The market where financial instruments are traded is called financial market. The financial instruments like a bond, stock, insurance policy, government securities, debentures, etc are traded in the financial market. It is the brain of the entire economic system. There are two types of the financial market which are as follows:
A. Money market
The market where short term financial instrument is traded is called the money market. In this market, the maturity period of the financial instruments is less than one year. For example treasury bills, commercial papers, certificates of deposits, etc.
According to the World Bank,” Money market is the market in which short term securities such as treasury bill, certificate of deposit and commercial bills are traded.”
Features of the money market
1. The maturity period of less than one year is accounted for in the money market.
2. The credit instruments are short term in nature.
3. The institutions involved in the money market is a central bank, commercial bank, bill brokers, etc.
4. Money market generally meets the short term credit needs of the business.
5. The degree of risk is small in the money market because the maturity period is less than one year.
6. The money market is directly linked with the central bank of the country.
B. Capital market
The market where long term financial instruments are traded is called capital market. This market makes the fund available for long term investment. For example, for purchasing capital equipment, fixed assets, power plant, construction of factory building.
According to the World Bank,” Capital market is the market in which long term financial instruments such as equities and bonds are raised and traded.”
Features of capital market
1. The maturity period is more than one year.
2. The main instruments of capital market are debenture, shares, government securities, etc which are of long term nature.
3. The institutions involved in the capital market are stock exchange, development banks, finance companies, provident fund.
4. The capital market meets the long term credit requirement of the business.
5. There is a higher risk in the capital market because of longer maturity period.
6. There is no close relationship between the central bank and capital market.