Explainer: What Are Financial Markets?

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BY BANKERS REPORTER

A Financial Market is a market where securities are traded (sold and bought). Securities include: stocks, bonds and also currency trading. According to this, financial markets are divided into stock markets, bond markets and currency markets.

Stocks are ownership instruments to a part of the issuer’s capital, while bonds are considered debt instruments on the entity that issued them.

When you purchase a stock, you become a participant or a shareholder in the company. On the other hand, if you purchase a bond, you become a creditor to this company.

Savers purchase stocks for two reasons: first, to obtain part of the profits generated by the company. This is known as dividends.

Second, the prices of these stocks may go up due to higher demand as a result of the company’s growth and the increase in its earnings.

Thus, the value of stocks owned by the investor increases. This is known as the capital gain. Stocks are bought and sold on the market in a regulated and legal manner so dealers do not lose their rights.

In Uganda, this is ensured through the Uganda Securities Exchange and Capital Markets Authority. Usually, all these operations are made through financial brokerage firms that are authorized by a market regulator, which is the CMA in Uganda.

There are various types of stocks which are traded on the market. There are stocks that give their holder the right to attend the general assembly of the company and express his opinion on the way the company is managed.

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There are also bonus stocks: they are free shares granted to the owners of ordinary stocks in order to increase what they own in the company and to increase the company’s capital as well.

As for preferred stocks, they give their owner the right and priority to obtain his rights from the company. There are two main types of stock markets: the primary market and the secondary market.


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