Difference between money market and capital market

Difference and demarcation between money market and capital market is made on the basis of maturity period of instruments and claims. short-term instruments maturing within a period of one year are traded in money market whereas the capital market deals with longer maturity financial assets and claims. Though both types of markets facilitate the transfer of funds from savers to deficit-users, still the difference between the two is maintained with reference to the time-period covered by the transactions. Capital market includes trading in securities, mutual fund units and government debt instruments. On the other hand’ money market facilitates dealings in short-term financial instruments such as inter-corporate deposits, certificate of deposits, treasury bonds, commercial papers, commercial bills, etc. Money market and capital market can be differentiated as follows :

  • The subject matter of capital market is long-term financial instruments having maturity of more than one year. on the other hand, the thrust of MM is on short-term instruments only.
  • Money market is a wholesale market and the participants in money market are large institutional investors, commercial banks, mutual funds, and corporate bodies. However, in case of capital market even a small individual investor can deal by sale/purchase of shares, debentures or mutual fund units.
  • In capital market, the two common segments are primary market and secondary market. Both these segments are interrelated. Securities emerge in primary segment and their subsequent dealings take place in secondary market. However, in case of money market, there is no such sub-division in general. In efficient money market, secondary market transactions may also take place.
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Major participants and players in financial markets

In the financial markets, there is a flow of funds from one group of parties (funds-surplus units) known as investors to another group (funds-deficit units) which require funds. However, often these groups do not have direct link. The link is provided by market intermediaries such as brokers, mutual funds, leasing and finance companies, etc. In all, there is a very large number of players and participants in the financial market. These can be grouped as follows :

The individuals: These are net savers and purchase the securities issued by corporates. Individuals provide funds by subscribing to these security or by making other investments.

The Firms or corporates: The corporates are net borrowers. They require funds for different projects from time to time. They offer different types of securities to suit the risk preferences of investors’ Sometimes, the corporates invest excess funds, as individuals do. The funds raised by issue of securities are invested in real assets like plant and machinery. The income generated by these real assets is distributed as interest or dividends to the investors who own the securities.

Government: Government may borrow funds to take care of the budget deficit or as a measure of controlling the liquidity, etc. Government may require funds for long terms (which are raised by issue of Government loans) or for short-terms (for maintaining liquidity) in the money market. Government makes initial investments in public sector enterprises by subscribing to the shares, however, these investments (shares) may be sold to public through the process of disinvestments.… Read the rest

Inroduction to financial instruments

Often investors invest through financial assets or financial instruments or securities. Investments that represent debt, ownership of a business or a legal right to acquire a part of ownership interest in business are called securities. There are a number of financial instruments which are traded in the money market. The important financial instruments are Treasury Bills, Certificates of Deposits, Commercial Bills, Commercial Papers, etc. The money market instruments have maturity period upon one year. Money market instruments are highly liquid, short-term debt instruments which mature in less than 12 months, and normally pay continuously varying returns. These involve no or very little degree of risk. The money market instruments pay return to investors in the form of discount at the time of issue. On the other hand, Capital market has instruments of longer maturity period. These instruments are :

Ownership Securities :

  • Equity Shares,
  • Preference Shares, and
  • Cumulative Convertible Preference Shares.

Debt Securities :

  • Non-convertible Debentures,
  • Partly Convertible Debentures,
  • Zero-Interest Fully Convertible Debentures,
  • Optionally Convertible Debentures,
  • Deep Discount Bonds.

Mutual Fund Units :

  • Income Schemes,
  • Growth Schemes,
  • Sectoral Schemes,
  • Equity Schemes,
  • Money Market Schemes.

Apart from these capital market securities, other investment options available, particularly to individual investors, are Savings Bank accounts, Fixed Deposits in banks, Post-Office Savings Schemes, Unsecured deposits in companies, etc.

A financial instrument (security) is issued under a set of terms and conditions about the payment of interest/dividend to the holder, maturity life, redemption value, etc. Equity shares and debentures are issued by corporate’s under virtually a standard set of terms and conditions-Some of these are statutory terms such as the preference shares in India must be redeemable within a maximum period of 20 years; or rate of dividend on cumulative convertible preference shares need not exceed 10% p.a., or debentures must be credit rated, etc.… Read the rest

Basic types of business entities

The basic types of business entities are sole properitorship and parterships.

Sole proprietorship:

Sole proprietorship type of business entity which legally has no separate existence from its owner. Limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. Also debts of the business are debts of the owner in the case of sole proprietorship type of business. A sole proprietorship essentially refers to a individual doing business in his or her own name and in which there is only one owner and it does not pay corporate taxes.

Advantages of Sole proprietorship:

  • —  No additional work needed to start the business
  • —  There are no legal formalities to forming or dissolving a business
  • —  What the business makes, so does the individual
  • —  Owner makes all the decisions rather than consulting with a partner

Disadvantages of Sole proprietorship:

  • —  Will likely have a hard time raising capital
  • —  Hiring employees may also be difficult
  • —  This form of business will have unlimited liability, so that if the business is sued, the proprietor is personally liable
  • —  The life span of the business is also uncertain
  • —  The business owner must also be an all-rounder

Partnerships:

Partnership is a type of business entity, where you partner with other individuals to own and run the business.  On a higher level, they can be viewed as collection of sole proprietors.  By partnering with other individuals, you get access to a bigger pool of capital, skills and other resources to fund and run your business.  … Read the rest

Ethical issues in Accounting and Finance

 

Ethics (maintaining true and fair statements) is a key part of financial reporting. For shareholders to trust a company with money, they must feel confident in the company’s financial reporting. Financial reporting presents all data relating to the entity’s current, historical and projected health meaning investors and shareholders rely upon the available financial data for making informed and educated decisions. To help entities comply with business regulations and maintain financial reporting, shareholders can trust the existing organizations designed to watchdog different aspects of the accounting world. Primary among the organizations are the Securities and Exchange Committee (SEC), Financial Accounting Standards Board (FASB) and Public Company Accounting Oversight Board (PCAOB). These three bodies together ensure financial reporting is fair, reliable, and available to all investors.

The specific importance of ethics in business and in financial reporting is to inspire and ensure public and investor confidence in companies. Without a strong code of ethics, and adherence to that code, individuals may not be certain their investments are secure. Accounting professionals must have a strong ethical and moral reasoning as their decisions regarding financial reporting can have major consequences for individuals as well as corporations and entire nations. Ethics in the business environment are more than just issues that relate to accounting; because ethical practices can and will cross boundaries from business practice in to what a company may ask its accounting professionals to do in financial record-keeping and recording. The many recent scandals involving accounting fraud generally began at the CEO and made their way down into the financial records.

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Introduction to Business Ethics

There is a big difference between what you have a right to do and what is right to do. – Justice Potter Stewart

Man is a social animal. Though rules of nature control humans as they control other living beings, man himself has derived certain principles to govern his own individual and group behavior. These rules, in the form of behavioral standards may differ across cultures and times, but their basic objectives are always mutual existence and peace within the particular community or the social group. By ensuring security and protection of the group these standards helps in the survival of the particular community or a social group and thus its members. These standards of behavior are called “ethics.”

Ethics is two things:

First, ethics refers to well-based standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethics, for example, refers to those standards that impose the reasonable obligations to refrain from rape, stealing, murder, assault, slander, and fraud. Ethical standards also include those that enjoin virtues of honesty, compassion, and loyalty. And, ethical standards include standards relating to rights, such as the right to life, the right to freedom from injury, and the right to privacy. Such standards are adequate standards of ethics because they are supported by consistent and well-founded reasons.

Secondly, ethics refers to the study and development of one’s ethical standards. As mentioned above, feelings, laws, and social norms can deviate from what is ethical.… Read the rest