The Financial Market is defined as a market where people lend and borrow money to fulfill various needs. The financial markets act as a link between the investors or lenders and borrowers or lenders. Financial Markets acts as a place where people can get short-term funds and long-term funds for working capital and fixed capital requirements.
Financial Market is composed of financial institutions, individual investors, finance companies, private chit fund companies, etc for trading various financial instruments and financial securities to facilitate the flow of money and effective functioning of the financial system in the country.
TYPES OF FINANCIAL MARKETS
The financial market of every country consists of two important segments, they are as follows:
- Money Market
- Capital Market
Money Market is the market where short-term funds are provided to fulfill the needs of the investors and borrowers. It is the important segment in the financial system which deals with close substitutes of money i.e more liquid and can be converted into money easily. Money Market deals with short-term funds up to 1 year.
The money market is the main tool through which the central bank fixes interest rates in an economy. It is mainly a market for short-term debt requirements which have the low risk factor and high liquidity to convert into money. Most of the money market transactions take place on telephone, fax or Internet only.
Money Market acts as a market for credit instruments such as promissory notes, bills of exchange, commercial paper, treasury bills, call money etc. The Reserve Bank of India (RBI) is known as the leader of the money market in India. The Money Market is usually dominated by the banks and financial institutions present in the country.
The Indian money market is divided into two segments namely organized sector which is regulated by RBI and unorganized sector. The unorganized sector comprises of unregulated non-banking financial institutions, individual money lenders, etc.
Capital Market is the market where long-term and medium-term funds are provided to fulfill the needs of the capital requirements of the business enterprises. The financial assets which are traded in Capital Market usually have long or no maturity period.
Capital market normally acts as a market for marketing and trading securities of the organizations to raise the capital from the public issue. The securities traded in the capital market are Equity shares, debentures, bonds, and preference shares etc. The capital market is usually dominated by stockbrokers, mutual funds, financial institutions, underwriters, and individual investors.
The market in which securities are traded is called as Securities Market. It is divided into PRIMARY MARKET which deals with the fresh issue of securities and the other one is SECONDARY MARKET which deals with the sale of existing securities which is known as ‘Stock Market’ or ‘Stock Exchange’.
MONEY MARKETCAPITAL MARKETMoney Market is the place where lending and borrowing of short-term funds takes place.Capital Market is the place where lending and borrowing of medium-term and long-term funds take place. Deals WithMoney Market deals with promissory notes, bills of exchange, commercial paper, treasury bills, call money etc.Capital Market deals with Equity shares, debentures, bonds, and preference shares etc. ContainsThe Money Market contains banks, financial institutions, financial companies, chit funds, etc.The Capital Market contains stockbrokers, mutual funds, underwriters and individual investors, etc. Maturity PeriodThe instruments which are traded in money market normally have a maximum time frame of 1 year or less.The instruments which are traded in capital market have a longer time frame or no maturity period. Risk FactorThe risk factor in trading with money market instruments is very low because of shorter duration and can be easily converted into cash.The risk factor in trading with capital market instruments is high because of longer duration and cannot be easily converted into cash. Divided IntoThe Money Market is divided into two segments called Organised and Un-Organised sector.The capital Market is divided into two segments called Primary Market and Secondary Market. ActivitiesThe activities carried on in Money Market is regulated by Reserve Bank Of India (RBI).The activities carried on in Capital Market is regulated by Securities Exchange Board of India (SEBI). ReturnsThe expected returns from Money Market instruments is less.The returns expected are very high because of higher durations.
The main function of the Finacial Market is to allow the funds to move from investors to borrowers to use the money for productive investment opportunities. The efficient working of the Financial Markets is the necessity for every country to develop economically. Both Money Markets and Capital Markets provides facilities for interaction between investors and borrowers and also ensures safety and security safety and security of the parties involved.