Types of Financial Markets: Money and Capital Market, Primary and Secondary Market, Organized and OTC Market

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Financial Market

Financial market is the place or mechanism where lenders and borrowers exchange their money with the help of intermediators or intermediaries.

This market includes the stock market, bond market, forex market and derivatives market etc.

These markets are vital to the smooth operation of capitalist economies.

Financial markets provide only services of fund related.

Financial markets make it easy for buyers and sellers to trade their financial holdings in one place.

 

Types of Financial Markets

There are two methods to explain for the types of financial market.

They are on the basis of maturity period of securities and on the basis of nature or trade of securities.

 

Types of Financial Market

Based on maturity		Based on trade
Money market		Primary market
Capital market		Secondary market

 

 

(A) ON THE BASIS OF MATURITY PERIOD OF SECURITIES

Maturity period means time limit.

According to maturity or time, there are two types of financial market.

They are money market and capital market.

 

  

Money market

When money is loaned or borrowed for less than one year, it is known money market.

Generally, short-term money or security is traded in money market.

Under this market, money instruments are traded. There are three connectors for money market.

They are money demander, money instrument and money supplier.

 

Definition

According to Oxford Dictionary, “Money market is the place where banks and other financial institutions lend or borrow money and buy and sell foreign money.”

 

Money Market

	Money Demanders	Money Instruments	Money Suppliers
	Individuals	Treasury bills	Central Bank
	Business firms	Commercial papers	Commercial bank
	Government	Certificate of deposits	Development banks
	Agricultural sectors	Letter of credit	Finance company
	Industrial sectors	Re-purchase agreement	Insurance company
			Provided fund
			Investment bankers
			Co-operatives

 

Capital market

Capital market is the place where long-term capital instruments are purchased and sold.

Here, long-term means more than one year period.

Under this market, capital instruments are traded.

There are three connectors for capital market.

They are capital demander, capital instrument and capital supplier.

 

 

Definition

According to World Bank, “Capital market is the place in which long-term financial instruments such as equities and bonds are raised and traded.”

 

Capital Market

	Capital demanders	Capital instruments	Capital suppliers
	Individuals	Equity shares	Central Bank
	Trading firms	Preference shares	Commercial bank
	Government	Bonds or debentures	Development banks
	Agricultural sectors	Treasury notes	Finance company
	Industrial sectors	Treasury bonds	Insurance company
	Service provide sectors		Provided fund
			Investment bankers
			Co-operatives

 

 

Differences between Money Market and Capital Market

Bases	Money Market	Capital Market
Time	Money market is for less than one year (short-term).	Capital market is for more than one year (long-term).
Liquidity	Money market is high liquidity.	Capital market is less liquidity.
Instruments	Under money market bills, commercial papers, deposit certificate etc are traded.	Under capital market shares, debentures and security are traded.
Investment	Under money market, less investment money is needed.	Under capital market, more investment money is needed.
Risk	Money market is less risky because it is related itself only.	Capital market is more risky than money market.
Return	Money market has less return because time and investment is low.	Capital market has high return because time and investment is more.

 

 

(B) ON THE BASIS OF NATURE OR TRADE OF SECURITIES

Trade means sales activity.

According to trade, there are two types of financial market; they are primary market and secondary market.

 

 

 

Primary market

Primary market is the place where new shares, debentures and other long-term securities are issued.

Different companies, financial institutions, government etc use this market.

In primary market, transactions are done for first time basis.

In this market, company sales securities to investors.

This activity is done with the help of brokers or underwriters. 

From primary market, business transactions are transferred into secondary market.

 

Secondary market

Secondary market is the place where old (existing or outstanding) securities are bought and sold.

Here, outstanding means issued shares. 

In secondary market, transactions are done for second time basis.

In this market, existing investor sales securities to new investors.

This activity is done with the help of Nepal Stock Exchange (NEPSE).

There are two types of secondary market; they are:

Organized stock market

Over the counter market

 

 

Differences between Primary Market and Secondary Market

Bases	Primary Market	Secondary Market
Trade	Under primary market, new capital is raised.	Under secondary market, existing capital is traded.
Functions	The main functions of primary market are to provide new investment for fixed assets and stock.	The main functions of secondary market are to provide liquidity for fixed assets and security.
Frequency	In primary market, transactions are less frequent.	In secondary market, transactions are more frequent.
Role	The investment bankers play main role in primary market.	Nepal Stock Exchange (NEPSE) plays main role in secondary market.
Fund transfer	Under primary market, fund is transferred from public to company.	Under secondary market, fund is transferred from buyer to seller.

 

 

 

 

 

Types of Secondary Market

All the limited company is based on equity share capital.

In other words, without equity shares, a limited company cannot be established.

These shares are bought and sold in two types of market; they are:

·         Organized stock market

·         Over the counter market

 

 

Organized stock market

Listed shares are traded (bought and sold) through stock exchanges.

Every developed or developing country has stock exchange market.

In Nepal, there is Nepal Stock Exchange (NEPSE), In Indian Bombay Stock Exchange (BSE).

Similarly, New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) etc. 

Every organized stock market has physical location where securities are bought and sold according to concerned security board’s rules and regulation.

 

Over the counter market

Unlisted shares are bought and sold through over the counter market (OTC).

Under this market, transactions are made by intermediators and authorized dealers.

The Securities Board of Nepal (SEBON) has also approved Nepal Stock Exchange (NEPSE) to work as OTC market.

Some other major over-the-counter market is given below:

NASDAQ Stock Market, USA (NASDAQ = National Association of Securities Dealers Automated Quotation).

EASDAQ Stock Market, European Union (EASDAQ = European Association of Securities Dealers Automated Quotation)

 

 

Differences between Organized Stock Market and Over the Counter (OTC) Market

Bases	Organized Stock Market	Over the Counter Market
Physical location	Organized stock market needs fixed place for trade.	Over the counter market (OTC market) does not need physical market.
Types of security	Under this market, only listed securities are traded.	Under this market, only unlisted securities are traded.
Commission	Under this market, commission is fixed.	Under this market, commission is negotiated (compromised).
Market	It is formal market for trade.	It is informal market for trade.
Price fix	It is auction market; therefore, price is fixed by demand and supply.	It is open market; therefore, price is fixed by compromise.

 

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