Consider the following statements on the distinction between the capital market and the money market:
(A) Participation in the money market is by and large undertaken by institutional participants such as the RBI and banks.
(B) Capital market instruments enjoy a higher degree of liquidity than money market instruments, as there is a formal arrangement for this.
(C) The capital market is generally much safer than the money market, with a minimum risk of default.
(D) In the capital market, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues.
(E) In the money market, transactions entail huge sums of money as the instruments are quite expensive.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (D) and (E) only
(A) Participation in the money market is by and large undertaken by institutional participants such as the RBI and banks. — Correct. The money market is used mainly by institutions such as the RBI, banks, financial institutions and finance companies.
(B) Capital market instruments enjoy a higher degree of liquidity than money market instruments, as there is a formal arrangement for this. — Incorrect. The feature is reversed. Money market instruments enjoy the higher liquidity, because of a formal arrangement.
(C) The capital market is generally much safer than the money market, with a minimum risk of default. — Incorrect. Again reversed. The money market is safer, because money is lent for a short time to sound issuers. Capital market instruments are riskier.
(D) In the capital market, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues. — Correct. In the long run, a growing company shares its profit with shareholders as high dividends and bonus issues.
(E) In the money market, transactions entail huge sums of money as the instruments are quite expensive. — Correct. Money market instruments are quite expensive, so each deal involves a huge sum.
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.” “(iii) Investment Outlay: Investment in the capital market i.e. securities does not necessarily require a huge financial outlay. The value of units of securities is generally low i.e. Rs 10, Rs 100 and so is the case with minimum trading lot of shares which is kept small i.e. 5, 50, 100 or so. This helps individuals with small savings to subscribe to these securities. In the money market, transactions entail huge sums of money as the instruments are quite expensive.” “(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.” “(vi) Safety: Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the shorter duration of investing and also to financial soundness of the issuers, which primarily are the government, banks and highly rated companies.” “(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.” |