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Fundamentals of Financial Market

This document provides an overview of financial markets. It begins with an introduction that defines financial markets and their key roles in price discovery and liquidity. It then discusses classifications of financial markets including physical vs financial asset markets, spot vs futures markets, money vs capital markets, primary vs secondary markets, and private vs public markets. For each classification, it provides examples and brief explanations of the differences. The document aims to explain the fundamental concepts of various financial market classifications.

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Ohimai-Uzebu Joshua
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463 views13 pages

Fundamentals of Financial Market

This document provides an overview of financial markets. It begins with an introduction that defines financial markets and their key roles in price discovery and liquidity. It then discusses classifications of financial markets including physical vs financial asset markets, spot vs futures markets, money vs capital markets, primary vs secondary markets, and private vs public markets. For each classification, it provides examples and brief explanations of the differences. The document aims to explain the fundamental concepts of various financial market classifications.

Uploaded by

Ohimai-Uzebu Joshua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Fundamental

of Financial
Markets
FPN ACADEMY – JUNE 2020
Course Contents

Fundamental of Financial Markets

* Introduction

** Financial Market Classifications

*** Overview

FPN Academy
Introduction

What are Financial Markets?


Financial markets, from the name itself, are a type of marketplace that provides an avenue for
the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives.
Often, they are called by different names, including “Wall Street” and “capital market,” but all
of them still mean one and the same thing. Simply put, businesses and investors can go to
financial markets to raise money to grow their business and to make more money, respectively.

Two Key Roles of Financial Market:


1. Price Discovery: It is these functions of financial markets that signal how the funds available
from those who want to lend or invest funds will be allocated among those needing funds
and raise those funds by issuing financial instruments.
2. Liquidity: It provides an opportunity for investors to sell a financial instruments since it is
referred to as a measure of the ability to sell an asset at its fair market value at any time. All
financial markets provide some form of liquidity. However, different financial markets are
characterized by the degree of liquidity.

FPN Academy
Introduction

Financial Intermediation
Financial market helps in the flow of funds from savers to borrowers.
This flow can occur in two ways; Direct Finance and Indirect finance route.

FPN Academy
Financial Market Classifications

Financial markets can be classified into the following categories:

Physical Asset Market Financial Asset Market

Spot Market Futures Market

Money Market Capital Market

Primary Market Secondary Market

Private Market Public Market

FPN Academy
Financial Market Classifications

Physical vs Financial Asset Markets

• Physical asset markets (also called “tangible” or “real” asset markets)


are those for products such as wheat, automobile, real estate,
computers, and machinery.

• Financial asset markets, on the other hand, deal with stocks, bonds,
notes, mortgages, and other claims on real assets, as well as with
derivative securities whose values are derived from changes in the
prices of other assets. A share of Ford stock is a “pure financial asset,”
while an option to buy Ford shares is a derivative security whose value
depends on the price of Ford stock.

FPN Academy
Financial Market Classifications

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). Also known as “cash
market”.

• 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 N1,500 a bushel. On the other side, a food producer looking to
buy soybeans in the future may enter into a futures contract in which it
agrees to buy soybeans six months from now.

FPN Academy
Financial Market Classifications

Money vs Capital Markets

• Money markets are the markets for short-term, highly liquid debt
securities. The FMDQ Securities Exchange, and Interbank markets
where commercial papers, treasury bills, promissory notes are traded
are good example of a money market.

• Capital markets are the markets for intermediate - or long-term debt


and corporate stocks. The Nigerian Stock Exchange and FMDQ
Securities Exchange, where the stocks and bonds are traded, is a prime
example of a capital market.

FPN Academy
Financial Market Classifications

Primary vs Secondary Markets

• Primary markets are the markets in which corporations raise new


capital. If MTN 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.

FPN Academy
Financial Market Classifications

Private vs Public Markets

• Private markets: Markets in which transactions are worked out directly


between two parties.

Bank loans and private debt placements with insurance companies


are examples of private market transactions. Because these
transactions are private, they may be structured in any manner that
appeals to the two parties.

• Private markets: Markets in which standardized contracts are traded


on organized exchanges.

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
features, both to appeal to a broad range of investors and also
because public investors do not generally have the time and expertise
to study unique, nonstandardized contracts.

FPN Academy
Financial Market Classifications

Private vs Public Markets

• Private markets: Markets in which transactions are worked out directly


between two parties.

Bank loans and private debt placements with insurance companies


are examples of private market transactions. Because these
transactions are private, they may be structured in any manner that
appeals to the two parties.

• Private markets: Markets in which standardized contracts are traded


on organized exchanges.

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
features, both to appeal to a broad range of investors and also
because public investors do not generally have the time and expertise
to study unique, nonstandardized contracts.

FPN Academy
Financial Market Classifications

Overview

FPN Academy
Thank you!

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