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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'.
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."
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
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”.
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.
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
2.1) Instruments of Capital Market:
Some of the most commonly used instruments of capital market are listed below:
- 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.