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Financial Markets and Its Types

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Table of Contents

Table of Contents        ii

1.0 Introduction        1

2.0 Types of Financial Markets        1

3.0 Functions of Financial Markets        3

4.0 Challenges Facing Financial Markets        4

5.0 Solutions for Solving Financial Markets Challenges        5

6.0 Conclusion        6

References        7

1.0 Introduction

Financial markets transfer funds from those who have excess funds to those who need funds (George, 2012). They enable people to obtain mortgages, loans to finance their business to grow and governments to finance their expenditures. Households and businesses that supply funds to financial markets earn return on their investment. Many deficit units such as firms and government agencies access funds from financial markets by issuing securities. Securities are certificates that represent a claim by the issuer (Pilbeam, 2018). Debt securities are certificates that represent borrowed funds incurred by the issuer. Equity securities are certificates that represent equity or ownership in the issuer. Issuing securities enables corporations and government agencies to obtain money from surplus units and therefore spend more money than they receive from normal operations. financial markets are an important contributor to the economy and provide an environment for investors to make decisions and act on investment opportunities.

Various financial institutions are a part of financial markets and offer not only opportunity for buyers and sellers but play a role as major employers of finance professionals. Success in investing requires having an understanding of the financial markets and the products that are available for investing (Sornette, 2017). These products can include stocks, bonds, mutual funds and international securities. Investors must weigh the risk and reward of these products and compare them to investing in other items or choosing to do nothing. Participation in financial markets and working with financial institutions requires understanding how they work and the process of investing. While this knowledge doesn't guarantee success, it can prevent investors from making avoidable mistakes.

2.0 Types of Financial Markets

Each financial market is created to satisfy particular preferences of market participants. There are many different types of financial markets and each market can be distinguished by the maturity structure and trading structure of its securities.

2.1 Capital market

The capital market aids raising of capital on a long-term basis, generally over one year. It consists of a primary and a secondary market and can be divided into two main subgroups which include Bond market and Stock market (Pilbeam, 2018).

  1. The Bond market provides financing by accumulating debt through bond issuance and bond trading
  2. The Stock market provides financing by sharing the ownership of a company through stocks issuing and trading

A primary market is where securities such as shares and bonds are created and traded for the first time without using any intermediary such as an exchange in the process (Sornette, 2017). When a private company decides to become a publicly-traded entity, it issues and sells its stocks at a so-called Initial Public Offering. IPOs are a strictly regulated process which is facilitated by investment banks or finance syndicates of securities dealers that set a starting price range and then oversee its sale directly to the investors.

A secondary market is the place where investors purchase previously issued securities such as stocks, bonds, futures and options from other investors, rather from issuing companies themselves ("Governance and Policy," 2004). The secondary market is where the bulk of exchange trading occurs and it is what people are talk about when they refer to the stock market like Nairobi Securities Exchange. Over the Counter traded stocks are the previously issued stocks which are not listed on an exchange, rather traded directly between dealers over the telephone or by computer (George, 2012). Companies which are traded this way usually don’t meet the requirements for listing on an exchange.

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