1.0. INTRODUCTION
Financial markets are broadly categorized into money and capital
markets. The structure of a
country’s financial markets is dictated by the economic and
financial development of its
economy. As a country experiences growth in its wealth and income,
its financial structure also
becomes richer in assets, institutions and markets. In this note,
you shall learn about money and
capital markets, the stock exchange and their functions
respectively.
2.0. OBJECTIVES
At the end of this note, you should be able to;
· Define money market
· Identify and explain the instruments of money
market
· Identify and discuss the functions of money
market
· Define capital market
· List and explain the instruments of capital
market
· Enumerate and discuss the functions of capital
market
· Define stock exchange market
· Identify and explain the functions of the stock
exchange
3.0. MONEY AND CAPITAL MARKETS
3.1. Money market
3.1.1. What is Money Market?
This is the market for short-term loanable funds or short-term credit.
The money market deals in
short-term instruments that are readily convertible into cash, and
whose maturity range between
a few days and two years. Thus, the money market provides opportunity
for those with surplus
funds to lend at short -term, thereby meeting the demand of
borrowers who are in need of
temporary finance and can offer an acceptable claim. In Nigeria,
the debt instruments traded in
this market include treasury bills, treasury certificates,
commercial papers, bankers’ acceptances,
promissory notes, certificates of deposits, bankers’ note fund and
money at call.
Participants in the market include the commercial banks (the most
dominant of the financial
institutions in the intermediation of short-term funds), merchant
banks, insurance companies and
other savings-type institutions such as savings banks, individuals
and others. The Central Bank
of Nigeria CBN supports the market as lender of last resort
through the provision of rediscount
facilities for Federal Government short-term debt instruments and
other eligible assets.
3.1.2. Instruments of Money Market
The following borrowing instruments are traded in the Nigerian
money market.
Treasury Bills: These are mere IOUs of government or short-term
borrowing instruments of
government with maturity duration of three months or 91days.
Through these bills, government
borrows funds to prosecute its programmes pending the collection
of government revenues.
Being a government borrowing instrument, loans granted through
this means are considered less
risky and hence treasury bills are popular with the commercial
banks.
Treasury certificates: These are another popular government borrowing
instruments in the
Nigerian money market. They are medium-term government securities
with maturity duration of
one to two years. The idea behind their issuance is to bridge the
gap between the Treasury bill
and long-term government securities. The treasury certificate
differs from the call money
scheme, which is an instrument for investment of surplus funds on
an overnight basis, and from
the treasury bills which provide a market for funds for periods
not exceeding 91 days.
Call money: The call money is another instrument used in the
money market. This is an
arrangement whereby the participating institutions invest monies
surplus to their immediate
requirements on an overnight basis with interest and withdrawable
on demand. The rationale
behind the call money arrangement derives from the realization
that while treasury bills provide
opportunities for investment of short-term funds on a
three-monthly basis, there is a need for
facilities for investment of funds surplus to immediate
requirements on an overnight basis. This
has advantages for banks. For instance, unlike the statutory and
other cash balances, call monies
earn some returns and at the same time are withdraw able on
demand. They thus act as a cushion
which absorbs the immediate shock of liquidity pressures in the
market. In this way, they provide
a first line defence against cash since they can always be drawn
up immediately to meet pressing
cash shortages.
Certificate of Deposit: These are inter bank debt instruments designed
to attract surplus fund
of commercial banks into the merchant or investment banks. They
help to reduce the excess
liquidity to commercial banks.
Bankers Note Fund (BUF): These are outlets for investment of surplus
funds by banks on
government stocks. They are also means to reduce the excess
liquidity in the banking system.
Bills of Exchange: A bill of exchange is an unconditional order in
writing addressed by
one person, signed by the person giving it, requiring the person
to whom it is addressed to pay on
demand, or at a fixed or determinable future time, a sum of money
or to the order of a specified
person or bearer. It originates from creditor and requires
acceptance of the debtor before it can
become valid. When a bill is accepted, it can be discounted for
immediate cash through the
forum of money market.
