Page 303 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 14.1.1 Capital Market

The capital market is the market for securities, where companies and governments can raise
long-term funds. It is a market in which money is lent for periods longer than a year.
The different types of financial instruments that are traded in the capital markets are equity
instruments, credit market instruments, insurance instruments, foreign exchange instruments,
hybrid instruments and derivative instruments.

Capital Market consists of primary market and secondary market. In primary market newly
issued bonds and stocks are exchanged and in secondary market buying and selling of already
existing bonds and stocks take place.

1. Primary Capital Market: The primary capital markets is also called the New Issue Market
or NIM. The securities which are introduced in the market are sold for first time to the
general public in this market. This market is also known as the long term debt market as
the fund raised from this market provides long term capital.
2. Secondary Capital Market: The secondary capital market deals with those securities that
are already issued in an initial public offering in the primary market. Typically, the
secondary markets are those where previously issued securities are purchased and sold.

14.1.2 Money Market

Money market provides a mechanism by which short-term funds are lent out and borrowed. It
is place where a bid is made for short-term investible funds at the disposal of financial and other
institutions by borrowers comprising institutions, individuals and the Government itself. Thus,
money market covers money, and financial assets which are close substitutes for money. The
money market is generally expected to perform following three broad functions:
 To provide an mechanism to fulfill the demand and supply of short term funds
 To provide a tool to manage the liquidity and interest rate in the economy

 To provide reasonable access to providers and users of short-term funds to fulfill their
borrowing and investment requirements at an efficient market clearing price
Money market can be of two types namely organized money market and unorganized money
market.
1. Organized money market: It comprises of commercial banks, financial institutions and all
short term asset trading institutions.

2. Unorganized Money Market: Along with the organized money market, there exists a very
strong unorganized money market, especially in countries that are developing but are
still to be developed. In such countries, people and small companies prefer taking loans
from relatives, usurers, sahukars, etc, instead of going and applying to organized
institutions registered under the monetary authorities.

Task Select the correct answer from the given alternatives:
1. The component of money market is:
(a) Government securities market
(b) Bill market
(c) Primary market
Contd...

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