Financial markets have always been responsible for governing the economy of the country. Different indices and tangents govern these markets. They are responsible for monitoring the currency as a whole.
All the buyers and sellers come on the platform and deal in the sale, purchase, and exchange of securities and financial assets. It helps to boost the liquidity and trade of a country and improve its performance on a global basis.
There are two types of versions of the financial markets. One is referred to as the money market, while the other is the capital market.
Both of these markets function together to channel the funds of the economy more productively. Let us explore the functioning of these markets in a better way:
What Is The Money Market?
These money markets are the platforms for dealing in financial securities and assets with a maturity period of fewer than twelve months. Banks, financial institutions, dealers, and brokers are the main participants in this market. They are very liquid and volatile. The money market helps to meet the short-term financial needs of the economy.
Money markets deal in foreign securities. These are commercial papers, call money, certificate deposit, and forward agreements. These markets depend on a large scale of money and consume a high degree of investments. Money markets are sometimes speculative and hence help to earn short-term profits and gains.
Types Of Money Markets
Money markets have taken the shape of different forms and types. These markets are genuinely helpful in meeting every short-term financial requirement of every institution. The different types of money markets have been given in the following way:
- Treasury bills
This is one of the most important components of the money market. The Reserve Bank of India issues this, and the government monitors these notes’ exchange directly.
- Mutual Funds
These are the collective funds that are owned by different vehicles. These funds offer liquidity and try to monitor the community as a whole. They are very safe in terms of offering a guaranteed return.
- Rate Swaps
The experts sign these instruments and agree to exchange a rate of interest with each other.
- Call money
This money is paid within 15 days. Big corporate houses use it, and these institutions satisfy their demand from the institution.
What Is The Capital Market?
These markets are referred to as the financial markets wherein securities with a maturity period of more than 12 months are traded.
These securities are either issued by the government or by the company. They help to channel the funds over a longer period of time. This is a category of long-term investment. It is a very risky kind of investment.
This market helps to establish a link between borrowers and lenders. The capital markets deal with intermediaries and agents.
These markets consist of indirect settlement of the trade. Government rules and regulations govern these transactions, and any settlement beyond that will be violative of the rules established by the government.
Types Of Capital Markets
These capital markets are of two types. These markets are distinguished based on the type of issue the securities are usually subjected to. The most prominent types of capital markets have been given in the following way:
- Primary market
This is the type of capital market wherein the securities are issued for the first time. They comprise the new issue of the securities such as shares, debentures, and bonds.
- Secondary market
This is the market wherein the already issued securities are traded between the buyers and the sellers. The exchange takes place between natural and legal persons according to the terms of the issue.
Difference Between The Money Market And The Capital Market
The list of the differences between the two most prominent categories of markets has been given in the following way:
Nature of the securities offered
Capital markets deal in securities such as shares, stocks, bonds, and debentures, while on the other hand, the money market deals in interest swaps, commercial papers, and certificates of deposit.
The maturity period of securities
The capital market deals in securities which are long-term. They have a maturity period that is more than 12 months.
Some of the securities are eligible for redemption after a decade. These capital markets help to meet the long-term fund requirements of the institutions.
On the other hand, the money market comprises securities with a maturity period of 12 months or less than 12 months.
These funds are eligible to be redeemed within days and hence try to meet the short-term financial needs of the institutions.
Rate of interest
The money market instruments are offered at a high rate of interest. Since they are offered for a short time, they have their own value.
While on the other hand, capital market instruments are offered at a low-interest rate. These funds are utilized for a long period of time.
Government is also an active participant in the money market. The presence of the government helps to control the possibility of speculations.
The capital markets are much more stable and less volatile. The government may or may not be a participant in the industry.
The money market is very liquid. This liquidity is promoted at the instance of the easy conversion into cash within a very less period of time.
The capital markets are liquid too. But they take time to get converted into cash as compared to the money market instruments.
This differentiation is helpful in order to understand the functioning of the markets in the financial setup. These markets are useful in order to gain access to funds and complete projects on time.
These markets help to satisfy the potential of the industries. It helps to monitor the demand and supply and accordingly determine price potential. They are considered to be the pillars of the financial markets in the long run.