Difference Between Capital Market And Money Market
Rajat is a new investor. He is thinking of beginning his journey as a proper and professional investor by investing in a mutual fund scheme. He knows that a mutual fund can be short-term as well as long-term. He went to his big brother, who has been professionally investing for over a decade now, to seek advice on the tenure of the mutual fund. His brother wanted Rajat to grow as a successful investor like himself; hence he advised him to research and distinguish between money market and capital market. He told Rajat that once he understands the difference between capital market and money market, he will easily choose the tenure of investment.
Many people don’t know the concept of money market and capital market and hence get confused while investing. In this blog, we will see capital market vs money market and what they are.
What is Money Market?
The part of the unorganised financial market and where lending and borrowing are done for a short-term that is up to one year is called a money market. In these messy markets, the functioning institutions are financial banks, the central bank, commercial banks, chit funds, etc. Money dealers and brokers trade in short-term debt instruments. They can be trade credits, commercial paper, T bills, etc. the feature is that they are highly liquid and can be easily redeemed in less than 1 year. In the money, market trading is done over the counter where little exchange occurs. The money market plays a significant role in providing liquidity in the economy by providing businesses with short-term credit.
What is Capital Market?
The main difference between the capital and money markets is time. The capital market serves the purpose of long-term financing and capital requirements. In this market, stocks, bonds, debentures are traded for a long time. Institutions like stockbrokers, individual investors, commercial banks, stock exchanges, etc., are involved. This is an organized and formal market with less liquidity than the money market, making it easier to trade over long durations. The capital market consists of two categories-
- Primary market: in this category, fresh issues of securities are offered to the public
- Secondary market: issued securities are traded between the investors in this category.
Difference between money market and capital market
To distinguish between the money market and capital market, one must know the difference between capital market and money market. Following are differences-
- Definition – as stated above, a money market is a part of a financial market where lending and borrowing are done for a short period, that is up to 1 year. On the other hand, the capital market is a part of a financial market where lending and borrowing are done for a medium to a long time.
- Instruments involved – money market involves instruments like the bills of exchange, promissory notes, call money, etc. The capital market deals with instruments like equity shares, bonds, debentures, etc.
- Institutions/ investors involved – the money market has institutions like the central bank, financial and commercial banks, chits funds, etc., engaged in the trading process. In the capital market, mainly investors, mutual funds, insurance companies, underwriters, stockbrokers, etc., are involved in trading.
- Nature of market – money market is unorganized and informal. The capital market is organized and formal.
- Liquidity- the liquidity in the money market is high compared to the capital market, which has low liquidity.
- Period of maturity – the maturity period of the financial instruments under the money market is up to 1 year. The same is longer under the capital market, and they usually don’t have a stipulated time frame.
- Risk factor – the risk in the money market is low due to its nature of high liquidity and early maturity period. The opposite is for the capital market, where the risk is comparatively high due to less liquidity and a long maturity period.
- Purpose – the money market fulfils the short-term credit needs of businesses, and it also serves the purpose of providing liquidity for the short-term. The capital market fulfils the long-term credit needs of businesses.
- Functional merit – money market is responsible for increasing the liquidity in the economy, whereas the capital market is responsible for stabilizing the market due to long-term savings.
- Return on investment – the returns gained on the investment made in the money market are low compared to the capital market, where it is usually high because of the longer duration of the investment.
Now that you know the difference between the two extensively discussed markets above, capital market vs money market, it will be easier for you to invest and deal according to your preference. Both these markets have merits and demerits of their own but understanding them before making your first move as an investor in the financial market is important. The money market is short-term, low risk but gives fewer returns, and the complete opposite is the scene with the capital market where it is long-term and high risk but gives pretty handsome returns. Your investment and choice of the market to invest in will be based solely on the objective of your investment. It is better, to begin with, the money market and then, with some experience, shift to the capital market.