money market vs capital market

7/23/2019 Money Market vs Capital Market

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University of Mumbai

2013-2014

A Project Report on

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Money market is a market for short term loans and financial assets. It is a

market for lending and borrowing of short term funds. The Money market

refers to an activity rather than a place. This market supplies funds for

financing current business operations, working capital requirements of

industries and short term requirements of government

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'AP($A) MAR#!$&

A market in which individuals and institutions trade financial securities.

Organiations!institutions in the public and private sectors also often sell

securities on the capital markets in order to raise funds. Thus, this type of

market is composed of both the primary and secondary markets.

"O#"$%T O& MO#$' MA()$T A#* "A%ITA+ MA()$T

The financial system is an important element of an economy. The financial

resources are e-changed through the financial system. The financial

market is the heart of the financial system. The financial market refers to a

place or mechanism through which financial instruments are traded.

According to .). "ooper and other &inancial markets are the markets in

which financial instruments are traded.

imilarly, according to *udley /. +uckett, &inancial market is to be

understood as any e-change of a variety of financial instruments.

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The financial market is said to the 0brain1 of entire economic system. The

savings are channelled to investments through financial market. The

financial instruments like stock, bond, insurance policy, government

securities and debentures are traded in the financial market.

The two important types of financial market are the money market and

capital market. "oncepts of these two types of financial market have been

presented below.

"O#"$%T O& MO#$' MA()$T

In economics, market does not mean a particular place. Instead, the market

is a process of buying and selling of goods by making contract through

different mediums. 2ence, money market also does not denote a particular

place. The money market refers to the whole area where money is bought

and sold. To be more precise, money market is simply a process of buying

and selling of money. 3nlike a stock e-change, the money market is not a

particular place but is a system. The transactions may take place between

different persons by telephone, fa- without personal meeting.

The short4term funds are transacted in the money market. In general the

term of the loan is less than one year. 2ence, the evidence of credit having

maturity of less than one year is the instruments of money market. The

main function of the money market is to make available working capital to

the business and loan to the government. It also makes available loans for

the speculation of goods and securities.

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The business firms use the money market to distribute wages and salaries,

repair equipment1s, pay energy charge, ta-es and so on. The government

uses it to meet the deficit in public revenue. The finance companies use it

to provide loans to the consumers. The banks use it to meet the temporary

deficit in reserve. All these credit are only for up to one year.

The meaning of money market becomes clear from the following

definitions54

According *udley /. +uckett 40The money market is a market for

short term 6less than one year7 loans. It1s very name suggests that it

is money that is being bought and sold.

In the words of 8.A. "ocharan, The money market is a market which

trades in short term, highly liquid, negotiable debt instruments of one

year or less in maturity.

9orld :ank has defined the money market as, A market in which

short term securities such as treasury bills, certificates of deposits

and commercial bills are traded.

In brief, the money market is a means of e-change of short term

credit. It is quite different from the capital market which deals in long

term credit.

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"O#"$%T O& "A%ITA+ MA()$T

The market dealing in long term finance is known as capital market. This

market makes available funds for long4term investment. 2ence, capital

market is a market for long term credit. The meaning of capital market

becomes clear from the following definitions54

According to *udley /. +uckett, A capital market is ;ust what the name

implies5 a market for capital funds. trictly speaking, the capital marketencompasses any transactions involving long4term debt or equity

obligations.

In the words of .). "ooper and others, The framework for the borrowing

and lending of funds for periods longer than a year is called the capital

market.

9orld :ank has defined the capital market as, The market in which long4

term financial instruments such as equities and bonds are raised and

traded


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MO!" MAR#!$&

I#T(O*3"TIO#

The money market is a wholesale debt market for low risk, highly liquid

short term instrument. &unds are available in this market for periods

ranging from a single day up to a year. Ma;orly, /overnments, banks and

other financial institutions dominate this market. The money market is a

market for short term financial assets that are close substitutes of money.

The most important feature of a money market instrument is that it is liquid

and can be turned over quickly at low cost and provides an avenue for

equilibrating the short term funds of lenders and the requirements of

borrowers.

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The money market is a subsection of the fi-ed income market. 9e

generally relates the term fo-ed income as being synonymous to bonds. In

reality, a bond is ;ust one type of fi-ed income security. The difference

between the money market and the bond market is that the money market

specialies in short term debt markets securities 6debt that matures in less

than one year7.

Money market instruments are also called cash investments because of

their short maturities.

Money market instruments are very liquid and are considered to bee-tremely safe. ince they are e-tremely conservative, money market

securities offer lower returns than most other securities. One of the main

differences between the money market and the stock market is that the

money market securities trade in very high denominations. This limits

access for the individual investor. &urthermore, the money market is a

dealer market which means that the firms buy and sell securities in theirown accounts and at their own risk. "ompare this to the stock market the

investor takes the risk of holding the stock. Another characteristic of a

dealer market is the lack of trading floor or e-change. *eals are transacted

over the phone or through electronic systems.

The easiest way to gain access to the money market is with the money

market mutual funds. These funds pool together the assets of thousands of

investors in order to buy the money market securities on their behalf.

2owever, some money market instruments like treasury bills can be

purchased directly.

"2A(A"T$(ITI" O& MO#$' MA()$T

=. The money market deals in financial assets having maturity period up

to one year only.

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>. In the money markets participants borrow and lend for short periods

that is up to twelve months.

?. Transactions usually take place via oral communication or written

communication.

@. There is no formal place like stock e-change.

. The money market comprises of the Treasury :ills market,

"ommercial :ills market, "all Money market etc.

B. Money market components include central bank, commercial bank,

non banking financial companies, etc.

C. The central bank plays a pivotal role in the money market.

O:8$"TID$ O& MO#$' MA()$T

=. %rovides the mobiliation of short term funds.

>. 2elps to overcome the short term deficits.

?. $nables the user to have easy access to short term funds in order to

meet their requirements quickly.

@. %rovides the central bank with the authority to influence and regulate

liquidity in the economy through its intervention in this market.

IM%O(TA#"$ O& MO#$' MA()$T

=. Monetary Po+icy"onditions in the market are an indicator of themonetary state of the economy. 2ence it enables the government in

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formulating and restricting the monetary policy on the basis of the

monetary conditions prevailing in the market.

