CAPITAL MARKET INSTRUMENTS & SECURITIES

CAPITAL MARKET INSTRUMENTS
Capital market instruments are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission.  

Therefore, the capital market instruments fall into four categories such as:  
Treasury securities; government agency securities; municipal bonds; and corporate bonds.

1. Treasury Instruments

All government securities issued by the Treasury department of Govt. are fixed income instruments. They may be bills, notes, or bonds depending on their times to maturity. Specifically, bills mature in one year or less, notes in over one to 10 years, and bonds in more than 10 years from date of issue government securities which confer debt obligations on the government.  

2. Government Bonds and Loan Stocks  
Government securities are sold by the apex banks on behalf of the government to support specific programs, but they are not direct obligations of the treasury department. Mortgage bonds are issued and sold for the purpose of using the proceeds to purchase mortgages from insurance companies or savings and loans; and the home loan which sells bonds and loans the money to its banks, which in turn provide credit to savings and loans and other mortgage-granting institutions. Other agencies are the government banks for cooperatives.

3. State and Local Government Bonds  
These bonds are issued by local government entities as either general obligation or revenue bonds. General obligation bonds are backed by the full taxing power of the municipality, whereas revenue bonds pay the interest from revenue generated by specific projects. These bonds differ from other fixed-income securities because they are tax-exempt. The interest earned from them is exempt from taxation by the government and by the state that issued the bond, provided the investor is a resident of that state. For this reason, these bonds are popular with investors in high tax brackets.

4. Corporate Bonds
Corporate bonds are fixed-income securities issued by industrial corporations, public utility corporations, or railroads to raise funds to invest in plant, equipment, or working capital. They can be broken down by issuer, in terms of credit quality in terms of maturity i.e. short term, intermediate term, or long term, or based on some component of the indenture.

CAPITAL MARKET SECURITIES
These are fixed-income obligations that trade in the secondary market, which means anyone can buy and sell them to other individuals or institutions. Marketable securities are exchanged through the organized markets for example, stock exchanges and its Representative dealers and brokers who sell and buy marketable securities on behalf of their customer in exchange of commission. Instruments issued and traded in the capital market differ in certain characteristics, such as: term to maturity; interest rate paid on the nominal value; interest payment dates; and nominal amount in issue.  

1. Interest Rate Securities

The interest paid on the nominal amount of capital market securities (called the coupon rate) appears on the certificate received by the holder (the investor) of such a security. This coupon rate is one of the parameters used to determine the consideration paid for the security when traded in the secondary market. Most securities are issued at a fixed coupon rate.  

Capital market securities are physical certificates and the issuer of the security keeps a register of owners. This register is used by the borrower (issuer) to pay interest to the lender (owner of the security) on the interest payment dates indicated on the certificate. When an instrument is sold to a new owner in the secondary market, the buyer is registered as the new owner on the settlement date of the transaction.  

2. Zero-rated coupons
These are long-dated securities with many terms to maturity with zero-rated coupons which are capital market instruments issued by borrowers of money such as blue chip firms. These instruments do not earn interest on the capital amount invested by the lender, and are therefore issued and traded at a discount on the nominal value, similar to discount instruments in the money market such as bankers acceptances and treasury bills.

The market value (nominal value less discount) of zero or nil-rated coupon bonds depends on the yield that the investor (lender) expects on his investment. The redemption amount, which is the only cash inflow for the investor, is equal to the nominal value of the bond, and is thus known to the investor.

3. Asset-backed Securities
Where an asset exists which represents cash inflow stream such as a normal loan or investment, a bond can be issued to fund this asset. The bond income is then derived or backed by the income stream of the asset. The performance on the bond is then dependent on the asset performance.

INSTITUTIONAL PARTICIPANTS IN CAPITAL MARKET
There are a number of financial institutions which are directly involved with real investment in the economy. These institutions mobilize the saving from the people and channel funds for financing the development expenditure of the industry and government of a country.  

