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Money & Capital Market

Reena Verma (CA Finalist) (417 Points)

22 May 2010

Hello Friends

1.Can u plz tell me what is Money market, Capital market & difference between the two?

2.What is primary & secondary market?

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8 Replies

ramajayam (ARTILCE) (144 Points)
Replied 22 May 2010

primary market is where the first hand goods are traded in general

eg market of ipo's markst of new issue of debentures

where as secondary market is where goods already held are traded

eg stock market like bse nsc nasdaq .......

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ramajayam (ARTILCE) (144 Points)
Replied 22 May 2010

if u need to subscribe to a new share then it is primary market

if u want to buy already held shares then it can be bought in a secondary market

ramajayam (ARTILCE) (144 Points)
Replied 22 May 2010

The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames.

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds.

(Guest)

Capital Market:-

The capital market has 3 components - the equity market, the debt market, and the derivative market. It consists of all those connected with issuing and trading in equity shares and also medium and long term debt instruments, namely, bonds and debentures. It is well accepted that tenures less than one year are considered as short term; while tenures more than one year and up to three years may be taken as medium term while more than three years can be considered as long term.

Both equity and debt market have 2 segments - the primary market dealing with new issues of equity and debt instruments and the secondary market which facilitates trading in equity and debt instruments thereby imparting liquidity to the instruments and making it possible for people with different liquidity preferences to participate in the market.

The capital market operations are regulated by the Securities and Exchange Board of India [SEBI]

Money Market:-

The money market is the market in which short term funds are borrowed and lent. The lending money market institutions are -

Government of India and other sovereign bodies

Banks and Development Financial Institutions

PSUs [Public Sector Undertakings]

Private sector organizations

The Government /Quasi government owned non-corporate entities.

Large numbers of instruments that are trade in the money market are issued by Government of India, State governments and other statutory bodies. Instruments that are issued by the Development Financial Institutions [DFI] and banks carry the highest credit ratings amongst non-government issuers mainly due to their connection with the Indian Government

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(Guest)

Primary Market

The primary market provides a channel for sale of new securities. This market provides opportunity to issuers of securities, the government as well as corporate, to raise resources to meet their requirements of investments and/or discharge their obligations.

They may issue securities at face value, discount, or premium. They may also issue the securities in the domestic market and/or the international market.

Secondary Market

The secondary market facilitates trading in equity and long term debt instruments, and therefore imparts liquidity and price discovery. It is an equity-trading venue in which the already existing or pre-issued securities are traded among investors. This market could be either the auction-market or the dealer market. While stock exchange is the part of the auction market, OTC is a part of the dealer market.

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(Guest)

Instruments of money market

Call Money -

Call or notice money is an amount borrowed or lent on demand for a very short period. If the period is greater than one day and up to 14 days it is called Notice money; otherwise the amount is known as Call money. No collateral security is needed to cover these transactions.

The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money. Co-operative banks, commercial banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements.

This is a completely inter-bank market. Interest rates are market determined. In view of the short tenure of these transactions, both borrowers and lenders are required to have current accounts with Reserve Bank of India.
Treasury Bills -
These are the lowest risk category instruments for the short term. RBI issues treasury bills [T-bills] at a prefixed day and for a fixed amount. There are 4 types of treasury bills.
- 14-day T-bill: maturity is in 14 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs. 100 crores.
- 91-day T-bill: maturity is in 91 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs. 100 crores.
- 182-day T-bill: maturity is in 182 days, it is auctioned on every alternate Wednesday, which is not a reporting week and the notified amount for auction is Rs. 100 crores.
- 364-day T-bill: maturity is 64 days, it is auctioned on every alternate Wednesday which is a reporting week and the notified amount for the auction is Rs. 500 crores.
Certificates of Deposits -
After treasury bills, the next lowest risk category investment option is certificate of deposit (CD) issued by banks and Financial Institution (FI).Allowed in 1989, CDs were one of RBI’s measures to deregulate the cost of funds for banks and FIs. A CD is a negotiable promissory note, secure and short term, of up to a year, in nature.

A CD is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor. Although RBI allows CDs up to one-year maturity, the maturity most quoted in the market is for 90 days.
Commercial Papers -
Commercial papers [CPs] are negotiable short-term unsecured promissory notes with fixed maturities, issued by well-rated organizations. These are generally sold on discount basis. Organizations can issue CPs either directly or through banks or merchant banks [called as dealers]. These instruments are normally issued in the multiples of five crores for 30/45/60/90/120/180/270/364 days.
Inter-Corporate Deposits -
An Inter-Corporate Deposit or ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporate, this market allows funds surplus corporate to lend to other corporate.

A better rated corporate can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than a bank, the rates in this market are higher than those in other markets. ICDs are unsecured, and therefore the risk inherent is high. The ICD market is not well organized with very little information available about transaction details.
Ready Forward Contracts -
These are transactions in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price.

Such a transaction is called Repo when viewed from the prospective of the buyer of securities that is the party acquiring fund. It is called reverse repo when viewed from the prospective of supplier of funds.
Commercial Bills -
Bills of exchange are negotiable instruments drawn by the seller or drawer of the goods on the buyer or drawee of the good for the value of the goods delivered. These bills are called trade bills. These trade bills are called commercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money during the currency of the bill then the seller may approach the bank for discounting the bill.
Pass through Certificates -
This is an instrument with cash flows derived from the cash flow of another underlying instrument or loan. The issuer is a special purpose vehicle (SPV), which only receives money, from a multitude of may be several hundreds or thousands, underlying loans and passes the money to the holders of the PTCs. This process is called securitization.

Legally speaking PTCs are promissory notes and hence tradable freely with no stamp duty payable on transfer. Most PTCs have 2-3 year maturity because the issuance stamp duty rate makes shorter duration PTCs unviable.
Dated Government Securities -
These are securities issued by the Government of India and State Governments. The date of maturity is specified in the securities therefore they are known as dated securities. The Government borrows funds through the issue of long term dated securities, the lowest risk category instruments in the economy. They are issued through auctions conducted by RBI, where RBI decides the coupon or discount rate based on the response received. Most of these securities are issued as fixed interest bearing securities, although the government sometimes issues zero coupon instruments and floating rate securities.

Rahul Bansal (Finalist) (35929 Points)
Replied 25 May 2010

The comparison between primary and secondary market lies in the process in which funds are raised from the capital market.

Primary markets are those where securities are offered to the public in the form of subscripttion with the intention of raising money.

On the other hand, secondary market refers to the market where trading of already existing securities take place.

The secondary market is often referred to as dealer market or an auction market.

Examples of an auction market is the stock exchange whereas an OTC or over the counter exemplifies a dealer market.

In a primary market, the securities, stocks or bonds are bought directly from the company issuing all of the above. These are usually bought at a "par value".

In the secondary market, the existing securities, bonds or stocks are traded again.

For instance, if an individual had purchased bonds or any other investment instruments from the primary market a year back and the individual now wants to avail of the principal amount the bonds may be sold off in secondary market.

In the event when the price of the bonds rise, the individual intending to dispose off the bonds needs to do it at a discounted rate.

On the other hand, if the price of bonds increase, the individual selling the shares will be benefited and may sell it at a premium rate.

There are times when small investors have questioned the security of investments in the primary markets. This has been true especially after there has been a debacle pertaining to the demat accounts lately. A big investor disguising as a small investor had "cornered" several thousand shares, which were actually meant for allotment to the small investors. Small investors may also invest in the primary market through mutual funds. Several categories of mutual funds like the IPOs or initial public offerings as well as the FPOs or the Follow Up Public Offers have hit the capital markets lately.

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