Types of financial market | full explanation

first of all, we discuss what is the financial market, then the financial market is a link between the investor and businesses. the investor is ready to investest his hard-earned money into businesses and businesses also ready to sell their shares to the common public. financial market work as a fund transfer from investors to businesses. the financial market consists of two major aspects for the investors and businesses, we discuss this aspects bellow

  • money market

  • capital market

what is money market?

basically the money market is a platform of the short term finance options. the instrument in the money market works as a short-term investment. the instrument dealt with the market are liquid and can be converted quickly into cash at low transaction cost.

according to reserve bank of India :

" A money market is a center for dealing, mainly of short term character in money assets, it needs the short term requirements of borrowers and provides liquidity or cash to the lenders.it is a place where short term surplus invisible funds at the disposal of a financial institution or an individual are bid by borrowers agents comprising institution and individual and also the government itself"

to learn this topic in-depth read this book

The Financial System in India: Markets, Instruments, Institutions, Services, and regulation

we explain the money market in the following terms,

  • in the money market, short term funds are borrowed and lent

  • no fixed place for carrying out operations

  • dealing may be contacted with or without a broker

  • the financial assets which are dealt in are close substitute for money i.e.the assets can be converted into cash with ease, speed and without any loss.

  • it is not a signal market but a collection of markets for different instruments.

  • the main organization in the market are RBI, state governments, banks, corporates investors, etc.

Example :

  • commercial papers

  • commercial bills

  • certificates of deposits

  • treasury bills

  • government securities

  • money market mutual funds

  • repo rate ( central bank repurchase the government securities)

what is the capital market?

basically it deals in long term financing that is more than 1 year. in the financial market, assets are health with a dealt for an indefinite maturity period and capital market is also known as the stock market or share Bazar in India.

according to G.H peters :

"capital market as being the market or collection of interrelated markets in which potential borrowers are bought into contact with potential lenders."

capital market deals in equity and debt with maturity ranging up to 10 years.

companies enter through IPO from the primary market and then list on exchange to enter in the capital market. and in the capital market, various instrument trades among the market list is in bellow

  • equity share

  • preference shares

  • non-voting equity shares

  • cumulative convertible preference shares

  • company fixed deposits

  • warrants

  • debentures and bond

but in the real known market equity shares more preferable by investors and fund managers because it gives more than any other assets in the market. and others are less preferable for long term investment.

in the capital market, there are two segment

  • primary market

  • secondary market

what is the primary market?

The primary market is also known as the issue market because it consists of bid price only in the market. shares of the companies in the issue market are getting bids from the public as an issue of instruments.companies form IPO to collect money for it;f operation od business from the primary market.

there are 3 ways to raise capital through the primary market:

  • public issue

  • right issue

  • private placement

what is secondary market?

It is the market where shares buy and sell shares with buyers and share. in this market company not directly involved in trading shares. secondary market functionalized the facility of liquidity and marketability of shares. this market contributes to economic growth through the mobilization of funds to the most efficient channel and a secondary market provides an instant valuation of securities dealt in the stock exchange.

Thank you for reading our article.