Financial markets notes

Definition of Terms:
Market- an avenue for the sale and purchase of provisions, commodities and other dealings.

Finance- relating to finances or any monetary considerations or transactions.

Financial market- an avenue for the sale and purchase of financial instruments/ assets.

Financial instruments- a contract between individuals/parties that holds a monetary value. They
can either be created, traded, settled, or modified as per the involved parties' requirement.
Examples include cheques, shares, stocks, bonds, futures, and options contracts.

FUNCTIONS OF FINANCIAL MARKETS:

 Price Setting
Markets provide price discovery, a way to determine the relative values of different
items based on the price an individual is willing to buy or sell them.
 Asset Valuation
Market prices offers the best way to determine the value of a firm or the firm's assets or
property.
 Arbitrage
 Markets helps an economy to be more efficient by trading commodities or currencies at
different prices in different locations

 Raising Capital
Shares, bonds & other types of financial instruments help firms to increase and raise
capital to build new facilities & expand business
 Commercial Transactions
Financial markets provide grease that makes many commercial transactions possible.
 Investing
Financial instruments provide an opportunity to earn a return on funds that are not
needed immediately, and to accumulate assets in the future
 Risk Management
Derivative contracts can provide protection against many types of risks.
A. Government & Central Banks
Central banks being independent from the government as if the central banks are not a part
of, or accountable to the government. Central banks have a mandate to ensure the financial
stability of an economy and if the markets felt that political motives.

In order to understand the differences between what each institution does we need to know
two key terms:

 Monetary Policy

 Fiscal Policy
What is Monetary and Fiscal Policy?

Monetary and Fiscal policy describe a range of tools used by governments and central
banks that are used to influence a country’s economy.

 Monetary policy is generally implemented by the central banks

 Monetary policy deals primarily with interest rates and the supply of money in an
economy
 Fiscal policy is generally implemented by government legislation
 Fiscal policy is in effect government budgets, what they borrow, tax and spend