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Money Market and Capital Market Notes

Financial Market

Financial market is the market that facilitates transfer of funds between investors/ lenders and borrowers/ users. Financial market may be defined as ‘a transmission mechanism between investors (or lenders) and the borrowers (or users) through which transfer of funds is facilitated’. It consists of individual investors, financial institutions and other intermediaries who are linked by a formal trading rules and communication network for trading the various financial assets and credit instruments. It deals in financial instruments (like bills of exchange, shares, debentures, bonds, etc).

Main functions of financial market

Let us now see the main functions of financial market.
(a) It provides facilities for interaction between the investors and the borrowers.
(b) It provides pricing information resulting from the interaction between buyers and sellers in the market when they trade the financial assets.
(c) It provides security to dealings in financial assets.
(d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
(e) It ensures low cost of transactions and information.

Also read:  Bitcoin: Understanding the Basics of Digital Currencies

Classification of Financial Market

A financial market consists of two major segments: (a) Money Market; and (b) Capital Market. While the money market deals in short-term credit, the capital market handles the medium term and long-term credit.

Financial Market Classification

    1. Money Market.
      1. Call Money.
      2. Treasury Bill.
      3. Commercial Paper.
      4. Certificate of Deposit.
      5. Trade bill.
    2. Capital Market.
      1. Securities Market
        1. Primary Market : IPOs, Book Building, Private Placements.
        2. Secondary Market : Equity Market, Debt Market, Commodity Market, Futures and Options Market. (Secondary Market can be basically divided into two – spot market and forward market. Forward market has two divisions – futures and options/derivatives. Again, there are two types of options – put option and call option.)
      2. Non-Securities Market
        1. Mutual Funds.
        2. Fixed Deposits, Savings Deposits, Post Office savings.
        3. Insurance.

Money Market

It is one part of financial market where instruments like securities ,bonds having short term maturities usually less than one year are traded  is know as Money market .Organization or Financial institutions having short term money requirement less than one year to meet immediate needs like buying inventories, raw material ,paying loans come to Money Market. It involves lending and borrowing of short term funds. Money market instruments like treasury bills, certificate of deposit and bills of exchange are traded their having maturity less than one year .Investment in money market is safe but it gives low rate of return.

Money Market is regulated by R.B.I in India  and instrument having maturity less than one year usually traded in money markets


Major Players in Money Market:-

  1. RBI
  2. Central Government
  3. State Governments
  4. Banks
  5. Financial Institutions
  6. Micro Finance Institutions
  7. Foreign Institutional Investors (FII)
  8. Mutual Funds

Money Market Instruments

  1. Treasury Bills
  2. Commercial Papers
  3. Certificate of Deposit
  4. Bankers Acceptance
  5. Repurchase Agreement

1. Treasury Bills

Treasury Bills are also know as T-Bills. This is one of safest instrument to invest .T-bills are issued by RBI  backed by government security. RBI issue treasury bills on the behalf of central government to meet the short term liquidity needs of central government bills are issued at a discount to face value, on maturity face value is paid to holder.

At present , the Government of India issues three types of treasury bills through auctions, for 91-day, 182-day and 364-day. Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000.

Treasury bills are also issued under the Market Stabilization Scheme (MSS).In this if RBI want to absorb excess liquidity it can issue T-bills .

2. Commercial Papers (CP)

Commercial papers are issue by private organizations or financial institutions having strong credit rating to meet short term liquidity requirements. These are unsecured instruments as these are not backed by any security. The return on commercial papers is usually higher than T-bills. Different rating agencies ,rate the commercial paper before issue by any organization .If commercial paper carrying good rating means it is safe to invest and carrying lower risk of default .

All corporate are not eligible to issue CP, only who met certain defined criteria by RBI are eligible to issue CP.

CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue and can be issued not less than 5 lakhs and multiples thereafter.

3. Certificate Of Deposit

Certificate of Deposit (CD) is a money market instrument. CDs can be issued by  scheduled commercial banks and  select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources. Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter. The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. CDs may be issued at a discount on face value.

In this a person invest his money  in COD  and after the end of maturity period he receives money along with interest.

4. Bankers Acceptance

Bankers Acceptance is also a money market instrument to meet short term liquidity requirement .In this company provides bank guarantee to seller to pay amount of good purchased at agreed future date . In case buyer failed to pay on agreed date , seller can invoke bank guarantee . It is usually used to finance export and import.

5. Repurchase Agreement

Repurchase agreement is also know as Repo .It is money market instrument .In this one party sell his asset usually government securities  to other party and agreed to buy this asset on future agreed date . The seller pays an interest rate, called the repo rate, when buying back the securities. This is like a short term loan given by buyer of security to seller of security to meet immediate financial needs.

Major Players in Money Market:-


2.Central and State Government

3.Financial Institutions like L.I.C.

4.Financial intermediaries like stock brokers


6.Corporate houses

7.Insurance companies

Capital Market

 Capital market is also very important part of Indian financial system .This segment of financial market meant to meet long term financial needs usually more than one year or more .Companies like manufacturing , infrastructure power generation and governments which need funds for longer duration period  raise money from capital market. Individuals and financial institutions who have surplus fund and want to earn higher rate of interest usually invest in capital market .

S.E.B.I. regulate the capital market in India .It set the transparent mechanism rules and regulations for investors and borrowers .It task is to protect the interest of investors and promote the growth of capital market.

 Capital market can be primary market and secondary market . In primary market new securities are issued where as in secondary market already issue securities are traded.

Capital market  is divided into two



Capital Market Instruments

  2. Debentures
  3. Bonds


Equity market generally know as stock .In this company want to raise money issue shares  in share market like B.S.E.or individual or financial institutions who want to invest their surplus money

Shares can be issued in two ways:

If company issuing share for first time that it is know as I.P.O.(Initial Public Offering ).IPO  of any company issued in primary market and if company issuing shares for second or third time than it is know as FPO(Follow on Public Offering ) and trading of already issued shares take place in secondary market.

Share gives ownership right to individuals who subscribe to it ,in this way company has to dilute his ownership right Same way public sector undertakings dilute up to 49 percent of their ownership and keep remaining 51 percent with them so that they have majority control.

A person earns from shares is company make profit which is distributed among share holders  know as dividend and if company make loss value of share also falls so shares are high risk instruments

Bond or Debt

Bond market is also know as Debt market. A debt instrument is used by government or organization to generate funds for longer duration. The relation between person who invest in debt instrument is of lender and borrower .This gives no ownership right .A person receives fixed rate of interest on debt instrument.

If any company or organization want to raise money for long term purpose without diluting his ownership that it is know as Debentures. These are backed by security so there is no risk involves but return on these instrument is low as compared to shares .Company pay fixed rate of interest on debentures.

If government want to generate funds to meet long term needs like infrastructure it issue bonds know as sovereign bonds which are backed by government security so there is no risk

Money Market and Capital Market : A comparison

Point of Distinction Money Market Capital Market
1. Time period / Term Deals in short-term funds. Long term funds.
2. Instrument Dealt In Deals in securities like treasury bills, commercial paper, bills of exchange, certificate of deposits etc. Deals in securities like
shares, debentures,
bonds and
government securities.
3. Participants Commercial banks,
NBFS, chit funds etc.
Stock brokers,
under writers,
mutual funds,
individual investors,
financial institutions
4. Regulatory body RBI SEBI



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