–
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.
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.
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 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 |
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 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 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
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. |
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
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.
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) |
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. |
*****
Thank you for investing your time.
Please comment on article.
You can help us by sharing this article at your social media platform.
Jay Google, Jay YouTube, Jay Social Media
जय गूगल, जय युट्युब, जय सोशल मीडिया