Financial Markets are platforms where buyers and sellers trade financial assets like stocks, bonds, and currencies. Think of them as organized marketplaces, like a sabzi mandi or a supermarket, but for financial products instead of vegetables. Their primary role is to channel savings and investments between suppliers of capital and those who are in need of capital.
Types of Financial Markets
Financial markets are broadly divided into two main categories based on the maturity of the financial claims being traded.
1. Money Market (Short-Term Market)
The Money Market is the market for borrowing and lending for a short period, typically up to one year. It deals with highly liquid, short-term financial instruments.
- Main Purpose: To meet the temporary cash and liquidity needs of banks, financial institutions, and large corporations.
- Key Instruments:
- Treasury Bills (T-Bills): Short-term debt instruments issued by the Government of India.
- Commercial Paper (CP): An unsecured promissory note issued by large corporations to raise short-term funds.
- Certificate of Deposit (CD): A time deposit issued by banks and financial institutions.
- Call Money: Very short-term borrowing and lending between banks, usually for one day, to manage their cash reserves.
2. Capital Market (Long-Term Market)
The Capital Market is the market for raising long-term funds, with a maturity of more than one year. It is the market for long-term investments.
The Capital Market is further divided into two segments:
a. Primary Market
This is where new securities are issued for the first time. When a company wants to raise funds from the public, it issues shares or debentures in the primary market.
- Also known as: The New Issues Market.
- Example: An Initial Public Offering (IPO) is a classic example of a primary market transaction. When a company like Zomato or LIC first sold its shares to the public, it was done in the primary market.
b. Secondary Market (Stock Market)
This is where existing, previously issued securities are traded between investors. The company is not directly involved in these transactions.
- Also known as: The Stock Market or Stock Exchange.
- Purpose: It provides liquidity to investors, allowing them to easily buy and sell securities.
- Example: When you buy or sell shares of Reliance or TCS through a stockbroker, you are trading in the secondary market. The main stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Summary: Money Market vs. Capital Market
| Feature | Money Market | Capital Market |
| Time Horizon | Short-Term (up to 1 year) | Long-Term (> 1 year) |
| Purpose | Managing Liquidity | Raising Long-Term Capital |
| Instruments | T-Bills, Commercial Paper, CDs | Shares, Bonds, Debentures |
| Risk | Lower Risk | Higher Risk |
| Main Players | RBI, Banks, Large Corporations | Stock Exchanges, FIIs, Retail Investors |