Segments of Financial Market

Segments of Financial Market

Different types of securities are traded in the securities market. These may include ownership securities, debt securities, short-term securities, long-term securities, government securities, non-government or corporate securities. The nature of return and risk involved in short-term securities is vastly different from that of long-term securities. Hence, on the basis of the maturity period of securities traded in the market, the securities market is segmented into money market and capital market.

Money market is the market for short-term financial assets with maturities of one year or less. Treasury bills, commercial bills, commercial paper, certificate of deposit, etc. are the short-term securities traded in the money market. These instruments being close substitutes for money, the market for their trading is known as money market.

Money market is the main source of working capital funds for business and industry. It provides a mechanism for evening out short-term surpluses and deficits. The short-term requirements of borrowers can be met by the creation of money market securities, which can be purchased by lenders with short-term surpluses to park their funds for short durations. In India, the money market has a narrow base with limited number of participants who are mostly financial institutions.

Capital market, on the other hand, is the market segment where securities with maturities of more than one year are bought and sold. Equity shares, preference shares, debentures and bonds are the long-term securities traded in the capital market. The capital market is the source of long-term funds for business and industry.