BBM 311: Financial Markets Notes

Institution: Moi University

Course: Bachelor of Business Management

Posted By: Jackline mbuya

Document Type: DOCX

Number of Pages: 21

Price: KES 100

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A market can be defined as an organizational device, which brings together buyers and sellers. A financial market is a market which financial assets (securities) such as stocks and bonds can be purchased or sold. It brings together the parties willing to trade in a commodity, which constitutes fluids. The respective parties in financial markets are known as demanders of funds (borrowers) and suppliers of fluids (lenders) who come together to trade so as to meet financial needs. The level of economic development of any country will be affected by the ability of the financial markets to move surplus funds from certain economic units, which constitutes individuals and corporate bodies to other economic units in need of additional funds. Financial market can be divided into three categories: -
a) Capital and money markets. b) Primary and secondary markets c) Organized and over — the counter markets.
Functions of financial system and markets
1. Distribution of financial resources of the most productive units i.e. savings are transferred to economic units that have channel of alternative investments (link between buyer and seller) 2. Allocations of saving to real investment. 3. Achieving real output in the economy by mobilizing capital for investment 4. Enable companies to make short term and long term investment and increase liquidity of shares. 5. Provision of investment advice to individuals through financial experts 6. Enable companies to raise short term and long term capital/funds 7. Means of pricing of securities e.g. NSE index shares indicate changes in share prices. 8. Provide investment opportunities i.e. savers can hold financial instruments for investments made.
Primary and secondary market Primary financial markets are those markets where there is transfer of new financial instruments. Financial instruments constitute assets, which are used in the financial markets. They consists o f cash, shares and debt capital both long term and short-term e.g. commercial paper. The primary financial markets trade is for securities which have not been issued e.g. if a
company wants to make an issue of ordinary share capital issue of commercial paper, issues of preference shares, debentures etc, offers and purchase will be through the primary etc. Secondary markets — the secondary financial markets are for already issued securities. After a thorough issue of new securities in the primary market later trading of the securities will take place in secondary market e.g. if a company is to make public issue of ordinary share capital the issue will take place in primary market. If the initial purchasers wish to dispose off the shares, trading will take place in the secondary market. The only distinction between primary and secondary markets is the form of security being traded but there is no physical separation of the markets.

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