The financial institutions take maximum care in investing funds in those projects where there is high degree of security and the income is certain. The main institutional sources of capital market are as follows:

(i) Insurance Companies.
Insurance companies are financial intermediaries. They call money by providing protection from certain risks to individuals and firms. The insurance companies invest the funds in long term investments primarily mortgage loans and corporate bonds.

(ii) Pension Funds.
The pension funds are provided by both employees and employers. These funds are now increasingly utilized in the provision of long term loans for the industry and government.

(iii) Building Societies.
The building societies are now activity engaged in providing funds for the construction, purchase of buildings for the industry and houses for the people.

(iv) Investment Trusts.
The investment trust mobilize saving and meet the growing, need of corporate sector, The income of the investment trust depends upon the dividend it receives from shares invested in various companies.  

(v) Unit Trust.
The Unit Trust collects the small savings of the people by selling units of the trust. The holders of units can resell the units at the prevailing market value to the trust itself.  

(vi) Saving Banks.
The saving banks collect the savings of the people. The accumulated saving is invested in mortgage loans, corporate bonds.

(vii) Specialized Finance Corporation.
The specialized finance corporations are being established to help and provide finance to the private industrial sector in the form of medium and long term loans or foreign currencies.

(viii) Commercial banks.
The commercial banks are also now activity engaged in the provision of medium and long terms loans to the industrialists, agriculturists, specialist finance institutions, etc., etc.

(ix) Stock Exchange.
The stock exchange is a market in existing securities (shares, debentures and securities issued by the public authorities). The stock exchange provides a place for those persons who wish to sell the shares and also wish to buy them. Stock Exchange, thus helps in raising equity capital for the industry

The capital market

Having discussed what financial system is, then there is the need to go further by touching the various components of the system. Therefore this post will be focusing on capital market which together with the money market makes up the important component of the financial system known as financial market.

Therefore, capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long term productive use, such as companies or governments making long-term investments In another perspective, capital market is a market in which financial securities such as stocks, bonds and government loan instrument are bought and sold. Corporate entities and governments therefore, use capital market to raise funds for their operations and programmes respectively. For example, a company may float an initial public offer while a government may issue bond or development loan stock to raise funds for new projects or ongoing public programmes Investors purchase securities (stocks or bonds) in the capital markets in order to extract some returns or earn profits on their investment. Capital markets include primary markets, for the initial public offers of securities that are placed with investors through issuing houses and underwriters, and secondary markets, in which all subsequent trading on existing securities takes place.  

Financial regulators, such as the UK's Bank of England (BoE) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties. The Nigerian Securities and Exchange Commission also perform the same function


Transactions in modern capital markets are almost invariably carried out based on computer-operated electronic trading systems; most can be accessed only by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public.  

There are many thousands of such systems, most only serving only small parts of the overall capital markets. Entities hosting the systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated in financial hubs or centres such as Lagos, London, New York, and Hong Kong, among others  

There is an important division between the stock markets mainly for equity securities, in form of shares, which investors purchase for the purpose of having ownership interest in the companies that float such securities. The other is the bond markets which cater for creditors when they subscribe to the securities floated by companies for raising funds on the basis of debts that have maturity dates before they are repaid back to the holders.  

Operations of a Capital Market
In respect of the operations of the capital market, there are different players that are active in the secondary segment of the market. Such players include the following.

Regular individual investors
These participants in the market account for a small proportion of trading, though their share still plays some significant role in the market. A few wealthy individuals who could afford an account with a broker, but transactions are now much cheaper and accessible over the internet.  

Traders
These are the jobbers and stock brokers. The jobbers in highly developed capital markets operate by buying securities with the intention of making profits. The do not transact business on behalf of any investors but behave like real traders who engage in buying and selling of capital market securities.

The profit earned by the jobbers is called the jobbers turn. On the other hand, the stock brokers transact business on behalf of investors who pay commission on volume of transactions done for them by the stockbrokers. There are numerous small traders who can buy and sell securities on the secondary markets using platforms provided by brokers which are accessible through electronics means such as with web browsers. When such an individual trades on the capital markets, it will often involve a two stage transaction.  

