Financial Markets
This unit asks you to classify markets and instruments, and to state the functions of the stock exchange and SEBI.
Money market versus capital market
Money market deals in short-term funds up to one year, with high liquidity and low risk. Instruments: call money (1–15 days, interbank), treasury bills (issued by RBI for the Government, zero-coupon), commercial paper (unsecured promissory note by large creditworthy firms), certificate of deposit (issued by banks). Capital market deals in long-term funds. Primary market means new issues such as IPO, FPO and rights issue; secondary market means the stock exchange for existing securities.
Stock exchange and SEBI
Functions: liquidity and marketability, pricing of securities, safety of transactions, spreading the equity cult, scope for speculation. SEBI: protects investors, regulates intermediaries, promotes market development, prohibits unfair trade practices.
Worked example
Classify: (a) 91-day treasury bill; (b) ₹50 crore debenture issue; (c) two-day call money; (d) 60-day commercial paper. Items (a), (c) and (d) are money market because maturity is one year or less; (b) is capital market because funds are long-term. Reasoning: classify by maturity first, then by issuer.
Traps
- Saying the capital market deals in short-term funds.
- Calling SEBI a stock exchange; it is the regulator.
- Mixing primary with secondary market; an IPO is primary.
- Forgetting that treasury bills are zero-coupon.