Financial Market
Learning objectives
Understand the meaning and functions of
financial markets
Identify and describe the different types of
financial markets
Explain the roles of different participants in the
financial market
Discuss the methods of raising equity funds.
Explain the importance of listing on securities
exchange.
Definition
• This is a market where financial securities are
traded; e.g. stocks, preference shares, bonds,
hedging instruments and any other
promissory notes.
• It’s a market that brings together buyers and
sellers of financial instruments. The buyers are
at times referred to as lenders (surplus units)
while sellers are the borrowers (deficit units).
Functions of a financial market
The three major functions of a
financial market includes;
Price determination; the forces of
demand and supply in the market determines
how much a security is worth.
Liquidity provision; facilitates the selling of
securities given the large number of participants
Cost reduction; the cost of looking for
buyers are either reduced or eliminated by the
presence of the financial market.
Types of Financial Market
There are two main categorization of the market
Money Market Vs Capital Market
Money market is where short term securities are traded. Funds for short term
use are generated from the money market by issuing securities such as
commercial papers, short term bonds and other promissory notes.
Capital Market refers to a market where long term financial instruments are
traded and long term funds are generated. Instruments such as preference
shares, long term corporate bond/debentures or ordinary shares are common
in the capital markets.
Primary Market Vs Secondary Market
Primary market is a market where new securities are issued for the first
time; what is commonly referred to as the Initial Public Offering – IPO.
Secondary market is where shares that are already trading on the
securities exchange are issued either by the company or its
shareholders.
Financial Market Participants
Brokers; Links the buyers and sellers of
securities in the financial markets
Investment banks; these are mainly
underwriters of new issues. They
acquire/guarantees the shares from the
issuing companies at a wholesale and resell to
the general public
Individuals; These are investors interested in
acquiring shares/bonds or lending to
government.
Financial Market Participants
Institutional investors; these are mainly fund
managers who are more of a surplus unit and
invest in long term instruments to generate
returns for its members.
Central bank; the central bank regulates the
operation of the financial market and its
players.
Listed companies; these are companies that
are registered to sell their instruments on the
securities exchange
Methods of Raising Equity Funds
Offer for Sale/IPO; shares that were previously authorized but
not bought are issued or a completely new set of shares are
issued for the first time - IPO.
Private Placement; companies look for specific investors and
offer a given number of shares to them for acquisition.
Competitive Bidding; investors are invited to bid for available
shares in a given listed company. An investor bids for the
number they whish to acquire at a price of their choosing
deemed to be competitive.
Rights Issue; new shares are issued to the existing
shareholders in the proportion of their current holding. The
price for such shares are relatively lower than the market
price and the funds being sought may be relatively small.
Stock listing
• Stock listing refers to the registration of a
company’s shares to be able to trade on a
given securities exchange market. The
company is allowed by law to sell its shares to
the public when listed. Examples of securities
exchanges; Uganda Securities Exchange,
Nairobi Securities Exchange, London Securities
Exchange, etc.
Benefits of listing
Ease of raising additional funds
Creates investors confidence
Improves corporate image
Improves firm’s liquidity position
Facilitates transfer of ownership
Improves marketability of a firm’s
shares
Disadvantages
Cost of listing compliance
Public scrutiny
Extensive disclosure
Dilution of control of existing
shareholders
Bureaucratic decision making
The role of Uganda Securities
Exchange
Provision of liquidity
Provides avenues for trading
Regulates trading activities
Enables issuers to raise capital
Requirements for listing
The securities exchanges requires an
intending company to comply with the
following requirements;
Transferability of shares
Audited books of accounts
A minimum stated capital
Ug.Shs1billion
Profitability Record
Requirements for listing – Cont.
Minimum Public Floatation
Minimum paid up share capital
Years in existence
Corporate governance
Compliance with other regulatory
authorities
Why Firms may not List
Alternative sources of funds.
Restrictive listing requirements.
Desire for control
Extensive reporting requirement
Underperforming stock exchange market
No need for additional funding
Companies Listed on USE
Uganda Clays Centum Investments
DFCU Group Jubilee Holdings
New Vision Ltd Kenya Airways
BAT Uganda Equity Group
Stanbic Bank Limited Uchumi Supermarkets
UMEME EABL
MTN Uganda Ltd KCB
Cipla Quality Chemicals Nation Media Group
Bank of Baroda
National Insurance Co