First they place an order with their broker, on the strength of which the broker executes the trade. If the trade can be done on an exchange, the process will often be fully automated. If a dealer needs to manually intervene, this will often mean a larger fee.  

Investment banks
Traders in investment banks will often make deals on their bank's behalf, as well as executing trades for their clients. Investment banks will often have a department called capital markets. Staff in such department try to keep abreast of the various opportunities in both the primary and secondary markets, and will advise major clients accordingly.  

Pension and Sovereign Wealth Funds  
These players tend to have the largest holdings, though they tend to buy only the highest grade securities which are safest types of bonds and shares, and often don't trade all that frequently.  

Hedge funds  
These are increasingly making most of the short-term trades in large sections of the secondary markets of advanced economies such as the UK and US stock exchanges, which is making it harder for them to maintain their historically high returns, as they are increasingly finding themselves trading with each other rather than with less sophisticated investors.

Divisions in the Capital market .
The capital market is divided into two sectors depending on the type of issues they deal in and they are as follows,

Primary market
The capital market is operated in two main segments such as the primary market and the secondary market. The primary market is used for transactions on new stocks or bond issues, which are handled by issuing houses and underwriters.  

The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be local, state or federal) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds.  

The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf.  

Characteristics  of primary market
The characteristics of a primary market include the following.

i ) This is the market for new long term capital. The primary market is the market where the securities are sold for the first time.Therefore it is also called New Issue Market (NIM)

ii) In a primary issue, the securities are issued by the company directly to investors

iii) The company receives the money and issue new security certificates to the investors

iv) Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business

v) The primary market performs the crucial function of facilitating capital formation in the economy

vi) The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’


Methods of getting new issues into the market  
The major issuers of securities particularly the shares are the corporate entities. Government bonds are commonly referred to as "gilt-edged" securities. Intermediaries such as brokers and banks (especially merchant banks) are often used by borrowers to administer the issuing of new bonds. Bonds can be issued in the primary market using several different methods. Both equities and bonds can be issued through the following ways:   

a) Public Subscription  
This presupposes that a prospectus is issued. The document contains details of the company issuing the security such as bond or shares, and of the securities themselves. Members of the public can then subscribe to the security, and the borrower or an intermediary on behalf of the borrower will allocate the securities to subscribers on issue date by means of a certain process.

b) Private Placing
The securities (e.g., shares or bonds can also be issued through private placing. This method is used when the borrower (or an intermediary on behalf of the borrower) places bonds or shares with certain investors selected by the borrower. The selected investor would then receive a certain amount of bonds or shares at issue date and pay the borrower the issue price for the bonds received.

c) Tender Method
A third method used to issue bonds or shares is known as the "tender" method. The borrower or intermediary will issue a media statement that bonds shares will be issued in the market on a certain date.  

The details of the bonds shares and the capitalisation of the issue (total nominal amount to be issued) will also be communicated. Interested parties are then invited to tender before a certain date for these bonds. Tenders from interested parties would normally consist of the nominal amount plus the percentage of the nominal amount that the interested party is willing to pay for the shares or bonds at issue. The company or borrower usually allots the shares or bonds in order of highest tenders first, but it is in his power to decide who will receive the securities at issue date.

d) Tap Method
Another method that is used to issue new instruments is known as the "tap" method, whereby not all the shares or bonds are allocated at the first issue through any of the above three methods. If, for instance, the company or borrower wants to issue N100 million worth of shares or bonds he can choose to issue only N70 million at the first issue. The borrower or intermediary then starts creating a secondary market for these instruments by buying and selling the issued instruments in the secondary market. This process, where one party buys and sells the same instrument in the market, is known as market making.  

The market maker thus has a bid (to buy) and an offer (to sell) in the market for the same instrument, trying to create an active and liquid market in this instrument. The "tap" method is then used by the borrower or intermediary, whereby more instruments are sold in the market than that bought back. By using this method, the amount of the issue is increased, often without the market realising it.  

