The money market and the equity securities (instruments of the capital market) are the two main types of financial markets. The money market plays a fundamental role in short-term lending and borrowing; these assets are retained for less than one year. On the other hand, equity securities serve a fundamental function in investment research and portfolio management.
What are Equity Securities?
Equity securities represent ownership claims on a corporation’s net assets. Because it makes up a sizable percentage of many individual and corporate investment portfolios, equity plays a key role in investment evaluation and portfolio management.
There are numerous benefits of studying equities securities.
First, the proportion of a client’s portfolio allocated to equities directly impacts the risk and return ratios of the total portfolio.
Second, the ownership claims made by various equity security types on a company’s net assets affect those instruments’ risk and return ratios.
Finally, because different equity security features have different market prices, it’s critical to understand how these aspects affect valuation.
What is the Money Market?
Money markets are unstructured markets primarily used by banks, brokers, financial institutions, and money dealers to trade efficiently in financial instruments. For instance, they deal in short-term debt instruments like commercial paper, trade credit, certificates of deposit, and T bills. They can be cashed in less than one minute and are very liquid.
Money market trading primarily takes place over-the-counter (OTC), with little to no usage of exchanges. However, they contribute significantly to the economy’s short-term liquidity and offer short-term lending to firms. Additionally, it assists businesses and sectors with their need for operating capital.
Types of Money Market Instruments
The money market is a suitable name for a short-term money market. It deals in financial assets known as “money market instruments,” which include bonds and other comparable short-term borrowing tools with maturities ranging from 24 hours to one year. Their main goal is to generate short-term financing so a corporation can conduct day-to-day tactical activities. Here are the categories of Indian money market instruments.
Treasury bills, often known as T-bills, are issued by the government of India and have a maturity of up to 365 days. They are regarded as one of the safest investment options in the money market. As a result, these instruments’ returns are lower than those of alternative money market instruments.
Certificates of Deposit
Certificates of deposit, or CDs, are issued by designated commercial banks. These savings instruments, like FDs, pay interest on lump sums for a certain amount of time. However, they have greater interest rates than FDs and do not offer the possibility of early redemption.
Repurchase agreements, often known as repos, are established between two banks or among a bank and the Reserve Bank of India (RBI) to provide liquidity for financing short-term loans. Under such arrangements, banks sell government securities to obtain short-term liquidity and commit to repurchasing them at a higher price the following day.
Commercial papers, often called CPs, are generally unsecured promissory notes issued by highly rated businesses and financial institutions. It enables businesses to borrow money from several other sources. Although CPs are typically provided at a discount, they are redeemed for their face value. Investors in these CPs receive the difference in exchange for undertaking a limited risk up until the CP’s maturity.
Money markets are foundational elements of the economy’s financial system. It includes huge cash transfers overnight between the government and the banks. Most money market transactions are commercial exchanges between businesses and financial institutions.
Equities, on the other hand, are financial instruments that represent ownership shares. It grants their owners varied voting power over things like the choice of a board of directors who then represent the shareholders in decisions.