What is financial market in Nigeria?
January 21, 2022
What is financial market – The investment market undoubtedly drives the economy, it provides a platform for both financial suppliers and users. However, financial market is the biggest platform in the investment sphere.
The concept what is financial market?
Financial market is a marketplace where securities are traded, this include the stock market, bond market, forex market among others.
The market plays a role in allocating the resources and creating liquidity for businesses and entrepreneurs. It’s build on the premise that the buyers and sellers trade their financial holding.
It provides a return for those who have excess funds mainly investors and lenders, who in turn make these funds available for borrowers.
The financial market is divided into two, namely the “Money market and capital Market.”
The Money market
Money market is a market arrangement where short term debt instruments/securities are traded.
The period usually span from a day to 1-year, when such security is expected to have reached its maturity.
Features of money market
- In money market large volumes of short term securities/instruments are sold
- Against the idea that it involves banks and companies, individuals can invest in money market purchasing a mutual fund, treasury bill, they may choose to open a money market account even.
- Instruments traded in money market are highly secure with less risk and are relatively liquid.
- They have a short maturity span
- Returns on money market investments are usually low
How money market works
The idea with money market is to invest for a short time usually within one month to 1-year, with this regard it can be said that investors who play in this market aim at managing their short term needs or fill a short term financial gap.
Assuming a company is in need of funds to fill its short term operational cost, it may seek out funding from the market.
Instruments traded in the money market
The money market consists of a number of instruments that facilitates trading, these include but limited to,
- Commercial Paper(CP)
- Certificate of Deposit (CD)
- Treasury Bill, etc.
1. Commercial Paper
Commercial paper is an unsecured and short term loan used by companies who are looking to finance a short term project.
Commercial paper as a money market instrument has a maturity window of 15 days to 1-year discounted, where the interest payable is dependent on demand and supply of liquid funds.
2. Certificate of deposit
Certificate of deposit is a savings account with a fixed sum deposited for a time frame, which could be six months, one year, or five years, the issuing bank pays interest on such deposit.
When such CD is liquidated, the owner receives the initial amount deposited and the interest accrued.
This is however one of the safest financial investment in market, however, before making such deposit you should understand the following,
- The interest rate receivable at the end of the CD tenor
- Understand if such rate is fixed or variable
- You should know when you are expected to get the interest
- Should there be penalty for withdrawing such deposit before the due date?
3. Treasury Bills
Treasury bills are short term debt instruments with a maturity date of one year or less.
TB are the most liquid of all the money market securities backed by the Federal government of Nigeria through the Central bank of Nigeria.
The essence here is for the government to meet its funding needs, TB is an ideal investment for active investors.
Interest on treasury bill is paid at investment, unlike other instruments where the interest will come at the maturity date alongside the initial investment.
The Capital market is a market arrangement where long term debt instruments/securities are traded.
The risk involved in Capital market is high, though the return is relatively high too compare to the money market.
The later has low risk with low return.
The Capital market is divided into Primary and Secondary market.
The Primary market
The primary market is a market where companies sell new stocks or bonds for the very first time. Often seen in the initial public offering (IPO), may still be referred as the new issues market.
The secondary market
At the Secondary market, investors buy existing stocks who have passed the initial public offering from other investors who wish to sell a fraction or the whole of their investment holding, not necessarily from the company who made such offering.
You can buy existing shares at the Secondary market any time.
The Secondary market allows you to buy at your own pace, the stock is always available for purchase, an upside to this market is that you can buy fewer stocks according to your budget.
Most of these purchases may have to go through certified brokers licensed to carry out such transactions under the dictate of the “Security and Exchange Commission (SEC).”
|Importance of financial markets||The financial market is known for its role in enhancing the hitch free operation of capitalist economies, wherein it allocates resources and creates liquidity with ease for businesses and entrepreneurs. The availability of the market makes it easy for buyers and sellers to trade their holding with ease.|
|Examples of financial markets||Examples of the financial market include but not limited to; the stock market, the bond market, the commodity market, etc. This can further be divided into money market and capital market. Where the capital market is further divided in primary and secondary market as stated above.|
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