In any economy, financial markets or an institution helps in the distribution of financial resources to the most productive units: Savings are transferred to economic units that have channels of alternative investments; making them the link between buyers and sellers. They help in the allocation of savings to real investment, in achieving real output in the economy by mobilizing capital for investment and in enabling companies make short term and long term investments decisions and hence increasing the liquidity of shares. According to Saunders & Million (n. d.), ffinancial markets provide provision of investment advice to individuals through financial experts, enables companies to raise short term and long term capital/funds; they act as means of pricing of securities for example Stock Exchange index shares by indicating changes in share prices.
In addition, they are providing investment opportunities to various groups and savers can hold financial instrument for investment made. Financial markets are broadly classified into two categories namely; the capital Markets and the Money Market. Capital marketsThese are markets for long term funds with maturity period of more than one year. For example in capital markets, the financial instruments used here are debentures, terms, loans, bonds, warrants, preference shares, ordinary shares etc.
The capital market serves as a way of allocating the available capital to the most efficient users. Capital market financial institution includes: Stock exchange, Development bank, Hire purchase companies, Building societies and Leasing firms. Capital markets are sub-divided into two namely Security markets and the Non-security/instrument. Security markets; these are the stock exchange dealing with instruments such as shares and debentures. Security market is further sub-divided into two; Primary market which enable organisations to raise new finance by issuing new shares or bonds, and the Secondary market which enables existing investors to sell their investments, should they wish to do so.
Secondary market enhances the marketability of securities. The second type of Capital markets is the Non-security/instrument markets which involve mortgages and the capital leases. In both types, they provide long term funds which are necessary for investment decisions, help in giving advice to investors to make wise investments decisions and to make viable investments, they make long term investments to be made liquid as the transfer between shareholders is facilitated, facilitates the international capital inflow.
In addition, capital markets facilitate the liquidation and marketing of a long term investor and also act as a channel through which foreign investments find their way into the market. Money/discount marketsThis is a market for Short Term funds maturing in a period of one year. Money market works through financial institutions as they facilitate transfer of capital between savers and users. The transfer can be direct (from saver to investor) and indirectly through an intermediary.
Foreign exchange market is also part of money market. The money market or discount market is the market for short term loans. Financial Instruments in Money market include: Commercial paper, Treasury bills, Bills of exchange, Promissory notes, Bank overdrafts and Bankers certificate of deposit. These instruments are sold by commercial banks, merchant banks, discounting houses, acceptance houses, and government.