Financial Markets
Money market versus capital market
Money market deals in short-term funds up to one year; capital market deals in long-term funds through the primary market (new issues) and secondary market (stock exchange).
Money market instruments
- Call money: interbank, 1–15 days, no collateral.
- Treasury bill: issued by government at a discount, repaid at face value.
- Commercial paper: unsecured promissory note issued by large creditworthy firms.
- Certificate of deposit: issued by banks and financial institutions to depositors.
- Commercial bill: bill of exchange financing trade.
Primary market methods
Offer through prospectus, offer for sale, private placement, rights issue, e-IPO.
Stock exchange and SEBI
A stock exchange gives liquidity, price discovery, safety of transactions and spread of the equity cult. SEBI protects investors, regulates intermediaries and promotes market development. Demat accounts are held with NSDL or CDSL.
Worked example
A company offers new shares to existing shareholders in proportion to their holdings. This is a rights issue, made in the primary market, and no prospectus is required. Answering 'secondary market' loses the mark because no existing shares change hands.
Traps that cost marks
- Treating the primary market as a physical place; it is a mechanism.
- Saying SEBI conducts trading - it regulates, the exchange trades.
- Mixing treasury bills (government) with commercial paper (firms).