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Unit 2: Financial Markets

2.1 Types of Financial Market Notes

A Financial Market can be defined as the market in which financial assets are created or transferred.
As against a real transaction that involves exchange of money for real goods or services, a
financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial
Instruments represent a claim to the payment of a sum of money sometime in the future and/or
periodic payment in the form of interest or dividend.
1. Money Market: The money market is a wholesale debt market for low-risk, highly-liquid,
short-term instrument. Funds are available in this market for periods ranging from a
single day up to a year. This market is dominated mostly by government, banks and
financial institutions.
2. Capital Market: The capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.
3. Forex Market: The Forex market deals with the multicurrency requirements, which are
met by the exchange of currencies. Depending on the exchange rate that is applicable, the
transfer of funds takes place in this market. This is one of the most developed and integrated
market across the globe.
4. Credit Market: Credit market is a place where banks, FIs and NBFCs Purvey short, medium
and long-term loans to corporate and individuals.

Caselet Financial Literacy

inancial literacy should make us aware of the rewards and risks in the financial
markets and help us make informed choices. It is a tool to improve the skill and
Fconfidence with which a common man improves and secures his financial condition.
It is only a primary step and not a driving force behind financial inclusion.

India is among the world's most efficient financial markets in terms of technology and
regulation. It has one of the highest savings rate in the world yet only four per cent of it is
invested in the financial markets.
Unless the common man becomes a wiser investor, wealth creation will remain a distant
dream. The Government can declare the next year as financial literacy year and focus on
educating the average Indian family. Money sense, like civic sense, should me inculcated
in people as early as possible.

2.2 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.

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