Financial Market is any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies**,** and derivatives. Thus, it acts as a platform where potential buyers and sellers meet to exchange capital and credit.
Financial markets can be categorized as follows.
Money Market Vs Capital Market
Primary Market Vs Secondary Market
Debt Market Vs Equity Market
Money Market Vs Capital Market
This classification of the financial markets is based on the maturity period of the securities being traded. Where the money market is the market in which short-term interest-bearing assets are traded. That is, this is the market for assets with a maturity period of less than one year. For example, Treasury bills, commercial papers, and certificates of deposits are considered money market instruments. The main issuers of money market securities are government, banks, and private companies whereas the primary investors of these securities are banks, insurance companies, pension, and provident funds. The main types of money market instruments available in Sri Lanka are.
Treasury bills
Repurchase (Repo)
Reverse-repurchase agreement.
Commercial paper
Fixed deposits
Banker acceptances
The market at which long-term interest-bearing assets are traded is known as the Capital market. Thus, this is the market for assets with a maturity period greater than one year. For example, Treasury Bonds, private debt securities (bonds and debentures), and Equities (shares) are the instruments traded in a capital market. The main issuers of capital market instruments are Government, banks, and private companies whereas the primary investors are pension and provident funds and insurance companies.
The main types of capital market instruments available in Sri Lanka are;
Shares
Corporate bonds
Treasury bonds
Sri Lanka Development Bonds
Unit trust
Fixed deposits
Primary Market Vs Secondary Market
Based on the market levels, the financial markets can be further classified as Primary markets and Secondary Markets.
The primary market is the market for the new issues of securities. That is primary market deals with the securities that are issued for the first time. The primary market provides direct cash inflows to the issuing entity by connecting the primary issuer directly with the prospective primary investor.
Example:
Initial Public Offering (IPO) issuing equity to the public for the first time by a company.
Seasonal Equity Offering (SEO) is simply selling more stocks by a firm already publicly traded.
On the other hand, the secondary market is for the securities that are already being issued at the primary market. The secondary market provides the space for the already issued securities to be re-traded among prospective buyers and sellers. That is, during the secondary market transaction, the securities that are already outstanding and owned by the primary investors are bought and sold through the secondary market. Since this is the market where second-hand securities are sold, there is no direct cash inflow to the issuing entity of the security as was the case in the primary market operations.
Example:
- Share transactions of the Colombo Stock Exchange (CSE).
Debt Market Vs Equity Market
A debt market is a market in which all the debt securities are traded, such as Treasury Bills, Bonds Debentures, etc. Thus, this is the market for any debt financing needs, where funds are borrowed and lent. The main feature of this market is that the borrower agrees to pay the lender the specific amount borrowed plus interest, which is fixed at the time the transaction is made. Hence, this market is also known as the Fixed Income Securities Market which brings fixed cash flows to both the borrower and the lender. There are two major segments of the debt market.
Government Securities Market (Treasury Bills and Bonds)
Corporate Debt Securities Market (Commercial Papers, Corporate Bonds and Debentures)
The equity market is the market for trading equity instruments commonly known as Stocks for any equity financing needs. Stocks are securities representing a portion of the ownership of a company that is a claim on the company's earnings and assets and stockholders are paid dividends which are a percentage of the profits of the company.
Example: