Introduction In economics, typically, the term market means the aggregate of

possible buyers and sellers of a certain good or service and the

transactions between them. The term "market" is sometimes

used for what are more strictly exchanges, organizations that

facilitate the trade in financial securities. Financial market is

the market for sale and purchase of stocks (shares), bonds, bills

of exchange, commodities, foreign currency etc. which works

as liquid assets.

Financial market is of two types-

Capital Market

Money Market

Financial Market

Capital market

Capital markets are those that provide businesses, firms,

governments, and other organizations with securities for long-

term financial growth

Money market

Money markets are markets that provide short-term funding for

banks and other financial organizations. The financial

instruments used in money markets may include deposits and

commercial paper for financial agreements, such as car loans and

mortgages

Capital market vs. Money market: Features Capital market Money market

Definition Capital market is a component of

financial markets where long-term

borrowing takes place.

Money market is a component of the

financial markets where short-term

borrowing takes place.

Maturity Period

 

The capital market deals in the lending

and borrowing of long-term finance

(i.e., for more than one year).

The money market deals in the lending

and borrowing of short-term finance

(i.e., for one year or less).

Credit Instruments

 

The main instruments used in the

capital market are stocks, shares,

debentures, bonds, securities of the

government.

 

The main credit instruments of the

money market are call money,

collateral loans, acceptances, bills of

exchange.

Continued…Features Capital market Money market

Nature of Credit

Instruments

 

The credit instruments dealt with in

the capital market are more

heterogeneous than those in money

market.

The credit instruments dealt with in the

money market are less heterogeneous

than those in money market.

Institutions

 

Important institutions of the capital

market are stock exchanges,

commercial banks and nonbank

institutions, such as insurance

companies, mortgage banks, building

societies, etc.

 

Important institutions operating in the'

money market are central banks,

commercial banks, acceptance houses,

nonbank financial institutions, bill

brokers, etc.

Continued…Features Capital market Money market

Purpose of Loan The capital market meets the long-term

credit needs of the industrialists and

provides fixed capital to buy land,

machinery, etc.

 

The money market, on the other hand,

meets the short-term credit needs of

business; it provides working capital to

the industrialists.

Rate of interest Capital market’s interest and dividend rate

depends on demand and supply of

securities and stock market’s conditions.

Rate of interest in money market is

controlled by central bank of any

country.

Risk

 

The risk is much greater in capital market. The degree of risk is small in the

money market.

Continued…

Features Capital market Money market

Basic Role

 

The basic role of capital market is that

of putting capital to work, preferably

to long-term, secure and productive

employment.

The basic role of money market is

that of liquidity adjustment.

Relation with

Central Bank

 

The capital market feels central bank's

influence, but mainly indirectly and

through the money market

The money market is closely and

directly linked with central bank of

the country.

Market Regulation

 

In the capital market, the institutions

are not much regulated.

 

In the money market, commercial

banks are closely regulated.

A key division within the capital markets

is-

Primary Market

The Primary market refers to the market where new securities are

issued for the purpose of obtaining capital. In this market that

firms sell (float) new stocks and bonds to the public for the first

time

Capital or equity can be raised in primary market

by any of the following four ways-

Public Issue

Rights Issue

Private Placement

Preferential Allotment

Secondary Market

The secondary market refers to the market where securities that

have already been issued are traded. Once a security has been

purchased for the first time by an investor on the primary market,

the same security can be sold to another investor in the secondary

market

The secondary market can be further broken

down into two specialized categories-

Auction market

Dealer market

Primary Market vs. Secondary Market

Primary and Secondary markets refer to markets which assist

corporations obtain capital funding 

The Primary market refers to the market where new securities

are issued by the company that wishes to obtain capital and is

sold directly to the investor, whereas, the secondary market

refers to the market where securities that have already been

issued are traded

Continued…

The main difference is that, in the primary market, the

company is directly involved in the transaction, whereas in the

secondary market, the company has no involvement since the

transactions occur between investors

Differences of primary and secondary in a nutshell- Features Primary market Secondary market

Definition The Primary market refers to the market

where new securities are issued for the

purpose of obtaining capital.

The secondary market refers to the

market where securities that have

already been issued are traded.

Involvement of

corporation

In the primary market, the corporation is

directly involved in the transaction,

Does not directly involve corporation

Type of selling Direct sale to the investors. Sale between two independent parties;

investors and/or financial institution

Offering type May be offered publicly or privately. Sold through dealer or auction markets.

Endnote… Without financial markets, borrowers would have difficulty finding

lenders themselves.

Today most economies around the world are judged by the

performance of their financial markets. The financial markets serve

a vital purpose in the growth and development of a company that

wants to expand.