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Financial markets can be described as a means through which individuals and organizations buy and sell pecuniary securities, such as bonds and stocks, and precious metals among other valuable commodities at low transaction charges (Focardi & Fabozzi, 2004, p. 25). Financial markets perform six fundamental functions in the business realm. These include; lending and borrowing where by funds are transferred from one agent to another. They also determine prices since they provide a media through which security values are set. Another function is collection and aggregation of data concerning funds flow and asset values. They also facilitate transfer of risks from investors to fund providers as well as reduce transaction and information expenses. Lastly, they provide asset holders with a chance to liquidate their assets (Focardi & Fabozzi, 2004, p.26). Since financial markets stimulate and regulate the economy, without them there would be less strict governmental guideline and this would lead to numerous ethical issues (Dana & Jeanblanc, 2007, p. 91).
The main difference between capital and money markets is the period of maturity of the securities they trade (Focardi & Fabozzi, 2004, p. 25). Money markets provide transactions in short-term (one year and below) fiscal instruments, commonly issued with high credit rates. Major instruments traded include U.S. Treasury statements, commercial papers and deposit certificates among others (Madura, 2008, p. 5). Capital markets on the other hand provide for business transactions in long-term (more than a year) fiscal instruments, generally issued with low credit rates. Instruments traded here include loans, bonds and corporate equities (Focardi & Fabozzi, 2004, p. 25).
Some of the major benefits that corporations and investors enjoy because of the existence of organized security exchanges include; security exchanges provide constant markets, which result into incessant security prices. Organized security exchanges publish and establish reasonable security prices as determined by demand and supply rather than haggling. Lastly, they help businesses to raise capitals through floating of new securities (Keown, 2004, p. 43).