Question

These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

1) Name the function being performed by the market in the above case.

2) Also. explain briefly three other functions performed by this market.

These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

1) Name the function being performed by the market in the above case.

2) Name the market segment other than the capital market segment in which unsecured and short-term debt instruments are traded. Also, give any three points of difference between the two.

Answer 1

1) The function is performed by the market in the given case is facilitating economic growth. By facilitating the sale and purchase of securities, the stock market helps in channelising the savings to most productive investment. This, in turn, promotes capital formation and economic growth.

2) Three other functions performed by the market area

• Provides Liquidity and Marketability: The stock exchange provides a platform where sale and purchase of existing securities can take place. In this way, the stock exchange facilitates the conversion of securities to cash as and when required. In addition, it renders liquidity to long-term securities and can be converted to medium-term and short-term securities.
• Determination of Prices: A stock exchange acts as a link for the interaction of buyers and sellers. In other words, it helps in the interaction of demand and supply forces and thereby helps in establishing the price of securities.
• Fair and Safe Market: A stock exchange provides a safe and fair market for the trading of securities. It functions according to a well-regulated legal framework.

Answer 2

1) The function being performed by the market in the given case is facilitating economic growth. By facilitating the sale and purchase of securities, the stock market helps in channelising the savings to most productive investment. This, in turn, promotes capital formation and economic growth.

2) Unsecured and short-term debt instruments are traded in the money market. The money market is the market which deals in short-term securities and whose maturity is less than one year. Because of their short maturity period, the assets in the money market can be regarded as very close substitutes of cash. 

The basis of Difference	Capital Market	Money Market
Time Span of Securities	Capital market deals in long-term and medium-term securities having a maturity period of more than a year.	Money market instruments have a maturity period of maximum one year
Liquidity	Securities in the capital market are liquid only to a certain extent that they are tradable on stock exchanges. However, they are comparatively less liquid than money market securities.	Securities in the money market are highly liquid as DFHI  provides a ready market for them.
Returns Expected	They offer the higher possibility of gain as securities are for a longer period.	As securities have a shorter maturity period, the expected return is lower.