3.1.3. Functions of Money Market
Money market performs the under listed functions in Nigeria:
i. Promotion of an efficient allocation and utilization of funds
in the economy, thus
ensuring non-existence of idle fund.
ii. Helps the commercial banks to hold lower cash reserve through
provision of
numerous investment outlets – treasury bills, call money, treasury
certificates etc.
iii. Acts as an important source for short-term borrowing to the
government.
iv. Helps to indigenize the credit base of the economy through
provision of Nigeria
securities.
v. Provision of an avenue or way for the implementation of
government monetary
policy.
vi. Provision of forum for fund mobilization and allocation in the
economy.
vii. Provision of opportunity for investment in fairly liquid and
riskless assets.
viii. Help banks to invest their surplus funds in earning assets
and thus minimizing their
cash holding.
ix. It promotes liquidity and safety of financial assets since
through the forum of money
market one can easily convert an undesired short-term security
into cash.
x. Gives the central bank signals with respect to shortages/
surpluses of funds in the
economy through preventing interest rate.
3.1.4. Features of a Developed Money Market
A developed money market refers to one which is comparatively
efficient in the sense
that it is responsive to changes in demand for and supply of funds
in any of its segments, and
effects initiated in any part of it quickly spread to others
without significant time lag. To be able
to be considered as a developed money market, the market should be
able to posses the following
features:
Presence of a Central Bank: A Central Bank with adequate legal powers,
sufficient relevant
information and the expertise, must exist as a lender of last
resort and as the initiator and
executor of monetary policy as a whole.
Presence of a developed commercial banking
system: A well developed money
market should
be characterized by the presence of a developed commercial banking
system, along with a widespread
banking habit on the part of the public.
Adequate supply of a variety and
quantity of financial assets: In a well developed money
market, there should be an adequate supply of a variety and
quantity of short-term financial
assets or instruments such as trade bills, treasury bills, etc.
Presence of well-developed
sub-markets: The existence of well-
developed sub- markets and
the adequate responsiveness to small changes in interest and
discount rates make room for a
well-developed money market. If the demand and supply of certain
instruments dominate, the
interaction between different interest rates will be limited.
Existence of specialized
institutions: For competitiveness and
efficiency, there must exist
specialized institutions in particular types of assets, e.g.
specialized discount houses, acceptance
houses specializing in accepting bills, or specialized dealers in
government securities.
Existence of contributory legal and
economic factors: For the
money market to be well developed,
there must exist appropriate legal provisions to reduce
transaction costs, protect
against default in payment, while prerequisite economic forces
such as speedy and cheap
transmission of information, cheap fund remittance, and adequate
volume of trade and
commerce, must exist.
3.2. Capital market
3.2.1. What is a Capital Market?
A capital market is the market for buying and selling of long-term
securities. Alternatively, it is
the market for long-term credit or loanable funds. Thus, while
those who are short of funds and
need to borrow for short-term purposes borrow from the money
market, those who are short of
funds and are desirous of borrowing for long-term go to the
capital market. Similarly, whereas
those who have funds surplus to their immediate requirements and
wish to lend or invest these
funds for short-term periods do so in the money market, those who
have such funds and wish to
lend them for long periods, invest or lend these funds to the
capital market.
The market is the source from which industry obtains its capitals
for establishment, expansion
and modernization and from which the government borrows on long-term
basis for development
purposes. It offers access to a variety of financial instruments
that enables economic agents to
pool, price, and exchange risk. Through assets with attractive
yields, liquidity and risks
characteristics, it encourages savings in financial form. This is
very important for governments
and other institutions in need of long-term funds who because of
the nature of their liabilities,
undertake to maintain part of their assets in relatively illiquid
form.
The financial instruments (or securities) traded in the market
include equities or ordinary shares,
industrial loans and preference shares, Federal Government
Development Stocks, State
Government bonds, company bonds and dentures and mortgages.
Securities traded and in the
capital market mature as from three years and above. Participants
in this market include, the
commercial, merchant and development or specialized banks, finance
and insurance companies,
provident and pension funds, other financial intermediaries like
the Federal Savings Bank; and
individuals. The non-bank financial institutions are dominant in
this market just as commercial
banks dominate the money market. As with the money market, the CBN
is a major participant in
the market as it is statutorily required to absorb unsubscribed
portions of government debt issues
into its portfolio.
The capital market is divided into two:
i. The primary (or New issue) market which deals with the selling
of fresh or new
securities; and
ii. The secondary (Stock exchange) which is concerned with the
resale of old or secondhand
securities.
3.2.2. Capital Market Instruments
The following instruments are traded in the capital market.
Equity stocks (Shares): These are notes of capital of a company. Holders
of equity stocks
are co-owners of the company. Companies raise initial capital
through the sale of shares in the
capital market. Those who invest in equity stocks receive dividend
per annum depending on the
state of the company’s profit.
