Money market and Capital Market

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What is Money Market?

Money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. Short term refers to a period which is less than one year. Money market instruments are generally financial claims that have low default risk, maturities under one year and high marketability.

Money market is one of the principal components of financial market related to short term buying, selling, lending and borrowing. The trading or dealing in the money market is performed across the table and is carried out at a particular place.

Therefore, the money market value changes with time and place and are heterogeneous. Examples of money market instruments are Treasury bills, commercial papers etc. The assets involved in money market have a high liquid value and can be converted into cash quickly.

Functions of Money Market

The main functions of money market are:

  • Money market fulfils the short-term finance requirements of trade and industries using bills of exchange, commercial papers, etc.

  • Money market helps in the economic growth of a company by making the funds available to different sectors of the society like agriculture, small-scale enterprises, etc.

  • It provides a mechanism through which the monetary policy of the government can be implemented effectively.

  • It keeps equilibrium between demand and supply of short-term money transactions.

  • Money market allows commercial banks to invest their excess reserves in an investment so as to make profit and maintain liquidity of cash at any uncertain demand of account holders. This also helps these banks to become self-sufficient in terms of availability of funds.

What is Capital Market?

Capital market is a market where stocks, shares and bonds are tradeds in the market which is generally a stock exchange. The capital market is a market for financial investments that are direct or indirect claims to capital. It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument.

The capital market comprises the complex of intermediate term funds and long-term funds are pooled and made available to business, government and individuals. It encompasses the process by which securities already outstanding are transferred.

The capital market is highly prone to risks due to the dynamics of the political system, enforcement of government policies, new tax structure, etc. Examples of capital market instruments are equities, insurance instruments, foreign exchange instruments, etc. The capital market helps the investor in accumulating large amount of funds especially when the economy of the country is progressing very well.

Capital market can be broadly categorised as primary market and secondary market. Primary market is the one in which the new securities are issued by organisations for raising long-term funds. These securities will include stocks as well as bonds.

Characteristics of Primary Market

Some of the characteristics of primary market are:

  • New securities are traded in the primary market.

  • New share certificates are issued to investors for shares purchased by them.

  • Primary markets enable organisations to raise funds for their growth and development.

  • They also help in capital formation of the economy.

On the other hand, a secondary market is the one in which the trading of the existed securities takes place in the stock market. These markets basically fulfil the short-term requirements of organisations.

Characteristics of Secondary Market

The characteristics of the secondary market are as follows:

  • It transfers securities from initial purchasers to other buyers and speculators.

  • It needs high liquidity.

  • It deals with high fluctuation in prices of securities.

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