>. $rae an (nustryA developed money market plays an important

role in the financial system of a country by supplying short term

working capital requirements adequately and quickly to trade and

industry.

?. Aut.ority of t.e 'entra+ an/The central bank through the money

market pumps new into the economy in slump and withdraws it

during a boom. The central bank thus has the authority in regulatingthe flow of money in the economy so as to promote economic growth.

@. on-inf+ationary source of finance to t.e 8overnment The

government meets its short term requirements trough the issue of

treasury bills. In the absence of a developed short term working

capital requirements the government will be forced to issue additional

notes or to borrow from the central bank. :oth the ways would lead toan increase in prices and the consequent inflationary trend in the

economy.

. 'ommercia+ an/s The money market provides the commercial

banks with facilities for temporarily employing their surplus funds in

the easy realiable assets. The banks can get the funds quickly in

times of need by resorting to the money market.

B. &tatutory re@uirements of an/s "ommercial :anks meet their

statutory requirements of "ash (eserve ratio 6"((7 and tatutory

+iquidity (atio 6+(7 by utiliing the money market mechanisms.

&$AT3($ O& MO#$' MA()$T

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=. 'onstituents of Money Mar/et +ike other markets, money market

also has three constituents56a7 It has buyers and sellers in the form of borrowers and lenders,6b7 It has a commodityE it deals with short4maturity credit instruments,

like commercial bills, treasury bills, etc.c7 It has a price in the form of rate of interest which is an item of cost

to the borrower and return to the lender.

27 5etero8eneous Mar/et The money market is not a single

homogeneous market but consists of several sub4markets, each

market dealing with a specific short4term credit instrument, e.g., call

money market, trade bill market, etc. Thus, it is difficult to talk about a

general money market.

?. &.ort-term )oans Money market deals with short4term loans. In a

money market, the borrowers can obtain funds for periods varying

from a day, a week, a month, or three to si- months.

@. Money AssetsMoney market does not deal in money, but in short4

term financial instruments or near4money assets. These assets are

relatively liquid and readily marketable. The assets against which the

funds can be borrowed in the money market include short4term

government securities, bills of e-change, bankersF acceptances, etc.

. P.ysica+ 'ontact ot ecessaryMoney market does not refer to a

specific place where borrowers and lenders meet each other. In fact,

it is not necessary that the borrowers and lenders should have

personal contact with each other at a particular place. They may carry

on their negotiations through telephone or mail. Thus, money market

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simply relates to the arrangement which establishes direct an indirect

contact between the borrowers and lenders.

B. =ifferent from 'apita+ Mar/et Money market is different from

capital market on the basis of maturity period. Money market deals

with the short4term lending and borrowing of funds, while capital

market deals with medium and long4term lending and borrowing of

funds.

C. Association it. i8 'ities /enerally, money markets are

associated with important places or localities. Almost every big city

has a money market. In this way, we have +ondon money market,

#ew 'ork money 4market, :ombay money market, etc.

G. '.an8e it. P+ace an $ime Though the functions of money

markets in different countries are broadly the same, the instruments,institutions and practices of these markets vary considerably from

country to country. Money markets also change with time.

H. =ea+ers of Money Mar/et The financial institutions in the money

market meet the short4term needs of the borrowers. The borrowers in

the money market are traders, manufactures, speculators, and evengovernment institutions. The lenders in the money market are

commercial banks, central banks, non4bank financial intermediaries,

etc.

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(=(A MO!" MAR#!$&

The Indian money market is a market for short4term and +ong term funds

with maturity ranging from overnight to one year and includes financial

instruments that are deemed to be close substitutes of money. It is

diversified and has evolved through many stages, from the conventional

platform of treasury bills and call money to commercial paper, certificates of

deposit, repos, &(As and I( more recently.

The Indian money market consists of diverse sub4markets, each dealing in

a particular type of short4term credit. The money market fulfills the

borrowing and investment requirements of providers and users of short4

term funds, and balances the demand for and supply of short4term funds by

providing an equilibrium mechanism. It also serves as a focal point for the

"entral :ankFs intervention in the market.

The Indian money market consists of three parts5

6i7 Organied sector

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6ii7 3norganied sector6iii7 "ooperative sector

6=7 O(/A#IJ$* $"TO(

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o Indian :anks

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9hile the need for long term financing is met by the capital or financial

markets, money market is a mechanism which deals with lending and

borrowing of short term funds. %ost reforms age in India has witnessed

marvelous increase of the Indian money markets. :anks and other financial

institutions have been able to meet the high opportunity of short term

financial support of important sectors like the industry, services and

agriculture. It performs under the regulation and control of the (eserve

:ank of India 6(:I7. The Indian money markets have also e-hibit the

required maturity and fle-ibility over the past two decades. *ecision of the

government to permit the private sector banks to operate has provided

much needed healthy competition in the money markets resulting in fair

amount of improvement in their performance.

Money markets denote inter4bank market where the banks borrow and lend

between themselves to meet the short term credit and deposit needs of the

economy. hort term normally covers the time period up to one year. The

money market operation help the banks rush over the provisional mismatch

of funds with them. In case a particular bank needs funds for a few days it

can lend from another bank by paying the strong4minded interest rate. The

lending bank also gains as it is able to earn interest on the funds lying idle

with it. In other words money market provides avenues to the players in the

market to strike balance between the surplus funds with the lenders and

the obligation of funds for the borrowers. An significant function of the

money market is to provide a central point for interventions of the (:I to

pressure the liquidity in the financial system and implement other monetary

policy measures. Luantum of liquidity in the banking system is of dominant

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importance as it is an important determinant of the inflation rate as well as

the formation of credit by the banks in the financial system. Market forces

generally indicate the need for borrowing or liquidity and the money market

ad;usts itself to such calls. (:I facilitates such ad;ustments with monetary

policy tools obtainable with it. 2eavy call for funds overnight indicates that

the banks are in need of short term funds and in case of liquidity crunch the

interest rates would go up.

