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Financial markets

ArticleID 108  
Writer Isaac Thuku
Category Personal Article

Financial markets are crucial to any investment environment. By design, they allow corporations and governments to raise new funds and for investors to execute their trading orders. In these markets, funds are channeled from those with the surplus, to those, with shortage. A financial market can be described as a set of arrangements that allows buying and selling among participants.

A standard financial market provides three important economic functions;

1. Determining the prices of assets traded through the interactions between buyers and sellers

2. Providing liquidity of the financial assets

3. Reducing the cost of transactions by reducing explicit costs, such as money spent to advertise intent to trade

Financial markets could be classified on the bases of those characteristics:

• Sequence of transactions for trading securities.

• Terms of circulation of financial assets traded

• Economic nature of securities, traded.

• Rules of a given country.

Sequence of transactions for trading securities

All securities are first traded in the; primary market, and then the secondary market provides necessary liquidity for these securities.

Primary Market

The Primary market is where corporate and government entities raise capital. It is also the place where the first transactions with the new issued securities are performed. If a company’s shares are traded in the primary market for the first time it is referred to as an initial public offering (IPO).

Investment banks play a crucial role in the primary market because they:

• Are familiar with issues in the primary market.

• Act as underwriter of a new issue,

• Guarantee the proceeds to the issuer.

Secondary market

This is where previously issued securities are traded among investors. Basically, individual investors have no access to secondary markets. They have security brokers act as intermediaries on their behalf. The broker delivers any orders received form investors in securities to a market place, where these orders are executed. Finally, the clearing and settlement processes ensure that both parties to these transactions honor their commitment.

Financial markets
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