Anatomy of Financial Markets


Financial Markets is a broad term used to denote collections of "things". These things facilitate fundraising for organizations, companies, and even countries. We all need some $$ to run errands.

The institutions I referred to as things differ from each other in a variety of ways. Majorly on what the terms are, who all pay up, and for how long.

In India, we can bifurcate them into two categories: A) Money Markets and B) Capital Markets.

So imagine a situation where an organization or a country comes up to you saying: "Hey dude, I wanted a big wad of cash. I'll give it back soon". You should probably redirect them to Money Markets. Here they can finance their short-term cash requirements under various instruments like Treasury Bills, Commercial Papers, Call Money, Forward Rate Agreements, etc. All of this has little relevance for most retail investors. Plus all of this is very un-sexy.

In contrast, Capital Markets are very sexy. Companies come here for long-term financing. I don't let my sister eat my snacks if she does not promise me to bring me more in the future. Practically this form of arrangement won't work with companies. So in return for your investment, they give you some security. It can either be a formal promise to repay you (Bonds), an unsecured loan based on their reputation (Debenture), or part ownership of the company (share).

Truly, Financial Markets have many branches. Our focus would be more on the share market, where much of the fun happens.