Money market
Deals in short-term funds and instruments, generally with maturity up to one year. Examples include treasury bills, commercial paper, certificates of deposit and call money. Instruments differ in issuer, maturity, risk and return.
Meaning and role
A financial market brings savers and users of funds together and facilitates the creation and exchange of financial claims. It helps mobilise savings, allocate funds to productive uses, provide liquidity, support price discovery and reduce transaction costs. Market efficiency depends on information, infrastructure, trust and regulation.
Capital market
Mobilises medium- and long-term funds through securities such as shares and debentures. It includes the primary market, where new securities are issued, and secondary markets, where existing securities are traded.
Primary and secondary markets
| Feature | Primary market | Secondary market |
|---|---|---|
| What is exchanged? | New securities issued by an organisation | Existing securities between investors |
| Fund flow | Issue proceeds go to the issuing organisation | Sale proceeds usually go to the selling investor |
| Main contribution | Raises fresh capital | Liquidity, continuous valuation and exit opportunity |
| Example route | Public issue, rights issue or private placement | Trading through a recognised stock exchange |
Do not say that a stock exchange directly supplies new capital every time a share is traded. The issuer receives capital at issue; subsequent exchange trades transfer ownership and can influence the price at which future issues are made.
Stock exchange functions and process
- Provides a regulated platform for buying and selling listed securities.
- Supports liquidity and marketability, price discovery, investor information and safer settlement through standardised systems.
- Investors generally use a registered intermediary and a demat account; orders are placed electronically, matched under exchange rules and settled through clearing and depository arrangements.
- Market price reflects demand and supply and may differ from face value and issue price.
SEBI and investor protection
The Securities and Exchange Board of India (SEBI) regulates the securities market, protects investors and promotes market development under its statutory framework. Its work includes oversight of intermediaries and exchanges, disclosure requirements, surveillance and action against unfair practices. Regulation lowers risks but does not guarantee investment returns; investors still assess suitability and risk.
Exam distinction: face value is the nominal value stated on a security; issue price is the amount charged when first offered; market price is the price at which it trades in the secondary market.
Original case study
Aarav buys shares in a new public issue. Two years later, he sells some holdings to another investor through an exchange. A small firm also issues commercial paper to meet a short-term working-capital need.
- The initial public issue is a primary-market transaction; Aarav’s later exchange sale is secondary-market trading.
- The public issue helps the company raise fresh capital. The later sale transfers funds between investors and provides liquidity to Aarav.
- Commercial paper is a short-term money-market instrument; it is not a long-term capital-market security.
- SEBI’s regulatory role supports orderly markets and investor protection, but cannot remove all investment risk.
Board-style practice
- Explain any four functions of financial markets.
- Differentiate money market and capital market using maturity, instruments and purpose.
- Distinguish primary and secondary markets and state how they are connected.
- Case: A company’s share is traded between two investors on an exchange. Explain the fund flow and market contribution.
Self-check
Financial markets mobilise savings, allocate funds, provide liquidity and assist price discovery. Money market instruments are short term. Primary issues raise funds for issuers; secondary trades provide liquidity to investors. A company generally receives no new funds from a routine secondary-market transfer.
Course map
Unit 10 follows Financial Management and precedes Marketing Management in the current Class XII sequence.