FINANCIAL SYSTEM

The financial system of every economy consists of various constituents such as
1) Financial Institutions
2) Financial Companies
3) Financial Markets
4) Financial Instruments
5) Financial Services
6) Financial regulations

The financial market in India comprised of capital market and money market whereas the financial system of the country comprised of institutions, which operate the financial markets and the financial instruments with which the financial system is put into operation. Tax anomy of financial markets can be understood on functional, sectoral and institutional basis. On a functional basis we can divide financial markets into

1. Capital market (long term)
2. Money market (short term)
 
What is Capital Market?

A Capital Market deals in financial assets, excluding coins and currency. The financial assets comprise of banking accounts, pension funds, provident fund, mutual fund, insurance policy, shares, debentures, and other securities. If the stock exchanges are well regulated and function smoothly, then it is an indication of healthy capital market. Stock exchange provide a good leverage of the capital market and their relationship is directly proportional. India has multi-stock exchange system with more than 24 stock exchanges functioning across the country. In our country, capital markets are generally also known as security/stock market.

The Indian Capital Markets can be broadly classified into three types of markets.
1. Money market
2. Primary market
3. Secondary market

Money market

 The money market is part of overall financial system and securities or capital market. It deals in short term financial assets which can be readily converted into cash. Money market is a place for trading in money and short tern financial assets that are as liquid as money. It provides a platform for short term surplus funds of lenders or investors and short term requirements of borrowers, the instruments can be traded at low cost and are highly liquid.

Primary marketThe primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.

Secondary Market

Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.