The topic of discussion of this post is Indian Financial Market. We will see what money market and capital market are. We shall also look into the details of sub-topics like call money, treasury bill, shares, debentures, put/call options etc. We hope this post to throw light on the various aspects of capital market, particularly related with shares and stock market. Clear IAS™ plan to cover this topic as an article series, breaking the details into 2-3 parts. Let’s first have a quick overview.
Fund Raising By Business Units
Business units have to raise short-term as well as long-term funds to meet their working and fixed capital requirements from time to time. From where would they get funds from? Ans : From investors or lenders. Surplus money flows from the investors or lenders to the businessmen for the purpose of production or sale of goods and services. So, we find two different groups, one who invest money or lend money and the others, who borrow or use the money.
Main functions of financial market
Let us now see the main functions of financial market.
(a) It provides facilities for interaction between the investors and the borrowers.
(b) It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets.
(c) It provides security to dealings in financial assets.
(d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
(e) It ensures low cost of transactions and information.
Classification of Financial Market
A financial market consists of two major segments: (a) Money Market; and (b) Capital Market. While the money market deals in short-term credit, the capital market handles the medium term and long-term credit.
Financial Market Classification
- Money Market.
- Call Money.
- Treasury Bill.
- Commercial Paper.
- Certificate of Deposit.
- Trade bill.
- Capital Market.
- Securities Market
- Primary Market : IPOs, Book Building, Private Placements.
- Secondary Market : Equity Market, Debt Market, Commodity Market, Futures and Options Market. (Secondary Market can be basically divided into two – spot market and forward market. Forward market has two divisions – futures and options/derivatives. Again, there are two types of options – put option and call option.)
- Non-Securities Market
- Mutual Funds.
- Fixed Deposits, Savings Deposits, Post Office savings.
- Securities Market
The money market is a market for short-term funds, which deals in financial assets whose period of maturity is upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organisations and the Government to borrow the funds to meet their short-term requirement.
The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialised financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.
Money Market and Capital Market : A comparison
|Point of Distinction||Money Market||Capital Market|
|1. Time period / Term||Deals in short-term funds.||Long term funds.|
|2. Instrument Dealt In||Deals in securities like treasury bills, commercial paper, bills of exchange, certificate of deposits etc.||Deals in securities like
|3. Participants||Commercial banks,
NBFS, chit funds etc.
|4. Regulatory body||RBI||SEBI|
References : NOS and CBSE.