Test: Financial Market & Money Market - 1 - Banking Exams MCQ

Financial markets encompass any marketplace where securities are traded, such as the stock market, bond market, forex market, and derivatives market, among others.

• Money Market or Working Capital Market refers to the market for short-term requirements and deployment of funds.
• Money Markets instrument are those instruments which have a maturity period of less than one year.
• The money market does not deal in cash or money rather it provides a Marketplace for the different credit and financial instruments which includes treasury bills, promissory notes, bill of exchange etc, which are the close substitute of money.
• Different Instruments of Money Market:
  • Treasury bill
  • Commercial bills
  • Cash management bills(CMBs)
  • Certificates of Deposits (CDs)
  • Commercial Papers (CPs)
  • Money Market Mutual Funds (SEBI)
  • Repo/Reverse Repo Market
  • Discount And Finance House of India (DFHI)
• Money Market is regulated by both RBI and SEBI
• Note: Mostly Money market instruments are regulated by RBI except mutual funds which is regulated by the Securities and Exchange Board of India (SEBI)
• Cash Management Bills(CMBs) have the generic character of Treasury Bills.
• It means both serve the same purpose but Cash Management Bills are issued for maturities less than 91 days, while Treasury Bills are issued for maturity period of 91 days, 182 days and 364 days. Hence CMBs and Treasury Bills are not the same

Financial markets are classified as:

1. Money market
2. Capital market

Money and Capital market in India

• Capital market instruments are riskier both concerning returns and principal repayment.
• Issuing companies may fail to perform as per projections and promoters may defraud investors.
• On the other hand, the money market is generally much safer with a minimum risk of default. Hence, Statement 1 is correct.
• This is due to the shorter duration of investing and also to the financial soundness of the issuers, which primarily are the government, banks, and highly rated companies.
• Investment in the capital market i.e., securities do not necessarily require a huge financial outlay. Hence, Statement 2 is incorrect.
• The value of units of securities is generally low i.e., Rs 10, Rs 100. In the money market, transactions entail huge sums of money as the instruments are quite expensive. 
• Investment in capital markets generally yields a higher return for investors than the money markets. Hence, Statement 3 is correct.
• The possibility of earnings is higher if the securities are held for a longer duration.
• First, there is the scope of earning capital gains in equity shares.
• Second, in the long run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues. 

Functions of Capital Market:

1. The Capital Markets help to accelerate the process of economic growth
2. Facilitates the movement of capital to be used more profitability and productively to boost the national income
3. Minimization of transaction and information cost
4. Quick valuations of financial instruments
5. Encourages a massive range of ownership of productive assets

Money Market is divided into three types-Call Money, Term Money and Notice Money. 

The capital market consists of two types i.e. Primary and Secondary.

Securities & Exchange Board of India (SEBI)

• It is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India.
• SEBI’s primary functions include protecting investor interests, promoting and regulating the Indian securities markets.
• All financial intermediaries permitted by their respective regulators to participate in the Indian securities markets are governed by SEBI regulations, whether domestic or foreign.
• Foreign Portfolio Investors are required to register with DDPs in order to participate in the Indian securities markets.

The main instruments traded in the capital market are equity shares, debentures, bonds, and preference shares.

• The history of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued.
• In 1850 the Companies Act was introduced for the first time bringing with it the feature of limited liability and generating investor interest in corporate securities.
• The first stock exchange in India was set-up in 1875 as The Native Share and Stock Brokers Association in Bombay. Today it is known as the Bombay Stock Exchange (BSE).
• This was followed by the development of exchanges in Ahmedabad (1894), Calcutta(1908) and Madras(1937).
• Until the early 1990s, the Indian secondary market comprised regional stock exchanges with BSE heading the list.
• After the reforms of 1991, the Indian secondary market acquired a three tier form. This consists of: Regional Stock Exchanges, National Stock Exchange (NSE), Over the Counter Exchange of India (OTCEI)