This method can also be used in inverse form to decrease the total outstanding loan. The ultimate user of the funds from the securities in the capital market can use the tap method, because the company is allowed to trade in its own securities. This is possible in the equities market because a company is allowed to buy its own shares.

Secondary Market

In the secondary markets, existing securities are sold and bought among investors or traders, usually on a stock exchange, characterized by over-the counter, or operated electronically in highly developed economies.  

The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises. Transactions in secondary markets: Most capital market transactions are executed electronically, but in less developed stock exchanges sometimes traders are directly involved and sometimes unattended computer systems in highly developed stock exchanges execute the transactions, such as in algorithmic trading system. Most capital market transactions take place on the secondary market. On the primary market, each security can be sold only once, and the process to create batches of new shares or bonds is often lengthy due to regulatory requirements.  

On the secondary markets, there is no limit on the number of times a security can be traded, and the process is usually very quick. With the rise of strategies such as highly frequency trading, a single security could in theory be traded thousands of times within a single hour.  

Transactions on the secondary market don't directly help raise finance, but they do make it easier for companies and governments to raise finance on the primary market, as investors know if they want to get their money back in a hurry, they will usually be easily able to resell their securities.  

Sometimes secondary capital market transactions can have a negative effect on the primary borrowers - for example, if a large proportion of investors try to sell their bonds, this can push up the yields for future issues from the same entity. In modern time, several governments have tried to avoid as much as possible the penchant for borrowing into long dated bonds, so they are less vulnerable to pressure from the markets.  

A variety of different players are active in the secondary markets. Regular individuals account for a small proportion of trading, though their share has slightly increased; in the 20th century it was mostly only a few wealthy individuals who could afford an account with a broker, but accounts are now much cheaper and accessible over the internet.  

These days there are now numerous small traders who can buy and sell on the secondary markets using platforms provided by brokers which are accessible with web  browsers. When such an individual trades on the capital markets, it will often involve a two stage transaction. First they place an order with their broker, then the broker executes the trade. If the trade can be done on an exchange, the process will often be fully automated. If a dealer needs to manually intervene, this will often mean a larger fee.  

Traders in investment banks will often make deals on their bank's behalf, as well as executing trades for their clients. Investment banks will often have a department called capital markets: staff in this department try to keep aware of the various opportunities in both the primary and secondary markets, and will advise major clients accordingly. Pension and Sovereign wealth funds tend to have the largest holdings, though they tend to buy only the highest grade (safest) types of bonds and shares, and often don't trade all that frequently

What is finance ?

The field of finance is broad and dynamic. It directly affects the lives of every person and every organisation. There are many areas for study and large number of career opportunities available in the field of finance. Finance has been defined in different ways. Each definition however reflects the perception of finance relative to its role and scope. However, it may not be possible to give a precise and very comprehensive definition to such a wide, complex and important subject which is of interest to everybody.

Webster’s third International Dictionary, for example, defines finance as “the system that includes the circulation of money, the granting of credit, the making of investments and the provision of banking facilities.” This definition gives an indication to the fact that finance is a system by itself and thus a broad field of activities at the centre of economic operations or social activities with economic implication.

The Shorter Oxford English Dictionary defines finance as “to lend, to settle debt, pay ransom, furnish, and procure, etc. [--- the management of money] --- [the science of levying revenue in a state, corporation] --- [the provision of capital.]” This definition looks at finance as a science which applies to both the public and private sectors.   

The Encyclopaedia of Banking and Finance has however given a broader definition of finance.  Its definition is classified into three categories as follows:

i) to raise money necessary to organise, re-organise or expand an enterprise whether by sales of stocks, bonds, notes, etc
.
ii) a general term to denote the theory and practice of monetary credit, banking and promotion of operations in the most comprehensive sense. It includes money, credit, banking, securities, investment, speculation, foreign exchange, promotion, underwriting brokerage trusts, etc.

iii) originally applied to raising money by taxes or bonds issues and the administration of revenues and expenditure by government.

