Financial markets can be defined as a market place where you can purchase and sell assets such as shares, debentures, bonds etc. They allow businesses and investors to create more revenue and grow their operations by raising their funds. Money market and capital market are the two course which you can take for short-term and long-term investments. In order to maintain your wealth and have a steady financial position you can opt between money and capital market for your investments.
Money Market.
The money market can be defined as the market for short-term securities with a maturity period of less than one year. The securities included in money market are commercial paper, certificates of deposits, treasury bills, and commercial bill. This market serves the basic purpose of fulfilling the immediate financial demands in an economy. We can also say that money market meets the liquidity requirements of an economy. The organizations use this market to raise money to meet their short-term monetary requirements. Money market investors find it easier to move their savings into investments, as the products of this market have significant liquidity.
Characteristics of Money Market.
1. Security- The instruments of money market are the most secure and safest instruments in the market, as these are issued by organizations which have a good credit rating and the returns on investments are guaranteed, so essentially there is no chance of loosing the money.
2. Liquidity- The money market contains short-term securities which have the maturity period of less than one year and hence they are highly liquid assets which help the investors to receive steady returns on their investments.
3. Returns- In the money market investment, the investor can predict in advance how much money he will make from the investment, as the market instruments are sold at a discount to their dace value and have a maturity date of less than one year. So in this way the investor can calculate his return on investment and set his financial goals accordingly.
Types of Money Market Instruments.
1. Commercial Paper- The organizations and businesses with good credit ratings, issue theses commercial papers for raising short-term finance to fulfill their short-term commercial needs. Maturity period ranges from 7 to 270 days.
2. Certificates of Deposits- Certificates of deposits are similar to promissory notes as they are accepted by commercial banks. They can be defined as negotiable term deposits issued by individuals, commercial banks, corporations etc. The maturity period of certificates of deposits can last anywhere from three months to one year.
3. Treasury Bills- Treasury Bills are short-term financial instruments with a maturity period of maximum one year. They are issued by the Reserve bank on behalf of the government, to raise finances.
4. Commercial Bills- Commercial bills are also know as Bills of exchange and businesses Bills of exchange to meet their short-term cash needs. The creditor's bill of exchange can be discounted by a broker or a bank. Bills of exchange are very liquid instruments because they may be passed from one person to another.
Capital Markets.
When different organizations and businesses require financing over a long period of time, they enter into the capital market, hence capital market is a market for long-term investments. The instruments of capital markets have a maturity period of more than one year. The participants of capital market deal in securities such as debentures, bonds, stocks, ETFs, and derivatives such as options and futures. Investments in the capital market aid corporations in long-term funding projects. Capital markets have the potential to provide long-term investments but it is a little riskier than the money market.
Characteristics of Capital Markets.
1. Long-term investment- Capital markets provide opportunity to every investor to invest their savings for long-term growth and returns.
2. Security- The capital markets are considered safe and secure as they are regulated by the set of rules of the government, therefore it is a secure trading environment fore the investors.
3. Serve as a channel for savings- Capital markets serve as a channel for investors to invest their savings and promote economic growth.
4. Creation of wealth- The investors are provided with the opportunity to invest in capital market instruments such as stock and bonds, so that investors can use compounding to build their wealth.
Types of Capital Markets.
The two different types of markets are-
1. Primary Market- Primary market can be defined as a new issue market, where organizations issue their fresh stocks through different ways which are initial public offering, offer through prospectus, offer for sale, private placement, and right issue.
2. Secondary Market- This is the market for buying and selling of existing securities and the price of the securities are determined by the force of demand and supply.
Capital Market Instruments.
1. Stocks- Stock can be defined as a share of a company. A shareholder is someone who owns some stock in a corporation. The investors investing in stocks have the right to receive share in the profits of the organization and have the right in decision making of the business.
2. Bonds- Businesses and companies issue bonds for expanding their operations and raising funds. Bonds can be defined as debt securities which are traded on a stock exchange. As bonds are debt instruments the holders of bonds can earn interest. The investors receive the principal amount plus the interest at the end of maturity period.
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