A WALK THROUGH THE FINANCIAL MARKETS

A WALK THROUGH THE FINANCIAL MARKETSsome amount of loss due to possible changes in
A host of people fail in investment because of ainterest rates.
lack of understanding of the financial markets.It is advisable for investors considering long-term
Knowing how the markets work and the kind ofsavings (between 20 and 30 years) to put their
instruments available is a prerequisite for triumphmoney in shares through Pension Funds and
in investment, just as knowledge of an alphabet isInsurance Policies. Those interested in earning
needed for excellence in a language. The UKfixed interests on their investments can consider
financial market can be split into two: the Moneygilts, which are relatively safe instruments by
Market and the Stock Exchange Market.which the government usually borrows to help
The Money Market is dominated by the highpay off its deficits. There are short gilts, with a
street banks and Building Societies. It deals mainlymaturity up to 5 years; medium gilts with a
in short-term loans (normally between 3 to 6maturity between 5 and 15 years, and long gilts
months). The banks and Building Societies servewith a maturity of 15 years and above. Undated
as intermediaries to funnel aggregates of depositsgilts are those without a redemption date; the
from individuals (who have excess money tointerest payment goes on non-stop, without a
save) to companies who want to borrow extraredemption of the principal invested. Index-linked
funds to support their operations.gilts have their interest payments and redemption
Conversely, the Stock Exchange Market has toamounts based on the level of inflation.
do with securities that are negotiable - can beBonds are another class of interest earning
bought and sold before the redemption time. Theinstruments that are traded on the Stock
Stock Exchange Market can be essentially dividedExchange Market. They are issued by companies
into the Primary Market and the Secondaryin order to raise extra loans to top up loans that
Market. The Primary Market has to do with newtheir level of credibility could help raise from the
issues of shares, gilts and bonds, whereas themoney market - the banks and so on. They have
Secondary Market is involved in the buying andredemption dates and pay interest greater than
the selling of second-hand shares, gilts and bonds.that paid on gilts, because investing in such bonds
In fact, a greater majority of the transactionshave a much higher default risk than investing in
that occur on the Stock Exchange Market relategovernment gilts. In the worst case scenario, the
to the Secondary Market. Arguably, thegovernment can print money to pay off principal
Secondary Market is the linchpin of the Primaryand interest on the issued gilts.
Market. This is because the main reason whyWhether you find yourself dealing in the Money
investors buy shares and bonds in the first place,Market or the Stock Exchange Market, the rule of
is because they can sell it on the Secondarythumb is to exercise great caution and to shop
Market, whenever they want to. It must,around as much as possible. Stock prices change
however, be noted that a sale of a gilt or bondvery fast and timing, as well as awareness are of
prior to its redemption is most likely to result ingreat essence.