Читать книгу Fundamentals of Financial Instruments - Sunil K. Parameswaran - Страница 51

One of the ways of classifying financial markets is based on the original term to maturity of the financial claims that are traded. The market in which instruments with one year or less to maturity are traded is called the money market, whereas the market in which medium- to long-term instruments are traded is called a capital market. Obviously, all money market securities have to be debt securities since equity shares never mature. Capital market securities can be equity securities or medium- to long-term debt securities.

The two markets differ fundamentally from the standpoint of their roles in a market economy. Money markets provide a means for economic agents to adjust their liquidity positions. As we discussed at the outset, every economic agent will receive some form of income in a financial year and also incur some form of expenditure; however, for any economic unit, it will rarely be the case that cash inflows and outflows are perfectly matched with respect to their timing. The mismatch between inflows and outflows leads to short-term deficits and surpluses, which are bridged by borrowing and lending in the money market.

Consider the case of a government. Revenue comes primarily in the form of taxes and is lumpy in nature. However, expenses are incurred on a daily basis. Consequently, if the government were to have a budget surplus, which is rare in practice, for most governments have budget deficits, during most of the year there will be a deficit. Consequently, governments need to constantly borrow to meet the shortfalls. Similarly, a business may have a substantial profit in a financial year but may have a cash deficit on most days. Thus, it would need to borrow periodically to bridge the shortfall.

A capital market, on the other hand, performs a very different economic function. The purpose of a capital market is to channelize funds from people who wish to save to those who wish to make long-term investments in productive assets in an effort to earn income. Thus, when a government or a municipality needs to finance developmental activities that are long-term in nature, such as building a metro railway or putting up an oil refinery, or when a business wants to expand or diversify, it will approach the capital market for the required funds.