Question

King Solomon is a rich farmer in Tetebia, a town in the Asou Municipal Assembly. He owns over 100,000 hectares of farmlands. However, he fears the worst might happen and wants to do some investments to secure his future and that of his children. He is contemplating some long term investments he could undertake to secure his future and that if his children. He is now 50 years old and he plans to retire in 10 years from active farm work. He expects to live for another 25 years after he retires –that is, until age 85. He was advised by a friend that an investment in the financial market will help him plan his retirement well. He has no idea about financial markets and how they operate

Answer 1

Financial markets achieve the role of exchanging securities between buyers and sellers. In simple words, a financial market is a place where individuals are involved in any kind of financial activity.

Let us elaborate more clearly, imagine a bank where a person maintains a savings account. The bank can use his money and the money of other depositors to loan to other people and organizations and charge an interest fee.

The depositors also earn and see their money grow through the interest that is paid to them. Therefore, the bank serves as a financial market that benefits both the depositors and the debtors.

Meaning of Financial Markets:

Financial Market is referred to as space, where selling and buying of financial assets and securities take place.

In a financial market, the stock market allows investors to purchase and trade publicly companies share. The issue of new stocks are first offered in the primary stock market, and stock securities trading happens in the secondary market.

Normally, we prefer having less risk at the initial steps. It is also true that Higher the Risk, Higher the returns. This is the main reason why people prefer investing in stock markets rather than mutual funds, real estate, bonds, etc. Because they get higher rewards but at a cost of higher risk.

Let us see an example

if Stock A and Stock B with 4 monthly returns and Stock A giving you say 10% returns and Stock B 3% for the last month. What would be your choice of investment? Stock A is the smart investment giving you higher returns.

A stock exchange is an institution which provides a platform for buying and selling of existing securities. As a market, the stock exchange facilitates the exchange of a security (share, debenture, etc.) into money and vice versa.

Functions of Financial Market :

• Financial markets play a key role in the allocation of scarce resources in an economy by performing the following functions.
• Mobilization of Savings and trading them into the most Productive Uses
• Gives liquidity to bartered assets
• Promoting investment
• Providing the borrower with funds to enable them to carry out their investment plans.
• Facilitating balanced economic growth
• Facilitating price discovery by interaction with investors and depending on the demand and supply in the market.
• Providing Liquidity to Financial Assets
• Reducing the Cost of Transactions effectively
• Financial markets and financial institutions together contribute to economic growth

Advantages of financial markets:

It provides a platform to buyers and the sellers, to meet to trade in the assets.

It helps in the mobilization of savings.

Financial markets help lower the unemployment rate because of the many job opportunities it offers.

conclusion:

So it can be concluded that the Financial Markets is the market where the traders are involved in the buying and selling of the financial assets like shares, bonds, derivatives, commodities, currencies, etc. It is an arrangement or institution which facilitates the exchange of financial instruments and financial securities. It may have or not have a physical location. The assets can be exchanged between the parties over the phone or the internet as well. From the last few years, the role of the financial market has seen an immense change, because of several factors such as high liquidity, low transaction cost, pricing information transparency, investor protection, legal procedures easiness for the settling of disputes, etc.

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