ACTIVITY 1 – ESSAY.

Discuss the following:

In your own words, what do you understand about financial instruments (Money market and
capital market financial instruments)? What is its importance and role to the
business and to the economy?

The money market contributes to the economic stability and development of a country by
providing short-term liquidity to governments, commercial banks, and other large organizations.
Investors with excess money that they do not need can invest it in the money market and earn
interest. The money market provides financing to local and international traders who are in
urgent need of short-term funds. It provides a facility to discount bills of exchange, and this
provides immediate financing to pay for goods and services.

International traders benefit from the acceptance houses and discount markets. The money
market also makes funds available for other units of the economy, such as agriculture and small-
scale industries. The central bank is responsible for guiding the monetary policy of a country and
taking measures to ensure a healthy financial system. Through the money market, the central
bank can perform its policy-making function efficiently.

For example, the short-term interest rates in the money market represent the prevailing
conditions in the banking industry and can guide the central bank in developing an appropriate
interest rate policy. Also, the integrated money markets help the central bank to influence the
sub-markets and implement its monetary policy objectives.

On the other hand, Capital markets are the exchange system that moves capital from people
looking to invest for a return to the users of capital who require the capital to finance various
projects or business operations. They are the most important way the economy grows and
functions effectively. Capital market is defined as the market where medium and long terms
finance can be raised. Capital market offers a variety of financial instruments that enable
economic agents to pool, price and exchange risk. Through assets with attractive yields, liquidity
and risk characteristics, it encourages saving in financial form.

This is very essential for government and other institutions in need of long term funds.
According to Al-Faki (2006), the capital market is a network of specialized financial institutions,
series of mechanism, processes and infrastructure that, in various ways facilitate the bringing
together of suppliers and users of medium to long term capital for investment in economic
developmental project”.

Taking into account the role in the market economy, the capital market occupies an important
place, through their specific mechanisms, succeeding to give its contribution to the economic
development of the society. In consequence, the public authorities must notice the importance of
the capital market in the national economy and, on the other hand, to make the efforts for
insuring the necessary framework for the normal functioning of its specific mechanisms. The
valences of the capital could be even more interesting in the case of emerging markets being
well-known its contribution in reorienting financial resources to efficient activities, contributing
to the economic reform, but also being interesting in the privatization process.
Again the capital market was instrumental to the initial twenty five Banks that were able to meet
the minimum capital requirement of N25 billion during the banking sector consolidation in 2005.
The stock market has helped government and corporate entities to raise long term capital for
financing new projects, and expanding and modernizing industrial/commercial concerns.

ACTIVITY 2. Create illustrations that best describes the following:

1. Primary Market transactions

2. Secondary Market transactions

3. Given the participants in the PSE trading below, prepare a diagram that will best describe
the flow of transaction in the stock market: