FinanceFinance DefinitionFinance Explanation

Money Market Instruments and Capital Market Instruments

Money Market Instruments

First of all remember one thing money market is an essential component of the global financial system. Basically it facilitating trading in short-term debt investments and also providing liquidity to governments, banks, and other large organizations.
Money market global financial system. it facilitating trading in short-term debt investments and also providing liquidity to governments, banks, and other large organizations


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It is defined by a high degree of safety, relatively low rates of return, and short-term debt securities with maturities of one year or less,.

Key Instruments in the Money Market

Some of the most common and primary instruments which are been traded in the money market that are:

Treasury bills (T-bills)

Short-term debt securities issued by the government, with maturities ranging from a few days to one year. And that’s why T-bills are considered low-risk investments. And it can be purchased directly from the government through its Treasury Direct website, or through banks and brokers.

Certificates of deposit (CDs)

Time deposits offered by banks, with a specific maturity date and a fixed interest rate. CDs are low-risk investments, and most money market accounts are insured by the FDIC up to $250,000 per institution.

Commercial paper

Short-term debt issued by corporations to meet their short-term cash flow needs, with maturities ranging from overnight to 270 days. Commercial paper typically offers higher interest rates than bank time deposits or T-bills but carries a higher risk of default.

Repurchase agreements (repos)

Short-term borrowing agreements where a party sells securities to another party with the agreement to repurchase them at a later date.

Money market mutual funds

Professionally managed funds that invest in money market securities on behalf of individual investors, aiming to maintain a net asset value (NAV) of $1.

Functions of the Money Market

The money market serves several critical functions in the economy:
Providing short-term liquidity: It allows governments, banks, and other large organizations to access short-term financing, ensuring the smooth functioning of the economy.
Facilitating international trade: The money market offers financing to local and international traders in need of short-term funds, and provides a facility to discount bills of exchange.
Individuals and institutions can earn interest on their extra funds by investing in money market products such as money market mutual funds, T-bills, and CDs.

Capital Market Instruments

Capital markets play a crucial role in the economic growth of a country by providing medium and long-term funds for organizations, institutions, and instruments. In India, the capital market in india is overseen by the Securities and Exchange Board of India (SEBI) and comprises various instruments that cater to the diverse needs of investors and businesses.

Primary and Secondary Markets

Capital markets can be divided into 2 market segments that are primary and secondary markets.
In the primary market, new securities are issued and sold to investors. In contrast, the secondary market deals with the trading of previously issued securities among investors without any new capital being received by the issuing company.

Capital Market Key Instruments

Stocks

Stocks represent ownership in a company, and the buyer of a share is referred to as a shareholder. They are traded on stock exchanges and are a common instrument in the capital market.

Bonds

Bonds are debt securities issued by corporations or governments to fund projects. A bond market is a financial institution that specializes in raising funds by issuing debt securities such as bonds.

Mutual Funds and Exchange-Traded Funds (ETFs)

Mutual funds and ETFs are pooled investment vehicles where many investors pool their resources to invest in a diversified portfolio of stocks, bonds, or other assets. ETFs are similar to mutual funds but trade like shares on stock exchanges. Most ETFs are registered with the SEBI.

Indian Depository Receipt (IDR)

An IDR is a financial instrument that enables a foreign company to raise funds in India. In an IDR, a foreign company issues shares to an Indian Depository, which then issues depository receipts (IDR) to Indian investors.

Participatory Notes

Participatory Notes are financial instruments that allow foreign investors to invest in Indian stock exchanges without registering with SEBI. They are Overseas Derivative Instruments with Indian stocks as underlying assets.

Inter Corporate Deposits Market (ICDs)

ICDs are unsecured short-term loans from one corporation to another, registered under the Companies Act 1956. Companies with excess funds lend to other companies in need of money.

Collective Investment Scheme (CIS)

A CIS is a system where contributions by investors are pooled and used with the goal of receiving profits, income, produce, or property. It is referred to as a Collective Investment Scheme when a corpus amount of Rs 100 crore or more is gathered from investors.

Alternate Investment Funds (AIFs)

AIFs are privately pooled investment funds, including venture capital funds, hedge funds, private equity funds, commodity funds, debt funds, infrastructure funds, and others, as defined by the SEBI (Alternative Investment Funds) Regulations, 2012.

Infrastructure Investment Trusts (InvITs)

InvITs are investment instruments that enable developers to monetize revenue-generating infrastructure assets while allowing investors or unitholders to invest in them without actually owning them. They aim to make infrastructure investment more accessible.

Hedge Funds

Hedge funds are money pools that invest in a variety of asset types. Such as short and long positions, stocks, bonds, currencies, convertible securities, commodities, and derivatives, in order to generate larger returns with lower risk that is called the hedge funds.

Venture Capital

Venture capital is funding provided by wealthy investors who invest in businesses with long-term growth potential. Venture capitalists typically obtain ownership in the new company in exchange for their support.

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