Finance, as seen by the Encyclopaedia of Banking and Finance, is much more comprehensive than the concept of finance as reflected in earlier definitions. The above concepts of finance are synonymous with business finance, money and credit and public finance, international finance, investments, etc.

Lastly, Gitman (2000) defines finance as the art and science of managing money. In contrast with Christy and Roden (1973), money is mentioned here. Virtually all individuals and organisations earn or raise money and spend or invest money. Finance is the study of applying specific value to things we own, services we use, and decisions we make. Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among and between individuals, businesses and governments.  

The Finance Functions
Finance pervades all disciplines and all facets of human, economic and social activities. It influences the psychological behaviour of individuals as well as the socio-cultural and economic environments of both natural and legal persons (Emerson, 1904).  Finance has therefore evolved to assume a very important position in the decision process of households, businesses, governments and other non-business organisations. Households, businesses, governments and non-governmental entities cannot escape the influence of finance on their daily decision activities.  

What is now known as finance evolved as a branch of economics in the later part of the 19th Century. Since then, finance has exerted the most important influence on technological and industrial development, the turnaround of depression or recession, consumer behaviour, administrative strategies and styles of governments and research and development etc. Finance can be classified into two broad categories, namely: micro and macro finance

a) Micro finance relates to financing decisions and practices of individual households, businesses and non-business organisations.

b) Macro finance relates to the financing decisions and practices of the entire economy.  Finance has as its area of concentration the use and impact of money and money substitutes.

Therefore, the principle of finance has brought about the concept of financial management which involves the management of instruments of finance. No decision involving finance can be efficiently and effectively implemented without financial management.  
The functions of finance include sourcing and application of funds, and demands that money is used in the firm wisely, that is, when and where it is desired. Money sourced, for example, to improve on the production base of a firm should be appropriated wisely. It will be most inappropriate to use such funds to acquire assets unrelated to the course of production

CONCEPT OF FINANCIAL MANAGEMENT

The activities of organisations whether business or non-business, have finance as their centrepiece. The role of finance however reflects the objectives of an organisation. Therefore, financial management is a reflection of the nature and objectives of the organisation.  Financial management is thus a very important aspect of finance although it is not easy to separate financial management from the rest of other finance activities (Myres, 1976). However, an attempt to limit the areas of financial management can be made if one agrees with the fact that financial management itself requires the simultaneous consideration of three key financial decisions (Christy and Roden, 1973), namely:  

i) anticipation of financial needs of the organisation;

ii) acquisition of financial resources for the organisation;  

 
iii) allocation of financial resources within the organisation.

These three key financial decisions provide the basis for periodic financial analysis and interpretation of historical financial practices. The control measures which may be  contemplated by management or re-orientation of management strategies in turn depend on the analysis and interpretation of historical financial data.  

Financial management is, therefore, a dynamic and evolving art of making daily financial decisions and control in households, businesses, non-business organisations and government. It is a managerial activity which is concerned with planning, providing and controlling the financial resources at the disposal of an organisation. Thus, a financial manager continues to answer some basic questions like:   

√ What specific assets should the organisation    acquire?  

√ How much of funds should the organisation commit?   

√ How can such funds be acquired?  

Financial management system is, therefore, very important for adaptation in government, business and other organisations as it provides the theoretical concepts and analytical models and insights for making skillful financial decisions. However, the definition of financial management is influenced by its objectives. It can however, in general, be defined as the use of accounting knowledge, financial models, mathematical rules and some aspects of systems analysis and behavioural science for the specific purpose of assisting management in its function of financial planning, implementation and control.

The role of financial management in a simplified form is the synchronisation of receipts and payments flows. Thus, payments must be planned against receipts in order that the firm may remain liquid to the extent desired by management. In other words, financial management involves the management of funds inflows and outflows efficiently and effectively in order to guarantee the firm adequate liquidity. This implies effective management of financial resources in order to achieve a firm’s two most important objectives, namely: the maximisation of profits or maximisation of shareholder’s wealth and the maintenance of adequate liquidity level.

