though its mechanism remains a fantastic source of wealth creation. A careful and focused investor with a defined investment objective and strategy can build an empire through the mechanism of the stock market. Ask Warren Buffet.