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Question
What is the market? Explain the meaning of the capital market and money market.
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Solution
A market is a place where the regular gathering of people for the purchase and sale of provisions, livestock and other commodities, takes place.
Capital Market:
The capital market is a market that deals with long-term loans. It supplies industry with fixed and working capital and finances medium-term and long-term borrowings of the central, state and local governments. The capital market deals in ordinary stock are shares and debentures of corporations and bonds and securities of governments.
The funds which flow into the capital market come from individuals who have savings to invest, the merchant banks, the commercial banks and non-bank financial intermediaries, such as insurance companies, finance houses, unit trusts, investment trusts, venture capital, leasing finance, mutual funds, building societies, etc.
Money Market:
The money market is the trade-in short-term loans between banks and other financial institutions. Money markets allow banks to manage their liquidity as well as provide the central bank means to conduct monetary policy. Money markets are markets for debt instruments with a maturity of up to one year. The most active part of the money market is the call money market (i.e., market for overnight and term money between banks and institutions) and the market for repo transactions. The former is in the form of loans and the latter are sale and buyback agreements – both are obviously not traded. The main traded instruments are commercial papers (CP’s), certificates of deposit (CD’s) and treasury’bills (T-Bills).
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