When we hear the word Market what comes in our mind is a place where two people meet who cannot survive without each other. these are Seller and buyers. sellers require buyers so that they can sell what they have and buyer needs sellers in order to get things that they need. Similarly does financial market is anything different from an ordinary market? Answer is a big “No” Because financial market is just like an ordinary market where instead of Commodities financial instruments are traded. This financial market has two main sections which are Money market and Capital market. These two sections of financial market have Some similarities as well as few differences.
Let’s take an example of Company X. This company may require funds mainly for two reasons, one for meeting liquidity needs and other may be for its plans of further expansion in long run. here if Company X borrows money For meeting liquidity needs then it is likely that after meeting liquidity needs company may repay borrowed money in short term to lender while same is not possible in case Company Borrows for expansion plans because for such requirements long term funds are required.
So here comes concept of money and capital market. The main difference in these two is of the time period for which trading of financial instruments takes place. In case of money market such trading is of short term up to the period of one year. as it is of short term period it provides a greater liquidity for investors as well as comparative less risk of default. money market so far has never shown inefficiencies except few exceptions.
Here market participants issues instruments with a goal to meet liquidity requirements and other short term objectives. these participants are generally Companies, government, financial institutions like banks etc.
Companies issues commercial paper that has a maturity of 1 year that investors can buy in order to lend their money. Government issues treasury bill popularly known as T-bills through reserve Bank of India to meet Gap between revenue and expenditure with maturity period of 91 days, 182 days and 364 days. also banks can issue certificate of deposit and also participate in call money market that is to meet their statutory reserve requirements.
Therefore money market is the section of financial market that is for short term and provides High liquidity with low risk and low but consistent returns for investors. this money market together with capital market forms whole financial market that is a must for any country as these markets bridges the gap between fund savers and fund scares group.
Companies for their expansion plans require large amount of funds which are provided by these markets which helps companies to expand more .this expansion further requires more manpower so this in turn increases employment. increase in employment leads to improvement in living standard of people. So collectively it provides overall growth for a country,