What the NSE’s amended pricing methodology is expected to accomplish

The Nigerian Stock Exchange (NSE) recently announced an amendment to its pricing methodology, whereby the price movement of the securities traded on the bourse will, henceforth, be guided by certain rules. In specific terms, the NSE said the new minimum number of equities that must be traded between two parties before prices can change is 100,000. This applies to all the securities listed on the bourse.

The development is expected to encourage stability, efficiency, and fairness in the pricing of securities, according to Muktar Mohammed, an Analyst at Assar Investments. Mohammed joined CNBC Africa’s Market Watch host, Esther Awoniyi, to discuss the development.

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Good for market liquidity: According to Mohammed, the new rule will now make sure that price movements in the Nigerian capital market are solely influenced by the forces of demand and supply. He further explained that the advantage of this is that it would encourage liquidity because companies would now be forced to either issue bonuses or offer fresh shares.

“What we are going to see now is that markets will be moved based on demand and supply in both ways. So, this method is not just that maybe the units of Nestle will have to move by 100,000 units; no. It has to move by one single individual, one single trade of 100,000 units. 

“In the long run, what this will do is that some of these equities (Nestle, Dangote, and others) will need to either add up by giving bonuses to their shareholders, or come to the market and have people still buy into the market so that they can be very liquid because the challenge about it is that some stocks are actually not liquid. So, this also will help in terms of market liquidity.” 

In the meantime, he reacted to the concerns that have been raised by some people who feel that the new pricing methodology may not be fair enough on big stocks such as Nestle, Seplat, and the likes. According to him, such concerns are groundless and “illegitimate” because the big stocks have to boost their liquidity anyway. He also pointed out that some of these companies’ share outstanding is quite small and held by very few individuals.

The development will also favour low-cap stocks which have been suffering under the dominance of the big ones, Mohammed noted.

“That too could be fair on the low cap stocks who have been suffering from not being treated fairly because then with about 50, 000 units (some of them 10, 000 units) their prices came crashing down. Now, it will take a 100, 000 units to bring down their prices or even raise up their price. So, it depends on which space of the pendulum you are… But I think in the long run, it’s a good thing that the Exchange is doing what they are doing.” 

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