*epending on the financial situation and available market trends the (:I

intervenes in the money market through a crowd of interventions. In case of

liquidity crunch the (:I has the option of either dropping the "ash (eserve

(atio 6"((7 or pumping in more money supply into the system. (ecently to

conquer the liquidity crunch in the Indian money market the (:I has

released more than (s C,KKK crores with two back4to4back reductions in

the "((. In adding to the lending by the banks and the monetary

institutions, various companies in the commercial sector also issue fi-ed

deposits to the public for shorter period and to that amount become part of

the money market mechanism selectively. The maturities of the instruments

issued by the money market as a whole, range from one day to one year.

The money market is also closely linked with the &oreign $-change Market

throughout the procedure of covered interest arbitrage in which the forward

premium acts as a bridge among the domestic and foreign interest rates.

*etermination of appropriate interest for deposits or loans by the banks or

the other financial institutions is a comple- device in itself. There are

several issues that need to be determined before the optimum rates are

determined. 9hile the term arrangement of the interest rate is a very

important determinant, the difference between the e-isting domestic and

international.

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Interest rates also emerges as a significant factor. &urther, there are

several credit instruments which involve similar maturity but diversely

different risk factors. uch distortions are accessible only in rising and

diverse economies like the Indian economy and need e-tra care while

handling the issues at the policy level.

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MO!" MAR#!$ (&$RUM!$&

*ebt instruments which have maturity of less than one year at the time of

issue are called money market instruments. These instruments are highly

liquid and have negligible risk. The ma;or money market instruments are as

follows5

=."all Money Market

>.:ill Market

a. Treasury :ills Market

b. "ommercial :ills Market

?."ommercial %apers

@."ertificate of *eposit

.(epos

B.Market Mutual &unds

The money market is dominated by the government , financial institution

banks and corporate. Individual investors scarcely participate in the moneymarket directly.

"A++!#OTI"$ MO#$' MA()$T

"all!#otice money is the money borrowed or lent on demand for a very

short period. 9hen money is borrowed or lent for a day, it is known as "all

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6Overnight7 Money. Intervening holidays and!or unday are e-cluded for

the purpose. Thus, money borrowed on a day and repaid on the ne-t

working day,6irrespective of the number of intervening holidays7 is "all

Money. 9hen money is borrowed or lent for more than a day and up to =@

days, it is #otice Money. #o collateral security is required to cover these

transactions.

In this market, while banks and primary dealers 6%*1s7 are allowed to both

borrow and lend , non bank participants such as financial institutions. The

ease of transactions as well as low transactions costs arising from least

documentation and same day settlement of funds in call!notice money

market act as strong incentives for non banking institutions to participate in

the call money market.

In India the public sector banks account for GK of borrowings and foreign

banks!private sector banks account for the balance >K. #on bank

financial institutions like I*:I, +I", and /I" etc participate only as lendersin this market. GK of the requirement of call money funds is met by the

non bank participants and >K from the banking system.

:I++ MA()$T

The bill market is the most important part of the money market. The billmarket is further subdivided into5

i. Treasury :ills Marketii. "ommercial :ills Market

"OMM$("IA+ :I++ MA()$T

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A "ommercial bill arises out of a genuine trade transaction that is credit

transaction. As soon as the goods are sold on credit the seller draws a bill

on the buyer for the amount due. The buyer accepts it immediately

agreeing to pay the amount mentioned therein after a certain specified

date. Thus, a bit of e-change contains a written order from the creditor to

the debtor, to pay a certain sum, to a certain person, after a certain period.

It is the drawn always for a short period ranging between three months and

si- months.

T($A3(' :I++

Treasury bills or T4bills mature in one year or less. A Treasury bill is a

promissory note issued by the government under the discount for a specific

period started therein. The government promises to pay the specific

amount mentioned there into the bearer of the instrument on the due date.

The period does not e-ceed one year. It is purely a finance bil since it is not

arise out of any trade transaction. It does not require any grading since it is

a claim of the government.

Treasury bills are issued by the (:I on behalf of the government. Treasury

bills are issued for meeting temporary government deficits. The Treasury

bill rate or the rate of discount is fi-ed by the (:I from time to time. It is

lowest one in the entire structure of interest rates in the country because of

short term maturity ad high degree of liquidity and security.

"OMM$("IA+ %A%$(

A commercial paper 6"%7 is an unsecured money market instruments

issued in the form of a promissory note. It was introduced in =HHK with view

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to enabling highly rated corporate borrowers to diversify their sources of

short term borrowings and to provide additional instruments to investors.

Also primary dealers 6%*s7 and All India &inancial Institutions 6&Is7 are

eligible to issue commercial papers.

"ommercial papers are also called industrial papers, finance papers and

corporate papers4the names depend upon who liability the paper. If it is a

liability of the business or industrial or commercial or manufacturing

concern, it is known as a industrial or commercial paper it is a liability of the

financial company, it can be called finance paper. The concept of

commercial papers originated in 3A in early =Hth century when

commercial banks monopolied and charged high rates of interest on loans

and advances. The financial as well as non financial firms started selling

"ommercial papers as substitutes for bank loans required for working

capital. /radually owing to the advantages available to both the issuer and

the investor, the instrument grew in 3A, as the second largest money

market instrument for treasury bills.

"$(TI&I"AT$ O& *$%OIT

In India certificate of deposits 6"*s7 were first introduced in 8une =HGH with

the viewed to further widen the range of money market instruments and to

give investors greater fle-ibility in deployment of their short4term surplus

fund. "ertificate of deposit represent the time deposit with the bank,

certificate of deposit are generally issued by commercial banks.

:anks have the freedom to issue certificate of deposits depending on their

requirement. They wear a specific maturity date and specified interest rate.

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"ertificate of deposit offer a slightly higher yield than treasury bills because

of the slightly higher default list for a bank, but overall the likelihood that a

large bank will go broke its pretty thin.

"ertificate of deposit represent bank deposit accounts which are

transferrable from one party from another ."ertificate of deposits are

interest bearing, maturity dated obligations of banks N technically they are

a part of the banks time deposits. "ertificate of deposits are issued in

multiples of ( lakhs, sub;ect to a minimum sie of an issue to a single

investor being ( > lakhs.They have a maturity period of three months to

one year, N they would be issued at discount to face value.

