Financial Markets – Meaning & Classification
Introduction
A Financial Market is a mechanism that allows people to buy and sell financial securities (stocks, bonds), commodities, and other fungible items.
"A market for the creation and exchange of financial assets."
1. Classification of Financial Markets
A. Based on Nature of Claim
- Debt Market: Trading in Fixed Income Securities (Bonds, Debentures). Buying here makes you a Creditor.
- Equity Market: Trading in Shares. Buying here makes you an Owner.
B. Based on Maturity of Claim
- Money Market: Short-term funds (< 1 Year). E.g., Treasury Bills.
- Capital Market: Long-term funds (> 1 Year). E.g., Equity Shares.
C. Based on Timing of Delivery
- Cash/Spot Market: Immediate delivery of asset and payment.
- Forward/Futures Market: Asset delivery and payment happen at a future date.
D. Based on Seasoning of Claim
- Primary Market: New Securities are issued (New Issue Market). Company sells to Investor directly.
- Secondary Market: Existing securities are traded (Stock Exchange). Investor sells to another Investor.
2. Difference: Money Market vs Capital Market
| Feature | Money Market | Capital Market |
|---|---|---|
| Duration | Short Term (< 1 Year) | Long Term (> 1 Year) |
| Risk | Low | High |
| Instruments | T-Bills, Commercial Paper | Shares, Debentures |
| Purpose | Working Capital | Fixed Capital (Assets) |
3. Difference: Primary vs Secondary Market
| Feature | Primary Market | Secondary Market |
|---|---|---|
| Dealing | New Securities | Existing Securities |
| Parties | Company & Investor | Investor & Investor |
| Price | Fixed by Company | Determined by Demand/Supply |
| Example | IPO | BSE/NSE Trading |
Summary
- Maturity: Money (<1yr) vs Capital (>1yr).
- Seasoning: Primary (New) vs Secondary (Old).
- Claim: Debt (Loan) vs Equity (Ownership).
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