Financial Market

A financial market is a place where people can buy and sell financial instruments like stocks, bonds, futures, etc. It’s also called a stock exchange or the trading floor of any bank. Savings are channelized to investment through the financial market.

 How does it work?

The idea behind this system is that the price of an asset will fluctuate according to supply and demand. The supply of an asset can be increased by buying from someone who has more than he needs or selling from someone who has less than he needs. This will increase the amount in supply which will decrease its value. Similarly, if you have more money than you need, you can buy some assets.

There are two types of financial markets. They are:

Money market
Capital market

Concept of Money Market

The money market is a short-term debt instrument that is used to raise funds for the purpose of lending. The money market consists of three main types: Commercial Paper, Treasury Bills, and Repo.

Commercial paper is a short-term unsecured loan that can be issued by companies to finance their working capital needs. It is commonly used for businesses that are in need of quick liquidity and have the ability to repay it quickly without having to go through the process of issuing long-term debt.

What does commercial paper consist of?

A commercial paper consists of two main parts: (1) a note and (2) an indenture. The note is the actual document that outlines the term’s condition and other important information about the commercial paper, while the indenture details how much money will be borrowed and when it will be repaid.

Treasury bills are short-term debt instruments issued by the Government. They mature in one year or less and carry a fixed interest rate. The principal amount is repaid at maturity, but the interest accumulates from the date of issue to that date only. Treasury bills are used for financing government expenditures and investments, as well as for meeting foreign exchange requirements of the country.

Repo (repurchase) refers to an agreement in which one party agrees to repurchase security from another at a specified price. A repurchase repo is a short-term loan that banks can take from other banks. It’s also called repos, repos (short for repurchase agreements), or reverse repos. Banks use it to finance their own securities and loans. The central bank of the U.S., the Federal Reserve, provides these loans through its open market operations in order to stabilize the economy by controlling interest rates and money supply.

What are the benefits of using Repo?

The main benefit of using repo is that it allows you to borrow at a very low rate compared to your deposit rate but with some conditions attached to it.

 What are the benefits of using the Money Market?

It provides you with liquidity when you need it most. It helps you to manage your cash flow by borrowing or lending at an interest rate that is lower than what banks offer on their own products. You can borrow from money markets at any time and pay back the loan whenever you want to do so.

The money market is the part of financial markets where short-term loans are made. It is a place where investors can buy and sell securities such as bonds, bills, and other fixed-income instruments. The money market also includes investments that are not based on any physical asset such as cash or gold. Money markets are usually used by banks to meet their short-term funding needs while they wait for long-term assets to mature.

Types of money market:

Short-term money market:

This is the most liquid and short short-term money market. It is also known as the T-bill or Treasury bill. The maturity period for this type of money market is less than one year, and it has very high liquidity. If you have any T-bills in your bank account, then that will be considered cash in your bank account. You can use these bills to buy goods or services from others and pay them back later when you need to. When the government issues new bills, they are called new-issue bills.  It allows you to invest in the financial markets for a period of less than one year.

Long-term money market:

Long Term Money Market works by allowing you to deposit funds into your account at any time with no restrictions on how much or when you can withdraw them. You will also have access to additional features such as cash management services and interest rates that are higher than what is offered in other types of accounts.

Concept of Capital market

The capital market is a system of financial markets where investors are allowed to buy and sell shares, bonds, mutual funds, and other, investment products. The term “capital” means money that can be used to make investments in the form of stocks or bonds. This money is also known as capital assets because it represents an asset for the business enterprise. In simple words, it is a source of wealth for any company. It helps them earn profits by investing their resources into various projects or ventures such as manufacturing, mining, etc. The companies use these funds to expand their businesses and maintain growth over time.

A capital market is a place where investors can purchase shares of companies. It is also known as the stock exchange or simply, the market.

The capital markets are composed of two parts:

Primary and secondary markets.

Primary markets are those that offer stocks to retail investors who do not have access to large amounts of money (e.g., small investors). Secondary markets are those in which only institutional buyers participate (e.g., mutual funds, and hedge funds). In both cases, trading takes place through brokers who act as intermediaries between buyers and sellers in order to execute transactions on their behalf; they charge commissions for their services as well as fees.

Capital Market vs Money Market

Basis of difference	Money Market	Capital Market
Maturity Period	The money market is the market for short-term borrowings of small amounts which have a maturity period of less than one year.	The capital market is the market for medium or long-term borrowings of assets that have a maturity period of more than one year.
Credit Instruments	Money, Collateral loans, bills of exchange, etc.	Bonds, debenture, equities, shares, stocks, etc.
Institution for operations	The central bank, commercial bank, etc.	Non-banking financial institutions, Development banks, Finance companies, Insurance companies, investment companies, etc.
Purpose of loan working	Working capital to buy raw materials, payment of wages, etc.	Fix capital to buy fixed factors of production such as machinery, land, etc.
Risk	Low( Because of the short maturity period)	High(Because of the long maturity period)
Basic Role	Liquidity adjustment	To put capital to work
Relation with the central bank	Direct	Indirect

 

Conclusions of the Financial Market by a Trader

Traders draw conclusions to ascertain if their investment choices have been successful or unsuccessful, and if they have succeeded in achieving their objective, which was to generate money through investments, they will sell their stocks or shares at a price.