Components

of Financial
Market
LESSON 2
 A market that serves as a link between the
savers and borrowers, by transferring the
capital or money from those who have a
surplus amount of money to those who are in
need of money or investment.
the investors are known as the surplus units and business enterprises are known
as the deficit units.
Capital Markets

Capital markets are concerned with raising capital for entities through issuing
equity stock or long-term debt. Elements of capital markets:

a) Stock markets: They are markets that companies leverage to raise capital
by creating shares. The shares are sold to external investors, who can either
be corporations or individual buyers. Companies can sell the shares on their
own or engage the services of stockbrokers.

b) Bond markets: When organizations need large-scale financing, they may

resort to bonds. Bonds are borrowing instruments which generate a fixed
interest rate after a predefined period. Different types of bonds include
treasury bonds, corporate bonds, and municipal bonds.
Commodity Markets
This is where companies trade in natural resources such as oil, corn or gold, for
short-term financing

Money Markets
Money market instruments are also referred to us 'paper'. They entail trading of
financial instruments which are highly liquid and have short-term maturity dates.
The maturity dates of papers could be as short as a few hours but not more
than one year.
Derivatives Markets
These are markets that facilitate the trading of financial instruments like futures
contracts or options which are derived from other forms of assets like stocks,
bonds, commodities, and market index price

Futures Markets
A futures market is one where participants agree to buy or sell an asset at a future
date at an agreed-upon price.

Insurance Markets
Insurance markets are a means of protection against financial loss or any other
uncertain loss. Insurance companies compensate to the insured party in case of
occurrence of the insured loss.
Primary market
Primary Market:
The primary market, also known as the new issue market, is where newly
issued securities are first sold to the public.

In the primary market, companies raise capital by selling their securities directly
to investors
The main features of the primary market include:
Issuance of New Securities
Companies or government entities issue new stocks, bonds, or other securities to
raise funds for various purposes such as expansion, research and development, or
debt repayment.

Investor-Company Interaction
Investors in the primary market purchase securities directly from the issuing
company or government. The funds raised from the sale of securities go to the
issuer.
Price Determination
The price of securities in the primary market is often
determined through negotiations between the issuer and
underwriters (investment banks or financial institutions
facilitating the offering).

Limited Liquidity
Securities purchased in the primary market are not as easily
tradable as those in the secondary market. Investors typically
need to hold them until they become available for trading in
the secondary market.
Underwriting
In many cases, securities are underwritten by financial institutions that help
manage the issuance process, assess risks, and ensure the successful sale of
the securities.
Secondary Market

The secondary market, also

known as the stock market or the
resale market, is where previously
issued securities are traded
among investors.
The main features of the secondary market include:

Trading of Existing Securities

Investors trade securities among themselves, and the
transactions don't involve the issuing company. The
company does not receive funds from secondary market
trades.

Price Determination
The prices of securities in the secondary market are
determined by supply and demand forces, and they
fluctuate based on market sentiment, economic
conditions, and other factors.
High Liquidity
Securities in the secondary market are more liquid, meaning
they can be easily bought and sold. Investors can exit their
positions quickly.

Investor Speculation and Profits

Many investors buy securities in the secondary market with
the goal of making a profit through price appreciation or
dividend income.
Market Regulation
The secondary market is subject to regulations and oversight by regulatory
bodies to ensure fair trading practices, transparency, and investor protection.
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