Financial Markets
Financial markets channel savings from surplus units to deficit units and provide liquidity and price discovery. The exam tests money versus capital markets, primary versus secondary markets, stock exchange functions and SEBI’s role.
Core rules
- Money market deals in short-term funds up to one year: Treasury bills, commercial paper, certificates of deposit and call money.
- Capital market deals in long-term funds: equity shares, debentures and bonds. It has a primary segment for new issues and a secondary segment for trading existing securities.
- A stock exchange provides liquidity, price discovery and investor protection but does not itself set prices or guarantee returns.
- SEBI is the market regulator; stock exchanges are trading platforms. An IPO is a first public issue; an FPO is a further public issue by a listed company.
Worked example
A company needs ₹50 crore for a new plant. If it wants to avoid diluting ownership and can service fixed interest, it may issue debentures. If cash flow is uncertain and it can accept new shareholders, equity is safer. A short-term need for ₹2 crore for raw materials would instead use commercial paper or a working-capital loan, because it belongs to the money market.
Traps
Do not put long-term bonds in the money market. Do not confuse primary market with secondary market. Do not say the stock exchange fixes prices. Do not treat SEBI and the exchange as the same institution. Do not call an FPO an IPO.