Financial Markets, Components & Instruments of a Financial Market: Money Market and Capital Market

We might all be aware of the term 'Financial Markets'. In economics, finance and business studies this term 'Financial markets' holds great importance. In this little article, I will try to sum up the core areas related to 'Financial markets'. We will have a look at some 'Instruments of Financial Markets' and we will also study 'Money Market' and 'Capital Market' and will mention some uses and importance of 'Money Market' and 'Capital Market'.


http://one2get2no.files.wordpress.com/2010/01/financial-markets.jpg
http://one2get2no.files.wordpress.com/2010/01/financial-markets.jpg

What is 'Financial Markets'?

We may find many definitions of financial markets, but to understand the concept easily and comfortable, I will sum up the definition of financial markets in the easiest possible way. The definition may be termed as:

"Financial Markets are generally known as a market where financial securities or/and assets are bought and sold by the buyers and sellers respectively."

http://investmentdiv.com/wp-content/uploads/2010/02/money-market-instruments.jpg
http://investmentdiv.com/wp-content/uploads/2010/02/money-market-instruments.jpg

Instruments of Financial Markets:


Financial instruments are those securities/items that are being sold in the financial markets. Some of the common financial instruments used in the financial markets are:

  • Treasury Bills (T-Bills)
  • Commercial Papers
  • Certificate of Deposits
  • Repurchase Agreements
  • Call Loans
  • Shares
  • Debentures
  • Mortgages

Types of Financial Markets:

After having the basic knowledge about the definition of financial markets and financial markets instruments, let's have a look at the 'Types of Financial Markets'.


Financial markets are divided into two major categories:

1. MONEY MARKET

2. CAPITAL MARKET

We can have a detailed look, in each of these components of financial market, as under:

1. MONEY MARKET:

The market for short-term debt instruments maturing in one year or less is known as “Money Market”.

Courtesy: http://www.corbisimages.com/images/67/523CD70B-8EDD-400B-AD6A-1F4D8E7D2239/42-18121816.jpg
Courtesy: http://www.corbisimages.com/images/67/523CD70B-8EDD-400B-AD6A-1F4D8E7D2239/42-18121816.jpg

1.1) Instruments of Money Market:

Following are some commonly used financial instruments used in money market.

  • Commercial Papers
  • Treasury Bills
  • Certificate of Deposit
  • Call Loans
  • Repurchase Agreement (REPO)

1.2) Parallel Money Markets:

Some of the parallel money markets are listed as under:

  •  The inter-bank market which is a source to obtain wholesale loans from one bank to another)
  • The market for certificates of deposit.
  •  The inter-companies deposit market by which short-term loans can be arranged through the market by one company for another)
  • The foreign currencies market which deals in foreign currencies deposited short term
  • Finance house market which facilitates short-term borrowing to finance hire purchase agreements.

1.3) Uses of Money Market:

Some of the most common uses of money market are:

  •  A money market provides the lenders a well organized place for dealings in monetary assets and satisfying the short-term requirements of borrowers as well.
  •  A short-term money market provides a medium for the redistribution of loan able funds among banks.
  •  The money market provides a mean of meeting short-term financing requirements for the government also.
  • Specialized credit institutions also lend a portion of their surplus funds as call-loans.

http://www.sneijers.net/wp-content/uploads/2008/08/stockexchange.jpg
http://www.sneijers.net/wp-content/uploads/2008/08/stockexchange.jpg

Now we will have a look at 'Capital Market'

2. CAPITAL MARKET:

The market for trading long-term instruments (those that mature in more than one year) is known as a “Capital Market”.

Capital markets can further be subdivided into two sections:

(i). Primary Market

(ii). Secondary Market

http://www.prowessentertainment.com/bonds.jpg
http://www.prowessentertainment.com/bonds.jpg

2.1) Instruments of Capital Market:

Some of the most commonly used instruments of capital market are listed below:

  • Shares/Stocks
  • Debentures
  • Bonds
  • Mortgages
  • Treasury Notes

2.2) Uses and Importance of Capital Markets:


  • The existence of an organized capital market is absolutely necessary to encourage and mobilize savings and to introduce profitable avenues of investment so that capital formation can be promoted to country.
  • Businesses often raise their fixed capital from capital market through issue of shares.
  • The government and local authorities also borrow long term finance from capital market.
  • Issuance of bonds and debentures are an integral part of monetary policy of any economy which is carried effectively through capital markets.

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Comments 13 comments

Nan Mynatt profile image

Nan Mynatt 5 years ago from Illinois

Excellent analysis of the markets and investments. I was licensed by the SEC to sell mutual funds for 12 years and resigned when the market was down. Why, because people would not invest, because they were afraid, you have to plan on leaving your money in for at least 10 years before it should return 3'x or at least 2 1/2 your initial investment.


Neon_Letters profile image

Neon_Letters 5 years ago

To raise the economy people need to begin to trust in financial markets and invest.


Hunbbel Meer profile image

Hunbbel Meer 5 years ago from Karachi, Pakistan. Author

@ Nan Maynatt. Oh that's great. And yes you are right, people ARE afraid, these financial things are more often volatile. The recent global financial crisis increased that possibility even further.

And thanx for the liking :)


Hunbbel Meer profile image

Hunbbel Meer 5 years ago from Karachi, Pakistan. Author

@ Neon ... Yes you are right, trust in the financial sector is one of the most important ingredient for any economic development.


bloggering profile image

bloggering 5 years ago from Southern California

Very informative and enjoyable hub!


George Huss profile image

George Huss 5 years ago from United States

Well Done. Good or bad or right or wrong, free flow of capital is what improves the standard of living for all. When the tide rises in a marina, all boats rise.


Hunbbel Meer profile image

Hunbbel Meer 5 years ago from Karachi, Pakistan. Author

@bloggering ... Thank you. M glad that you found it interesting and useful :)


Hunbbel Meer profile image

Hunbbel Meer 5 years ago from Karachi, Pakistan. Author

@George Huss ...

Yes you are absolutely right. This is the basic ingredient without any doubt.

By the way, I like your line "When the tide rises in a marine, all boats rise"

Simple yet meaningful :)


sophie_allen profile image

sophie_allen 5 years ago from Washington D.C. USA 20002

This is a good read. Yes we need to trust financial institutions and markets because they are a tool in increasing economic efficiency and enhance living standards. Buyers and sellers, savers and borrowers are all benefited directly and indirectly. People just need to know and fully understand how financial market works. Thanks for sharing this.


i wan to know the most volatile part of the money market... 4 years ago

i want to know the most volatile part of the money market...


tsongo moses 3 years ago

very interesting


Navjot 2 years ago

Excellent as well as easy explanation about financial markets


mrunali 14 months ago

Please send mi .composition financial market

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