Solutions to Assignments
MMPC-003 - Business Environment
Question No. 3
Describe the structure and working of the money market and capital 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. Since then, over the years, markets have gone through tremendous changes. The way the market works, the asset classes, the framework of the exchanges, and everything has been evolving over time. The changes have been brought in gradually according to the convenience of the investors and market participants. Also in order to prevent market participants to take undue advantage of the information in order to gain monetary benefits, the Securities Regulatory bodies over the world have surveillance methods for mitigation of such acts.
Structure of Capital Market
The capital market in India consists of the following structure:
Capital Market Instruments
There are mainly two types of instruments that are traded in the capital market, which are:
Stocks: Stocks are sold and bought over a stock exchange, They represnt ownership in the company and the buyer of the share is referred as the shareholder.
Bonds: The debt securities which are traded in the capital market are known as the bonds. Companies issue bonds for in order to raise capital foe the expansion of the business and growth.
Features of Capital Market:
Here are the features of the Capital Market:
1. Serves as a link between Savers and Investment Opportunities:
The capital market serves as a crucial link between the saving and investment process as it transfers money from savers to entrepreneurial borrowers.
2. Long term Investment:
It helps the investors to invest their hard-earned money in long-term investments.
3. Helps in Capital formation:
The capital market offers opportunities for those investors who have a surplus amount of money and want to park their money in some type of investment and also take the benefit of the power of compounding.
4. Helps Intermediaries:
While transferring shares and money from one investor to another, it takes help from intermediaries like brokers, banks, etc. thus helping them in conducting their business.
5. Rules and Regulations:
The capital markets operate under the regulation and rules of the Government thus making it a safe place to trade.
Example of Capital Market:
Suppose a company says ABC requires capital for expanding its business, so it plans to raise the required fund from the public by issuing new securities in the primary market.
After issuing the new securities, the people who are interesting in buying those shares after doing research of the company, buy those shares through the Initial Public Offering (IPO) process.
After the initial buying, it sharts trading in the secondarily market, where the existing buyers and sellers start trading that security.
Capital Market Intermediaries
Financial Intermediaries are the organizations that help in the transfer or channeling of funds from those who have surplus funds to those who are in need of it. They act as a middleman in connecting the surplus parties to the deficit ones. A classic example can be a bank that accumulates bank deposits and uses them to provide bank loans.
The main Financial Intermediaries of India include:
Stock Exchanges: These include the NSE (National Stock Exchange), BSE (Bombay Stock Exchange), MCX (Multi Commodity Exchange), etc
Banks
Insurance Companies
Pension Funds
Mutual Funds
Money Markets
The money market is a sub-section of the financial market that trades in short term financial funds and financial assets. These instruments and assets usually have a maturity period of less than one year and are highly liquid. So the buying and selling of such instruments, like commercial papers and t-bills, occurs in the money market.
This market is not a physical location. Most of the trading happens over the phone and now over the internet. It is a virtual market for trading in low-risk, liquid, and unsecured instruments to meet short-term financial needs a company may have. Companies turn to monetary market mostly to meet their working capital requirements.
The major players and institutions of this market are the Reserve Bank of India, all the commercial banks of the country, NBFC’s, LIC, Mutual Funds, large corporates, and even the respective state governments. Let us look at some other features of this market.
- Unlike the stock exchange, the money market does not have geographical restrictions. Most transactions happen in the virtual world with institutions that can be spread out over the whole country, the whole world even.
- While the market is quite flexible and unrestricted, it only deals in short-term securities (maturity period between one day and 364 days)
- There is no need for brokers or other intermediaries. The transactions can happen without them.
- There are many securities in the money market like T-bills, commercial bills, call money etc.
Structure of Indian Money Markets
The Indian monetary market has two broad categories – the organized sector and the unorganized sector.
a. Organized Sector: This sector comprises of the governments, the RBI, the other commercial banks, rural banks, and even foreign banks. The RBI organizes and controls this sector. Other corporations like the LIC, UTI, etc also participate in this sector but not directly. Other large companies and corporates also participate in this sector through banks.
b. Unorganized Sector: These are the indigenous banks and the local money lenders and hundis etc. Their activities are not controlled by the RBI or any other body, so they are the unorganized sector.
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