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The Mathematics of the New "Par Value" Pricing Methodology in the Nigerian Stock Market

Proshare

Wednesday, January 31, 2018 / 12:45PM  / Proshare Research


There is an on-going discussion in the elite “Capital Market Roundtable Forum” on the new pricing rule in the Nigerian Stock Market.

The discussion, as should be expected of discerning professionals and operators, centers around the new par value rule and the financial arithmetic involved in the decision making process and impact/value sustainability of the rule.

An informed commentary postulated that a minimum trade value of N4.5m will be required to move the share price of a share trading at N90.00 by a tick size of five kobo (N0.05k), while only 22% of that amount, which is N1m, is required to move the price of a share trading at N100.00 by a tick size of ten kobo (N0.10k)”.

We interrogated this assertion to determine its truth and practicality and in doing so, stocks were grouped in three (3) distinct categories based on the criteria stated below:

Group A: Equities trading at 100 and above

Group B: Equities trading at 5 and above but below 100 

Group C: Equities trading at 0.01 and above but below 5

Based on the above categories, each group of stock(s) were assessed based on a price range.

Two scenario emerged, and analysis will be premised/presented based on the highest and lowest price ranges in each group.

Scenario A: Highest Price Range
This scenario presents a case of the highest range prices for all groups. It is reflective here for Group A stocks trading at N1,000 for instance will required a value of N10m to move a stock price by N0.10k while about 50% (N4.9m) of such amount will be required for Group B stocks and far lesser for Group C. 

The Mathematics of New Par Value and Pricing Methodology Rule

Group

Quantity Reqd for Price Movement

Tick Size

Price Range Trading Period

Assumed Price

Value (N)

A

                10,000

 N0.10k

 N100.00 or above, for 4 of the last 6 months, or new security listings priced at N100.00 or above at the time of listing

    1,000.00

   10,000,000

B

                50,000

 N0.05k

 N5.00 or above but lower than N100, for 4 of the last 6 months, or new security listings priced at N5.00 or above but lower than N100 at the time of listing 

99.99

     4,999,500

C

              100,000

 N0.01k

 Lower than N5, for 4 of the last 6 months, or new security listings priced lower than N5 at the time of listing 

4.99

         499,000

Source: NSE, Proshare Research

 
Scenario B: Lowest Price Range
The second scenario presents a case of the lowest range prices for all groups. It reflected that for Group A stocks trading at N100, for instance, will required a value of N1m to move a stock price by N0.10k while about 25% of such amount (N250,000) will be required for Group B stocks and far lesser for Group C. 

The Mathematics of New Par Value and Pricing Methodology Rule

Group

Quantity Reqd for Price Movement

Tick Size

Price Range Trading Period

Assumed Price

Value (N)

A

                10,000

 N0.10k

 N100.00 or above, for 4 of the last 6 months, or new security listings priced at N100.00 or above at the time of listing

        100.00

      1,000,000

B

                50,000

 N0.05k

 N5.00 or above but lower than N100, for 4 of the last 6 months, or new security listings priced at N5.00 or above but lower than N100 at the time of listing 

5

         250,000

C

              100,000

 N0.01k

 Lower than N5, for 4 of the last 6 months, or new security listings priced lower than N5 at the time of listing 

0.01

              1,000

Source: NSE, Proshare Research

 
Based on the two scenarios above, the determinant factor in the value of any stocks traded in line with the new pricing methodology is the current market price of such stock.

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Proshare Nigeria Pvt. Ltd.

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