Financial markets

A financial market is a place where buyers and seller come together to trade in financial assets
such as bonds, stocks, derivatives, currencies and commodities. The main objective of a
financial market is to fix prices for global trade, increase capital and transfer risk and liquidity.

The Primary Market

The primary market is where securities are created. It's in this market that firms sell (float)
new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an
example of a primary market. These trades provide an opportunity for investors to buy
securities from the bank that did the initial underwriting for a particular stock. An IPO occurs
when a private company issues stock to the public for the first time.

For example, company ABCWXYZ Inc. hires five underwriting firms to determine the financial
details of its IPO. The underwriter’s detail that the issue price of the stock will be $15.
Investors can then buy the IPO at this price directly from the issuing company.

This is the first opportunity that investors have to contribute capital to a company through the
purchase of its stock. A company's equity capital is comprised of the funds generated by the
sale of stock on the primary market

Features of Primary Market

 A company turns to the primary market for its long-term capital needs. Fulfilling the
need for long term capital is, therefore, a feature of a primary market.
 A fresh issue of securities takes place in the primary market. The buyers are usually
institutional investors and retail investors.

The Secondary Market

For buying equities, the secondary market is commonly referred to as the "stock market." This
includes the New York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the
world. The defining characteristic of the secondary market is that investors trade among
themselves.

That is, in the secondary market, investors trade previously issued securities without the
issuing companies' involvement. For example, if you go to buy Amazon (AMZN) stock, you are
dealing only with another investor who owns shares in Amazon. Amazon is not directly
involved with the transaction.

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 In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity,
this date is often many years down the road. Instead, bondholders can sell bonds on the
secondary market for a tidy profit if interest rates have decreased since the issuance of their
bond, making it more valuable to other investors due to its relatively higher coupon rate.

Features of Secondary Market

 The secondary market helps companies fulfil short-term liquidity requirements. It

facilitates the marketability of existing securities.
 It also ensures true and fair dealing for the protection of the investor’s interest.

Difference between Primary and Secondary market

Primary market Secondary market

Also called as New Issue Market (NIM) After Issue Market (AIM)

Role of the Market where stocks are issued for the Market where stocks are
market first time traded once issued

Intermediaries Investment banks Brokers

Sale of Directly by companies to investors Sold and purchased

securities amongst investors and
traders

Price of shares Fixed at par value Changes depending on the

supply and demand of
shares

Conclusion

The basic difference between the primary and secondary market lies in the type of companies
and investors. Companies looking for long term investments for an IPO which is a function of
the primary markets, while companies that look for short-term capital use the secondary
market.

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 Thought the financial market has various components; the two most important components are
the money market and capital market. In the money market, only short-term liquid financial
instruments are exchanged. Whereas, in the capital market, only long-term securities are dealt
with.

The Money Market

IS a random course of financial institutions, bill brokers, money dealers, banks, etc., wherein
dealing on short-term financial tools are being settled is referred to as Money Market. These
markets are also called wholesale markets.
In India, money markets serve an essential objective of providing liquid cash to borrowers and
fund providers for a small period of time, while keeping a balance between the supply and
demand short-term funds. The important money market instruments in India today cover call
money, commercial papers, certificates of deposit, treasury bills, and forward rate agreements.
Money Market is a disorganised market, so the dealing is done off the public exchange market,
i.e. Over the Counter (OTC), within two bodies by using email, fax, online and phones, etc. It
supports the industries to accomplish their working capital demand by circulating short-term
funds in the economy.

KEY TAKEAWAYS

 The money market is a short-term lending system. Borrowers tap it for the cash they
need to operate from day to day. Lenders use it to put spare cash to work.
 The capital market is geared toward long-term investing. Companies issue stocks and
bonds to raise money to grow their businesses. Investors buy them to share in that
growth.
 The money market is less risky than the capital market while the capital market is
potentially more rewarding.
The returns are modest but the risks are low. The instruments used in the money markets
include deposits, collateral loans, acceptances, and bills of exchange. Institutions operating in
the money markets include the Federal Reserve, commercial banks, and acceptance houses.
About Liquidity
The money market plays a key role in ensuring that banks, other companies, and governments
maintain the appropriate level of liquidity on a daily basis, without falling short and needing a
more expensive loan and without hoarding excess cash that isn't earning interest.

