Financial Market

A financial market is an organized market where government-recognized financial instruments and financial services are traded. This type of financial market trades financial instruments such as money, cheques, and travelers' cheques.  The prevalence of financial markets has increased significantly in the modern era. 

This type of financial market includes two types of markets: the money market and the capital market, which are discussed below:

A. Money Market

In any economy, a financial market where monetary instruments with a maturity of less than one year are traded is called a money market. This market trades highly marketable liquid loans such as money, cheques, travelers' cheques, bills of exchange, and treasury bills. 

Various financial institutions such as commercial banks, development banks, finance companies, and cooperatives are established to provide short-term loans in the money market and provide services. 

This market generally trades near-money instruments. That is, the market where short-term monetary instruments and credit are traded is called the money market. 

The money market was born specifically for the purpose of providing short-term loans of less than one year. Various economists have defined the money market in different ways. 

According to the definition given by C.R. Crowther, "The money market is the collective name given to various firms and institutions that deal in various grades of near money." 

According to the World Bank Report, "The money market is a market where short-term debt instruments, securities, treasury bills, certificates of deposit, and various types of commercial bills are traded."

From the above definitions, it is clear that various financial instruments, i.e., short-term credit instruments, are traded in the money market. 

The money market also requires two parties, buyers and sellers, but transactions take place even without direct contact between these two parties. Transactions can also be done through telephone, internet, intermediaries, or financial institutions.

B. Capital Market

The capital market is a financial market where long-term capital transactions take place. Generally, financial transactions for more than one year are done from this market. 

This market provides long-term capital required for capital goods and fixed assets such as land, machinery, equipment, and buildings. 

It performs functions such as issuing, buying, and selling shares, bonds, and debentures of organized institutions and making long-term investments in business organizations.

According to the World Bank Report, "The capital market is a market where long-term financial instruments such as equity and debt securities are collected and traded."

Difference between Money Market and Capital Market

The differences between the money market and the capital market are presented in the table below:

Table 1 : Differences Between Money Market and Capital Market

This table 1.1 highlights the key differences between the money market and capital market, helping to understand their functions, instruments, and participants.