FINANCIAL MARKETS

M1 LESSON 1 ROLE OF FINANCIAL MARKETS

The role of financial markets in the success and strength of an economy cannot be underestimated. Here are some of the vital roles of financial markets in the economy:

  1. To facilitate savings by businesses and households.- people and businesses can save money.

  2. To lend to businesses and individuals.- money can be borrowed by individuals and companies.

  3. To allocate funds to productive uses. - it has specific purposes in the form of capital formation or funding ( used for businesses expansion and projects)

  4. To facilitate the final exchange of goods and services.- this applicable in exchanging of commodities

  5. To provide a market for equities.- referring to shares of stocks being sold or bought In the financial markets (Buying and selling of company shares (stocks).

WHAT IS FINANCIAL MARKETS?

it is where buying and selling financial assets occur. In other words, the financial market refers to a virtual platform that facilitates trading financial instrument and securities.

  • A place (virtual or physical) where people buy and sell financial assets (like stocks, bonds, etc.)

  • It helps connect savers (those with extra money) and borrowers (those who need money).

WHAT IS A FINANCIAL ASSETS?

  • It is a liquid assets that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds and bank deposits are all examples of financial assets.

  • Assets that get their value from a contract or ownership claim.

    Examples: Cash, stocks, bonds, mutual funds, bank deposits.

7 FUNCTIONS OF FINANCIAL MARKETS

  • PRICE DISCOVERY - is a process by which people decide how much a particular product or service is worth. (Find the value of assets based on demand and supply)

  • FUNDS MOBILIZATION- is one of the function of financial markets that refers to raising capital or money from investors or other sources for various purposes, such as funding a new project, expending a business, or investing in financial assets. (Collects money form investors for business/project)

  • MARKET EFFICIENCY -availability of needed information by investors.(Gives investors needed information)

  • LIQUIDITY - easy buying and selling assets ( turning them into cash)

  • RISK SHARING - refers to the distribution of risk among different market participants to decrease the impact of prospective losses.

  • CAPITAL FORMATION- (helps create and grow businesses by providing funds)

  • INTERMEDIARY- the financial markets provides a platform where companies can easily get the required amount to grow, and investors can find good opportunities to invest their money and seek good returns.

Lesson 2 TYPES OF FINANCIAL MARKETS

STOCK MARKET

  • The stock market trades shares of ownership of publing companies. Each shares comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to buy stocks. The real challenges is in choosing the right stocks that will earn money for the investor.

  • (THIS IS WHERE PEOPLE BUY AND SELL SHARES)

  • The challenge: knowing which company’s shares will make you money. 👉 Think of it like buying a slice of a cake—if the cake tastes better over time, your slice becomes more valuable.

BOND MARKET

  • The bond market offers opportunities for companies and the government to secure money to finance a project or investment. In a bond market, investors buy bonds from a company, and the company returns the amount of the bonds within an agreed period, plus interest.

  • (the investor) lend them money by buying a bond.They promise to pay you back later with extra money (interest).👉 It’s like you lending money to a friend, and they agree to return it with a little “thank you” gift (interest).

COMMODITIES MARKET

  • The commodities market is where traders and investors buy and sell natural resources or commodities such as corn, oil, meat and gold. A specific market is created for such resources because their prices are unpredictable.

  • This is where people trade natural resources like gold, oil, corn, or meat.These things have their own market because their prices can change quickly depending on supply and demand.
    👉 Example: If a storm destroys crops, the price of corn may shoot up in the commodities market.

DERIVATIVES MARKET

  • It facilitates the trading in financial instruments such as futures contracts and options used to help control financial risk. The instruments derive their value mostly from the value of an underlying asset that can come in many forms – stocks, bonds, commodities, currencies or mortgages.

    👉 Example: An airline might buy a contract to lock in today’s oil price, so even if oil prices rise later, they still pay the lower price.

  • People use them to manage risks (like protecting against price changes).

To sum all of it, this financial markets helps the money flow in the econpmy allowing the businesses to grow, give investment opportunities, and manage risks.

All of these from m1 to m2 are all interconnected. Based on the past lesson a change in a market can influence the bonds, derivatives, bank and such. This shows that the financial system literally does play a big role in our economy for it to affect our daily lives.