Dr. Boni Wanjau. [Courtesy]
Financial markets refer to all markets where trading of financial securities takes place, including stock markets, bond markets, foreign exchange markets, derivatives markets, cryptocurrencies and commodities markets. When financial markets fail, economic disruptions, including recession and rising unemployment, can occur, as was the case in the 2008 global financial crisis.
Stock markets are the most famous financial markets. These are investment instruments in which companies list their shares, which are then bought and sold. Stock markets or stock markets are used by companies to raise capital.
Over 65 companies are listed on the Nairobi Securities Exchange. In fact, stock prices have a significant impact on the economy. The majority of Kenyans are involved in the stock market as they invest in these markets for their retirement savings. You invest in company stocks, and when stock prices rise, people tend to spend more as they feel wealthier and more optimistic about the future.
Companies issue new shares to raise more money when stock prices are high. The stock market reflects the health of an economy as GDP increases and companies therefore achieve greater profitability.
The bond market is a security in which an investor borrows money for a fixed period of time at a predetermined interest rate. Think of a bond as an agreement between the lender and the borrower that contains the details of the loan and its payments. Bonds are issued by both companies and governments to finance projects. The bond market is also known as the debt, credit or bond market.
Derivatives markets are a contract between two or more parties in which trades (quantity and price) are agreed now and executed at a later date. The Nairobi Securities Derivatives Market was established in 2009. This market is still developing in African countries.
The Forex or foreign exchange market allows individuals and businesses to buy, sell, hedge and speculate on the exchange rates between different currencies. The foreign exchange market is the most liquid market in the world. A currency's exchange rate is essentially the price of one currency relative to another currency and is typically determined by the strength or weakness of the underlying economic fundamentals. Frequent exchange rate fluctuations disrupt international trade and cause problems in a country's financial system. A strong exchange rate (appreciated exchange rate) can slow economic growth by making exports more expensive and imports cheaper, whereas a devalued currency causes exporters to earn more and imports more expensive.
Commodity prices actually have a significant impact on the economy. Rapidly rising commodity prices can lead to cost-increasing inflation as they affect consumers' purchasing power. When prices for basic goods such as energy and agricultural products rise, this directly affects the cost of living of individuals and companies and leads to a decline in consumption. Commodity prices also influence a country's trade balance (exports minus imports). When a country exports goods at higher prices, it earns more foreign exchange, which has a positive impact on the balance of payments.
The author Dr. Boni Wanjau is an economist
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