FINANCIAL MARKET

GROUP 2

A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand.

Securities include stocks and bonds, and commodities include precious metals or agricultural goods

FINANCIAL MARKETS FACILITATE The raising of capital in the capital

markets The transfer of risk (in the derivatives

markets) Price discovery Global transactions with integration of

financial markets The transfer of liquidity (in the money

markets) International trade (in the currency

markets)

TYPES OF FINANCIAL MARKETS Capital markets which consist of:

Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

Commodity markets: which facilitate the trading of commodities.

Money markets: which provide short term debt financing and investment.

Derivatives markets: which provide instruments for the management of financial risk.

Futures markets: which provide standardized forward contracts for trading products at some future date; see also forward market.

Insurance markets: which facilitate the redistribution of various risks.

Foreign exchange markets: which facilitate the trading of foreign exchange.

CAPITAL MARKET The capital markets may also be divided

into primary markets and secondary markets.

Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings.

Secondary markets allow investors to buy and sell existing securities.

The transactions in primary markets exist between issuers and investors, while in secondary market transactions exist among investors.

MONEY MARKET As money became a commodity, the

money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less.

Trading in the money markets is done over the counter, is wholesale.

FUNCTIONS OF THE MONEY MARKET

transfer of large sums of money transfer from parties with surplus funds

to parties with a deficit allow governments to raise funds help to implement monetary policy determine short-term interest rates

COMMON MONEY MARKET INSTRUMENTS

Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions.

Commercial paper - short term usanse promissory notes issued by company at discount to face value and redeemed at face value.

Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months.

DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET1. Maturity Period: The money market deals in the lending and borrowing of

short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).

2. Credit Instruments: The main credit instruments of the money market are call

money, collateral loans, acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government.

3. Nature of Credit Instruments: The credit instruments dealt with in the capital market are

more heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors.

4. Institutions: Important institutions operating in the' money

market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc.

5. Purpose of Loan: The money market meets the short-term credit

needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc.

6. Risk: The degree of risk is small in the money market. The

risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market.

7. Basic Role: The basic role of money market is that of liquidity

adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment.

8. Relation with Central Bank: The money market is closely and directly linked with

central bank of the country. The capital market feels central bank's influence, but mainly indirectly and through the money market

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