A financial market is a market in whichpeople and entities can trade financialsecurities, commodities, and other fungibleitems of value at low transaction costs and atprices that reflect supply and demand. Securities include stocks and bonds, andcommodities include precious metals oragricultural goods
The raising of capital in the capital markets The transfer of risk (in the derivativesmarkets) Price discovery Global transactions with integration offinancial markets The transfer of liquidity (in the moneymarkets) International trade (in the currency markets)
Capital markets which consist of: Stock markets, which provide financing throughthe issuance of shares or common stock, andenable the subsequent trading thereof. Bond markets, which provide financing throughthe issuance of bonds, and enable thesubsequent trading thereof. Commodity markets: which facilitate thetrading of commodities. Money markets: which provide short termdebt financing and investment.
Derivatives markets: which provideinstruments for the management of financialrisk. Futures markets: which provide standardizedforward contracts for trading products atsome future date; see also forward market. Insurance markets: which facilitate theredistribution of various risks. Foreign exchange markets: which facilitatethe trading of foreign exchange.
The capital markets may also be divided intoprimary markets and secondary markets. Newly formed (issued) securities are boughtor sold in primary markets, such as duringinitial public offerings. Secondary markets allow investors to buy andsell existing securities. The transactions in primary markets existbetween issuers and investors, while insecondary market transactions exist amonginvestors.
As money became a commodity, the moneymarket became a component of the financialmarkets for assets involved in short-termborrowing, lending, buying and selling withoriginal maturities of one year or less. Trading in the money markets is done overthe counter, is wholesale.
transfer of large sums of money transfer from parties with surplus funds toparties with a deficit allow governments to raise funds help to implement monetary policy determine short-term interest rates
Certificate of deposit - Time deposit,commonly offered to consumers by banks,thrift institutions, and credit unions. Commercial paper - short term usansepromissory notes issued by company atdiscount to face value and redeemed at facevalue. Treasury bills - Short-term debt obligations ofa national government that are issued tomature in three to twelve months.
1. Maturity Period:The money market deals in the lending and borrowing ofshort-term finance (i.e., for one year or less), while thecapital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).2. Credit Instruments:The main credit instruments of the money market arecall money, collateral loans, acceptances, bills ofexchange. On the other hand, the main instruments usedin the capital market are stocks, shares, debentures,bonds, securities of the government.3. Nature of Credit Instruments:The credit instruments dealt with in the capital marketare more heterogeneous than those in money market.Some homogeneity of credit instruments is needed for theoperation of financial markets. Too much diversity createsproblems for the investors.
4. Institutions:Important institutions operating in the moneymarket are central banks, commercial banks,acceptance houses, nonbank financial institutions,bill brokers, etc. Important institutions of the capitalmarket are stock exchanges, commercial banks andnonbank institutions, such as insurance companies,mortgage banks, building societies, etc.5. Purpose of Loan:The money market meets the short-term creditneeds of business; it provides working capital to theindustrialists. The capital market, on the other hand,caters the long-term credit needs of the industrialistsand provides fixed capital to buy land, machinery,etc.
6. Risk:The degree of risk is small in the money market. Therisk is much greater in capital market. The maturityof one year or less gives little time for a default tooccur, so the risk is minimised. Risk varies both indegree and nature throughout the capital market.7. Basic Role:The basic role of money market is that of liquidityadjustment. The basic role of capital market is thatof putting capital to work, preferably to long-term,secure and productive employment.8. Relation with Central Bank:The money market is closely and directly linked withcentral bank of the country. The capital market feelscentral banks influence, but mainly indirectly andthrough the money market