Capital Market Instruments

Topics: Economics, Stock market, Stock exchange Pages: 11 (3754 words) Published: April 10, 2013

In many countries, Capital market is an engine of economic growth and development...

A capital market is a market for long term debt and equity securities, where business enterprises (companies) and governments can raise funds for long term investment. It is normally divided into two broad categories - the stock market and the bond market. The stock market is the market where equity securities such as stocks, representing ownership shares in particular corporations issuing the securities are traded. These instruments are usually issued by big corporations and promise a return (in the form of dividends) based solely on performance of the issuing corporation. In addition, investors can gain from appreciation of stock prices. The stock market securities are usually listed and traded on stock exchanges - corporations or mutual organizations which provide trading facilities for stock brokers and traders. Stock exchanges provide facilities for issue and redemption of securities as well as other financial instruments and capital events including payment of income and dividends. They are sometimes referred to as securities exchange to reflect these broad functions. Securities that are traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.

On the contrary, bond market comprise of long-term borrowing or debt instruments such as treasury notes and bonds, corporate bonds, mortgages securities etc. Most of these instruments promise to pay either fixed streams of income or a stream of income that is determined according to a specific formula over its entire life and return face value upon maturity. As such, they are usually called fixed-income capital market instruments. Typical issuers of bonds include government and government agencies as well as private corporations.

Money Market: a building block for development of Capital Market One of the building blocks for development of capital market is effectiveness and efficiency of money market. Money markets are arguably a precondition for development of sound bond markets. The money market facilitates smooth introduction of capital market, particularly bond market. It links capital market to the banking system, (the ultimate provider of liquidity) and helps anchor short-term end of yield curve, which is an essential tool in the pricing of debt securities. It also plays a critical role in price discovery and in the setting and transmission of interest rates. The money markets are critical to financial stability and development. Well-functioning money markets enable other financial institutions to cover their short-term liquidity needs. Many banks and other financial markets, participants obtain a significant portion of their funding from the money markets and rely on rolling over short-term debt contracted. Therefore, if market participants become concerned about their access to money market funding, they can refrain from investing in the capital market, reducing funding to bond and stock issuers. This would ultimately affect the market for long-term funds and therefore the real economy. There are strong indications that the Securities and Exchange Commission (SEC) has concluded plans to redirect capital formation from the capital market towards real productive sector to finance growth of the economy.

Director General of the Commission, Ms Arunma Oteh, dropped the hint recently during an interactive session with market operators at the Nigerian Stock Exchange (NSE) where emphasized the role of the capital market in the larger economy. She said: “I do think that the capital market is extremely important to any economy, much more so to our own economy. Over the years we have been dependent on oil. And...

References: Anyanwu JC, Oyefusi SA, Oaikhenan H, Dimowo FA 1997. Structure of the Nigerian Economy (1960 – 1997). Onitsha: JOANEE Educational Publishers Ltd., P. 453.
Central Bank of Nigeian (CBN) Statitical Bulletins of 2005, 2006 and 2008. Abuja: Central Bank of Nigeria Publication.
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