($%O

(eady forward as a transaction is which agree to buy and sell the same

security at an agreed price. The repo rate represents the borrowing rate for

the use of his money in the intervening period. Internationally are usede-tensively in the money market operations. All dated government

securities are eligible for trading in the repo market.

(epos can be for any period. 9hile earlier there was a minimum period of

? days, this has since been withdrawn. The (:I has been using repo

instrument effectively for its liquidity managementE both for absorbing

liquidity N for repurchase agreement. Those who deals in government

securities reps as a form of overnight borrowing. A dealer or other holder of

government securities 6usually T4bills7 sells the securities to a lender N

agrees to purchase them at an agreed price. They are usually very short

term from overnight to ?K days or more. This short term maturity N

government backing means repos provide lenders with e-tremely low risk.

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(epos are popular because they can virtually eliminate credit problems.

3nfortunately, a number of significant losses over the years from fraudulent

dealers suggest that lenders in this market have not always checked their

collateraliation closely enough.

9hen (:I conducts repos the short term interest rates in the money

market do not go below the (:I repo rate. If the interest rate is lower in

other markets such as foreign e-change market, Treasury bills market

holder of funds may go for repos with (:I.

Thus repos transactions ensure stability in the short term interest rates inthe money marketE it will conduct a (everse (epo transaction with the

primary dealers against government securities.

(everse (epo4 the reverse repo is the complete opposite of a repo. In this

case, a dealer buys government securities from an investor C then sells

them back at a later date for a higher price.

The following table summaries the terminology5

Repo Reverse repo

Participant eller

"ash receiver

:uyer

"ash provider

ear +e8 ells securities :uys securities

,ar +e8 :uys securities ells securities

MO#$' MA()$T M3T3A+ &3#*

I#T(O*3"TIO# O& M3T3A+ &3#*

Investment in a portfolio can take different forms. An investor can either

invest directly in securities, or can invest through mutual funds. Mutual

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funds collect funds from investors N invest in different various securities in

their behalf. The returns from these investments are passed on to investors

either periodically, or at the end of a specified time period. The mutual fund

charges for its services referred to as management fees.

I#T(O*3"TIO# O& MO#$' MA()$T M3T3A+ &3#*

I# April =HH> the government announced the setting up of the MMM& with

the purpose of bringing money market instruments within the reach of

individuals. The money market mutual funds would be set up by scheduled

commercial banks N public financial institutions. The shares!units of moneymarket mutual funds would be issued to individuals only. In this respect,

they will differ from 3TI N other mutual funds that have been mobiliing the

savings of the middle classes.

Money market fund is a mutual fund that invests solely in money

instruments. Money market instrument are forms of debt that mature in less

than one year are very liquid. Treasury bills make up bulk of the money

market instruments. ecurities in the money market are relatively risk free.

Money market funds are generally the safest and the most secure of

mutual fund investments. The goal of a money fund is not preserve

principal, while yielding a modest return. Money market mutual fund is akin

to a high yield bank account but it is now entirely risk free.

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'AP($A) MAR#!$&

I#T(O*3"TIO#

"apital markets are markets where people, companies, and governments

with more funds than they need 6because they save some of their income7

transfer those funds to people, companies, or governments who have a

shortage of funds 6because they spend more than their income7. tock and

bond markets are two ma;or capital markets. "apital markets promote

economic efficiency by channeling money from those who do not have an

immediate productive use for it to those who do.

"apital markets carry out the desirable economic function of directing

capital to productive uses. The savers 6governments, businesses, and

people who save some portion of their income7 invest their money in capital

markets like stocks and bonds. The borrowers 6governments, businesses,

and people who spend more than their income7 borrow the saversF

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investments that have been entrusted to the capital markets.

&or e-ample, suppose A and : make (s. K,KKK in one year, but they only

spend (s.@K,KKK that year. They can invest the =K,KKK 4 their savings 4 in amutual fund investing in stocks and bonds all over the world. They know

that making such an investment is riskier than keeping the =K,KKK at home

or in a savings account. :ut they hope that over the long4term the

investment will yield greater returns than cash holdings or interest on a

savings account. The borrowers in this e-ample are the companies that

issued the stocks or bonds that are part of the mutual fund portfolio.

:ecause the companies have spending needs that e-ceeds their income,they finance their spending needs by issuing securities in the capital

markets.

OD$(DI$9 O& I#*IA# "A%ITA+ MA()$T

The Indian capital market is more than a century old. Its history goes back

to =GC, when >> brokers formed the :ombay tock $-change 6:$7. 3p

until May, =HH>, the "apital "ontroller of Issues used to regulate the

primary market. It had laid down various rules, norms for issue and pricing

of the securities. India had a vibrant primary market with wide participation

from =HC onwards.

"onsequent upon the liberaliation adopted by the /overnment in =HH=,

and the subsequent abolition of "apital "ontroller of Issues in May =HH>,

the %rimary Market got a further tremendous boost. ecurities and

$-change :oard of India 6$:I7 was set up to regulate and frame rules and

regulations for the conduct of %rimary as well as the econdary Market.

Over the period, the Indian securities market has evolved continuously to

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become one on the most dynamic, modern, and efficient securities markets

in Asia. Today, Indian market confirms to best international practices and

standards both in terms of structure and in terms of operating efficiency

.Indian securities markets are mainly governed by a7 The "ompany0s

Act=HB, b7 the ecurities "ontracts 6(egulation7 Act =HB 6"(A Act7,

and c7 the ecurities and $-change :oard of India 6$:I7 Act, =HH>. A brief

background of these above regulations is given below5

a7 The "ompanies Act =HB deals with issue, allotment and transfer of

securities and various aspects relating to company management. It

provides norms for disclosures in the public issues, regulations for

underwriting, and the issues pertaining to use of premium and discount on

various issues.

b7 "(A provides regulations for direct and indirect control of stock

e-changes with an aim to prevent undesirable transactions in securities. Itprovides regulatory ;urisdiction to "entral /overnment over stock

e-changes, contracts in securities and listing of securities on stock

e-changes.

c7 The $:I Act empowers $:I to protect the interest of investors in the

securities market, to promote the development of securities market and toregulate the security market.

