Money Market vs Capital Market

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    University of Mumbai

    2013-2014

    A Project Report on

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    Money market is a market for short term loans and financial assets. It is a

    market for lending and borrowing of short term funds. The Money market

    refers to an activity rather than a place. This market supplies funds for

    financing current business operations, working capital requirements of

    industries and short term requirements of government

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    A market in which individuals and institutions trade financial securities.

    Organiations!institutions in the public and private sectors also often sell

    securities on the capital markets in order to raise funds. Thus, this type of

    market is composed of both the primary and secondary markets.

    "O#"$%T O& MO#$' MA()$T A#* "A%ITA+ MA()$T

    The financial system is an important element of an economy. The financial

    resources are e-changed through the financial system. The financial

    market is the heart of the financial system. The financial market refers to a

    place or mechanism through which financial instruments are traded.

    According to .). "ooper and other &inancial markets are the markets in

    which financial instruments are traded.

    imilarly, according to *udley /. +uckett, &inancial market is to be

    understood as any e-change of a variety of financial instruments.

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    The financial market is said to the 0brain1 of entire economic system. The

    savings are channelled to investments through financial market. The

    financial instruments like stock, bond, insurance policy, government

    securities and debentures are traded in the financial market.

    The two important types of financial market are the money market and

    capital market. "oncepts of these two types of financial market have been

    presented below.

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    In economics, market does not mean a particular place. Instead, the market

    is a process of buying and selling of goods by making contract through

    different mediums. 2ence, money market also does not denote a particular

    place. The money market refers to the whole area where money is bought

    and sold. To be more precise, money market is simply a process of buying

    and selling of money. 3nlike a stock e-change, the money market is not a

    particular place but is a system. The transactions may take place between

    different persons by telephone, fa- without personal meeting.

    The short4term funds are transacted in the money market. In general the

    term of the loan is less than one year. 2ence, the evidence of credit having

    maturity of less than one year is the instruments of money market. The

    main function of the money market is to make available working capital to

    the business and loan to the government. It also makes available loans for

    the speculation of goods and securities.

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    The business firms use the money market to distribute wages and salaries,

    repair equipment1s, pay energy charge, ta-es and so on. The government

    uses it to meet the deficit in public revenue. The finance companies use it

    to provide loans to the consumers. The banks use it to meet the temporary

    deficit in reserve. All these credit are only for up to one year.

    The meaning of money market becomes clear from the following

    definitions54

    According *udley /. +uckett 40The money market is a market for

    short term 6less than one year7 loans. It1s very name suggests that it

    is money that is being bought and sold.

    In the words of 8.A. "ocharan, The money market is a market which

    trades in short term, highly liquid, negotiable debt instruments of one

    year or less in maturity.

    9orld :ank has defined the money market as, A market in which

    short term securities such as treasury bills, certificates of deposits

    and commercial bills are traded.

    In brief, the money market is a means of e-change of short term

    credit. It is quite different from the capital market which deals in long

    term credit.

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    The market dealing in long term finance is known as capital market. This

    market makes available funds for long4term investment. 2ence, capital

    market is a market for long term credit. The meaning of capital market

    becomes clear from the following definitions54

    According to *udley /. +uckett, A capital market is ;ust what the name

    implies5 a market for capital funds. trictly speaking, the capital marketencompasses any transactions involving long4term debt or equity

    obligations.

    In the words of .). "ooper and others, The framework for the borrowing

    and lending of funds for periods longer than a year is called the capital

    market.

    9orld :ank has defined the capital market as, The market in which long4

    term financial instruments such as equities and bonds are raised and

    traded

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    The money market is a wholesale debt market for low risk, highly liquid

    short term instrument. &unds are available in this market for periods

    ranging from a single day up to a year. Ma;orly, /overnments, banks and

    other financial institutions dominate this market. The money market is a

    market for short term financial assets that are close substitutes of money.

    The most important feature of a money market instrument is that it is liquid

    and can be turned over quickly at low cost and provides an avenue for

    equilibrating the short term funds of lenders and the requirements of

    borrowers.

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    The money market is a subsection of the fi-ed income market. 9e

    generally relates the term fo-ed income as being synonymous to bonds. In

    reality, a bond is ;ust one type of fi-ed income security. The difference

    between the money market and the bond market is that the money market

    specialies in short term debt markets securities 6debt that matures in less

    than one year7.

    Money market instruments are also called cash investments because of

    their short maturities.

    Money market instruments are very liquid and are considered to bee-tremely safe. ince they are e-tremely conservative, money market

    securities offer lower returns than most other securities. One of the main

    differences between the money market and the stock market is that the

    money market securities trade in very high denominations. This limits

    access for the individual investor. &urthermore, the money market is a

    dealer market which means that the firms buy and sell securities in theirown accounts and at their own risk. "ompare this to the stock market the

    investor takes the risk of holding the stock. Another characteristic of a

    dealer market is the lack of trading floor or e-change. *eals are transacted

    over the phone or through electronic systems.

    The easiest way to gain access to the money market is with the money

    market mutual funds. These funds pool together the assets of thousands of

    investors in order to buy the money market securities on their behalf.

    2owever, some money market instruments like treasury bills can be

    purchased directly.

    "2A(A"T$(ITI" O& MO#$' MA()$T

    =. The money market deals in financial assets having maturity period up

    to one year only.

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    >. In the money markets participants borrow and lend for short periods

    that is up to twelve months.

    ?. Transactions usually take place via oral communication or written

    communication.

    @. There is no formal place like stock e-change.

    . The money market comprises of the Treasury :ills market,

    "ommercial :ills market, "all Money market etc.

    B. Money market components include central bank, commercial bank,

    non banking financial companies, etc.

    C. The central bank plays a pivotal role in the money market.

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    =. %rovides the mobiliation of short term funds.

    >. 2elps to overcome the short term deficits.

    ?. $nables the user to have easy access to short term funds in order to

    meet their requirements quickly.

    @. %rovides the central bank with the authority to influence and regulate

    liquidity in the economy