Feature Article of Sunday, 30 September 2012

Columnist: Teye, Sophia Kafui

Ways Of Improving Liquidity On The Ghana Stock Exchange

What is liquidity on a Stock Market?

Every investor needs to be assured of maximum right or freedom to manage his/her assets. One of these freedoms is the ability to convert assets quickly, with less hustle into cash or cash equivalent, of which today’s investor is obsessed with. This is referred to as liquidity. The easier it is for investment managers to do this, the happier investors become and are then spurred on to invest more of their resources in such markets. The question of what exactly a liquid market is has been explained in most investment literatures.
The reiterating points in the definition of Market Liquidity are; market, assets (financial), convertibility (ease), cash, time, and value. These key words stress the fact that, for a market to be considered as liquid, it must have the ability to easily convert financial assets into cash or cash equivalents within a specific time with little or no loss in value.

A liquid market also refers to the ability to buy or sell financial asset quickly and in large volume without substantially affecting the asset’s price and with minimal loss of value.

For instance shares in large companies such as Ecobank Ghana Limited are liquid because they are actively traded and therefore the stock price will not be dramatically moved by a few buy or sell orders. Liquidity is not permanent; Ghana Commercial Bank was believed to be one of the most actively traded stocks with significant liquidity on the Ghana Stock Exchange (GSE) in 2010 but that is not the case now. Sometimes, people misconstrue huge float (a lot of issued shares) as a measure of liquidity but this is not always the case. It depends on the number of shares available for trade. The International Finance Corporation (IFC), Social Security and National Insurance Trust (SSNIT), Asset Management Corporation of Nigeria and Stanbic Nominees Nigerial Ltd Trading A/C for instance have substantial shareholding in Ecobank Transnational Incorporated (ETI) but they hardly trade from past observation. Hence trade in ETI is only transacted by retail investors who are not willing to trade because of the fall in the share price.

Financial assets include shares, bonds, mutual funds and other exchange traded funds or derivatives, but for the sake of this article, much emphasis would be placed on shares. This is so because shares are the next common capital market instrument known to Ghanaians after mutual funds.

Most investors in Ghana are more comfortable in putting their money in savings account and treasury bills to enable them withdraw as and when it’s needed. These investors also remain more comfortable with the normal retails and wholesale business. Ghanaian investors also lack knowledge about financial investment alternatives like close ended mutual funds that return better yield than the traditional banking products. Enticing them to the stock market is even more difficult because of this lack of knowledge. Hence the only way they can be enticed to invest in the stock market is an assurance of liquidity, profitability and good corporate governance.

So many reasons influence liquidity on the stock market and this cut across legal, regulatory, accounting and tax systems. The efficiency of trading systems determines the ease and confidence with which investors can buy and sell their shares. Also, macroeconomic and political environments affect market liquidity. This article seeks to enlighten readers on the importance of the capital market liquidity and how this can boost investor confidence.

Every vibrant stock market is characterized by high liquidity, without which investors would be reluctant to buy shares. Hence poor liquidity introduces a very undesirable downside risk to prospective and current investors. A stock exchange must do all it can to promote liquidity so as to improve public participation in the market.

Features of a liquid market
? Shares can be sold swiftly, with negligible loss of value, any time within market hours.
? There are ready and willing buyers and sellers at all times.
? Liquidity is the probability that the next trade is executed at a price equal to the last one.
? There are ready and willing buyers and sellers in large quantities.
Causes of market illiquidity

An asset is said to be illiquid if it is not readily saleable due to:
? Uncertainty about its value
? Lack of irregular market to trade


? Increases investor confidence because investors know the risk and return associated with stocks.
? It aids development: Research has shown that countries with both liquid stock markets and well developed banks grew much faster than countries with both illiquid markets and underdeveloped banks.
? Liquid equity markets make investment less risky and more attractive. This is because they allow savers to acquire shares and to sell it quickly if they need access to their savings or want to alter their portfolios.
? Companies enjoy permanent access to capital raised through equity issues.
? By facilitating longer-term, more profitable investments, liquid markets improve the allocation of capital and enhance prospects for long-term economic growth.
? Investors can buy and sell as and when the need arises.


The Role of Industry Regulators
Many companies should be encouraged to list on the Ghanaian bourse so as to facilitate liquidity on the market. This can be widely achieved by the regulators of the various industries. The National Insurance Commission can persuade blue chip companies within its regulatory jurisdiction to get listed on the Ghana Stock Exchange. The National Communication Authority should convince the telecommunications companies as well as some big media houses within its jurisdiction to get listed on the Ghana Stock Exchange (GSE). The Bank of Ghana (BoG), the Minerals Commission and Ghana National Petroleum Commission (GNPC) could also do same. This can be achieved through persuasion, dialogue, collaboration, policy setting and mutual consent. For more companies to list on the Ghana stock exchange it is not only the duty of Ghana Stock Exchange (GSE) or the Securities and Exchange Commission (SEC) but all other industry regulators and policy makers. If more companies are not encouraged to list on the stock exchange, we are likely to have a situation where we have more money chasing fewer listed companies which would lead to more shares being mispriced.

Massive education and training should be intensified to increase investor’s knowledge on the role of the stock exchange in Ghana’s development. The challenges confronting the stock market can be tackled by the collective efforts of all industry players which can be done through monthly or quarterly sensitization programmes on capital market investment. Securities and Exchange Commission (SEC) being the regulator should persuade all firms within its jurisdiction to include education of the public as a license renewal requirement.