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PR(MAR" MAR#!$

M$A#I#/ O& #$9 I3$

A reference to a security that has been registered issued and is being sold

on a market to the public for the first time. %rimary are sometimes referred

to as primary shares or new offerings. The term does not necessarily refer

to newly issued stocks, although initial public offerings are the most

commonly known %rimary. ecurities that can be newly issued include both

debt and equity.

Many investors buy %rimary because they often e-perience tremendous

demand and, as a result, rapid price increases. Other investors donFt

believe that %rimary warrant the hype that they receive and choose to

watch from the side4lines. An investor who purchases a new issue should

be aware of all the risks associated with investing in a product that has only

been available to the public for a short timeE %rimary often prove to be

rather volatile and unpredictable.

M$A#I#/ O& #$9 I3$ MA()$T

The %rimary market is that part of the capital markets that deals with the

issuance of new securities. This is typically done through a syndicate of

securities dealers. The process of selling %rimary to investors is called

underwriting. In the case of a new stock issue, this sale is an initial publicoffering 6I%O7. *ealers earn a commission that is built into the price of the

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security offering, though it can be found in the prospectus.

It refers to the set4up which helps industry to raise the funds by issuing

different types of securities. These securities are issued directly to the

investors 6both individuals as well as institutional7 through the mechanism

called %rimary Market.

The securities take birth in this market. The main function new issue

market is to facilitate transfer resources from savers to the users. It plays

an important role in mobiliing the funds from the savers and transferring

them to the borrowers.

&$AT3($ O& %(IMA(' MA()$T

=. This is the market for new long term equity capital. The primary market

is the market wherethe securities are sold for the first time. Therefore itis also called the new issue market 6#IM7.

>. In a primary issue, the securities are issued by the company directly to

investors.

?. The company receives the money and issues new security certificates tothe investors.

@. %rimary issues are used by companies for the purpose of setting up new

business or for e-panding or moderniing the e-isting business.

. The primary market performs the crucial function of facilitating capital

formation in the economy.

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B. The new issue market does not include certain other sources of new

long term e-ternal finance, such as loans from financial institutions.

:orrowers in the new issue market may be raising capital for converting

private capital into public capitalE this is known as going public.

C. The financial assets sold can only be redeemed by the original holder.

G. It is characteried by being the only moment when the enterprisereceives money in e-change for selling its financial assets.

The main function of new issue market can be divided into three service

functions5

=. Ori8ination5 It refers to the work of investigation, analysis andprocessing of new pro;ect proposals. Origination starts before an issue

is actually floated in the market. It includes a careful study of technical,

economical and financial viability to ensure the soundness of the pro;ect

and provides advisory services.

>. Unerritin85 It is an agreement whereby the underwriter promises to

subscribe to a specified number of shares or debentures in the event of

the public not subscribing to the issue. Thus it is a guarantee for the

marketability of shares.

?. =istribution5 It is the function of the sale of securities to the ultimate

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investors. :rokers and agents who maintain, regulate and direct

)$' %+A'$(

The following are the key players in the primary market process5

=. (ssuer5 The corporation, municipality, government agency or investment

company offering securities for sale to investors.

>. Unerriter5 An investment bank that serves as intermediary between

the issuer and the investing public.

?. &ynicate5 A group of investment banks which ;ointly underwrite and

distribute an offering

MA()$T %A(TI"I%A#T

There are various participants in the %rimary market. These participants

play a ma;or role in the new issue of securities. These are as follows5

Re8u+ators5 The key agencies that have a significant regulatory

influence, direct or indirect, over the securities markets such as $:I

6ecurities and $-change :oard of India7, (:I 6(eserve :ank of

India7, *$A 6*epartment of $conomic Affairs7 and M"A 6Ministry of

"orporate Affairs7 ,etc.

&toc/ !Bc.an8es5 A stock e-change is an institution where the

securities that have already been issued are bought and sold.

%resently there are >? stock e-changes in India. The most important

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ones being :$ and #$.

=epositories A depository is an institution which dematerialie

physical certificates and effects transfer of ownership of securities by

electronic book entries. %resently there are two depositories in India,

vi. #*+ and "*+.

ro/ers :rokers are registered members of the stock e-changes

through whom investors transact.

,orei8n (nstitutiona+ (nvestors ,(( Institutional investors from

abroad who are registered with $:I to operate in the Indian "apital

Market are called &IIs.

Merc.ant an/ers5 &irms that specialie in managing the issue of

securities are called merchant bankers. They have to be registered

with the $:I.

&ynicate Members &irms who manage the book 6In the :ook

:uilding method of Issuance7 are called :ook (unning +ead

Managers 6:(+Ms7 or yndicate Members. They have to be

registered with the $:I.

Cua+ifie (nstitutiona+ iers These are &irms that are registered

with $:I as Institutional Investors, namely5 &II1s, :anks, Mutual

&unds, etc.

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on (nstitutiona+ (nvestors5 These are Individuals or companies

investing (s.> lakhs or more in an Issue. They are also called 2#I1s.

Retai+ (nvestors5 These are Individuals or companies investing not

more than (s.> lakhs in an Issue

Primary =ea+ers Appointed by the (:I, %rimary *ealers serve as

underwriters in the primary market and as market makers in the

secondary market for governmental securities.

Mutua+ ,unsA mutual fund is a vehicle for collective investment. It

pools and manages the funds of investors.

'ustoiansA custodian looks after the investment back office of a

mutual fund. It receives and delivers securities, collects income,distributes dividend and segregates the assets between schemes.

Re8istrars5 Also known as transfer agent, a registrar is employed by

a company or a mutual fund to handle all investor4related services.

Unerriters5 An underwriter agrees to subscribe to a given numberof shares in case public subscription is inadequate.

an/ers to an issue The bankers to an issue collect money on

behalf of the company from the applicants.

=ebenture trustees 9hen a company issues debentures, adebenture trustee has to be appointed to ensure that the borrowing

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firm fulfills its contractual obligations.

