Financial Market
- A financial market serves as a platform that connects buyers and sellers for the trading of financial assets, such as stocks, bonds, derivatives, and currencies. Broadly, financial markets are classified into two types:
Capital Market
- The capital market facilitates the buying and selling of equity and debt securities, typically involving medium- and long-term instruments with durations exceeding one year. This market is further divided into two categories:
1. Primary Market
- This segment is where securities are created and issued for the first time. Companies raise funds by issuing new shares or bonds in this market, such as through an Initial Public Offering (IPO).
- Transactions occur directly between the issuer (company) and the investor. For example, when a company issues bonds for the first time to lakhs of investors, the transaction takes place in the primary market.
2. Secondary Market
- Once securities are issued in the primary market, they are traded in the secondary market. Here, investors exchange already issued securities among themselves.
- The issuer (company) is not involved in these transactions. A key example is the Bombay Stock Exchange, where securities are traded after issuance.
Money Market
- The money market is a segment of the financial market dealing with short-term financial instruments that exhibit high liquidity. The instruments traded in this market generally have maturities of less than one year and are primarily debt instruments.
- Some of the key instruments include:
- Call/Notice Money
- Treasury Bills
- Commercial Paper
- Cash Management Bills
- Certificates of Deposits
- Collateralized Borrowing and Lending Obligations (CBLO)
- The major players in the money market are financial institutions, commercial banks, central banks, and large corporations. Transactions in this market can also be classified into primary and secondary categories. Money markets are considered less risky compared to capital markets.
- Call/Notice Money:
- In the money market, Call Money refers to transactions where funds are borrowed and lent on an overnight basis under notice Money.
- It involves borrowing and lending funds for a period ranging from 2 to 14 days.
- It comprises unsecured instruments.
- Primary Dealers, both commercial and cooperative banks, insurance companies and certain mutual funds are its participants.
- Certificate of Deposits (CD):
- CDs are unsecured, negotiable/tradable money market instruments.
- Issued primarily by Scheduled Commercial Banks.
- Maturity period can extend up to one year against deposited funds.
- Commercial Paper (CP):
- CPs are unsecured money market instruments issued as promissory notes.
- The maturity ranges from seven days to one year.
- Issued by NBCs, development financial institutions (like NABARD, SIDBI), cooperative societies, Government entities (PSUs), and other companies to raise money in the money market.
Securities Market
- Securities are financial instruments that represent ownership (in the case of equities), a creditor relationship (in the case of bonds or debt securities), or rights to ownership (in the case of options). These instruments are crucial for raising capital in the financial markets and can be broadly classified into two types: equity and debt securities.