A financial market is a market where loanable funds and many assets such as debt instruments and securities are traded. Good examples of financial markets are the saving banks, savings and loan associations, an insurance company, pension funds, bill broker, finance Houses and acceptance houses. The components of financial markets include money market and capital market.
A money market is a market where you trade short-term funds. The short term instruments traded in the money market include treasury bills, call money fund, certificate of deposits, treasury certificate, banker unit fund, commercial bills and stabilization securities.
The money market is used by enterprises to raise funds for financing work capital, used by banks to finance temporary reserve loss, used by companies to finance consumer credit and used by the federal government to bridge the gap between its receipts and expenditure.
Unlike the commodity market, there is no place called money market. However, the activities in the money market can be concentrated in a particular place, e.g. Broad street in Lagos.
Dealers in the money market are individual institutions with the excess fund, and those in need of funds.
Types of Money Market
There are two types of money market which are namely
- Discount money market and
- Parallel money market
A discount money market is an institution that deals on bills of exchange that is, an unconditional order in writing. The discount houses discount bills by buying them for less than face values. There is always a difference between the maturity value and the discount values. The acceptance house (merchant banks) accept bills on commission. The commercial banks are expected to provide discount houses with the fund.
A parallel money market is the horizontal transfer of credit to meet the tailored needs of both lenders and borrowers. An excellent example of the parallel money market is the interbank deposit. By this arrangement, banks having surplus funds lends to banks of deficit funds with interest-bearing outlets.
A capital market is a market where long term securities are traded. The securities traded in the capital market include long term equities, government securities and debentures. The components of the capital market include the primary market and the secondary market.
The primary market deals with selling of new securities when the issuing houses first offer them. Since many of the buyers of the new securities will eventually resell them, there is a market for such hold securities known as the secondary market. The primary market is dominated by the investment banking firm known as a merchant bank. If a firm wants to raise new capital, it will do so through an investment banker.
The secondary market deals with the selling of old securities. The stock exchange dominates it. In this market, the transaction takes place through jobbers and brokers. A jobber is a wholesaler who buys and sells securities, and he does not deal directly with the public but with a broker and other jobbers. A broker, on the other hand, is a retailer who trades on securities, he acts as an agent for buying and selling shares on behalf of his client, the principal. He directly with the public and earns commission known as brokerage.
The Nigerian financial market is an integral part of the economy with all its players and their unique role in the market. It is also the best place for investing either as a beginner or an experienced investor as it is backed by the laws of the nation.