Individual investors may use the money markets to invest their savings in a safe and accessible
place. Many choices are available, including mutual funds that focus on state money market
funds, municipal funds, and U.S. Treasury funds. Many of the government funds are tax-free. A
money-market fund also can be opened at most banks.

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 Features of Money Market
A few general money market features are:

 It is fund-term market funds.

 It’s maturity period up to one year.
 It trades with assets that can be transformed into cash easily.
 All the transactions take place through phone, email, text, etc.
 Broker not required for the transaction
 The components of a money market are the Commercial Banks, Non-banking financial
companies and Central Bank, etc.

5 Types of Money Markets

Money market instruments have different securities, which can be utilised for short term
borrowings. A few different types of market money are:

 Call Money- It portrays a short-term loan with maturities term starting from one day to
fourteen days, and it can be repaid on demand.
 Treasury Bill- It is the oldest and traditional money market instrument and is practised
across the globe. The instrument is declared by the Government and does not have to
pay any interest. This is available at a discounted rate at the time of issue.
 Ready Forward Contract (Repo)-The word repo is acquired from the phrase “repurchase
agreement”. It is an agreement that specifies the sale and purchase of an asset. In India,
this agreement is prepared between different banks and sometimes between bank and
RBI for short term loans.
 Money Market Mutual Fund-This is the alternative name for liquid funds and are the
lowest risk debt funds.
 Interest Rate Swaps- This is the latest money market instruments in India. Here, two
parties sign an agreement, where one decides to pay a fixed rate of interest, and the
other pays a floating rate of interest.

Money Market Examples

Since they are extremely liquid in nature, the money market recovery period is restricted to one
year. A few examples of Money Market are:

 Trade Credit
 Commercial Paper
 Certificate of Deposit
 Treasury Bills

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 The Capital Market

A kind of financial market where the company or government securities are generated and
patronised with the intention of establishing long-term finance to coincide the capital necessary
is called Capital Market.
In this market, the buyers use funds for longer-term investment. The nature of the capital
market is risky markets. Therefore, it is not used for short-term funds investment. Most of the
investors obtain the capital markets to preserve for education or retirement.
The overriding goal of the company’s institutions that enter into the capital markets is to raise
money for their long-term purposes, which usually come down to expanding their businesses
and increasing their revenues. They do this by issuing stock shares and by selling corporate
bonds.

Differences between Money Market and Capital Market

Money Market Capital Market

Definition

A random course of financial institutions, bill A kind of financial market where the company or
brokers, money dealers, banks, etc., wherein government securities are generated and patronised
dealing on short-term financial tools are being with the intention of establishing long-term finance
settled is referred to as Money Market. to coincide with the capital necessary is called
Capital Market.

Market Nature

Money markets are informal in nature. Capital markets are formal in nature.

Instruments involved

Commercial Papers, Treasury Certificate of Bonds, Debentures, Shares, Asset Secularisation,

Deposit, Bills, Trade Credit, etc. Retained Earnings, Euro Issues, etc.

Investor Types

Commercial banks, non-financial institutions, Stockbrokers, insurance companies, Commercial

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 central bank, chit funds, etc. banks, underwriters, etc.

Market Liquidity

Money markets are highly liquid. Capital markets are comparatively less liquid.

Risk Involved

Money markets have low risk. Capital markets are riskier in comparison to money
markets.

Maturity of Instruments

Instruments mature within a year. Instruments take longer time to attain maturity

Purpose served

To achieve short term credit requirements of the To achieve long term credit requirements of the
trade. trade.

Functions served

Increasing liquidity of funds in the economy Stabilising economy by increase in savings

Return on investment achieved

ROI is usually low in money market ROI is comparatively high in capital market

Features of Capital Market

Important features of the capital market are:

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  Unites entrepreneurial borrowers and savers
 Deals with long-term investments.
 Agents are required.
 It is controlled by government rules and regulations.
 Deals in both commercial and non-commercial securities.
 Foreign Investors.

Types of Capital Market

The Capital Market instrument involves both the auction market and dealer market. It is
classified into two sections: Primary Market and Secondary Market.