State Owned Organizations to Raise Money from the Stock Market
Liquidity could be improved by persuading state-owned enterprises and statutory bodies to raise a portion of their funds needed through the issuance of corporate bonds that can be listed on the stock market. Local government authorities like the District, Municipal, Metropolitan assemblies can use this as means of raising funds to execute certain developmental projects. If it is successful, the investing public both within and outside these local communities will buy the bonds which will be used to finance positive NPV projects such as markets, shopping malls, lorry parks, etc; i.e. projects that are self-financing and will payback both principal and interest within a defined time frame. This can be enforced when the Ministry of Finance and Economic Planning (MOFEP) reduces its budget allocation to organizations or local government agencies when they believe these organizations or local agencies have the capacity to issue bonds.

I believe that part of the reason why some of these Municipals and Districts do not take advantage of the capital market is that they are not well educated about those prospects. More so, the requirements for raising equity on the market are also too high for some of them. But current measures by the regulators to establish for instance the SME exchange, etc, and extensive education, should see some of these institutions patronizing the capital market. Also, I would admonish the management of these public organizations to work hard to meet the entry requirement by regulatory authorities to enable them raise money from the capital market.

Development of financial products
Investment banking firms should be encouraged to develop more products that can be traded on the Ghana Stock Exchange. If there are more investment instruments/products on the market then investor confidence in Ghana’s stock market will increase because of the expanded choice and thus boost liquidity in the long run. The weekly Bank of Ghana (BoG) auction on the money market is always oversubscribed because investors keep pushing money there, meaning there are more funds waiting for more products to invest in. The need for more investment products has even become more indispensable with the implementation of the three-tier pension scheme; a large portfolio of long-term funds is expected to be available for the Ghanaian capital market to tap into.

The listing of the first Exchange Traded Fund (ETF) – NewGold ETF – on the Ghana Stock Exchange by Absa Capital of South Africa is a good sign of the efforts by market participants at bringing variety to a stock market dominated by trading in company shares and bonds.

The role of listed companies in improving share liquidity
Listed companies should publicly release financials and disclose other price sensitive information that is rumoured about them in a timely manner. When rumours are out in the public, it is the role of the listed company to issue a press statement to inform the investor public as to what the real situation on the ground is. Some analysts are of the view that the country’s stock market is largely unresponsive to information and that stocks remain passive despite the release of pertinent information about the performances of companies listed on the stock exchange. This is very evident that when a company releases its financial statement and nothing happens until after three or four months, by which time things would have changed. In spite of all these claims, it is still the responsibility of the listed company to perform its duty of having investors informed at all times. This will affect market liquidity. Gradually, when the investor public is educated on this subject, it will boost their confidence to invest more in the company. The company in question stands to benefit more because if their stocks are actively patronized and if they need to raise more money from the stock market arises, their offer will be successful to a large extent because their liquidity is obvious to investors. Proceeds from these successful fund raising can be used for expansion of the company by promoting pending projects of the company. This will cause the Stock Exchange to also perform well because capitalization is more likely to increase.

The regulators role
Transaction fees can be reduced as this was done by the Nigerian Stock Exchange to attract more people to trade on the Ghanaian Stock Exchange. Currently, 2.5% transaction fees are being charged, if that can be reduce, it might affect liquidity to some extent.

The regulators can sanction listed companies that no longer meet the listing requirement as in the case of the Pioneer Kitchen Ware, Transol and Clydestone who were suspended by the GSE (the GSE has reinstated the status of Transol and Clydestone http://www.ibrokerghana.com/index.php?option=com_content&view=article&id=490:gse-lifts-clyd-and-transol-suspension&catid=5:local&Itemid=19). I will also encourage them to deal with companies whose shares have become junk shares and investors in them can only continue to hold and cannot sell. I see the shares of GWEB as ‘junk’.

The role of investors in improving the liquidity on a stock exchange
It is an undeniable fact that most institutional investors are part of the top 20 shareholders of almost all the listed companies on the Ghana Stock Exchange and the shareholding structure rarely change if you should monitor the trend for the past three years. Institutional investors are mostly interested in being part of the majority shareholders and appointing board members to represent their interest on the board. This analysis implies that these institutional investors hardly trade and hence have left determination of the market’s performance in the hands of a minority of retail clients who are largely indifferent to information despite the availability of material and sensitive information about the performances of companies listed on the Ghana Stock Exchange. Hence to ensure greater market liquidity, there is a need for these institutional investors to trade and avoid the habit of holding shares for extremely long time.

In conclusion, the importance of capital market liquidity cannot be underscored by any country that seeks to attain greater economic development. The attainment of a liquid capital market can only be attained by the collective efforts of all industry players such as the regulators, the investors, the listed companies themselves and the investment banking firms. If all stakeholders play their roles in the acceptable manner, capital market liquidity can be achieved. When this is achieved, the stock exchange stands to benefit because marketing capitalization is more likely to go up. The listed companies as well as the investors benefit greatly from a more liquid market. This would be a win-win game compared to where the market is illiquid and the investors stand to lose because they own shares but cannot sell them if they need money.

Direct all comments and suggestions to skafuiteye@gmail.com, skteye@gmail.com. ©, Sophia Kafui Teye, Blog: www.skafuiteye.blogspot.com, follow me on https://twitter.com/skteye