Functions Of Financial Markets – Definition, Types, Instruments
There exist a markets for all sorts of commodities, as economy may have it. Such markets include consumer goods market, capital market, and financial market, these markets enable the economics of money banking and financial markets to function to the maximum
Definition And Functions Of Financial Markets
Financial market has different definition that can fly in any channel, however, for this article, financial market can be defined as the market for the exchange of financial resources. This simply means that the market is for both the buyer and seller of financial instruments, they come into contact here.
Financial market is a medium where the surplus or the idle cash are employed into deficit finances, as it makes short, medium and long term surplus funds available to areas of need. in short financial market definition depends on the functions of financial markets.
Types Of Financial Markets
the technical analysis of the financial markets revolves around the financial market’s categories, here are the financial markets, namely
- Money market
- Capital market
- Foreign exchange market
- Insurance market
- Mortgage or real estate market… etc
The above are finance market functional in most economies of developed as well as developing nations, you can directly refer to them as the world financial markets.
- The Money Market – The money market is the market for short and medium term finance instrument. These short term and medium term finances are either bought or sold here. The main reason money market was established in most developing country is to indigenize the credit base. Money market is necessary because it has the capacity to provide for the investment of local fund. The money market can also be considered as an investment centre for the retention of local fund.
Instrument Traded In the Money Market
The financial money market has some instrument or articles of trade permitted in the market, these instruments function based on the classification of financial markets, here are the instrument as included below;
- Treasury bills
- Call money
- Certificate of deposit
- Treasury certificate
- Commercial bills…. Etc
- Treasury bills – The treasury bills is one of the instruments traded in the money market, this security is usually issued by the government of the country in most cases, they are designed to mature within the space of ninety (90) days from the day it was issued, this security is characterized by its default free nature.
- Call money – this simply refers to that money a bank issued to with the agreement that the money will be repaid on the banks demand or in a short notice, the money will have to be registered. The short notice may even be an overnight notice after the money was issued, say within the twenty four (24) hours of issue. A notable characteristic of this issue is that it gives a low interest to the bank.
- Certificate of deposit – this is refers to as the inter-bank debit instrument which is meant to provide outlets for commercial banks surplus funds. Most central banks in many countries use this instrument to open up new source for fund for merchant banks, they are the main users… there are two types of certificate of deposit, they include the negotiable and the non-negotiable certificate of deposit, they mature between 3 and 36 months respectively.
- Treasury certificates – this security is similar to that of the treasury bills, that is when you want to compare, it has a different face value and pay fixed interest rates. Treasury certificates can also be classified as a medium term government security, which is designed to mature within one (1) to two (2) years of its issue, the security is meant to bridge the gap between treasury bills and long-term government securities, for more on this you can always contact alpha financial markets consulting to get more information on this financial instrument.
- Commercial bills – commercial bills can be sold by large blue chip firms to obtain loan. These notes does not have the backing of a collateral, instead they hinge on high credit rating of the issuing companies.
- Ways and Means Advance – this security refers to temporary advances issued or granted by the central bank of a country.
- Stabilization security – this security are usually issued to mop up idle cash balance of banks that involved and the participation was made compulsory for all the banks that has savings deposits in excess amount.
Functions Of Financial Markets
The money market has a couple of functions which are restricted to the market, these functions of financial markets includes the following amongst many other;
- The money market is a borrower and lender of short-term funds and thereby discharge and function of ensuring that no loose funds lie idle. It therefore enhances sufficient allocation and utilization of resources in the economy.
- It enables the commercial banks to hold a lower cash reserves through the provision of a first line of defense for cash in the form of all money. Through the use of treasury bills and certificate of deposit.
- The commercial bills the money market provides a second line of defense for commercial banks in situation of cash shortages, thereby enabling them to maintain minimum and stable cash balance and liquidity ratios.
- It provides an avenue through which the central bank of the country performs its monetary policy functions.
- It is a good source of short-term borrowing especially whenever the government of the country is involved.