Distinguish between money market and capital market on the basis of:
(a) Participants
(b) Instruments
(c) Safety and
(d) Expected return
| Basis | Capital Market | Money Market |
| Participants |
The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from public. |
Participation in the money market are institutional participants such as the RBI, banks, financial institutions etc. |
| Instruments | The main instruments traded in the capital market are – equity shares, debentures, bonds, preference shares etc. | The main instruments traded in the money market are short-term debt instruments such as T-bills, trade bills reports, commercial paper and certificates of deposit. |
| Safety | Capital market instruments are riskier both with respect to returns and principal repayment. | The money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to financial soundness of the issuers. |
| Expected return | The investment in capital markets generally yield a higher return for investors than the money markets. The possibility of earnings is higher if the securities are held for a longer duration. | The investment in money market generally yield lesser return for investors than capital market. |
Give the meaning of 'Money Market'.
Money market refers to institutional arrangements, which deals with short-term securities. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day.
‘Financial market plays an important role in the allocation of scarce resources in an economy by performing various functions.’ Explain any three functions of financial market.
Financial markets play an important role in the allocation of scarce resources in an economy by performing the following important functions.
1) Mobilisation of savings and making its best use: A financial market helps to transfer savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use.
2) Facilitating Price Discovery: The forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are investors who supply fund and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
3) Providing liquidity to financial assets: Financial markets facilitate easy sale and purchase of financial assets. Thus they provide liquidity to financial assets, so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
‘Efficient functioning of stock exchange creates a conducive climate for active and growing primary market for new issues as well as for an active and healthy secondary market.’ In the light of this statement state any three functions of a stock exchange.
A stock exchange place where stock brokers and traders can buy and sell stocks ,bonds, and other securities. The important functions of a stock exchange are:
(1) Providing Liquidity and Marketability to Existing Securities: Stock exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, an investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increases their marketability and enhances liquidity.
(2) Pricing of Securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.
(3) Safety of Transactions: Stock exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and if any member is found violating them, his membership is cancelled.
Differentiate between ‘capital-market’ and ‘money-market’ on the following basis:
(i) Participants;
(ii) Instruments;
(iii) Investment outlay;
(iv) Duration and
(v) Liquidity.
The major points of distinction between the two markets are as follows:
|
Basis |
Capital Market |
Money Market |
|
Participants |
The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from public. |
Participation in the money market are institutional participants such as the RBI, banks, financial institutions etc. |
|
Instruments |
The main instruments traded in the capital market are – equity shares, debentures, bonds, preference shares etc. |
The main instruments traded in the money market are short term debt instruments such as T-bills, trade bills reports, commercial paper and certificates of deposit. |
|
Investment outlay |
Investment in the capital market does not necessarily require a huge financial outlay. The value of units of securities is generally low. |
In the money market, transactions entail huge sums of money as the instruments are quite expensive. |
|
Duration |
The capital market deals in medium and long term securities such as equity shares and debentures. |
Money market instruments have a maximum tenure of one year, and may even be issued for a single day.
|
|
Liquidity |
Capital market securities are considered liquid investments but less compared to money market. |
Money market instruments on the other hand, enjoy a higher degree of liquidity. |
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