Financial Markets

Financial markets
Definition
Financial market refers to an elaborate system of the financial institution and intermediaries and arrangement put in place and developed to facilitates the transfer of fund from surplus economics units (saver) to deficit economic units (investor)
Savers include individual, small business family units, government saving through institution such as SACCO, banks, insurance firms, pension schemes etc.
Investors includes government companies, family etc.
Functions of financial markets/institutions in the economy
1. Distribution of financial resources to the most productive units
2. Allocation of saving to real investment.
3. Achieving real output in the economy by mobilizing capital for investment
4. Enable companies to make short term and long-term investments and increase liquidity of shares.
5. Provision of investment advice to individuals through financial experts.
6. Enables companies to raise short term and long-term capital.
7. Means of pricing of securities e.g. N.S.E index shares indicating changes in share prices.
8. Provides investment opportunities
Kenya financial system
Financial markets are broadly classified into 2.
a. Capital markets
b. Money market
Capital market are sub divided into 2
1. Security markets e.g. stock exchange dealing with instrument such as shares, debentures etc.
2. Non security e.g. mortgage, capital lease,
security market is sub divided into 2.
Primary markets
Secondary markets
Capital markets
These are markets for long term funds with maturity period of more than one year, e.g. of financial instrument such as debentures, loans, warrant, bonds preference shares ordinary shares etc.
Capital markets financial institutions includes
1. Stock exchange
2. Development bank
3. Hire purchase companies
4. Building societies
5. Leasing firm

Functions of capital markets
1. Providing long term funds for investment
2. Provide advice to investors as to which investment are viable
3. Facilitates the international capital inflows
4. Facilitating the liquidation and marketing of long term
5. Long term investment are made liquids the transfer between shareholders is facilitated
Money markets/discount markets
These are short tern fund mature in one year
Financial instruments in money includes
a. Commercial paper
b. Treasury bill
c. Bills of exchange
d. Promissory notes
e. Bank overdraft
f. Bankers certificates of deposit.
Primary markets
These are the markets that deal with securities that have been issued for the first time. The money flows directly from transferor (owner of money) to transferee (investing person). they facilitate capital formation.
Economic advantages of primary markets
a. Raising funds for business
b. Mobilizing saving
c. Government can raise capital through sale of treasury bond
d. It is a vehicle for direct foreign investment
e. Open markets operation to effect monetary policy of the government
Secondary markets
Are those markets for subsequent selling and purchase of the financial securities i.e. a company which is already listed in the stock exchange will sell its securities in secondary financial markets.
Advantages of secondary markets in the economy
1. It gives people a chance to buy shares hence distribution of wealth in economy
2. Enables investors realize their investment through disposal of securities.
3. Increase diversification of investments
4. Improve corporate governance through separation of ownership and management. this increase higher standards of accounting resources management and transparency
5. Privatization of parastatal e.g. Kenya airways, this give individual a chance s a for ownership in large companies.
6. Parameter for health economy and companies
7. Provides opportunities for companies and small investors.

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