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Yesterday, the Nigerian Stock Exchange applied a circuit breaker during a trading session for the very first time.
What is a circuit breaker and why was it applied?
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What is a circuit breaker and why was it applied?
THREAD
The average movement in stock prices on an exchange is measured using the All Share Index
That index goes up and down all through the day
Rules set by the exchange state that if the index goes up or down by more than 5% during a session, trading should be paused for 30 minutes
That index goes up and down all through the day
Rules set by the exchange state that if the index goes up or down by more than 5% during a session, trading should be paused for 30 minutes
That happened yesterday, at about 12.55 pm as the index gained over 5% during trading.
Trading was then halted for 30 minutes.
Trading was then halted for 30 minutes.
The market reopened at exactly 1:25 p.m. with a 10-minute intraday auction session, before resuming continuous trading till the close of the day at 2:30 p.m.
At the end of the day, the index gained 6.2%
At the end of the day, the index gained 6.2%
That halt in trading is the application of a circuit breaker.
So why are these rules in place?
So why are these rules in place?
The essence of having those rules is to prevent the market from overheating.
That is slow either a rush into stocks or a rushed exit.
So why was there a frenzy in trading yesterday, and in fact over the last few months?
That is slow either a rush into stocks or a rushed exit.
So why was there a frenzy in trading yesterday, and in fact over the last few months?
Over the last year, the Central Bank of Nigeria (CBN) has gradually reduced the interest people can earn on treasury bills.
The CBN held an auction this week, and the 1-year treasury bill had a return of 0.3%.
The CBN held an auction this week, and the 1-year treasury bill had a return of 0.3%.
That is way lower than the inflation rate of 13.7%.
What that means is that anyone buying that is earning negative returns after factoring in inflation
What that means is that anyone buying that is earning negative returns after factoring in inflation
On the bond side, a 10-year government bond has a return somewhere between 3% and 4%.
For many of the big-ticket investors, they need to place that cash somewhere.
For many of the big-ticket investors, they need to place that cash somewhere.
If bonds and treasury bills are offering low returns, that leaves the stock market as the most viable option at the moment.
They would make a profit in two ways
They would make a profit in two ways
1. From the rise in share prices. This is known as capital appreciation.
Let’s say they make a 10% or 20% return in a few months.
That definitely beats a 0.3% return from treasury bills.
Let’s say they make a 10% or 20% return in a few months.
That definitely beats a 0.3% return from treasury bills.
2. The second benefit is something known as dividend yields.
You get the dividend yield when you divide the dividend paid by a company by its share price.
You get the dividend yield when you divide the dividend paid by a company by its share price.
For some companies, even with the rise in share prices, the dividend yields are between 5% to 10%.
Even after factoring in trading fees, this would still be much higher than the 0.3% return on a one-year treasury bill.
Even after factoring in trading fees, this would still be much higher than the 0.3% return on a one-year treasury bill.
