The Nigerian Exchange (NGX) has recently introduced changes to the mechanisms governing how share prices respond to trading activity. To many investors, the announcement may have appeared technical and obscure, but its implications for the Nigerian capital market are both practical and far-reaching. Essentially, this reform is not about changing the value of any company. Rather, it is about ensuring that share prices move in response to genuine and meaningful market activity, not the isolated transactions of a handful of investors executing insignificant trades.
The reform operates through two interrelated instruments: a minimum quantity threshold and a revised tick size. The minimum quantity threshold specifies the volume of shares that must change hands before a stock’s price is permitted to move at all. The tick size, on the other hand, determines the smallest increment by which that price may change once the threshold has been crossed. To be sure, these two concepts work in tandem. The minimum quantity threshold is, in effect, permission for a price to move, while the tick size governs the magnitude of each step once movement is authorised.
Under the new framework, listed securities have been categorised into three groups based on their current share price. For stocks trading at N1,000 and above, designated as Group A, a minimum of 10,000 shares must be traded before the price can move, and each permissible price movement occurs in increments of 10 kobo. For stocks in the N500 to N999 range, designated as Group B, the threshold is 50,000 shares, with a tick size of 5 kobo. The broadest category, Group C, covers all stocks priced below N500, requiring 100,000 shares to be traded before any price movement is permitted, with each movement occurring in steps of just 1 kobo. To illustrate, a stock like GTCO, which currently trades around N128.35, falls within Group C. Under the new rules, its price can only move after 100,000 shares have been exchanged, and when it does move, it will do so in increments of one kobo: from N128.35 to N128.36, and so forth. By contrast, a premium stock like Seplat, trading at approximately N11,360, requires only 10,000 shares to be traded before its price adjusts, with each step being 10 kobo which is a smaller relative increment but one that carries greater absolute naira value.
