LESSON TWO
Financial Market
A market is a place where firms and individuals can conveniently swap different types of assets
as and when required.
The purpose of market is to bring buyers and sellers together and one party agrees to sell and
the other agrees to buy an item in offer.
Financial market is the market where financial securities like stocks and bonds and
commodities like metals are exchange at efficient market prices. Here by efficient market
prices we mean the unbiased price that reflects belief of collective speculation of investors
about the future prospect. The trading of stocks and bonds in the financial can take place
directly between buyers and sellers or by the stock Exchange .Financial Markets can be
domestic or international.
Financial market s bring together people and organizations needing money with those having
surplus funds
They are many different financial markets in a developed economy dealing with different types
of instruments, customers or geographical location.
SELF-TEST QUESTIONS
Distinguish between physical asset markets and financial asset markets.
What is the difference between spot and futures markets?
Distinguish between money and capital markets.
What is the difference between primary and secondary markets?
Differentiate between private and public markets.
Why are financial markets essential for a healthy economy?
What is a derivative, and how is its value related to that of an “underlying
asset”?
Types of Financial Markets
The major types of markets are:
1. Physical asset markets which are also called tangible, real and commodity markets.
This type of markets deals with tangible commodities and products for example machinery,
computers, wheat and real estate.
2. Spot vs. Futures markets. Spot markets are markets in which assets are bought or
sold for “on-the-spot” delivery (literally, within a few days).
Futures markets are markets in which participants agree today to buy or sell an asset at
some future date. For example, a farmer may enter into a futures contract in which he
agrees today to sell 5,000 bushels of soybeans six months from now at a price of $5 a
1
, bushel. In contrast, an international food producer looking to buy soybeans in the future
may enter into a futures contract in which it agrees to buy
3. Money vs. Capital markets. Money markets are the markets for shortterm,
highly liquid debt securities. The New York and London money
markets have long been the world’s largest, but Tokyo is rising rapidly.
Capital markets are the markets for intermediate- or long-term debt and
corporate stocks. The New York Stock Exchange, where the stocks of the
largest U.S. corporations are traded, is a prime example of a capital market.
There is no hard and fast rule on this, but when describing debt markets,
“short term” generally means less than one year, “intermediate term”
means one to five years, and “long term” means more than five years.
4. Primary vs. Secondary markets. Primary markets are the markets in
which corporations raise new capital. If Microsoft were to sell a new issue
of common stock to raise capital, this would be a primary market transaction.
The corporation selling the newly created stock receives the proceeds
from the sale in a primary market transaction. Secondary markets
are markets in which existing, already outstanding, securities are traded
among investors. Thus, if Jane Doe decided to buy 1,000 shares of
AT&T stock, the purchase would occur in the secondary market. The
New York Stock Exchange is a secondary market, since it deals in outstanding,
as opposed to newly issued, stocks and bonds. Secondary markets
also exist for mortgages, various other types of loans, and other financial
assets. The corporation whose securities are being traded is not
involved in a secondary market transaction and, thus, does not receive
any funds from such a sale.
The initial public offering (IPO) market is a subset of the primary
market. Here firms “go public” by offering shares to the public for the
first time. Microsoft had its IPO in 1986. Previously, Bill Gates and other
insiders owned all the shares. In many IPOs, the insiders sell some of
their shares plus the company sells new shares to raise additional capital.
5. Private vs. Public markets. Private markets, where transactions are
worked out directly between two parties, are differentiated from public
markets, where standardized contracts are traded on organized exchanges.
Bank loans and private placements of debt with insurance companies are
examples of private market transactions. Since these transactions are private,
they may be structured in any manner that appeals to the two parties.
By contrast, securities that are issued in public markets (for example, common
stock and corporate bonds) are ultimately held by a large number of
individuals. Public securities must have fairly standardized contractual.
6. Public offering versus private placements.
Public offering markets. Refers to a security offering where all investors have the opportunity to
acquire a portion of the financial claims being sold.
