Financial Market - Meaning, Types, Difference and Role [Indian Financial System Notes BCOM NEP Syllabus]

Every firms, individuals and institutions need finance for its expansion and day to day operating activities. Financial needs may be of two types – short term or long term. Based on these needs, financial markets are divided into two categories:

a) Money market – Market for short term funds

Money market is a place where money and short term financial assets which are close substitutes of money are traded. It mainly deals in cash or near money or liquid assets of short-term nature. It also deals in treasury bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.

According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government."

From the above explanation, we can say that money market is a market for short term funds meant for use for a period of one year or less. The major participants of money market consist of the government, commercial banks, Life insurance companies, Mutual funds, Non-banking finance companies, stock exchange brokers etc.

Features of Money Market: The salient features of money market are as follows: 2020

a) Flow of short-term funds: The money market brings together the lenders who have surplus funds for short-term and the borrowers who are in need of short-term funds.

b) No fixed geographical location: There is no fix geographical location of money market. Different name is given to money market located in different areas.

c) Participants: The major participants of money market consist of the government, commercial banks, Life insurance companies, Mutual funds, Non-banking finance companies, stock exchange brokers etc.

d) Instruments:  It deals in money or instruments which are a close substitute of money such as treasury bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money market etc.

e) Sub-markets or components: Money market consists of many sub-markets such as call money market, collateral loan market, acceptance market, bill market, treasury bills market etc.

f) Reasonable access: Money market provides reasonable access to users of short-term funds to meet their requirements on reasonable terms or rates of interest.

Source of working capital: Money market constitutes a major source of working capital finance for borrowers. 

b) Capital market - Market for long term funds

Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares and equity shares. The capital market can be local, regional, national, or international.

The capital market is classified into two categories (Components), namely,

(i) Primary market or new issue market, and

(ii) Secondary market or stock exchange.

Features of Indian Capital Market                           

a) Dealing in Securities: It deals in long-term marketable securities and non-marketable securities.

b) Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.

c) Investors: It includes both individual investors and institutional investors such as Mutual funds, banks, Insurance companies etc. It also includes foreign institutional investors.

d) Link between savers and investment opportunities: Capital market is a crucial link between saving and investment process. It facilitates flow of long term capital from those who have surplus capital to those who need capital.

e) Intermediaries: It acts through intermediaries which includes bankers, brokers, underwriters etc.

f) Government rules and regulations: The capital market operates freely but under the guidance of government policies. These market functions within the framework of government rules and regulations.