Banking Notes / Banking Awareness / Chapter 11
Chapter 11 of 17

Financial Markets – Money Market & Capital Market

Short-term money market instruments versus long-term capital market instruments — the two pillars of India's financial system.

📖 ~9 min read 🏛️ Banking Awareness

Introduction

Financial markets channel savings into investment. They're broadly split by maturity: the money market handles short-term funds (up to 1 year), while the capital market handles long-term funds (equity and long-term debt).

Money Market Instruments

InstrumentFeature
Treasury Bills (T-Bills)Short-term government securities (91/182/364-day maturities), issued at a discount
Commercial Paper (CP)Unsecured short-term promissory note issued by corporates to raise working capital funds
Certificate of Deposit (CD)Short-term deposit instrument issued by banks, tradable before maturity
Call MoneyOvernight/short-term interbank borrowing/lending market

Capital Market Structure

SegmentFunction
Primary MarketWhere new securities are issued for the first time (e.g., IPOs)
Secondary MarketWhere already-issued securities are traded among investors (e.g., stock exchanges like NSE, BSE)

Key Capital Market Instruments

  • Equity Shares: Ownership stake in a company, with voting rights and dividend entitlement.
  • Debentures/Bonds: Long-term debt instruments paying fixed interest.
  • Preference Shares: Fixed dividend priority over equity shareholders, but usually no voting rights.
Q. Which market segment deals with the first-time issue of securities, such as an Initial Public Offering (IPO)?
The Primary Market deals with the first-time issuance of new securities directly from the issuer to investors.
⚠️ Key Insight: Treasury Bills are issued only by the Government of India (never by state governments or corporates) and never carry a coupon (interest) — they're sold at a discount and redeemed at face value, with the difference representing the investor's return.
✅ Practice Focus: Maturity-based money vs capital market distinction · T-Bill tenures · Primary vs secondary market roles · Equity vs preference share differences.

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