Financial market is a place where buyers and sellers come together to trade in various financial assets from stocks to bonds, commodities, and currencies. Although this highly volatile market has several components to it, of which most commonly used are money markets and capital markets. Both markets are meant for different purposes and deals in different trade.
Money market deals in financial instruments such as trade credit, commercial paper, treasury bills, and certificate of deposit for short-term. These assets are highly liquid and thus, can be redeemed within a year of investment. On the other hand, the rate of return in money market securities is also low due to its short-term nature.
The market is basically characterized into two segments – organized and unorganized. In organized segment, the market is strictly monitored and controlled by the Reserve Bank of India. The segment covers banks, non-banking financial companies (NBFCs), and co-operative societies, which functions under fairly rigid and complex rules by the RBI.
On the contrary, unorganized segment primarily deals in the lending business where a borrower, who is not able to get a loan or credit from the mainstream money market, requests a credit from unorganized participants such as local money lenders, chit fund company, nidhi company, etc. Unorganized market segment has comparatively flexible terms, informal procedures, and high rate of interest to approve a loan application.
While discussing about money market vs capital market, it is clear what the former deals in. Now, we are going to discuss about the later one.
The capital market is a long-term trade that financial instruments like stocks, bonds, and debentures are traded for a longer tenure. The market is considered to fulfill purpose of long-term financing and meeting long-term capital requirements. The market is again divided into two segments – primary and secondary market.
While in primary market, newly issued shares and securities are subscribed by the public such as initial public offerings (IPOs); in secondary market the already issued securities are traded.
Primary market also includes the shares which are issued by already listed companies to raise capital. Different types of intermediaries operate in the primary market such as merchant bankers, brokers, debenture trustees, registrar to issue, share transfer agents, and portfolio managers to assist the traders in completing the transactions. All the intermediaries are regulated by SEBI (Securities and Exchange Board of India).
On the other hand, in secondary market securities are purchased from another investor rather than the issuer. The market trades in already-issued securities, subsequent to the original issuance in the primary market.