MONEY AND CAPITAL MARKET

Presented by
V.V.K. Senevirathne
D.R.C.M. Dasanayaka
P.S.R. Fernando

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 CONTENT
⮚ Introduction ⮚ Types of Capital Market
⮚ Classification of Financial Market ⮚ Primary Market
⮚ Money Market ⮚ Secondary Market
⮚ Features of the Money Market ⮚ Similarities between Primary &
⮚ Significance of the Money Market Secondary Market
⮚ Functions of the Money Market ⮚ Distinction between Primary &
⮚ Money Market Instruments Secondary Market
⮚ Capital Market ⮚ Debt Market & Equity Market
⮚ Features of the Capital Market ⮚ Summary
⮚ Significance of the Capital Market ⮚ References
⮚ Capital Market Instruments

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 INTRODUCTION
● Simply, Financial market can be identified as the market for credit and
capital.
● Financial market is the market for creation and exchange of financial
assets.
● In an economy, there are individuals and organizations with excess
amounts of funds and others with lack of funds. Exchange between
these two groups is settled in financial markets.
● It can be divided into the Money Market and the Capital Market based
on maturity of claim and purpose.

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CLASSIFICATION OF FINANCIAL MARKET

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 MONEY MARKET
● Money market is a market that deals with the lending and borrowing of
short term funds.
● It is a segment of the financial market in which financial instrument with
high liquidity and very short maturities are traded.
● Enabling the Central Bank to influence and regulate the liquidity of the
economy through its intervention in this market.

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 FEATURES OF MONEY MARKET
● Purely for short-term funds or financial assets called near money.
● Have maturity period up to one year only.
● Deals with only those assets which can be converted into cash readily
without loss and with minimum transaction cost.
● Generally transactions take place through phone i.e., oral
communication. Relevant documents and written communications can
be exchanged subsequently. There is no formal place like stock
exchange as in the case of a capital market.

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CONTD…
● Transactions have to be conducted without the help of brokers.
● The components of a money market:
o Central Bank
o Commercial Banks
o Non-banking financial companies
o Discount houses and acceptance house
● Commercial banks generally play a dominant in this market.

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 SIGNIFICANCE OF THE MONEY MARKET

● Provide parking for short-term surplus funds.

● Helps to overcome short term deficits, requirements quickly.
● Enabling the Central Bank to influence and regulate the liquidity of the
economy through its intervention in this market.

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 FUNCTIONS OF THE MONEY MARKET
● Providing trade financing.
○ The money market plays a vital role in financing domestic and
international buying and selling.
● Ensuring industrial financing.
○ Money market help industries to meet their short term
requirements.
● High liquidity investment solution.
● Maintaining money supply for Central Banks.
● Ensuring self-sufficiency of banks through call money instrument.

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 Commercial
Bill

Treasury
Bill
Repurchase
Agreement

Money Market
Instruments Commercial
Paper
Certificate of
Deposit

Call
Certificate of Money
Deposit

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 MONEY MARKET INSTRUMENTS
Instrument Definition Purpose Issuer Customer
(Investor)

Treasury Bill An instrument of short-term - Issue when the government - Government - Individuals
borrowing by the Government needs money for a short (Issued through - Trusts
maturing in less than one period auctions conducted by - Institutions
year. - For open Market Operation the Central Bank of Sri - Banks
- To help Government in its Lanka on behalf of the
Fiscal policy Government.)

Commercial Short-term unsecured - To provide short-terms - Large Banks - Other corporations

Paper promissory note, negotiable funds for seasonal and - Corporations - Financial
and transferable by working capital needs institutions
endorsement and delivery - Wealthy individuals
with a fixed maturity period up - Money market
to 270 days. funds

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 CONTD…
Instrument Definition Purpose Issuer Customer (Investor)

Call Money Short term finance repayable - To assist commercial banks in - Scheduled - Scheduled
on demand, with a maturity meeting their immediate liquidity Commercial Commercial Banks
period of one day to fifteen requirements Banks - Co-operative Banks
days, used for inter-bank - To fill the gaps or temporary - Co-operative
- Primary Dealers (PDs)
transactions. mismatches in funds Banks
- To meet the cash reserve - Primary - Select Financial
ratios & statutory liquidity ratio Dealers (PDs) Institutions
mandatory requirements as - Insurance Companies
stipulated by the Central bank - Mutual Funds

Certificate of Short-term security with a - To mobilize a large amount of - Commercial - Individuals

Deposit fixed interest rate and money for short periods Banks - Corporations
maturity date issued by a - Development - Companies
bank that seeks to raise Financial
funds from the secondary Institutions
money market.

