Understanding the basics of the financial market

Financial markets have been recognized as key factors in stimulating growth in economies, particularly in the flow of funds to finance investments by individuals, corporates, and governments across the world.

Despite their importance, knowledge of how financial markets operate is confined to people who work within the financial ecosystem. A large chunk of regular people avoid any discussion about financial systems and markets because of the technical nature of the field.

This article will aim at adding to the literature in demystifying the financial markets and how it operates in a way that makes it easily comprehensible even to the financially uninitiated.

Financial markets just like any other market, connotes the operations of buyers and sellers. In this market however, the object of trade are financial instruments or assets that include but not limited to bonds, stocks and currencies.

Buyers usually found in the financial markets are either looking for short term or long-term assets to invest their funds in and the sellers are looking for short term or long-term funding for their businesses. Despite this fundamental character of financial markets, their nature differs per the jurisdiction in which the market operates.

In advanced economies, financial markets may be composed of a derivative market, a capital market or a money market. In Ghana, however, our financial market consists of the latter two, i.e., the money market and the capital market.

The money market serves the purpose of those looking for short term assets or security to buy or sell. Short term in this sense normally refers to assets or securities that do not exceed one year. Put simply, if you are an investor looking for an investment with a short-term duration, you will participate in the money market.

A business owner on the other hand, looking for money in the short term to pay workers or for daily business operations, may access funds from the money market. Money markets are where you typically find fixed deposits, treasury bills commercial papers etc. because of their short-term nature.

The capital market provides an avenue for anyone looking for long term investments and those with long-term funding needs. The capital market is where you are likely to find businesses, quasi-government and governments institutions going to raise funds that affords them the laxity to repay over a longer period.

Typically, in Ghana, any asset or financial security that has a duration of above one year can be captured under a capital market arrangement.

For the money market and the capital market to operate effectively, it is essential for the regulators; the Bank of Ghana (BoG) and the Securities and Exchange Commission (SEC), to ensure that the market is operating optimally. What the financial market does is to set prices for global trade i.e. allow investors to trade in our local market and provide some form of stability and predictability.

Again, the market provides businesses and government an avenue to raise capital and allow for the transfer of liquidity or cash from those who have in excess to those who need it.

This presupposes that for the financial market to work effectively, investors should be able to get accurate and quick information necessary for secured transactions. In effect, there should be information available for everyone who is moving to that market to make informed decisions or secure transactions.

The market should also afford players the ability to negotiate for a better price and transact at minimal cost. Transaction cost here refers to the cost to an investor trading in a financial market. For instance, the transaction cost in Ghana should not be so high that I would want to go to another country’s financial market to trade.

The availability and accuracy of information is key to ensure no investor has an undue advantage over the other.

The efficiency of the financial market therefore depends largely on the ability to have relative information to enlighten your transaction decisions. Speak to an investment advisor whenever in doubt to ensure your purchase matches your unique needs.

Stay Safe.

Information on Financial Markets:

www.bog.gov.gh, sec.gov.gh, gsiaonline.org

Miriam Amissah

Business Development Manager,

STANLIB Limited