'reit Ratin8 A8encies A credit rating agency assigns ratings

primarily to debt securities. In India there are two main credit rating

agencies, "redit (ating Investment ervices of India +imited

6"(II+7 and Investment Information and "redit (ating Agency

6I"(A7.

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&!'O=AR" MAR#!$

I#T(O*3"TIO#

econdary market is an avenue in which equity and pre4issued securities

are traded between potential investors.

The secondary market, also called aftermarket, is the financial marketwhere previously issued securities and financial instruments such as stock,

bonds, options, and futures are bought and sold. It is also known as tock

Market.

The term secondary market is also used to refer to the market for any

used goods or assets, or an alternative use for an e-isting product or asset

where the customer base is the second market 6for e-ample, corn has

been traditionally used primarily for food production and feedstock, but a

second or third market has developed for use in ethanol production7.

9ith primary issuances of securities or financial instruments, or the primary

market, investors purchase these securities directly from issuers such as

corporations issuing shares in an I%O or private placement, or directly from

the federal government in the case of treasuries. After the initial issuance

investors can purchase the same from other investors in the secondary

market.The activities of buying and selling of securities in a secondary

market are carried out through the mechanism of TO") $P"2A#/$.

The secondary market for a variety of assets can vary from loans to stocks,

from fragmented to centralied, and from illiquid to very liquid. The ma;or

stock e-changes are the most visible e-amples of liquid secondary markets

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4 in this case, for stocks of publicly traded companies. $-changes such as

the #ew 'ork tock $-change, #asdaq and the American tock $-change

provide a centralied liquid secondary market for the investors who own

stocks that trade on those e-changes. Most bonds and structured products

trade over the counter or by phoning the bond desk of oneFs broker4dealer.

+oans sometimes trade online using a +oan $-change.

econdary marketing is vital to an efficient and modern capital market. In

the secondary market, securities are sold by and transferred from one

investor or speculator to another. It is therefore important that the

secondary market be highly liquid 6originally, the only way to create this

liquidity was for investors and speculators to meet at a fi-ed place

regularlyE this is how stock e-changes originated, see 2istory of the tock

$-change7. As a general rule, the greater the number of investors that

participate in a given marketplace and the greater the centraliation of that

marketplace, the more liquid the market.

&undamentally, secondary markets match the investorFs preference for

liquidity 6i.e., the investorFs desire not to tie up his or her money for a long

period of time, in case the investor needs it to deal with unforeseen

circumstances7 with the capital userFs preference to be able to use the

capital for an e-tended period of time.

Accurate share price allocates scarce capital more efficiently when new

pro;ects are financed through a new primary market offering, but accuracy

may also matter in the secondary market because5 =7 price accuracy can

reduce the agency costs of management, and make hostile takeover a less

risky proposition and thus move capital into the hands of better managers,

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and >7 accurate share price aids the efficient allocation of debt finance

whether debt offerings or institutional borrowing.

The term may refer to markets in things of value other than securities. &or

e-ample, the ability to buy and sell intellectual property such as patents, or

rights to musical compositions, is considered a secondary market because

it allows the owner to freely resell property entitlements issued by the

government. imilarly, secondary markets can be said to e-ist in some real

estate conte-ts as well 6e.g. ownership shares of time4share vacation

homes are bought and sold outside of the official e-change set up by the

time4share issuers7. These have very similar functions as secondary stock

and bond markets in allowing for speculation, providing liquidity, and

financing through securitiation.=7 to facilitate liquidity marketability of long

term instrument. >7 to provide instant valuation of securities caused by

changes in the environment.

In private equity, the secondary market 6also often called private equity

secondaries or secondaries7 refers to the buying and selling of pre4e-isting

investor commitments to private equity funds. ellers of private equity

investments sell not only the investments in the fund but also their

remaining unfunded commitments to the funds.

$"O#*A(' MA()$T %A(TI"I%A#T

&ollowing are the key players and participants in the econdary market5

$.e &toc/ !Bc.an8esA stock e-change is the marketplace where

companies are listed and where the trading happens. They provide a

transparent and safe 6risk4free7 forum of a market for investors to

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transact and invest their funds. There are >? tock $-changes

registered with $:I and under its regulation. #ational tock

$-change 6#$7 and the :ombay tock $-change 6:$7 are the

pre4dominant ones.

Re8u+atory oy $:I 6the ecurities N $-change :oard of India7

an autonomous and statutory body acts as the market regulator and

market developer. $:I also looks into investor complaints against

companies. It is quasi4;udicial and can try cases and pass ;udgments

against any market participant.

ro/er-ea+er It is a company or firm that trades securities for its

own account or on behalf of its clients. Any person wanting to trade ordeal on the stock market has to go through a broker4dealer.

(nvestor5 The person who makes an investment. There are different

types of investors in the financial market including weat equity

investor, Individual investors, Investment banks, Investment trusts,

Institutional Investors, &oreign Institutional Investors, Insurance

companies, %ension &unds, Mutual &unds, etc.

Mar/et ma/er It is a firm that quotes both a buy and a sell price in a

financial instrument or commodity on a regular and continuous basis.

2e provides liquidity and depth in the market and thereby earning a

small spread.

&pecu+ator An individual or organiation who buys or sells or is

involved in short4selling of various investments thereby seeking to

gain profits derived from the variations in pricing, rather than

purchasing for the purpose of income through dividends or interest.

2e does not take or give delivery of securities.

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5e8ers5 An individual or institution who hedges stock for

diversifying risk by pairing the stock owned 6the long position7 with an

appropriate short position. Thus, hedging is not about absolute return

but rather the relative advantage one stock or commodity has over

another. 2edging is for sophisticated investors only.

Arbitra8eurAn individual or institution who seeks to make profit

from the price difference 6mispricing7 between two or more markets

and a person who engages in arbitrage is called an arbitrageur.

Arbitrage is not the simple act of buying one asset at one market and

then selling it to another market at a later time when the price is

higher. (ather to avoid market risks of price change you need to

make sure that both the transactions at both the market are done

simultaneously.

$.e =epositories an t.eir Participants The depositories are

institutions that have rendered the market paperless by holdingstocks of investors in an electronic form through a registered

depository participant 6*%7 and can be compared to a bank.

*epositories hold securities in an account, transfer securities

between accounts on the instruction of the account holder and

facilitate the transfer of ownership without the account holder needing

to handle securities. They provide ease and speed for those

transacting in the market. There are two depositories in India44the

#ational ecurities *epository +td 6#*+7 and the "entral

*epository ervices +td 6"*+7, while there are over a CKK *%s.

Proprietary traer The firm that trades stocks, bonds, currencies, or

other financial instruments with the firmFs own money so as to make a

profit for itself.

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Cuantitative ana+ystA specialist in the numerical or quantitative

techniques of finance. In the investment industry, they are frequently

called quants.

'+earin8 member They consist of Trading and "learing Members.

They clear their own trades as well as the trades of other member

brokers.

Portfo+io mana8ers They provide a range of services to the

investors and are registered with $:I and act under the regulation

of $:I abiding by the "ode of "onduct prescribed for each of the

roles.

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MA8O( TO") $P"2A#/$ '$A( $#*$* ?=T *$"$M:$( >K=>

MO!" MAR#!$ v?s 'AP($A) MAR#!$

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Money market refers to the market for short4term securities with original

maturity of one year or less. These securities include T4bills, certificates of

deposits, commercial paper, and so on.

Money market instruments are relatively more liquid. The ma;or players are

banks, &Is, mutual funds, and large corporate entities. The role of

individuals is not significant.

The term capital market, in general, refers to a market for long4term

securities, such as corporate stocks and bonds for financing long4term

assets. "apital market is a much wider term and often denotes different

segments, which function independent of each other.

The first segment is the stock 6share7 market, in which equity shares are

traded. ecurities in the form of debt instruments 6also called loan4stocks7

are traded in the second segment. In the third, derivative instruments

relating to equity and debt securities are traded. In addition, capital market

includes the money market segment, where financial assets Q particularly

short4term debts of less than => months Q are traded

Money market is a component of financial market where short4term borrowing can be

issued. This market includes assets that deal with short4term borrowing, lending,

buying and selling. A capital market is a component of a financial market that allows

long4term trading of debt and equity4backed securities. +ong4term borrowing or

lending is done by investors or corporations that have large amounts of wealth at their

disposal.

9hen it comes to business, each business at a certain point has to borrow

money in order to keep running business. There are multiple ways that a

company can borrow money, including issuing bonds, shares or taking up a

loan. There are two different components of the financial marketE known as

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Money Market and "apital Market. These terms are more commonly come

across in business and economics.

Money market is a component of financial market where short4term

borrowing can be issued. This market includes assets that deal with short4

term borrowing, lending, buying and selling. The short4term ensures that

the borrowing and lending period has a lease of less than one year. The

lease can also be as short as a one hour, depending on the borrower and

the lender. According to The /lobal Money Markets, Trading is usually

done over the counter using instruments such as Treasury bills, commercial

paper, bankersF acceptances, deposits, certificates of deposit, bills of

e-change, repurchase agreements, federal funds, and short4lived

mortgage4, and asset4backed securities. The money market was created as

some businesses has a surplus of cash, while the other businesses were

looking for loans.

In the 3nited tates, all federal, state and local governments issue papersthat are traded in form of money. These include municipal paper and

Treasury bills. The main functions of Money market include5 Transfer from

parties with surplus funds to parties with a deficit, transfer of large sums of

money, help to implement monetary policies, determine short4term interest

rates and allow government to raise funds. The interest rates in a Money

market are also high as the borrowing time is low. Trading in the money

markets are usually done by banks or companies with high credit ratings.

A capital market is a component of a financial market that allows long4term

trading of debt and equity4backed securities. +ong4term borrowing or

lending is done by investors or corporations that have large amounts of

wealth at their disposal. The most popular capital market is the #'$ or

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the #ew 'ork tock $-change. 2uge financial regulators are responsible

for overseeing the capital market to ensure that companies do not defraud

their investors. Trading can be done by a number of credit instruments such

as stocks, shares, equity, debentured, bonds, and securities. Much of the

trading is actually done online using a computer. There is no actual cash

involved in trading.

Investments made in a capital market usually last longer than a year and

can even last up to >4?K years. ome investments may depend on the life

of the company, with the investment ending if the company shuts down. A

benefit of this investment is that if need arises, the investor can swiftly cash

their investment. "apital market can be divided into two divisions5 stock

markets and bond markets. In stock markets investors acquire the

ownership of the company they are investing in, while in bond markets

investors are considered as creditors. Investment done in capital markets

are usually for acquiring physical capital goods that would help increase its

income. 2owever, generating an income may take anywhere from a couple

of months to many years or could even fall through.

=(,,!R!'! !$;!! MO!" A= 'AP($A) MAR#!$

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The money market and the capital market are interrelated. The main points

of difference between these two markets are as follows54

=efinition The market where transactions of money and financial

assets are accomplished for short time is called money market. On

the other end, capital market is meant that market where transactions

of money and financial assets are occurred for a long period.

Maturity5 In general, these two markets are separated on the basis of

the maturity of the credit instruments related to these markets. The

maturity of the instruments of money market is one year or less than

one year. On the other hand, the maturity of the instruments of capital

market is more than one year.

Ris/s5 The risks are less in money market. :ecause, there is less

possibility of default of the credit of less than one year maturity.

+ikewise, the risk of interest rate is also low in the money market. On

the other hand, the credit of the capital market is of long term nature.

*ue to this risks are more and are of varied nature in capital market.

(nstruments5 The main instruments of money market are 4treasury

bills, commercial papers, certificate of deposit which are of short4term

nature. On the other hand, the main instruments of the capital market

are 4debentures, equities or shares and government securities which

are of long4term nature.

(nstitutions5 The different financial institutions related to short4term

credit participate in the money market. :ut there is predominance of

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commercial banks. In fact, the commercial bank is an institution

related to the money market. On the other hand, different kinds of

financial intermediaries participate in the capital market. The main

participants of the capital market are 4development bank, finance

company, provident fund, insurance company, Investment "ompany

and so on. The service institutions are also involved in the capital

market such as investment banking, commission brokers association,

investment consultancy etc. In recent clays, the commercial banks

also provide long4term loans to some e-tent. o they may also be

included among the participants of the capital market.