Development stocks: These are government long-term borrowing
instruments which mature
as from five years and above. The interest chargeable on such
securities conforms to the time
dimension.
Bonds/Debenture: These are fixed interest securities issued by
public authorities and quoted
enterprises to raise funds (mainly from the capital market). They
are therefore debt or borrowing
instruments of government and quoted companies. Bonds are largely
associated with public
authorities while debentures are often associated with the
companies. Unlike the equity stock
holders, bond and debenture- holders are creditors to the issuing
enterprise(s). They therefore
receive fixed interest payments and do not care to share in the
risks, and therefore the profits of
the enterprises.
3.2.3. Functions of Capital Markets
The capital market performs the following functions:
i. It provides local opportunities for borrowing and lending for
long-term purposes.
ii. Enables the authorities to mobilize long-term capital for the
economic development
of the country.
iii. Provides foreign business with the facility to offer their
shares, and the Nigerian
public an opportunity to invest and participate in the shares and
ownership of foreign
businesses.
iv. Provide facilities for the quotation and ready marketability
of shares and stocks, and
opportunities and facilities to raise fresh capital in the market.
v. Maintains discipline in the market through introduction of a
code of conduct,
checking abuses and regulating the activities of the operators in
the market.
vi. Provides a healthy and mutually acceptable environment for
participation and cooperation
of indigenous and expatriate capital in the joint effort to
develop the
Nigerian Economy to the mutual advantage of both parties through
participation and
ownership.
3.2.4. Differences between Money and
Capital Markets
i. Whereas the capital market provides opportunities for sourcing
medium and longterm
loans and avenues for medium and long-term investments, the money
market
offers opportunities for sourcing short -term loans and making
short-term
investments.
ii. Whereas the capital market instruments mature as from three
years and above,
money market instruments mature within one year mainly.
iii. Whereas the participants in the capital market are mainly
those that lend long, e.g.
Development Banks, Merchant Banks, Finance Corporations, Stock
Exchange
and the Central Bank, the participants in the money market are
largely those
institutions that lend short e.g. the commercial banks, discount
houses and
acceptance houses.
3.3. The Stock Exchange Market
3.3.1. What is stock Exchange market?
The stock exchange is an organized market for buying and selling
of secondary, existing,
old or second-hand securities (i.e. existing shares, stocks and
bonds). The Nigerian Stock
Exchange was founded in 1960 as Lagos Stock exchange through the
inspiration of the Federal
Government, the NIDB, the CBN and the business commnotey. Backed
by the Lagos Stock
Exchange Act of 1961, the exchange commenced business in June of
the same year.
As contained in the memorandum of association of the organization,
the objectives of the
Nigerian Stock Exchange (NSE) include:
i. The creation of an appropriate mechanism for capital formation
and efficient resource
allocation among competing projects.
ii. The provision of special financing strategies for those
projects with long – term
gestation periods.
iii. Maintenance of fair prices for securities.
iv. Maintenance of discipline in the capital market.
v. To spread share ownership among Nigerians.
3.3.2. Functions of the Stock Exchange
The Nigerian Stock Exchange performs the following functions.
i. It provides liquidity to investors by maintaining the transfer
of shares and other
securities or by enabling holders of such securities to convert
them into cash with
ease.
ii. It is a source of capital to government and companies.
iii. It helps to maintain prices of securities by controlling the
flow of stocks and shares
into the market.
iv. It provides information on the value and prices of securities
to investors.
v. It protects the investor / public against fraudulent practice
since the participants in the
market are known-licensed dealers.
vi. It stimulates inflow of foreign exchange into the economy by
promoting issuance and
sale of non – voting shares to foreign investors.
vii. It helps to maintain discipline in the capital market.
viii. It controls the activities of jobbers and brokers.
4.0. CONCLSION
Financial markets in general deal in financial assets and
liabilities of various maturities and
consist of institutions, instruments, rules and regulations which
guide the mobilization of funds
from the surplus notes of the economy to the deficit notes. The
role of the money and capital
markets in the economic development of Nigeria has continued to
attract increasing attention
among policy makers. This note examines the concept of money and
capital markets. It also
throws light on the functions of money and capital market. The
differences between money and
capital markets are highlighted; special attention is given to
stock exchange market and its
functions.
5.0. SUMMARY
In this note, you have learned about;
i. The concept of money and capital markets;
ii. Their functions in the economy;
iii. The differences between money and capital markets;
iv. The Stock Exchange Market
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