Home Money & Finance Understanding the Financial Market

Understanding the Financial Market

by Olufisayo
Financial Market

The financial market is built on the following basis.

  • Individuals in primary occupations minimize current consumption to build up savings.
  • The stock of savings is made available to fund users (Corporations and governments) at the current price of money i.e. interest rate, subject to government interference.
  • In the formal sector, savers and users of funds do not meet directly – they operate through financial intermediaries such as Banks/deposit intermediaries, stockbrokers/investment intermediaries, and insurer/risk management intermediaries.
  • Financial intermediaries issue financial instruments/claims to savers (Financial assets) and users (Financial liabilities) in exchange for the funds received/or disbursed, respectively.

A financial market is classified into two broad segments based on the tenor of the financial instruments issued.

The first one is the Money Market: This is the market for short-term financial instruments, usually with a 1-12 months tenor. The instruments are: Fixed deposits, treasury bills, commercial paper, banker’s Acceptance, etc. the attributes of these near money instruments are: Low risk, low return, and High liquidity, and the institutions that offer these instruments are:

  • Central Bank of Nigeria (CBN)
  • Commercial/Merchant Banks
  • Discount Houses.

The second one is the Capital Market: This is the market for long-term financial instruments, with over 12 month’s tenor. The instruments are Equity, Bonds, and Derivatives. The institutions that offer these instruments are:

  • Security and Exchange Commission, (SEC)
  • Nigeria Stock Exchange (NSE)
  • Stockbrokers/issuing Houses.

It is important to note that core capital market instruments are “typically creations of corporations in the process of corporate financing (i.e. capitalization) and the governments (Federal, state or local governments) in the financing or re-financing of development, public debt, and policy management.

As a matter of rules and procedures, the stock market features a number of registered market operators and consultants in both the primary and secondary market segments.

Investment and securities act, 1999 section 29 requires all capital market operators and other intermediaries associated with securities industries to register with the Securities and Exchange Commission and conduct all security transactions in accordance with the conditions of the certificate of registration obtained from the commission.

The Securities and Exchange Commission is the regulatory apex organization for the Nigerian capital market, just as the Central Bank of Nigeria regulates the money market. It was established by the investment and securities Act, 1999 to regulate investment and securities business in Nigeria.

The Nigerian Stock Exchange (NSE) provides secondary markets for securities (Le ordinary shares, corporate or government bonds) issued by companies and governments in the process of raising funds from the primary segment of the capital market.

It is Self Regulatory Organization (SRO) and provides trading floors for registered stockbrokers and dealing members of the stock exchange trading in registered/listed securities of quoted companies or government according to the Rules and Regulations of the Stock Exchange.

Manipulations, insider trading, money laundering, and other securities industry malpractices are strictly prohibited on the stock exchange.

Stockbrokers are the principal intermediaries, especially in the secondary market segment. In this capacity, a broker is an agent of the principal and he is paid a commission for his services.

Loans: To get a loan for start-up capital means that someone lends you money. You have to pay interest on the loan and you have to pay the loan back either in installments or all at once, depending on what agreement you make with the lending institution.

When you borrow money for start-up capital there will be more pressure on your business than if you use the owner’s equity. On the set date, you must pay interest and installments on the loan.

The more you borrow, the more you have to pay in interest and installments. This will always be difficult for new businesses and it is normally better to borrow as little money as possible to start your business.

Most lending institutions have two major requirements when you apply for a loan:

(i) A well-thought-out and clear feasibility study with a business idea make the lending institutions believe in it. An unclear feasibility study will make a bad impression and make it difficult for the lending institutions to form an opinion about your business idea.

The lending institution should believe in your business idea before it gives you a loan because the interest payments and the repayment of the loan will come from the profits that your business makes. Without a profit, your business will not be able to pay interest or repay the loan.

(ii) The lending institution will probably also need some kind of collateral for your loan. Collateral means the security that the lending institution has for the repayment of your loan. If you cannot repay the loan, the lending institution has the right to take possession of the collateral instead.

The reason why the lending institution needs collateral is that if your business fails and there is no money to repay the loan, the collateral can be sold by the bank to cover the loan.

Business investment funding is generalized either through provisions, retained profits borrowing, or through the sale of equity. A business needs capital investment to create productive capacity. (i.e.) innovative technology, modernization, and the expansion of its productive assets.

Most of the capital goods, commercial and social services, as well as technological, know-how required to satisfy our needs,  come from business activity, i.e. through economic development of privately owned resources which started from savings.

Finally, there is one economic goal that is not limited to the boundaries of the country but spread across other countries. This is the international balance of trade. We want to maintain a strong and balanced relationship in foreign trade and international payments.

Failure to achieve this not only causes serious economic problems at home and abroad but also increases international tensions threaten world peace.

Photo by Anna Nekrashevich from Pexels

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