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 CONTD…
Instrument Definition Purpose Issuer Customer
(Investor)

Commercial A bill of exchange used to finance - Often times for the - Finance companies - Large
Bill the working capital requirements of financing of short-term associated with well Institutional
business firms. liabilities and inventory known manufacturing Investors
companies
- Nonfinancial
companies; generally to
finance inventory

Banker’s An instrument representing a - To use as a means of - Individual or corporation - Public

Acceptance promised future payment by a ensuring payment for under the name Bank. Companies
bank. international trade - Private
Companies

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 CONTD…
Repurchase A formal agreement between two - Used by banks as a funding - Primary Dealer - Individual
Agreement parties and one party sells the source for short-term cash (banks) - Customers
securities to another party and at needs while reverse - Corporate
the same time signs an agreement repurchase agreements are Bodies
to repurchase the securities at a used by banks to earn a return - Banks
certain price at a future date. on idle cash.

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 CAPITAL MARKET
● The Capital Market is the market for trading in assets for maturities of
greater than one year, such as treasury bonds, private debt securities
(bonds and debentures) and equities (shares).
● The main purpose of the Capital Market is to facilitate the raising of
long-term funds.
● The rapid globalization of capital markets facilitates the free flow of
money around the world.
● Main Issuers: Government, banks, and private companies.
● Main Customers (Investors): Pension and provident funds and
insurance companies.

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 FEATURES OF THE CAPITAL MARKETS
● Serves as a link between Savers and Investment Opportunities
● Deals In Long Term Investment
● Utilizes Intermediaries
● Helps in Capital formation
● Varieties of instruments are traded
● Heavily regulated
● Includes Primary Market and Secondary Market

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 SIGNIFICANCE OF THE CAPITAL MARKET
● Capital Markets help to accelerate the process of economic growth.
● In the absence of Capital Markets, Investors might have invested in
unproductive assets like land or gold or might have indulged in
unnecessary spending.
● Stable and Systematic Security prices.
● Availability of Funds.

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 Treasury
Bonds

Bonds
Capital
Market
Instruments

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 CAPITAL MARKET INSTRUMENTS
Instrument Definition Purpose Issuer Customer Related
(Investor) Market

Treasury A government debt - To obtain instant - Government - Individuals Debt

Bonds security with a fixed liquidity by selling -Trusts security -
rate of return and them in the market - Institutions Secondary
relatively low risk. - Banks market

Bonds A financial - To raise money - Governments - Individuals Debt

instrument used to from investors willing - Municipalities - Banking security -
raise funds for the to lend them money - Corporations companies Primary
issuer by placing for a certain amount - Primary dealers market
the issuer in the of time - Other corporate
bondholders’ debt. bodies registered
or incorporated

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 CONTD…
Instrument Definition Purpose Issuer Customer Related
(Investor) Market

Equity A primary source of - To raise money - Public - Individuals Equity

Shares / finance for any from investors who Companies - Institutions security -
Ordinary company giving tend to invest their - Private Primary &
Shares investors rights to vote, money Companies Secondary
share profits, and claim market
on assets.

Preference Shares that enable - To raise money - Public - Individuals Equity

Shares shareholders to receive from investors who Companies - Institutions security -
dividends announced tend to invest their - Private Primary &
by the company before money Companies Secondary
receiving to the equity market
shareholders.

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 CONTD…
Instrument Definition Purpose Issuer Customer Related
(Investor) Market

Debentures A form of debt - To raise capital - Corporations - Individuals Debt security -

instrument with through a slightly - Governments - Banking Secondary
fixed-interest different debt companies market
securities in structure than that of - Primary dealers
return for long- a traditional - Other corporate
term loans. corporate bond. bodies registered
or incorporated

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 TYPES OF CAPITAL MARKET

Capital Market

Primary Market Secondary Market

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 1. PRIMARY MARKET
● Primary market is a market for new issues or new financial claims.
Hence it’s also called new issue market.
● Therefore, primary market is the market where the newly started
company issued shares to the public for the first time through IPO
(Initial Public Offering).
● The main investors in this type of market are financial institutions,
banks and High Networth Individuals(HNI).