 Primary Market: Here, fresh contracts are given to the people for the subscription
purpose.
 Secondary Market: The securities that have already been issued are exchanged among
investors.

Capital Market Examples

The capital market circulates the capital in the economy among the user and the suppliers of
money.
The maturity period is more than one year or sometimes it is incurable (no maturity).

 Stocks
 Bonds
 Debentures
 Euro issues
Conclusion

 Both are part of the financial markets. The main aim of the financial markets is to
channel funds and generate returns. The financial markets stabilize the money supply by
lending borrowing mechanism, i.e., surplus funds are provided to borrowers by the
lenders.
 Both are required for the betterment of the economy as they fulfill the business and
industry’s long-term and short-term capital needs. The markets encourage individuals to
invest money to gain good returns.
 Investors can tap into each of the markets depending on their needs. Capital markets
are generally less liquid but provide good returns at higher risk, whereas money markets
are highly liquid but provide lower returns. Money markets are also considered safe
assets.
 However, market anomalies and inefficiency due to some aberrations above may not
hold. Due to such irregularities, investors look for arbitrage opportunities to get higher

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 returns. Money markets are considered safe, but they sometimes give negative returns.
Thus, investors should study the pros and cons of each financial instrument and the
condition of the financial market before putting their money for the short term or long
term.

Debt Market

Investments in debt securities typically involve less risk than equity investments and offer a
lower potential return on investment. Debt investments by nature fluctuate less in price than
stocks. Even if a company is liquidated, bondholders are the first to be paid.

Bonds are the most common form of debt investment. These are issued by corporations or by
the government to raise capital for their operations and generally carry a fixed interest rate.
Most are unsecured but are issued with a rating by one of several agencies such as Moody's to
indicate the likely integrity of the issuer.

When compared to the equity market, the debt market is associated with low risk. The debt
market acts as a regular source of income and capital preservation through which the returns
from the debt market are generally lower than those from the equity market.

In the equity market, you buy and sell shares. In the debt market, bonds, certificates of
deposits, debentures, government securities are bought and sold.

The debt instruments include:

 Bonds: Both the government and the company, can issue bonds. Investing in the bonds,
you effectively loan money to the issuer of bonds. The issuer then repays this loan,
along with interest, for a predetermined period.
 Government securities or G-secs: These are issued by the RBI on behalf of the
Government of India. These are offered for both the short and long terms. Short term
bills with a maturity of less than one year are called Treasury Bills (T-bills) while long
term instruments are called Government Bonds or Dated Securities.
 Debentures: These are issued solely by the companies and come with a fixed interest
rate. You can invest in either convertible or non-convertible debentures.

Equity Market

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 Equity, or stock, represents a share of ownership of a company. The owner of an equity stake
may profit from dividends. Dividends are the percentage of company profits returned to
shareholders. The equity holder may also profit from the sale of the stock if the market price
should increase in the marketplace. The owner of an equity stake can also lose money. In the
case of bankruptcy, they may lose the entire stake.

The equity market is volatile by nature. Shares of equity can experience substantial price
swings, sometimes having little to do with the stability and good name of the corporation that
issued them.

The equity market is viewed as inherently risky while having the potential to deliver a higher
return than other investments. One of the best things an investor in either equity or debt can
do is to educate themselves and speak to a trusted financial advisor.

Equity markets are vulnerable to political, economic, national, and global factors. Investors are
quite cautious in entering the equity market as it is associated with higher risk. One can be
either an investor or a trader in the equity market. A company can issue shares to raise capital.
If the company grows, the value of the shares rises. Many traders buy and sell shares within a
very short period or one can choose to hold shares over a longer period too.

Differences Between Equity and Debt Market:

Equity Market Debt Market

Nature of
You invest in markets You invest in loans
investment
Risk Involved Riskier than the debt market Lower risk involved
Lower on returns than the equity
Nature of Returns Reaps higher returns
market
Type of Earning You reap dividends You earn interest
Much more volatile than debt
Volatility Low on volatility
market
Types of Trades in the Equity Market

 Intraday Trades: It is the process of buying and selling off of shares on the same day.
 Buy Today Sell Tomorrow (BTST): This enables you to sell off the shares before it is
credited to your Demat account.
 Position Trades: Position trading disregards short-term price fluctuations in favour of
long-term goals.

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