Welcome to myschoollibrary! Today in our economics class, we will be looking at another form of financial institution which is the “Money Market”. Do have a great time studying with us.

Lesson Note

Subject: Economics

Topic: Financial Institutions

Subtopic: Money Market

Learning Objectives: By the end of the lesson, the learners should be able to:

  1. Define the term money market;
  2. List and explain the instruments used in the money market;
  3. State and discuss the institutions involved in the money market;
  4. State the advantages of money market.

Discussions

Money Market

Money market can be defined as a market for short-term loan. The market consists of institutions or individuals who either have money to lend or wish to borrow on a short-term basis.

Instruments used in the money market

(1) Treasury Bills: Treasury bill is normally issued by the central bank of a country, which assists the government to borrow money from the money market on short-term basis.
(2) Bill of Exchange: Bill of exchange refers to a promissory note which shows the acknowledgement of indebtedness by a debtor to his creditor and his intention to pay the debts on demand or at an agreed time in future, normally ninety days.
(3) Call Money Funds: The call money fund or market is a special arrangement in which the participating institutions invest surplus money for their immediate requirement on an overnight basis with the interest and withdraw on demand. The call money has an advantage of early return and at the same time are withdrawable on demand. It provides solution to the immediate stock of liquidity pressures in the money market.

Institutions involved in the money market

i. Central bank
ii. Commercial banks
iii. Acceptance house
iv. Finance houses
v. Discount houses
vi. Insurance companies

Advantages Of Money Market

(1) Provision of finance: Money market enables entrepreneurs and investors to raise enough finance through borrowing to run their businesses.
(2) Creation of extra income: The money invested in money market is capable of yielding extra income in form of interest.
(3) Promotion of economic development: Economic growth and development is enhanced through borrowing from money market.
(4) Ability to recall invested funds: Funds invested in the money market are very easy to recall.
(5) It enhances savings: Money market provides opportunity for those having surplus fund to invest thereby enhancing savings.

Capital Market

Capital market is a market for medium-term and long-term loans. The capital market serves the needs of industry and the commercial sector. It comprises all the Institutions which are concerned with either the supply of or demand for long-term capital.

Instruments Used In Capital Market

The instruments used in capital market are mainly stocks and shares. Stocks and shares are securities purchased by individuals, which is an evidence of contributing part of the total capital used in running an existing industry. At the end of a normal business year, stock and share holders receive dividend as a reward for contributing the money in running the business.

Institutions Involved In Capital Market

i. Issuing houses
ii. Insurance companies
iii. Development banks
iv. Building societies
v. National Provident Fund
vi. Stock Exchange

Advantages of capital market

(1) Provision of long-term loans: Capital market provides long-term loans to the private and public sectors for investment.
(2) Mobilisation of savings: Savings are mobilised in the capital market.
(3) Growth of merchant banks: The existence of capital market helps the growth and development of merchant banks.
(4) General running of the economy: The existence of capital market encourages the general public to participate in the running of the economy of the country.

The Stock Exchange Market

Stock exchange market is a highly organised market when investors can buy and sell existing securities like shares, stocks, debentures etc. This is a market where those who are interested in the purchase of securities are brought into contact with the sellers. The stock exchange is an essential part of the capital market to serve as a source of raising capital as well as a forum for financial investment. The market deals in old existing shares only, i.e new ones are not traded on it.
The stock exchange market ensures that every transaction must follow prescribed set of rules and regulations, which are complex in nature. Quoted companies are organisations whose shares are quoted on the stock exchange market. The Nigerian Stock Exchange market is in Lagos with branches in Abuja and Port Harcourt. It was established in 1960 through the Act of Parliament. Some of the companies quoted on the stock exchange market include: Dunlop Nigeria Plc, Access Bank plc, First Bank of Nigeria plc, Zenith bank Plc, guiness Nig. Plc etc.

Importance of stock exchange

(1) An avenue for raising capital: Capital can be raised by companies nand governments through the stock exchange.
(2) Provision of employment opportunities: The stock exchange provides employment for brokers, jobbers, clerk’s and others.
(3) Provision of information to investors: Investors, especially foreign investors, can obtain necessary information about the investment situation of a country.
(4) Facilities transfer of investment: An investor can withdraw his investment from a company to invest in another company.
(5) It is a market for investment: The stock exchange provides an avenue for people to invest in any sector of the economy.
(6) It leads to increase in the standard of living: Investment opportunities will lead to more income, which will affect consumption, thereby increasing the standard of living of the people of a country.

Done studying? Its been a great moment learning the concept of financial institutions. As we have rounded up the topic, take a quick test to justify the lesson objectives.

See All Previous Lessons In Economics

  1. Define the term money market.
  2. List and explain the instruments used in the money market.
  3. State and discuss the institutions involved in the money market.
  4. State the advantages of money market.
  5. What are financial institutions?
  6. State and explain the various types of financial institutions.
  7. Define the term bank account.
  8. State and explain the types of bank accounts.
  9. Differentiate between current and savings accounts.
  10. What is a cheque?
  11. Mention the parties to a cheque.
  12. What dounderstand by fixed deposit account?
  13. State the features of each type of bank accounts.
  14. State the differences between central bank and commercial banks.
  15. State the way by which central bank control commercial banks.

Were you able to answer those questions correctly? Bravo!!

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