Functions of a Financial Manager

The financial manager assumes different names depending on the nature, size and organisational structure of the business. In some organisations, he is known as Finance Director or Director of Finance, in others, he is known as Finance Controller or General Manager (Finance).  Here, it will be assumed that the financial manager refers to the person in charge of the finance department of an organisation, whatever name he may be called. The financial manager is usually a member of the Board of Directors and he normally enlightens the board on financial implications of a firm’s decisions since most members of the Board are not usually adequately versed in financial terms and practices.

The functions of a financial manager pervade all the departments of an organisation in that he has to make key decisions affecting the operations of these departments as far as finances are concerned. And some of the functions are as follows,

1 Anticipation of the Financial Needs of an Organisation

Anticipation of the financial needs of an organisation involves the determination of how much the organisation would need within a certain period to run its activities.  This in essence is a forecasting activity. In other words, the financial manager has the responsibility of deciding how much funds his organisation would need within the short term, medium term and long term periods.  The short-term needs for funds are usually determined by considering series of cash inflows and outflows.  The financial manager can make a forecast of the firm’s financial requirements for a period of one month, one year or many years ahead. Forecasts are normally made in the form of budgets.

Forecast of the financial needs of an organisation should normally depend on the long term growth and profit plan of the organisation. By this, the financial manager will be able to determine the nature of funds needed by his organisation. This is because funds could be needed for expansion, in which case, such funds are of long-term nature.

2 Acquisition of Financial Resources  

Acquisition of financial resources is another important responsibility of the financial manager. This is based on the nature of funds needed by the organisation. The financial manager has to determine the time at which such funds could be acquired in order to make them available to his organisation when it most needs them. Thus, timing of funds acquisition is very important in financial management. Timing can equally help to reduce the cost of borrowing if the financial manager knows when to raise such funds from the market. The most important thing for the financial manager to do in terms of funds acquisition is to decide on where he is going to acquire such funds.

The nature and source of funds will determine the cost of borrowing. Funds could be raised from a bank, a non-bank financial  institution or from the capital market. The ability of a financial manager to raise funds from any of the sources would be determined by the size as well as the level of credit worthiness of the business organisation. The financial manager has to make the basic decision of whether funds should come from external or internal sources.  In the case of internal sources, he has to help in the formulation of appropriate dividend policy which will help him to achieve his objectives.

3 Allocation of Financial Resources  

Allocation of financial resources is the third important responsibility of the financial manager. Since the objectives of most businesses are profitability and liquidity, the financial manager has to allocate funds to assets that would help in the achievement of these objectives. The allocation of funds is normally done in a way that would minimise or eliminate over investment in fixed assets, or stock piling of inventory. In allocation of funds, the financial manager is normally conscious of maturity transformation in order to guarantee the firm its needed liquidity level.

4 Funds Management  

Funds management is highly related to allocation of funds. The financial manager can invest temporary surplus funds in securities to earn interest income for the company. He should know when to invest and when to divest. It is also the responsibility of the financial manager to prepare periodic reports on the finances of the organisation for the information of Management, Board of Directors, shareholders and the general public who may be interested in the affairs of the organisation.

5 Financial Analysis and Interpretation

The financial manager can also undertake the analysis of the historical financial data of the company in order to advise management on appropriate corporate and management strategies to adopt. An appropriate interpretation of financial analysis can always afford him to do this.  By his close association with the financial markets, the financial manager is in a position to determine the anticipated influence of fiscal and monetary policies on his company’s operations. It is his responsibility to pass informed judgement to management in order to adopt appropriate management strategies which can minimise such effects on the company’s operations.

6 Financial Planning and Control

The responsibility of the financial manager includes participation in product pricing. The determination of unit cost of production is done by accounting method and is under the control of the financial manager. Thus, pricing of products also attracts his attention since his objective is to maximise the difference between revenues and costs. Long-range planning, financial planning and control and budget preparation are very closely related.

‘Demutualisation central to NSE, stockbrokers’ value creation’

‘Demutualisation central to NSE, stockbrokers’ value creation’

What are Financial Assets ?

The financial assets are the financial instruments that are traded in the financial markets such as money market and capital market. These financial assets constitute the documentary evidence of the funds raised from the investors and savers who have surplus to part with for the use of corporate entities and government. The financial assets are inherently products of transactions in both the money market and the capital market. Such markets are well established in some economies while they are just being entrenched in some other economies.

The financial assets as products of transactions in the financial markets can be denominated in various currencies particularly the local currencies of various economies around the world. There are those financial instruments that are traded across international boundaries in some countries especially in highly developed capital markets in US, UK, Japan, France, and South Africa, just to mention but a few. Such financial assets are usually denominated mainly in American dollars and any other international money that is acceptable around the world.

Financial assets are normally issued in units such that the number of subscribers can be in threshold of thousands. For instance, a State Government Bond can be a total sum of N30 billion but in the denomination of N1,000 per unit of subscription. Therefore, the total amount of the amount has to be subscribed by many if not numerous investors at the end of the subscription period. This arrangement of raising funds through the financial markets is applicable to all financial instruments (e.g., Federal Government Loan Stock, shares, debentures, treasury bills, treasury certificates, etc) being used in such markets.

TYPES OF FINANCIAL ASSETS
The financial assets can be grouped into two main categories such as debt instruments and equity instruments. These are explained below.

i) Debt Instruments 
These are the financial instruments that are normally used by corporate entities and government to raise funds on the basis of debt obligations. This implies that such financial instruments are repayable by the organizations issuing them for raising funds from the financial markets from their operations.   The holders, therefore, are entitled to the funds at maturity dates in addition to the regular income accruing to them on them on the basis of interest payments by the corporate entities and government. Some of such instruments can be redeemed before their maturity dates as agreed to by the parties involved in the transactions. Such financial assets or instruments are also negotiable, being capable of being traded for cash before their maturity date. The various debt instruments being used for financial transactions in money market include the following:


> Treasury Bills;
> Treasury Certificates;
> Trade Bills; Commercial Papers; and
> Certificate of Deposits.

The above list is not exhaustive since there are new ones which are being developed and there are various ones that are peculiar to some specific economies that may not be available in some other economies.  The various debt instruments being used for financial transactions in capital market include the following:

> Development Loan Stocks;
> Debenture Stocks;
> Bonds;
> Mortgage Loan Stocks;
> Leases;
> Preference Shares; and
> Hire Purchase Contracts.

The above list is not exhaustive since there are variations in various world economies while there are new ones that are being developed. There are various ones that are peculiar to some specific economies that may not be available in some other economies.

ii) Equity Instruments
There are some financial instruments that are being used in the financial markets to raise equity funds by corporate entities. Such financial instruments are essentially Ordinary or Common Shares being used to raise funds to enhance the capital base of corporate organizations.

The Financial system

                       

The domestic financial system of any country refers to a set of instructional and other arrangements that transfer savings from those who generate them to those who ultimately use them for investment or consumption. It is made up of a mechanism for organizing and managing the payments for current and capital transactions; a mechanism for the collection and transfer of savings by banks and  other depository institutions; arrangements covering the activities of capital markets with respect to the issue and trading of marketable and transferable  long-term securities; arrangements covering the workings of money and credit markets dealing with short-term financial instruments; and arrangements covering the activities of financial market complementary to the capital market, credit and money markets, which in essence  provide hedging (or risk insurance) facilities, such as the new futures markets.

The financial system is complex, comprising many different types of private-sector financial institutions, including banks, insurance companies, mutual funds, finance companies, and investment banks- all of which are heavily regulated by the government. The Nigerian banking industry which is regulated by the Central Bank of Nigeria, is made up of; deposit money banks referred to as commercial banks, development finance institutions and other financial institutions which include; micro-finance banks, finance companies, bureau de changes, discount houses and primary mortgage institutions.

At international level, world financial system consists of a set of institutional and other arrangements governing the transfer of savings from those generating them to those wishing to use them, across national frontiers.

 Attributes of an Ideal Financial System

An ideal financial system is characterized by the following closely inter-connected attributes: it should be stable, efficient, competitive, flexible and balanced.

a. Stability  

It is imperative for confidence to be maintained in the financial system, especially in times of financial panic. It must be able to absorb shocks arising from the greater-than-anticipated and allowed for risks, and hence to contain a contractionary impact on activity, and trade, as well as any inflationary effect on prices.

 b. Efficiency
An efficient financial system directs savings to investments with the highest rate of return, allowing for risk. This consists of allocative, operating, and dynamic efficiency.

c. Competitiveness
A good financial system must have an adequate number of participants.

d. Flexibility  
The instruments employed and the methods of operation must be able to adapt to changes in the economic and financial structure.

e. Balanced
A balanced financial system requires that there should be an optimal mix of various types of financial system with respect to both transfer of current savings and the stock of past savings. The optimal mix would be such that changes in any one component could be absorbed by changes in another without having excessive impact on the providers and users of saving, while allowing both and adequate period of adjustment. It is important to note that the ideal combination of these closely inter-connected attributes will change as the process of economic growth proceeds.  

 The Nature of Financial Institutions 

A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Almost everyone deals with financial institutions on a regular basis. Everything from depositing money to taking out loans and exchanging currencies must be done through financial institutions. According to Mishkin and Eakins (2012:46), “Financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities. They thus play a crucial role in improving the efficiency of the economy.”

In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries.
They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. Most financial institutions are regulated by the government.

 Types of Financial Institutions

There are three major types of financial institutions (Siklos, 2001, Robert, E. W. and Quadrini, V. (2012)

1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies

2. Contractual Institutions : Insurance companies and pension funds; and

3. Investment Institutions : Banks, underwriters, brokerage firms.


However, financial institutions can be broadly classified into two: banks or bank financial institutions, and non- bank financial institutions. Commercial bank, Central bank, Merchant bank and Development bank are institutions in the banking sector while building societies, hire purchase companies, insurance companies, pension funds, and investment trusts are non-bank financial institutions. Whilst liabilities of banks form part of the money supply, the liabilities of non-bank financial institutions do not; for they are referred to as near money.
In Nigeria, the following types of financial institutions can be classified:

a. Traditional financial institutions
b. Commercial Banks
c. Central Bank
d. Development Banks
e. Merchant Banks
f. Insurance Companies

Meaning of Financial Markets

Financial markets (money and capital markets) consist of institutions, agents, brokers and intermediaries (banks, insurance companies, pension funds) transacting purchases and sales of securities. Financial markets facilitate the movement of funds from those who save to those who invest in capital markets. The persons and institutions operate in the friendships, contracts and communications networks which form an external visible financial structure. Financial markets are divided into two: investors and financial institutions. These financial institutions are organizations which act as intermediaries, agents and brokers in financial transactions. Financial intermediates purchase securities for their own account and sell their own liabilities and ordinary shares etc, agents’ and brokers’ contract on behalf of others.

  Financial markets are made up of:

 i. Financial intermediaries

ii. Agents and brokers

iii. Investors and borrowers.

Financial intermediaries, agents and brokers make up financial institutions. Thus one can say that financial markets are made up of financial institutions, investors and borrowers.

Lines of defence in the financial system to avert crisis 

Banks, insurance companies and
other financial institutions form the
first line of defence against financial
crises. It is their responsibility to
remain viable and solvent, checking
the creditworthiness of borrowers and
thereby managing the risks that they
take on.

Measures adopted by public
authorities in order to prevent or
mitigate financial crises constitute a
second line of defence. These
measures include:

1. prudential regulation (i.e. rules
that financial institutions have
to comply with in order to
ensure effective risk
management and the safety of
depositors’ funds),
accompanied by the disclosure
of information so as to promote
market discipline;

2. prudential supervision (i.e.
ensuring that financial
institutions follow these rules);

3. monitoring and assessment
activities, which identify
vulnerabilities and risks in the
financial system as a whole.

If, despite all of these measures,
financial institutions run into trouble,
public authorities may need to
intervene.