Consider the following statements on the distinction between the capital market and the money market:
(A) A capital market share may not be actively traded, that is, it may not easily find a buyer.
(B) Money market instruments enjoy a higher degree of liquidity, as there is a formal arrangement for this.
(C) In the capital market, the possibility of earnings is higher if the securities are held for a shorter duration.
(D) Participation in the money market is by and large undertaken by ordinary retail investors from the public.
(E) Individual investors are permitted to transact in the secondary money market, but do not normally do so.
How many of the above statements are correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Three
(A) A capital market share may not be actively traded, that is, it may not easily find a buyer. — Correct. Shares are marketable on stock exchanges, yet a share may not find a buyer easily.
(B) Money market instruments enjoy a higher degree of liquidity, as there is a formal arrangement for this. — Correct. The Discount Finance House of India gives a ready market for these instruments.
(C) In the capital market, the possibility of earnings is higher if the securities are held for a shorter duration. — Incorrect. Earnings are higher when securities are held for a longer duration.
(D) Participation in the money market is by and large undertaken by ordinary retail investors from the public. — Incorrect. The money market is used mostly by institutional participants such as the RBI, banks and finance companies. Retail investors take part in the capital market.
(E) Individual investors are permitted to transact in the secondary money market, but do not normally do so. — Correct. Individuals are allowed to trade there, but in practice they stay away. The deals are large, so institutions do most of the trading.
NCERT (Pre-rationalised Edition): “(i) Participants: The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from members of the public. Participation in the money market is by and large undertaken by institutional participants such as the RBI, banks, financial institutions and finance companies. Individual investors although permitted to transact in the secondary money market, do not normally do so.” “(v) Liquidity: Capital market securities are considered liquid investments because they are marketable on the stock exchanges. However, a share may not be actively traded, i.e. it may not easily find a buyer. Money market instruments on the other hand, enjoy a higher degree of liquidity as there is formal arrangement for this. The Discount Finance House of India (DFHI) has been established for the specific objective of providing a ready market for money market instruments.” “(vii) Expected return: The investment in capital markets generally yield a higher return for investors than the money markets. The possibility of earnings is higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share. Second, in the long run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues.” |