(a) Money Market
Meaning: The money market is a sector of the financial market where financial instruments with high liquidity and short maturities are traded. It primarily deals with the borrowing and lending of short-term funds, typically for periods of one year or less. Instruments commonly traded in the money market include Treasury bills, commercial paper, certificates of deposit, and repurchase agreements.
Functions:
- Liquidity Management: The money market provides a platform for institutions to manage their short-term liquidity needs efficiently.
- Interest Rate Determination: It plays a crucial role in determining interest rates for short-term borrowing and lending.
- Risk Management: Participants can hedge against interest rate fluctuations through various instruments available in the money market.
- Facilitating Monetary Policy: Central banks utilize the money market to implement monetary policy by influencing short-term interest rates.
Features:
- Short-Term Maturities: Instruments typically have maturities ranging from overnight to one year.
- High Liquidity: Assets in the money market can be quickly converted into cash without significant loss of value.
- Low Risk: Due to the short duration and high credit quality of instruments, the risk associated with money market investments is generally low.
- Market Participants: Includes banks, financial institutions, corporations, and government entities.
(b) Capital Market
Meaning: The capital market is a segment of the financial system that facilitates the buying and selling of long-term securities such as stocks and bonds. It serves as a platform for companies to raise capital for expansion while providing investors with opportunities to invest in these securities.
Functions:
- Capital Formation: The capital market enables businesses to raise funds for long-term investments through equity or debt issuance.
- Price Discovery: It helps in determining the price of securities based on supply and demand dynamics.
- Risk Diversification: Investors can diversify their portfolios by investing in various asset classes available in the capital market.
- Economic Growth Facilitation: By channeling savings into productive investments, it contributes significantly to economic growth.
Features:
- Long-Term Investments: Securities typically have maturities exceeding one year.
- Variety of Instruments: Includes stocks (equity) and bonds (debt), along with derivatives like options and futures.
- Market Segmentation: Divided into primary markets (where new issues are sold) and secondary markets (where existing securities are traded).
- Regulatory Frameworks: Governed by regulations that ensure transparency and protect investors’ interests.
(c) Insurance Market
Meaning: The insurance market encompasses all transactions related to insurance products designed to provide financial protection against risks such as loss or damage to property or health-related expenses. This sector includes various types of insurance such as life insurance, health insurance, property insurance, and liability insurance.
Functions:
- Risk Transfer: Allows individuals and businesses to transfer risk from themselves to an insurer in exchange for premium payments.
- Financial Security Provisioning: Provides policyholders with financial security against unforeseen events leading to losses or damages.
- Investment Opportunities: Insurers often invest premiums collected from policyholders into various assets, contributing to capital markets.
- Economic Stability Enhancement: By mitigating risks associated with personal or business losses, it fosters economic stability.
Features:
- Premium Payments: Policyholders pay regular premiums based on assessed risk levels.
- Underwriting Process: Insurers assess risks before issuing policies through underwriting processes that determine coverage terms.
- Claims Settlement Mechanism: Established procedures exist for policyholders to file claims when covered events occur.
- Regulatory Oversight: Subjected to strict regulations ensuring solvency and fair treatment of policyholders.