,inance5 The money market deals in only short4term funds. It

receives short term deposits and also provides the short4term credit.

On the other hand, the capital market receives long4term deposits

and also grants long term loan and equity capital to the business and

the government.

$ransactions Perio5 In money market transactions are

accomplished for one or less than one year. 9hile capital market

transactions are for long time.

$ransaction Proceures5 ince fewer formalities are required in

money market therefore, transactions cost is also minimum. 9hile,

many formalities are required in making capital market transaction

successful and therefore its transaction cost is little bit higher than the

money market.

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ature of 'reit (nstruments5 The credit instruments dealt with in

the capital market are more heterogeneous than those in money

market. ome homogeneity of credit instruments is needed for the

operation of financial markets. Too much diversity creates problems

for the investors.

Re+ation it. t.e 'entra+ an/s The money market has close and

direct relationship with the central bank. The central bank implements

its monetary policy through this market. The central bank directly

regulates the commercial banks in the money market. On the otherhand, the central bank has influence over the capital market only

indirectly through money market. imilarly, the institutions of the

capital market are less regulated by the central bank.

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'O')U&(O

A developed money market plays an important role in the development of

an economy. Thus the (:I should ensure qualitative development of all the

money market instruments in order to build a strong financial system in the

country. The issue of commercial paper plays a vital role in meeting the

short term working capital requirements of corporations. The borrowers can

get up to >K of their working capital requirements directly from the

markets at rates which may be more advantageous than borrowing through

a bank. 2ence in the initial stages (:I should concentrate on the quality

rather than quantity.

"apital markets are perhaps the most widely followed markets. :oth the

stock and bond markets are closely followed and their daily movements are

analyed as pro-ies for the general economic condition of the world

markets. As a result, the institutions operating in capital markets 4 stock

e-changes, commercial banks and all types of corporations, including

nonbank institutions such as insurance companies and mortgage banks are

carefully scrutinied. The institutions operating in the capital markets

access them to raise capital for long4term purposes, such as for a merger

or acquisition, to e-pand a line of business or enter into a new business, or

for other capital pro;ects. $ntities that are raising money for these long4term

purposes come to one or more capital markets. In the bond market,

companies may issue debt in the form of corporate bonds, while both local

and federal governments may issue debt in the form of government bonds.

imilarly, companies may decide to raise money by issuing equity on the

stock market. /overnment entities are typically not publicly held and,

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therefore, do not usually issue equity. "ompanies and government entities

that issue equity or debt are considered the sellers in these markets.

The buyers, or the investors, buy the stocks or bonds of the sellers and

trade them. If the seller, or issuer, is placing the securities on the market for

the first time, then the market is known as the primary market. "onversely,

if the securities have already been issued and are now being traded among

buyers, this is done on the secondary market. ellers make money off the

sale in the primary market, not in the secondary market, although they do

have a stake in the outcome of their securities in the secondary market.

The buyers of securities in the capital market tend to use funds that are

targeted for longer4term investment. "apital markets are risky markets and

are not usually used to invest short4term funds. Many investors access the

capital markets to save for retirement or education, as long as the investors

have long time horions, which usually means they are young and are risk

takers.

Money market is often accessed alongside the capital markets. 9hile

investors are willing to take on more risk and have patience to invest in

capital markets, money markets are a good place to park funds that are

needed in a shorter time period 4 usually one year or less. The financialinstruments used in capital markets include stocks and bonds, but the

instruments used in the money markets include deposits, collateral loans,

acceptances and bills of e-change. Institutions operating in money markets

are central banks, commercial banks and acceptance houses, among

others.

Money markets provide a variety of functions for either individual, corporate

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or government entities. +iquidity is often the main purpose for accessing

money markets. 9hen short4term debt is issued, it is often for the purpose

of covering operating e-penses or working capital for a company or

government and not for capital improvements or large scale pro;ects.

"ompanies may want to invest funds overnight and look to the money

market to accomplish this, or they may need to cover payroll and look to

the money market to help. The money market plays a key role in ensuring

companies and governments maintain the appropriate level of liquidityon a

daily basis, without falling short and needing a more e-pensive loan or

without holding e-cess funds and missing the opportunity of gaining

interest.

Investors, on the other hand, use the money markets to invest funds in a

safe manner. 3nlike capital markets, money markets are considered low

riskE risk4adverse investors are willing to access them with the anticipation

that liquidity is readily available. Older individuals living on a fi-ed incomeoften use the money markets because of the safety associated with these

types of investments.

There are both differences and similarities between capital and money

markets. &rom the issuer or sellerFs standpoint, both markets provide a

necessary business function5 maintaining adequate levels of funding.

The goal for which sellers access each market varies depending on their

liquidity needs and time horion. imilarly, investors or buyers have unique

reasons for going to each market5 "apital markets offer higher4risk

investments, while money markets offer safer assets money market returns

are often low but steady, while capital markets offer higher returns. The

magnitude of capital market returns is often a direct correlation to the level

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of risk, however that is not always the case of capital markets.

Although markets are deemed efficient in the long run, short4term

inefficiencies allow investors to capitalie on anomalies and reap higher

rewards that may be out of proportion to the level of risk. Those anomalies

are e-actly what investors in capital markets try to uncover. Although

money markets are considered safe, they have occasionally e-perienced

negative returns. Inadvertent risk, although unusual, highlights the risks

inherent in investing 4 whether long or short term, money markets or capital

markets.

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BIBLIOGRAPHY

Reference books

i. Banking Theory Law and Practice by Sundaram and Varshney

ii. Financial Markets and Serices by !ordan and "atra#an

iii. $n %ntroduction to !lobal Financial Markets& by Ste'hen Valde(

i. %ndia Banking& by S. "atra#an and R. Parameshwaran

. Financial %nstitution and Markets& by L.M.Bhole

i. Resere Bank )f %ndia Bulletin

Reference *ebsites

i. www.www.nseindia.com

ii. www.RB%.org

iii. www.inesto'edia.com

i. www.ecotimes.indiatimes.com

money market vs capital market

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