LECTURE 7
FINANCIAL MARKET
The financial market refers to the market where the sale and purchase of financial products
occurs. Such products include stocks, bonds, currencies, derivatives, commodities, crypto
currencies, etc. It acts as a platform for sellers and buyers to connect and deal in their desired
financial assets at a price determined by market forces.
A financial market becomes a medium between people or institutions requiring capital and those
having the capital to invest. It means those with extra funds offer them to those who need
additional finances to grow their businesses and earn more. These markets can be classified
based on the nature and maturity of claims, delivery timing, and organisational structure.
A financial market is a platform where businesses and investors look forward to raising funds to
grow their ventures and reap good returns on investments. In this marketplace, the buyers get
appropriate sellers, and the sellers crack a good deal by having the best buyers for their financial
products.
These markets are classified into different kinds based on varied parameters. However, the major
classifications are based on the nature of the claim, claim maturity, delivery time, and
organizational structure. For example, based on the nature and type of claim, a financial market
is classified as a debt or equity market. While the former is where the exchange
of bonds (debt instrument issued by government or companies to acquire investors’ funds for
a period of time) and debentures (long terms debt instruments issued by government or
companies to meet its financial requirement. In return, investors are compensated with an
interest income for being a credit to the issuer) occurs between investors, the latter is where
investors deal with equities.
Types of Financial Markets
The types of financial markets of these capital markets are mentioned below:
Stock Market: This is the hub for companies looking forward to raising their capital. First, they
register their shares and issue them to interested traders via an initial public offering (IPO) in the
secondary market. They list the shares or stocks on stock exchanges, including Nigeria Stock
Exchange, Security and Exchange Commission and non-physical trade counter.
Bond Market: It is the marketplace, allowing investors to buy bonds from companies to finance
their projects. The bonds are a promise of repayment to the companies or the government
purchasing them within a specified period. The companies have to pay the principal amount and
interest for a complete settlement.
Derivatives Market: The derivatives market deals with derivatives, which derive their value
from an underlying asset. Individuals and firms can trade in futures, options, forward contracts,
and swaps here. Such trades can be entered either via over-the-counter or in exchange-traded
derivatives to manage the financial risk.
Forex Market: The foreign exchange (Forex) market helps conduct currency trade. These
markets are operated through financial institutions and are used to determine foreign exchange
prices for every money.
Commodities Market: A commodity market deals with commodity market, including assets
like gold, oil, wheat, rice, etc. There are around 50 major commodity markets all over the world.
Crypto currency Market: Digital assets are trending, given the opportunities offered to
investors and traders. The transactions occur and are recorded using block chain technology. The
cryptos, including Bitcoin, Ethereum, etc., are available on online crypto exchanges, letting
traders participate in the trade on a global platform.
The exchanges have digital wallets through which users exchange one digital currency with
another, including traditional currencies. As centralized markets, these platforms are likely to
face cyber issues, like hacks and frauds.
Functions
The financial markets help individuals and institutions use their savings more productively.
Banks, one of the major elements of a capital market, help their customers utilize the money
saved to open multiple savings schemes for interested investors for better returns. In addition,
they enable firms and individuals to obtain loans from banking institutions to fulfill their
personal and business loan requirements.
One of the major financial market functions is determining the prices of the securities available
in the market. However, there is no law to set the securities prices. Instead, the capital market
determines the costs depending on how an asset performs or financial market news or
information surrounding it.
The traders and investors can easily acquire all the required information about the desired
securities without spending anything extra. In short, the cost of transactions is pretty low. Plus,
these markets make assets liquid. As a result, traders can trade in securities anytime at their
convenience.
