Money Market vs Capital Market

Difference Between Money Market vs Capital Market

Capital Markets are financial markets for the buying and selling of long-term debt or equity-backed securities. The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities. Money Market is a market for short-term financial assets that can be turned over quickly at a low cost.  A short-term financial asset in this context may be construed as any financial asset which can be quickly converted into money with minimum transaction cost within a period of one year.

Capital Market

Securities that are traded in Capital Market include stocks, bonds, debentures, etc. The maturity period of securities in the Capital Market is more than one year or irredeemable (i.e. without maturity).

The capital Market is divided into two major categories:

1. Primary Market: The primary market is the one in which newly issued securities are subscribed by the public. It is also called as IPO Market. Primary Market also includes the issue of further capital by companies whose shares are already listed on stock exchanges. There are different types of intermediaries that operate in this market in order to assist in completing transactions. Some of the critical intermediaries are Merchant Bankers, Brokers, Debenture Trustee, Bankers, Portfolio Managers, Registrar to Issue, Share Transfer Agents, etc. All of these intermediaries are regulated by SEBI.
2. Secondary Market: A market where already-issued securities are traded among investors. In this market, an investor purchases a security from another investor rather than the issuer, subsequent to the original issuance in the primary market.

Money Market

Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills are some examples of short-term debt instruments. Money Market securities are very liquid in nature, and hence, their redemption period is restricted to one year. Although the return of investment in money market securities is low compared to Capital Market securities, they are comparatively safer than Capital Market securities.  Trading in Money Market takes place off the exchange, i.e. Over The Counter (OTC) between two parties.

Money Market is characterized by two segments:

1. Organized Segment: Organised Money Market is subject to tight control by the Reserve Bank of India. They function under fairly rigid and complex rules. Some of the participants of organized money markets are Banks, NBC’s, and Co-operative Societies, etc.
2. Unorganized Segment: Unorganised Segment is primarily used by borrowers who are not able to get credit from the organized money market. The unorganized Money Market has comparatively flexible terms, informal procedures, and higher interest rates for borrowers, etc. Some of the participants of the unorganized money market are Money Lenders, Nidhi Company, Chit Fund Company, etc.

Money Market vs Capital Market Infographics

Below are the top 10 differences between Money Market vs Capital Market

Key differences between Money Market vs Capital Market

Both Money Market vs Capital Market are popular choices in the market; let us discuss some of the major Differences Between Money Market and Capital Market:

1. Short-term securities are traded in Money Market. Unlike Capital Market, where long-term securities are created and traded.
2. Capital Market more formal in nature compared to Money Market.
3. Money Market securities are less risky compared to Capital Market securities because they are issued for a shorter period and involve lower volatility.
4. Money Markets are highly liquid compared to Capital Markets.
5. Money Market helps in meeting short-term credit requirements of the companies such as working capital etc. However, the Capital Market helps in meeting long-term credit requirements of the companies, like providing fixed capital to purchase land, building or machinery etc.
6. Return on Investment is high in Capital Market compared to Money Market as Capital Market securities involve higher risk compared to Money Market securities.
7. A timeframe of redemption of Money Market securities is less than one year, while Capital Market securities get due after one year or even remains irredeemable in some cases.

Head To Head Comparison Between Money Market vs Capital Market

Below is the topmost Comparison between Money Market vs Capital Market

The basis Of Comparison	Money Market	Capital Market
Meaning	A section of the financial market where short-term securities are issued and traded	A section of the market where long-term securities are issued and traded
Financial Instruments	Government Securities, Certificate of Deposit, Commercial Papers (CPs), etc.	Shares, Bonds, Debentures, etc.
Purpose	Helps in fulfilling short-term credit requirements of the business.	Helps in fulfilling the long-term credit requirements of the business.
Risk Factor	Low	High
Return on Investment	Low	Comparatively High
Time Horizon	Less than one year	More than one year
Relevance to Economy	Helps Increasing liquidity of funds in the economy	Helps in Mobilisation of savings in the economy
Nature of Market	Informal	Formal
Classification	There is no subdivision in Money Market like it exists in Capital Market	Capital Market are classified between Primary Market and Secondary Market
Linkage with Central Bank of Country`	Money Market is directly and closely linked with Central Bank of Country	Capital Market gets influenced by Central Bank’s policies and decisions but there is no direct linkage with Central Bank of Country

Conclusion

Financial Markets enable money channelization between two or more parties. Money Market vs Capital Market help in channelizing funds from the lenders to the borrower depending on the timeframe of requirements and its purpose.

Thus, Money Market vs Capital Market fulfills the long-term and short-term capital requirements of the individual, corporate, firms, and government. They make funds available based on tenure, risk appetite, purpose, etc.

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