ASSIGNMENT 1 - A BLOG ON CAPITAL MARKET AND MONEY MARKET

 

ASSIGNMENT 1-

A BLOG ON CAPITAL MARKET AND MONEY MARKET

 

Capital markets commonly referred to as the stock markets have been in existence for centuries. The British East India Company was the first company to invite the public to buy shares in the company. There are generally two main types of Capital market – primary market and secondary market. The primary capital market is the marketplace where the companies create and issue bonds, stocks, and other liquid assets to the public. One of the most important roles of primary market is to issue publish share or conduct Initial Public Offering for companies. The person who purchases becomes an investor. So, it can imply that the primary market is the market of common or public investors and businesses. The market where previously issued/bought/sold liquid assets are traded among the investors is called the secondary market. It is also known as the stock market. The rates and prices in the secondary capital market are fairly controlled by the demand and supply of liquid assets in the business industry. There are different types of instruments in a Capital market. Equity securities refer to the part of ownership that is held by shareholders in a company. The main difference between equity holders and debt holders is that the former does not get regular payment, but they can profit from capital gains by selling the stocks. The equity holders get ownership rights and they become one of the owners of the company. Debt Securities can be classified into bonds and debentures: Bonds are fixed-income instruments that are primarily issued by the centre and state governments, municipalities, for financing infrastructural development or other types of projects. Debentures are unsecured investment options unlike bonds, and they are not backed by any collateral. The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution or company. Derivative instruments are capital market financial instruments whose values are determined from the underlying assets, such as currency, bonds, stocks, and stock indexes. The four most common types of derivative instruments are forwards, futures, options and interest rate swaps. Exchange-traded funds are a pool of the financial resources of many investors which are used to buy different capital market instruments such as shares, debt securities such as bonds and derivatives. Foreign exchange instruments are financial instruments represented on the foreign market. It mainly consists of currency agreements and derivatives. Participants of the capital market may be discussed in groups because of their similar activities. Examples: Loan Providers, Loan takers, financial intermediaries

 

Money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders. The market offers very high liquidity as the assets can easily convert into cash. Thus, it helps businesses and the government in meeting their working capital requirements. Money Market refers to the financial segment for the trade of liquid and short-term assets that can be easily converted into cash. Businesses and governments particularly benefit from this market as it helps in meeting their working capital requirements.

Money market instruments are short-term financing instruments aimed at increasing businesses' financial liquidity. The key feature of these types of securities is that they can quickly be turned to cash while maintaining an investor's cash needs. Call money is one of the most liquid instruments. The validity is generally one working day. Banks can face shortfalls that can be solved by borrowing through call money. Borrowing and lending take place at the call rate. T-bills are issued by a country’s central bank on behalf of its government. The government often raises funds through Treasury Bills that provide quick money. In the money market, it is considered one of the safest investments due to the government backing. The tenure of T-bills is generally from 14 days to 364 days. Companies generally use commercial papers to fund their short-term working capital needs, such as payment of accounts receivables, inventory purchases, etc. However, these are unsecured in nature. CPs come with an average maturity of two odd months. A certificate of deposit is a type of time deposit with the bank. Only a bank can issue a CD. Like all other time deposits, CDs also have a fixed maturity date and cannot be withdrawn before maturity. This acts as a major disadvantage for the instrument. Repo is a repurchase agreement with repo as its abbreviation. These are very short-term in nature. Tenure ranges from overnight to a month, while the securities can be directly transferred without the credit risk. Money market also has different participants who actively take part in the functioning and carrying out of activities. The Central Government is an issuer of Government of India Securities and Treasury Bills. These instruments are issued to finance the government as well as for managing the Government’s cash flow T-bills are short-term debt obligations of the Central Government. These are discounted instruments. State Governments issue securities termed as State Development Loans (SDLs), which are medium to long-term maturity bonds floated to enable State Governments to fund their budget deficits. Public Sector Undertakings (PSUs) issue bonds which are medium to long-term coupon bearing debt securities. PSU Bonds can be of two types: taxable and tax-free bonds. These bonds are issued to finance the working capital requirements and long-term projects of public sector undertakings. Banks issue Certificate of Deposit (CDs) which are unsecured, negotiable instruments. These are usually issued at a discount to face value. They are issued in periods when bank deposits volumes are l and banks perceive that they can get funds at low interest rates. Their period of issue ranges from 7 days to 1 year. Private Sector Companies issue commercial papers (CPs) and corporate debentures. CPs are short-term, negotiable, discounted debt instruments. They are issued in the form of unsecured promissory notes. Provident funds have short term and long-term surplus funds. They invest their funds in debt instruments according to their internal guidelines as to how much they can invest in each instrument category. General insurance companies (GICs) have to maintain certain funds which have to be invested in approved investments. They participate in the G-Sec, Bond and short-term money market as lenders. Life Insurance Companies (LICs) invest their funds in G-Sec, Bond or short-term money markets. They have certain pre-determined thresholds as to how much they can invest in each category of instruments. Mutual funds invest their funds in money market and debt instruments. The proportion of the funds which they can invest in any one instrument vary according to the approved investment pattern declared in each scheme. Non-banking Finance Companies (NBFCs) invest their funds in debt instruments to fulfil certain regulatory mandates as well as to park their surplus funds. NBFCs are required to invest 15% of their net worth in bonds which fulfil the SLR requirement.

Capital Markets Regulation Is Stronger, But Some Gaps Still Must Be Closed- Countries have made substantial progress toward implementing capital markets regulatory reform, but important gaps remain, and new challenges have raised the bar. 

ANALYSIS AND INTERPRETATION: 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. We need to know capital market because it provides a platform for mobilising funds. Capital markets is also referred to as stock markets. It helps to accelerate the process of economic growth. It helps in proper allocation of resources from the people who have surplus capital, to the people who are in need of capital. So, we can say it helps in the expansion of industry and trade, in both public and private sectors leading to balanced economic growth in the country.

==================================================================