The Effect of FDI on Stock Market Liquidity in Nigeria
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Background of the Study
Stock market liquidity—the ease with which assets can be bought or sold without affecting their price—is a key indicator of financial market efficiency. In Nigeria, FDI can enhance stock market liquidity by broadening the investor base, increasing trading volumes, and introducing advanced financial instruments. Foreign investors often bring with them sophisticated investment strategies and a higher tolerance for risk, which can stimulate market activity and deepen liquidity (Ibrahim, 2023). Conversely, if FDI is concentrated in a few sectors or subject to sudden reversals, it might lead to periods of volatility and reduced market stability (Afolabi, 2024).
This study investigates the impact of FDI on the liquidity of Nigeria’s stock market by analyzing trading volume, bid-ask spreads, and market capitalization trends over the period 2020 to 2024. It examines whether increased FDI inflows correlate with improved liquidity and whether regulatory reforms and financial innovations mediate this relationship (Chukwu, 2025). The findings aim to provide insights into how FDI can be leveraged to develop a more robust and efficient capital market, thereby facilitating broader economic growth.
Statement of the Problem
Despite ongoing efforts to modernize Nigeria’s capital markets, stock market liquidity remains suboptimal. Although FDI is expected to enhance liquidity by attracting sophisticated investors, the market continues to exhibit episodes of low trading volumes and wide bid-ask spreads. This raises the problem of whether FDI truly improves market liquidity or if structural issues—such as limited market depth, inadequate investor protection, and regulatory shortcomings—diminish its potential benefits (Ibrahim, 2023). Addressing this issue is essential for policymakers and market regulators aiming to create a more efficient and stable capital market environment (Afolabi, 2024).
Objectives of the Study
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To assess the impact of FDI on stock market liquidity in Nigeria.
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To identify the factors that influence the relationship between FDI and market liquidity.
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To propose policy measures to enhance the positive effects of FDI on liquidity.
Research Questions
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How does FDI influence stock market liquidity in Nigeria?
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What factors mediate the relationship between FDI inflows and liquidity indicators?
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What policy interventions can maximize the liquidity benefits of FDI?
Research Hypotheses
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FDI inflows are positively correlated with improved stock market liquidity.
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Market infrastructure and investor protection moderate the impact of FDI on liquidity.
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Regulatory reforms that enhance transparency will amplify FDI’s positive effects on market liquidity.
Scope and Limitations of the Study
The study focuses on Nigeria’s stock market data and FDI inflows from 2020 to 2024. Limitations include potential data limitations on liquidity measures and external market influences.
Definitions of Terms
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Stock Market Liquidity: The ease with which securities can be traded without significantly affecting their price.
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FDI: Investment from foreign entities in domestic capital markets.
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Bid-Ask Spread: The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
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