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FINANCIAL MARKETS AND INSTITUTIONS
QUESTION 1: FINANCIAL MARKETS
a) Explain the nature, types and functions of financial markets.
b) Describe the structure of Kenya’s financial markets highlighting the role played by
the
key players.
c) Discuss the role played by capital market regulators in Kenya.
a) Nature, types and functions of financial markets
Financial markets are crucial for firms and investors because
1) They facilitate the transfer of funds between the investors who wish to invest and firms
that need to obtain funds.
2) They can accommodate the needs of firms that temporarily have excess funds and wish
to invest those funds.
3) They can accommodate the needs of investors who wish to liquidate their
investments
in order to spend the proceeds or invest them in alternative investments.
The following are the types of financial markets:
A. Capital Markets
A capital market is one in which individuals and institutions trade financial securities.
Organizations and institutions in the public and private sectors also often sell securities on the
capital markets in order to raise funds. Its main role is to raise capital (funds) to finance
for
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corporations in order to continue with its operations and to engage in their own long-
term
investments. It may be divided into primary and secondary markets.
The primary markets are for newly issued securities while secondary markets are for the
subsidiary securities
There are two types: Stock market and the bond market.
I. Stock markets
Stock markets allow investors to buy and sell shares in publicly traded company. Their main role
is to provide companies with access to capital and investors with a slice of ownership in the
company and the potential of gains based on the company's future performance.
II. Bond markets
A bond is a debt investment in which an investor loans money to an entity (corporate or
governmental), which borrows the funds for a defined period of time at a fixed interest rate.
Bonds can be bought and sold by investors on credit markets around the world. This market is
alternatively referred to as the debt, credit or fixed-income market. It is much larger in nominal
terms that the world's stock markets.
B. Money Markets
The money market is a segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. They are meant to provide short-term lending
and borrowing within a short period of time usually less than one year.
C. Cash or spot market/Commodity market
Investing in the cash or “spot” market is highly sophisticated, with opportunities for both big
losses and big gains. In the cash market, goods are sold for cash and are delivered immediately.
The cash market is complex and delicate
FINANCIAL MARKETS AND INSTITUTIONS
QUESTION 1: FINANCIAL MARKETS
a) Explain the nature, types and functions of financial markets.
b) Describe the structure of Kenya’s financial markets highlighting the role played by
the
key players.
c) Discuss the role played by capital market regulators in Kenya.
a) Nature, types and functions of financial markets
Financial markets are crucial for firms and investors because
1) They facilitate the transfer of funds between the investors who wish to invest and firms
that need to obtain funds.
2) They can accommodate the needs of firms that temporarily have excess funds and wish
to invest those funds.
3) They can accommodate the needs of investors who wish to liquidate their
investments
in order to spend the proceeds or invest them in alternative investments.
The following are the types of financial markets:
A. Capital Markets
A capital market is one in which individuals and institutions trade financial securities.
Organizations and institutions in the public and private sectors also often sell securities on the
capital markets in order to raise funds. Its main role is to raise capital (funds) to finance
for
, Page |2
corporations in order to continue with its operations and to engage in their own long-
term
investments. It may be divided into primary and secondary markets.
The primary markets are for newly issued securities while secondary markets are for the
subsidiary securities
There are two types: Stock market and the bond market.
I. Stock markets
Stock markets allow investors to buy and sell shares in publicly traded company. Their main role
is to provide companies with access to capital and investors with a slice of ownership in the
company and the potential of gains based on the company's future performance.
II. Bond markets
A bond is a debt investment in which an investor loans money to an entity (corporate or
governmental), which borrows the funds for a defined period of time at a fixed interest rate.
Bonds can be bought and sold by investors on credit markets around the world. This market is
alternatively referred to as the debt, credit or fixed-income market. It is much larger in nominal
terms that the world's stock markets.
B. Money Markets
The money market is a segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. They are meant to provide short-term lending
and borrowing within a short period of time usually less than one year.
C. Cash or spot market/Commodity market
Investing in the cash or “spot” market is highly sophisticated, with opportunities for both big
losses and big gains. In the cash market, goods are sold for cash and are delivered immediately.
The cash market is complex and delicate
