To many the term financial markets sounds complex and just something that should be understood and known by financial experts and wealthy people but quit the contrast financial markets are not as complex as they sound and they play an important role in a country’s economy.
In layman’s terms financial markets are places (physical or virtual) where financial instruments (shares, bonds, currencies and etc.) are bought and sold at prices which are controlled by the market’s forces of demand and supply. No one has control over the prices of financial instruments which are traded on financial markets.
The participants in financial markets are buyer’s these can be retail investors such you or me and institutional investors such as pension funds and insurance companies. They are those with excess capital looking to invest it in companies as a way of growing their wealth. Secondly, sellers these are those in need of capital to grow and expand their companies, thirdly brokers they facilitate the buying and selling of financial instruments on a financial market.
The main types of financial markets are the equity market, this is the market where company’s stocks/shares are traded This market allows investors to buy shares or equity in a company and in return share in the profit or loss of that company and earn capital gains when the share price goes up. The Namibian stock exchange had a market capitalization of N$ 2,2 trillion in the 4th quarter of 2023. The market capitalization of the global stock market was 107 trillion USD in the 3rd quarter of 2023, according to the world federation of exchanges.
The second type of financial market is the bond market. In this market participants trade government and corporate debt instruments. This market allows governments and corporates to raise long/short term capital in the form of debt. The investors earn coupons by holding these financial instruments.
The Namibian bond market was valued at N$ 79 billion in the 4th quarter of 2023. The global bonds market was valued at 133 trillion USD in the 3rd quarter of 2022 according to the world economic forum.
There are also other types of financial markets such as the foreign exchange market, cryptocurrency market, derivatives markets etc.
Now that we have an understanding of what exactly financial markets are let’s look at their importance in a country’s economy. Firstly, financial markets, particularly stock markets, help companies raise the capital they need to grow. When companies grow, they provide better services and improved products to their clients.
Secondly local bond markets are important because they help the government raise funds locally to finance its deficit as opposed to raising it internationally where it will incur other costs such foreign exchange cost. In principle efficient and stable financial markets are important for preventing capital outflows.
Thirdly financial markets help investors be it retail or institutional create and grow their wealth over time, when investors buy shares on stock exchanges at a lower price and the share prices increase overtime the investors earn capital gain, and if the companies investors bought shares in make profits the investors get a share in these profits. Financial markets are a safe place for the investors of a country to create and grow their wealth as they are well regulated.
Fourthly, financial markets serve as an economic barometer by stating the health of a country’s economy. Stock exchanges are the pulse of an economy and a mirror which reflects the economic conditions of a country. A country’s economic cycle is reflected in a financial markets indexes.
I conclude with a quote by Michael Douglas. “Our economy is increasingly dependent on the success and integrity of the financial markets.” The money that investors invest in company stocks or bonds is taken and channeled into the economy.
Financial markets help companies raise capital, the companies then use this capital to grow, expand produce more goods, employ more people, and thus stimulate economic growth. Indeed, financial markets are the wheels on which a country’s economy runs.
*Jaezuruka Ndjarakana is a young finance professional with 2 years of experience in business banking. He can be reached at jaezurukandjarakana@gmail.com