The securities are usually made available to the public at large by an investment-banking firm
specializing in helping other firms raise money.
The initial public offering market (IPO)is a subset of the primary market. In this market ,firms
go “public” by offering their shares to the public mainly for the first time.
The insiders sell some of their shares and the company also sells newly created shares to raise
2
, additional capital.
Locally, mobile network Safaricom sold its shares through the initial public offering market to
raise capital.
Private markets. Are also called direct placement, the securities are offered and sold directly to a
limited number of investors.
For these markets, transactions are mainly worked out directly between two parties (the seller
and prospective buyer).
These transactions may be structured in a manner that appeals to the two parties involved.
Example of private market transactions are bank loans and private placement of debt with
insurance companies. Therefore, private markets transactions are more tailor made but less
subject to greater regulation and standardization.
World ,national ,regional and local markets.
It may have the capacity to borrow all around the globe or it may be confirmed to a strictly local
market.
Class activity
Explain how Capital Markets Authority can ensure faster growth and development of Security
Exchange in an economy
Trading procedures in the Financial Market.
Secondary markets have three dimensions trading procedures.
1. Location. It can be either a physical location exchange or a computer/telephone network.
2. Way orders from seller to buyers are matched
It can occur through an open outcry auction system ,through dealers or by automatic order matching. In
the a dealer market there are “market makers “who keep an inventory of the stock (or other financial
instrument) in much the same merchant keeps an inventory.
They list bid and asked quotes.
Computerized quotation systems keep track of all bids and asked prices ,but they don't actually match
buyers and sellers. Instead traders must contact a specific dealer to complete the transaction.
3. The third method of matching orders is through an electronic communication network
(ECN).Participants in an ECN post their orders to buy and sell and the ECN automatically
matches the orders. E.g if someone places an order to sell 1000 shares of KPLC and another
participant had placed an order to sell 1000 shares of KPLC at 26kes and this was the lowest
price of sale ,the ECN would automatically match this two orders, execute the trade and notify
both participants that the trade has occurred.
3
Financial Market
A market is a place where firms and individuals can conveniently swap different types of assets
as and when required.
The purpose of market is to bring buyers and sellers together and one party agrees to sell and
the other agrees to buy an item in offer.
Financial market is the market where financial securities like stocks and bonds and
commodities like metals are exchange at efficient market prices. Here by efficient market
prices we mean the unbiased price that reflects belief of collective speculation of investors
about the future prospect. The trading of stocks and bonds in the financial can take place
directly between buyers and sellers or by the stock Exchange .Financial Markets can be
domestic or international.
Financial market s bring together people and organizations needing money with those having
surplus funds
They are many different financial markets in a developed economy dealing with different types
of instruments, customers or geographical location.
SELF-TEST QUESTIONS
Distinguish between physical asset markets and financial asset markets.
What is the difference between spot and futures markets?
Distinguish between money and capital markets.
What is the difference between primary and secondary markets?
Differentiate between private and public markets.
Why are financial markets essential for a healthy economy?
What is a derivative, and how is its value related to that of an “underlying
asset”?
Types of Financial Markets
The major types of markets are:
1. Physical asset markets which are also called tangible, real and commodity markets.
This type of markets deals with tangible commodities and products for example machinery,
computers, wheat and real estate.
2. Spot vs. Futures markets. Spot markets are markets in which assets are bought or
sold for “on-the-spot” delivery (literally, within a few days).
Futures markets are markets in which participants agree today to buy or sell an asset at
some future date. For example, a farmer may enter into a futures contract in which he
agrees today to sell 5,000 bushels of soybeans six months from now at a price of $5 a
1
, bushel. In contrast, an international food producer looking to buy soybeans in the future
may enter into a futures contract in which it agrees to buy
3. Money vs. Capital markets. Money markets are the markets for shortterm,
highly liquid debt securities. The New York and London money
markets have long been the world’s largest, but Tokyo is rising rapidly.