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 2. SECONDARY MARKET
● The secondary market is a market for the purchase and sale of existing
securities such as stocks, bonds, currencies, and derivatives.
● It is also known as the stock market or stock exchange.
● It helps existing investors to disinvest and fresh investors to enter the
market.
● It also provides liquidity and marketability to existing securities.
● Here, the securities which have already passed through the new issue
market are traded in this market.
● Generally, such securities are quoted in the stock exchange and it
provides a continuous and regular market for buying and selling of
securities.

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 SIMILARITIES BETWEEN PRIMARY & SECONDARY
MARKET
● Both are important components of international finance market.
● Both markets permit investors to purchase debt securities.
● Fulfill the credit needs of the businesses.
● Helps businesses and government to raise money to pay for
operations or expand activities.
● Largely intangible.

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 DISTINCTION BETWEEN PRIMARY & SECONDARY
MARKET
Primary Market Secondary Market

There is sale of securities by new companies or further There is trading of existing shares only.
(new issues of securities by existing companies to
investors).

Securities are sold by the company to the investor Ownership of existing securities is exchanged between
directly (or through an intermediary). investors. The company is not involved at all.

The flow of funds is from savers to investors, i.e. the Enhances encashability (liquidity) of shares, i.e. the
primary market directly promotes capital formation. secondary market indirectly promotes capital formation.

Prices are determined and decided by the management Prices are determined by demand and supply for the
of the company. security.

There is no fixed geographical location. Located at specific places.

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 DEBT MARKET AND EQUITY MARKET
● Debt Market (Fixed Income Securities Market): Market where debt
instruments traded between investors.
o Government security market: Treasury bills, Bonds
o Private debt securities market: Commercial paper, Private bonds,
Debentures
● Equity Market (Share market): It is the market for trading equity
instruments (Stocks).

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 SUMMARY
Money Market Capital Market

Meaning A component of the financial market where A component of the financial market where
short-term borrowing takes place. long-term borrowings takes place.

Time Period The instruments traded have maturity The instruments traded have maturity period of
period of one year or less than one year. more than one year.

Purpose of Funds are borrowed to meet working Funds are required to establish new business,
Borrowing capital requirements. expand or diversity business or purchase of
fixed assets.

Return on Return on Investment is less as they are Return on Investment is comparatively high as
Investment highly liquid and safe. they are more risky.

Risk Risk is very less as maturity period of Risk is more as maturity period of the
instruments is less than one year. instrument is longer.

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 REFERENCES
❏ Financial Instruments | Central Bank of Sri Lanka. (2021). Central Bank of Sri Lanka.
https://www.cbsl.gov.lk/en/financial-system/financial-instruments/financial-instruments
❏ What is a Certificate of Deposit (CD)? - Definition | Meaning | Example. (2018, June 19). My
Accounting Course. https://www.myaccountingcourse.com/accounting-dictionary/certificate-
of-deposit
❏ Interbank Call money Market | Central Bank of Sri Lanka. (2020). Central Bank Sri Lanka.
https://www.cbsl.gov.lk/en/financial-system/financial-markets/interbank-call-money-market
❏ Chowdhury, N. (2022, June 18). Treasury Bond. WallStreetMojo.
https://www.wallstreetmojo.com/treasury-bond/
❏ Government Securities Market | Central Bank of Sri Lanka. (2020). Central Bank of Sri
Lanka. https://www.cbsl.gov.lk/en/financial-system/financial-markets/government-securities-
market#:%7E:text=Benefits%20of%20Investing%20in%20Treasury,selling%20them%20in%
20the%20market.

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 REFERENCES
❏ Verma, J. Financial Market Money Market & Capital Market. Jatinverma.org.
https://www.jatinverma.org/uploads/downloads/Financial_Market.pdf.
❏ Paramasivan, C., & Subramanian, T. (2008). Financial Management. New Age International
(P)
Limited.https://vcmdrp.tums.ac.ir/files/financial/istgahe_mali/moton_english/financial_manag
ement_%5Bwww.accfile.com%5D.pdf
❏ Capital, Commodity and Money Market. | Icsi.edu. (2014).
https://www.icsi.edu/media/webmodules/publications/Full%20CC&MM.pdf.
❏ Contents of the presentations presented by group 2 and group 3 on 20th June 2022.

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THANK YOU !!!

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