A financial market is a place where buyers and seller come together to trade in financial assets such as bonds, stocks, derivatives, currencies and commodities. The main objective of a financial market is to fix prices for global trade, increase capital and transfer risk and liquidity.
Thought the financial market has various components; the two most important components are the money market and capital market. In the money market, only short-term liquid financial instruments are exchanged. Whereas, in the capital market, only long term securities are dealt with.
Capital Market plays a significant role in the growth of a country’s economy as it provides a platform for mobilising the funds. Similarly, the money market holds a range of operational characteristics. This article will explain the difference between money market and capital market.
What is the Money Market?
A random course of financial institutions, bill brokers, money dealers, banks, etc., wherein dealing on short-term financial tools are being settled is referred to as Money Market. These markets are also called wholesale markets.
In India, money markets serve an essential objective of providing liquid cash to borrowers and fund providers for a small period of time, while keeping a balance between the supply and demand short-term funds. The important money market instruments in India today cover call money, commercial papers, certificates of deposit, treasury bills, and forward rate agreements.
Money Market is a disorganised market, so the dealing is done off the public exchange market, i.e. Over The Counter (OTC), within two bodies by using email, fax, online and phones, etc. It supports the industries to accomplish their working capital demand by circulating short-term funds in the economy.
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What is Capital Market?
A kind of financial market where the company or government securities are generated and patronised with the intention of establishing long-term finance to coincide the capital necessary is called Capital Market.
In this market, the buyers use funds for longer-term investment. The nature of the capital market is risky markets. Therefore, it is not used for short-term funds investment. Most of the investors obtain the capital markets to preserve for education or retirement.
This article is a ready reckoner for all the students to learn the Difference Between Money Market and Capital Market.
Top 10 Differences between Money Market and Capital Market
|Money Market||Capital Market|
|A random course of financial institutions, bill brokers, money dealers, banks, etc., wherein dealing on short-term financial tools are being settled is referred to as Money Market.||A kind of financial market where the company or government securities are generated and patronised with the intention of establishing long-term finance to coincide with the capital necessary is called Capital Market.|
|Money markets are informal in nature.||Capital markets are formal in nature.|
|Commercial Papers, Treasury Certificate of Deposit, Bills, Trade Credit, etc.||Bonds, Debentures, Shares, Asset Secularisation, Retained Earnings, Euro Issues, etc.|
|Commercial banks, non-financial institutions, central bank, chit funds, etc.||Stockbrokers, insurance companies, Commercial banks, underwriters, etc.|
|Money markets are highly liquid.||Capital markets are comparatively less liquid.|
|Money markets have low risk.||Capital markets are riskier in comparison to money markets.|
|Maturity of Instruments|
|Instruments mature within a year.||Instruments take longer time to attain maturity|
|To achieve short term credit requirements of the trade.||To achieve long term credit requirements of the trade.|
|Increasing liquidity of funds in the economy||Stabilising economy by increase in savings|
|Return on investment achieved|
|ROI is usually low in money market||ROI is comparatively high in capital market|
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Features of Money Market
A few general money market features are:
- It is fund-term market funds.
- It’s maturity period up to one year.
- It trades with assets that can be transformed into cash easily.
- All the transactions take place through phone, email, text, etc.
- Broker not required for the transaction
- The components of a money market are the Commercial Banks, Non-banking financial companies and Central Bank, etc.
Features of Capital Market
Important features of the capital market are:
- Unites entrepreneurial borrowers and savers
- Deals with long-term investments.
- Agents are required.
- It is controlled by government rules and regulations.
- Deals in both commercial and non-commercial securities.
- Foreign Investors.
5 Types of Money Markets
Money market instruments have different securities, which can be utilised for short term borrowings. A few different types of market money are:
- Call Money- It portrays a short term loan with maturities term starting from one day to fourteen days, and it can be repaid on demand.
- Treasury Bill- It is the oldest and traditional money market instrument and is practised across the globe. The instrument is declared by the Government and does not have to pay any interest. This is available at a discounted rate at the time of issue.
- Ready Forward Contract (Repo)-The word repo is acquired from the phrase “repurchase agreement”. It is an agreement that specifies the sale and purchase of an asset. In India, this agreement is prepared between different banks and sometimes between bank and RBI for short term loans.
- Money Market Mutual Fund-This is the alternative name for liquid funds and are the lowest risk debt funds.
- Interest Rate Swaps- This is the latest money market instruments in India. Here, two parties sign an agreement, where one decides to pay a fixed rate of interest, and the other pays a floating rate of interest.
Types of Capital Market
The Capital Market instrument involves both the auction market and dealer market. It is classified into two sections: Primary Market and Secondary Market.
- Primary Market: Here, fresh contracts are given to the people for the subscription purpose.
- Secondary Market: The securities that have already been issued are exchanged among investors.
Do you know: The difference between Primary Market and Secondary Market
Money Market Examples
Since they are extremely liquid in nature, the money market recovery period is restricted to one year. A few examples of Money Market are:
- Trade Credit
- Commercial Paper
- Certificate of Deposit
- Treasury Bills
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Capital Market Examples
The capital market circulates the capital in the economy among the user and the suppliers of money.
The maturity period is more than one year or sometimes it is incurable (no maturity).
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The above mentioned concept elucidates in detail the ‘Difference Between Money Market and Capital Market’ for Commerce students. To know more, stay tuned to BYJU’S.
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Frequently Asked Questions
Do Money Market Funds Have Fees?
Who Has The Best Money Market?
- Sallie Mae: 2.30% Annual Pension Yield (APY)
- Marcus by Goldman Sachs: 2.25% APY
- FNBO Direct: 2.25% APY
What Are The Types Of Capital Markets?
Give 4 Examples Of Capital Markets
- Stocks and bonds
- Treasury bills
- Foreign exchange
Give 4 Examples Of Money Markets
- Certificates of Deposit (CDs)
- Interbank loans
- Treasury bills (T-bills)
- Short-term securities loans