Classification & Diversity

Classification
Financial market can be better understood with a full-fledged knowledge on their various types and categories. Any attempt to classify the financial market becomes arbitary. In fact, there are no any hard and fast rules to classify the financial market. The lines of demarcation are not clear-cut in practice. Even then for the purpose of simplification and make it understandable, financial market is classified in the following order;

Primary Market
It is the market for new issue of securities. securities are issued for the first time in the primary market to raise funds to serve the specific purpose. The government, companies, business firms and industries to tap the needed funds from the market issue there securities. Sometimes, the responsibility to manage the new issues is entrusted to the security dealers and underwriter of securities under different terns and conditions of the issues.
Securities traded in the primary market for the very first time are referred to as Initial Public Offerings (IPO). After the initial trading the securities are no longer IPO and they go for trading in secondary market. To issue securities in the primary market, a firm in Nepal, must follow company Act. The Act has briefly specified the financial, corporate and business information that help investors make profitable investment decisions. In fact, the prospective is a document of public belief to raise confidence of the public to invest in the shares of public limited companies.

Secondary Market
It is the market for existing claims on the securities or outstanding securities. There is trading only on existing securities in secondary market without involving any additional infusion of funds. There is only changing hands of the securities or financial assets from one investor to another investor. The original issues are not obliged to redeem securities and investors can generate sufficient liquidity and marketability by exchanging these securities. Active secondary market trading can enhance the value of the financial assets because capital gain comes from rise in the market price. At present, there is revival of capital market to the extent there is optimistic market recording bullish sentiments bringing stock prices to excess highs as is the case with shares of Development Credit banks, Standard Chartered bank, NABIL, Siddhdartha Bank, Kumari Bank, Nepal Investment Bank,etc. Margin lending for sometime to bring stock market to the technical convection. Afterward relaxation is made to continue margin lending based on 50 percent of six months average market price.

Money Market
A money market is a market for instruments and a means of lending and borrowing funds for relatively short periods, typically regarded as from one day to one year. It is a market for short-term securities issued on a negotiable basis. These short-term securities are actively traded in secondary market. The prices and yields of these securities are closely related to those of the newly issued instruments. Due to short-term maturity characteristic, money market securities fluctuate very little in price when interest rates change. These securities sell before maturity at very close to their purchase price. Large volume of daily transaction takes place in the money market. The various money market instruments such as government treasury bills, negotiable certificate of deposit, bankers' acceptance, Euro dollars, commercial papers, shorts-term bank loans etc, are traded in this market.

Capital market
It is a market for long-term securities issued under various terms and conditions. In this capital market, trading is conducted on the long-term marketable government securities, corporate bonds, common stocks, municipal bonds and mortgage bonds. Government securities pay low interest rate and they are not so much profitable as capital market investment vehicle. Other market instruments provide substantially a higher rate or return. Even then, government securities are used in capital market as they ensure considerable liquidity and safety for financial institutions. Thus, banks and financial institutions are the principal buyers of these securities. Corporate bond is another important instrument used in capital market. Non-bank financial institutions such as insurance companies, pension funds, and individuals are the buyers of corporate bond because of its tax deduction feature on interest paid.

Loan & Securities Market
Another way of classifying financial market is to divide them into market for loans and market for securities. Loan market is negotiated face to face directly between borrower and lender. In contrast, securities market is impersonal or open market where buyers and sellers of securities are unknown to each other. However, they trade through the help of brokers or dealers. In loan market, the loan made my one institution may be sold to another institution. But, borrowers directly negotiate securities issues with the lenders through private placement of bonds issued my business firms and sold to insurance companies. Likewise, there is a market for bonds and equities such as common stock. Bonds involve obligations of companies or government to the vreditors while equities involve evidence of ownership of companies by the stockholders.

Diversity
Financial market is not homogenous beacuse it involves trading not only in a single security or in one type of fund. In fact, transaction in financial market takes place with a wide variety of securities. Moreover, funds are channeled and supplied for different purposes and activities. As such the diversity in financial market implies the exchange of a wide variety of securities in market as well as funds cover differenet terms and conditions of lending. These include among all differences in purpose of loan, differences in times, differences in collateral and interest rate, differences in maturity structure and nature of credit risks involved.
However, there are suppliers of funds interested in buying and holding highly volatile and risky equitiy securities. But, there are conservative investors trying to hold risk-less securities like govenrnment bonds and treasury bills. In the combination of money market and capital market, investors are shifting their strategy from time to time according to their needs to take advantage from diversity of the market. Some loans are purely for business purposes and their are other loans taken for housing and consumer durable. Even the government may a take a loan as a suppliment to tax receipt. In our country, financial market is just in the initial process of growth because a wide variety of financial instruments and the avenues are still to be developed.
The borrowers of the funds in the financial market always reveal various degrees of risks of default. Lenders are ready to assume these risks of default only if the return in the form of promised interest rate is sufficient to compensate for the additional exposure of risk. Again, the question comes about the adequacy of the backing of the collateral to cover the loan in case of default to protect the interest of the lenders. Many other securities are traded in financial market. These comprise trading on mortgage bonds, corporate bond, goverenment securities, tax exempt bonds and many more like that. Take the case of our own country.
Financial market within nine years of its growth taking from 1994-2003 has provided trading in limited variety of securities like common stock, preferred stock, debenture, government bonds, Treasury bills, etc. Even up until now, the wide diversity in financial market continues to remain one of the missing linkages in the country.
Among the various ingredients of the financial market, loan market has grown both in scope and in size. Loan markets are found to differ geographically. Local savings institutions channel funds for local construction through the mortgage market that may be both local-and-regional-based. In larger localities, there are regional stock exchanges to mobilize the funds. Big corporations are often very successful to raise the funds through issue of securities in national and international financial market. There is exchange of funds nationally and internationally as made possible from the existence of the efficient capital market.