The financial system is an important element of an economy. The financial resources are the exchange through the financial system. The financial market is the heart of the financial system. The financial market refers to the place or mechanism through which financial instruments are traded.
According to Copper and others " Financial markets are the markets in which financial instruments are traded".
The two important types of Financial Market are the money market and capital market. The concept of these two types of Financial Market has been presented below.
Concept of money market
The money market refers to the whole area where money is bought and sold. To be more precise, the money market is simply a process of buying and selling money. Stock exchange the money market is not a particular place what is a system. The transactions may take place between different persons by telephone, fax without a personal meeting.
The short term funds are transactions in the money market. In general, the term of the loan is less than one year. The main function of the money market is to make available working capital to the business and loan to the government. It makes available loans for the speculation of goods and securities.
According to Dudley G. Luckett: " the money market is a market for short-term (less than 1 year) loans. Its very name suggests that it is money that is being bought and sold".
In brief, the money market is on the means for the exchange of short-term credit. It is quite different from the capital market which deals in long-term credit.
Concept of capital market
The market dealing in long-term finance is known as the capital market. This market makes available funds for long-term investment. Hence, the capital market is a market for long-term credit. The meaning of capital market becomes clear from the following definitions:
According to Dudley G. Luckett: " capital market suggests what the name implies: a market for capital funds. Strictly speaking, the capital market encompasses any transactions involving long term debt or equity obligations".
Difference between money market and capital market
The money market and the capital market are interrelated. The main points of difference between these two are as follows:
1. Definition
The money market is a component of the financial markets where short-term borrowing takes place. Capital market is a component of financial markets where long-term borrowing takes place.
2. Maturity
In general, two markets are separated on the basis of the maturity of the credit instruments related to these markets. The maturity of the instruments of the money market is one year or less than one year. On the other hand, the maturity of the instruments of the capital market is more than one year.
3. Risks
The risks are lists in the money market. There is a loss probability of default of the creditor less than one year of maturity. Likewise, 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. Due to this, risks, are more and are of varied nature in the capital market.
4. Instruments
The main instruments of the money market are treasury bills, commercial papers, certificates of deposit which are of short-term nature. On the other hand, the main instruments of the capital market are debentures, equality shares, and government securities which are of a long-term nature.
5. Institutions
The different financial institutions related to short-term credit participate in the money market. But there is the predominance of commercial banks. In fact, commercial banking and institution are related to the money market. On the other hand, different kinds of financial intermediaries participate in the capital market. Participants of the capital market are Development Bank, the finance company, provident fund, insurance company, investment company, and so on.
6. Finance
The money market deals in only short-term funds. it receives short-term deposits and also provides short-term credit. On the other hand, the capital market receives long term deposit and also grant long term loan and equity capital of the business and the government.
7. Basic Role
The basic role of the money market is liquidity adjustment. While the basic role of the capital market is to put the capital of work.
8. Relation with Central Bank
The money market has a closed and direct relationship with the central bank. The central bank implements its monetary policies Road this market. The central bank directly regulates the commercial banks in the money market. On the other hand, the central bank has influence over the capital market only indirectly through the money market. Similarly, the Institutions of the capital market are less regulated by the central bank.
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