Note on Financial Market

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Financial Market

source:www.pixtastock.com
source:www.pixtastock.com

In economics, the financial market is an organization which lends loan to business enterprises and public authorities. The financial market is the institution that deals in financial assets and credit instruments like currency, cheques, bill, etc. Its main function is creation and allocation of credit and equity balanced economic growth. The financial market can be divided into two categories based on credit requirement for short or long term purposes. They are money market - short-term funds and capital market - long term funds.

Concept of Money Market

A money market is that marketing in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term. In the money market, its credit duration is less than one year. Hence, the credit having maturity period less than one year is an instrument of the money market.

According to Crowther, “The money market is the collective name given to the various firms and institutions that deal in the various grades of money”.

According to Dr. Chakoo, “A money market is a mechanism which makes it possible for borrowers to obtain funds and lenders to find suitable outlets for their money”.

According to J.A. Cocharm, “The money market is a market which trades in short-term highly liquid, negotiable debt instruments of one year or less than in maturity.”

The money market is a financial market where short-term securities such as commercial bills, treasury bills, etc are traded and short term funds are loaned and borrowed. (Jha, Bhusal, and Bista)

Characteristics of Money Market

source:www.slideshare.net
source:www.slideshare.net
  1. Financial Movement

Under the money market, loans are extended in a broad way and the velocity of loan is very high. That is how the commercial bank utilizes its fund.

  1. Use of Near Money

Under the money market, use of near-money is expanded in a pervasive way. Like bill of exchange, debenture, short run treasury bills, short run bond, etc are the examples of near money under money market.

  1. Conversion to quick cash

The important characteristic of the money market is that it can convert to the cash quickly at a relatively low cost. It has a low price risk due to a short time period.

  1. Role of Central Bank

Central bank plays an important role in helping money market. Nepal Rastra Bank has given the direction to another bank for the expansion of their branches to the rural areas.

(Karna, Khanal, and Chaulagain)

Concept of Capital Market

source:www.slideshare.net
source:www.slideshare.net

The capital market is a financial market where the transaction of long-term securities is traded by both government and companies. Long-term securities are like: T-bond, corporate bond, debenture, etc. The funds collected in this market are preserved for long-term investment. The main objective of the capital market is to rise huge capital for the organization. The capital market is also known as long-term credit market.

According to Encyclopedia Britannica, “Capital market, the market for long-term funds used in the financing of business and government. These funds are collected be such financial intermediaries as saving banks, saving and loan associations, insurance companies, stockbrokers and investment companies, which channel them to users. The lender of long-term funds receives claims such as stocks, bonds mortgages saving account and insurance policies”.

According to S.C.Kuchhal, “The capital market is concerned with long term finance. In the widest sense, it consists of a series of the channel through which the saving of the community are made available for industrial and commercial enterprises and public authorities.”

Thus, the capital market is designed to finance long-term funds to trade securities on the bond and the stock market, where maturity period is more than one year. Capital market includes stock market and bond market.

Bond Market: It provides financing for bond issuance and bond trading.

Stock Market: It provides financing by shares or stock issuance and by share trading.

Components of Capital Market

Capital market consists of Primary market and Secondary market

Primary market: In primary market newly issued bonds and stocks are exchanged. It is the market for the first issue of securities. This issue is normally done by means of public issue or by private placement.

Secondary market: In secondary market buying and selling of already existing bonds and stocks take place. It is the market for trading securities once they have been issued. (Jha, Bhusal, and Bista)

Characteristics of Capital Market

  1. Duration of Loan

The capital market provides a long-term loan. Under capital market, duration of the loan is above one year.

  1. Capital's Liquidity

Under capital market, capital is mobilized by means of different banks and financial institute. Such mobilization is given in liquidity as well.

  1. Role of Market

The role of the capital market is to collect the saving and mobile money market. Under capital market money are mobilized through the investment.

  1. Institutional Transaction

Under capital market, only high standard and useful securities are transacted because lending and borrowing are done on the basis of competition.

Difference between Money and Capital Market

Bases

Money Market

Capital Market

Definition

Financial market where funds are borrowed or loaned for short period of time i.e. less than one year.

Financial market where funds are borrowed or loaned for a long period of time i.e. one year or more than a year.

Trading materials

Commercial paper, certificates of deposits, short-term bonds, treasury bills, etc.

Shares, debentures, bonds, government securities, etc.

Principle participants

Unorganized sectors: creditors, landlords, friends, and relatives. Organized sectors: central bank, commercial bank, cooperative societies, etc.

Securities market: stock market, primary market, secondary market. Other non-securities market.

Suppliers

Central bank, commercial bank, credit union, acceptance house, etc

Commercial bank, financial institutions, development bank, etc

Demanders

Individuals, business house, government, other, etc.

Government, business house, agricultural sectors, etc

Bibliography

Adhikari, D. R., Dahal, G. D., Acharya, K. R., Lamichhane, B., & Shrestha, P. P. (2011). Economics II. Kathmandu: Asmita.

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter publisher and distrtibutors Pvt.Ltd., 2070.

  1. A money market is that marketing where financial instruments with high liquidity and very short maturities are traded. 
  2. The capital market is a financial market where the transaction of long-term securities is traded by both government and companies. 
  3. Capital market includes bond market and stock market.
  • Characteristics of money market
    1. Financial Movement
    2. Use of near money
    3. Conversion to quick cash
    4. Role of central bank 
  • Characteristics of capital market
    1. Duration of loan
    2. Capital's liquidity
    3. Role of market
    4. Institutional transaction

 

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