Capital markets are the markets for intermediate- or long-term debt and
corporate stocks. The New York Stock Exchange, where the stocks of the
largest U.S. corporations are traded, is a prime example of a capital market.
There is no hard and fast rule on this, but when describing debt markets,
“short term” generally means less than one year, “intermediate term”
means one to five years, and “long term” means more than five years.
4. Primary vs. Secondary markets. Primary markets are the markets in
which corporations raise new capital. If Microsoft were to sell a new issue
of common stock to raise capital, this would be a primary market transaction.
The corporation selling the newly created stock receives the proceeds
from the sale in a primary market transaction. Secondary markets
are markets in which existing, already outstanding, securities are traded
among investors. Thus, if Jane Doe decided to buy 1,000 shares of
AT&T stock, the purchase would occur in the secondary market. The
New York Stock Exchange is a secondary market, since it deals in outstanding,
as opposed to newly issued, stocks and bonds. Secondary markets
also exist for mortgages, various other types of loans, and other financial
assets. The corporation whose securities are being traded is not
involved in a secondary market transaction and, thus, does not receive
any funds from such a sale.
The initial public offering (IPO) market is a subset of the primary
market. Here firms “go public” by offering shares to the public for the
first time. Microsoft had its IPO in 1986. Previously, Bill Gates and other
insiders owned all the shares. In many IPOs, the insiders sell some of
their shares plus the company sells new shares to raise additional capital.
5. Private vs. Public markets. Private markets, where transactions are
worked out directly between two parties, are differentiated from public
markets, where standardized contracts are traded on organized exchanges.
Bank loans and private placements of debt with insurance companies are
examples of private market transactions. Since these transactions are private,
they may be structured in any manner that appeals to the two parties.
By contrast, securities that are issued in public markets (for example, common
stock and corporate bonds) are ultimately held by a large number of
individuals. Public securities must have fairly standardized contractual.
6. Public offering versus private placements.
Public offering markets. Refers to a security offering where all investors have the opportunity to
acquire a portion of the financial claims being sold.
The securities are usually made available to the public at large by an investment-banking firm
specializing in helping other firms raise money.
The initial public offering market (IPO)is a subset of the primary market. In this market ,firms
go “public” by offering their shares to the public mainly for the first time.
The insiders sell some of their shares and the company also sells newly created shares to raise
2
, additional capital.
Locally, mobile network Safaricom sold its shares through the initial public offering market to
raise capital.
Private markets. Are also called direct placement, the securities are offered and sold directly to a
limited number of investors.
For these markets, transactions are mainly worked out directly between two parties (the seller
and prospective buyer).
These transactions may be structured in a manner that appeals to the two parties involved.
Example of private market transactions are bank loans and private placement of debt with
insurance companies. Therefore, private markets transactions are more tailor made but less
subject to greater regulation and standardization.
World ,national ,regional and local markets.
It may have the capacity to borrow all around the globe or it may be confirmed to a strictly local
market.
Class activity
Explain how Capital Markets Authority can ensure faster growth and development of Security
Exchange in an economy
Trading procedures in the Financial Market.
Secondary markets have three dimensions trading procedures.
1. Location. It can be either a physical location exchange or a computer/telephone network.
2. Way orders from seller to buyers are matched
It can occur through an open outcry auction system ,through dealers or by automatic order matching. In
the a dealer market there are “market makers “who keep an inventory of the stock (or other financial
instrument) in much the same merchant keeps an inventory.
They list bid and asked quotes.
Computerized quotation systems keep track of all bids and asked prices ,but they don't actually match
buyers and sellers. Instead traders must contact a specific dealer to complete the transaction.
3. The third method of matching orders is through an electronic communication network
(ECN).Participants in an ECN post their orders to buy and sell and the ECN automatically
matches the orders. E.g if someone places an order to sell 1000 shares of KPLC and another
participant had placed an order to sell 1000 shares of KPLC at 26kes and this was the lowest
price of sale ,the ECN would automatically match this two orders, execute the trade and notify
both participants that the trade has occurred.
3
