Security is a financial asset that can be traded. A security market is a mechanism that brings buyers and sellers of financial assets for fixing the price of a particular security.
Characteristics of the Security Market
Individuals enter into the securities markets to buy and sell their securities at a price justified by the prevailing supply and demand of the subject securities.
An efficient security market is one where the participants must have timely and accurate information on the volume and prices of past transactions and on all currently outstanding bids and offers.
A sound securities market possesses the following characteristics:
- Investors will be able to get accurate and quick information necessary for secure transactions.
- A market should operate in a position where the ability to buy and sell an asset at a fixed price is not substantially different from the price for a prior transaction; assuming no new information is available.
- The buyers and sellers trade at prices above and below the current market price.
- A market should ensure price continuity meaning that the prices do not change much from one transaction to the next unless substantial information becomes available.
- An efficient or good market s one in which the transaction cost is minimum. It refers to inernal efficiency.
- A market should reflect all the information available regarding the supply and demand factors in the market. This refers to external efficiency.
Nature of Security Market
The prime objective of a firm is to achieve the highest value for the shareholders.
The firm’s management should examine sufficiently the process by which a firm’s market value is determined, in particular, the important role of financial markets in the process.
The determination of share price is a combination of the firm’s actions and reactions in the capital markets under the securities markets. Hence the securities markets make the flow of funds through the financial system.
The borrowers of funds seek to augment their current income in order to acquire assets, and their refinancing to do so. Lenders have excess funds on which they wish to earn a return.
The role of the securities markets is to facilitate the transfer of funds in the quickest and most efficient manner.
Capital markets are often referred to as the markets for long-term and medium-term funds.
The capital markets thus can be broadly classified into securities markets and non-securities markets.
The securities market has, in turn, two segments; The market for the primary issue, where the initial transactions between the users of funds and the suppliers of funds take place and The markets wherein secondary trading of issued securities take place in the secondary market.
No member of the stock exchange, in this respect, is supposed to violate the provisions of the Securities and Exchange Commission by manipulating the securities prices.
Probably the most essential function performed by the exchange is the creation of a continuous market- the opportunity to buy or sell securities immediately at a price that varies a little from the previous selling price.
Thus, a continuous market allows investors to be liquid. That is, they are not obligated to hold their securities until maturity, or if they have common stocks indefinitely.
An exchange also helps to fix the prices. Buy and sell order (or demand or supply) determine the prices. The exchange brings together buyers and sellers from all over the nation and even from foreign countries.
The stock exchange also provides a service to the industry by directly aiding new financing. The ease with which the investors can trade issues makes them more willing to invest in new issues.
One way in which the securities market may be classified is by the types of securities bought and sold there.
The broadest classification is based on whether the securities are new issues or are already outstanding and owned by investors.
New issues are made available in the primary markets; securities that are already outstanding and owned by investors are usually bought and sold through the secondary market.
Another classification is by maturity; securities with a maturity of one year or less are normally traded in the money market; those with maturities of more than one year are bought and sold in the capital market.
However, highly liquid debt securities that have short terms until they mature and involve little or no risk of default are called money market securities.
Importance of Security Market
the securities market contributes to the efficient allocation of resources in the economy.
Without the securities market, savers would have to spend significant resources finding individuals, companies, and governments offering suitable investment opportunities.
Similarly, spenders or users of capital would have to spend significant resources to search for capital rather than on considering how to best use it. The following lists some functions of the securities market in fostering economic growth:
1) It supports industrialization through savings, investments and maturity transformation. Maturity transformation occurs when financial institutions take short-term sources of finance, such as deposits from savers and money market loans, and turn them into long-term borrowings, such as mortgages. Essentially the securities market fosters a culture of savings and investment in a country.
2) It provides a flow of long-term savings for economic development as these funds are channeled through these markets to meet not only domestic but also foreign demands.
3) The securities market can function as a mechanism that provides instantaneous feedback to policymakers.
When policymakers propose policies that do not promote positive market development, equity and bond risk tend to rise. Stocks and bonds can also decrease in value.
These price signals raise a red flag to lawmakers about the wisdom of pursuing the policies in question.
In essence, because the securities markets anticipate future developments, they reduce the incentives to do things that provide short-term gains but rather look at long-term benefits that will boost a country’s economic performance.
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