Financial Markets (Pols 219)

Introduction

Financial markets are essential components of the financial system. They provide the platform through which financial claims are created, exchanged, and priced, thereby facilitating the flow of funds from surplus units to deficit units in the economy.

Meaning of Financial Markets

Financial markets are centres or arrangements for the provision of financial facilities for the buying and selling of financial claims (such as stocks, bonds, and other securities).

Free market 

They are used by corporations, individuals, governments, and financial institutions, either directly or through brokers and dealers on organized exchanges. Financial markets are broadly classified into primary and secondary markets, as well as money and capital markets.

Primary and Secondary Markets

Primary Market

The primary market is a direct market that deals in new financial instruments. It mobilizes savings and supplies fresh capital to businesses, governments, and other economic units.

Secondary Market

The secondary market is an indirect market where existing securities are bought and sold. It does not directly provide new capital but enhances liquidity, marketability, and price discovery of financial assets.

Money and Capital Markets

Money and capital markets perform the function of transferring financial resources to producers.

• The money market deals with short-term financial instruments.
• The capital market deals with long-term financial instruments.

Financial System

The financial system is an umbrella concept that comprises institutions, markets, instruments, and mechanisms through which financial assets are created, traded, and financial services are delivered within an economy.

According to Banji and Mordi, the financial system plays vital roles in economic development, including:

1. Creating pricing information, which assists government and regulators in policy formulation and regulation.

2. Promoting economic development by enabling firms and economic agents to assess the value of financial assets and make informed lending and borrowing decisions.

3. Helping to engender sustainable economic development, especially in the face of globalization, structural changes, and the need for integrity in financial markets.

Commercial Banks

Commercial banks facilitate development through various forms of financial inter mediation. They mobilize savings by accepting deposits from individuals, governments, and corporate bodies, and act as agents between surplus and deficit units.

Types 

1. Depository institution

2. Investment institution

3. Contractual institution

Conclusion

Financial markets and the financial system play a central role in economic growth by mobilizing savings, allocating capital efficiently, and supporting investment decisions. Through primary and secondary markets, as well as money and capital markets, financial resources are transferred to productive sectors, with commercial banks serving as key intermediaries in this process.