The Indian financial system has two major components: themoney market and the capital market. Themoney market fulfils short-term liquidity needs, while thecapital market offers aplatform for long-term investing. Money market instruments are more liquid than capital market instruments, and the money market is less risky than the capital market. There are more such differences.
Explore the difference between capital market and money market and more in this article.
What is a Money Market?
Amoney market is a market forshort-term, highly liquid securities. It caters to immediate cash requirements of the economy and helps mobilise funds across different sectors. Money market interest rates serve as a benchmark for other debt securities and are used by RBI and the government to frame monetary policy.
Major players in the money market include the Reserve Bank of India (RBI), banks, NBFCs, acceptance houses, mutual fund houses and All India Financial Institutions (AIFI). Individuals, firms, companies and other institutions may invest in treasury bills and other money market instruments.
What is a Capital Market?
Capital market is a market forlong-term investments that helps businesses raise funds for long-term projects. It also helps to mobilise savings to investments and enables faster valuation of financial securities that are listed on the stock exchange. Capital markets in India are highly regulated and organised and have the potential to give good returns in the long run.
Key Differences Between Money Market and Capital Market
The following table lays down the key differences between capital and money markets:
Here are some examples of money market instruments:
Treasury Bills (T-Bills): Short-term government bonds issued by the Reserve Bank of India.
Certificate of Deposits (CDs): Negotiable term deposits issued by corporates, scheduled commercial banks, trusts, and individuals.
Repurchase Agreements (Repos): A legal agreement between two parties where one party sells a security to another with a promise of purchasing it back at a later date.
Bills of Exchange or Commercial Bills: Short-term promissory notes issued by businesses to meet their short-term money requirements.
Commercial Papers (CPs): Short-term unsecured debt instruments issued by large businesses and corporations.
Call and Notice Money: Short-term unsecured loans borrowed and lent by cooperative banks and commercial banks for periods of one day and 14 days, respectively.
Banker's Acceptance: A financial instrument guaranteed by a commercial bank that obligates the issuer to pay a specific sum on a specific date.
Examples of Capital Market Securities
Here are some examples of capital market securities:
Equities: Shares of ownership in a company.
Debt Securities: Loans to companies or governments.
Exchange-Traded Funds: Baskets of securities that can be traded on an exchange.
Derivatives: Financial contracts whose value is derived from the value of an underlying asset.
Foreign Exchange Instruments: Contracts to exchange one currency for another.
Alternatives to Money Markets and Capital Markets
Apart from money market and capital market instruments, there are other places to invest. Here are some alternatives to them:
Commodities such as gold, other precious metals, gas, oil, etc.
Real estate.
Collectables such as wine, coins, artworks, etc.
Investment in private companies or start-ups.
Conclusion
When it comes to choosing, you should consider the difference between the money market and the capital market. The choice should be based on your financial and investment goals and risk tolerance level. You might also consider other alternatives to diversify your portfolio.
Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.
An investor can invest in any categories of funds in accordance with his requirements and risk index. For example, those who want to earn high returns over a longer period can invest in Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund.
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
Capital markets consist of money market, bond market, mortgage markets, stock market, spot or cash markets, derivatives markets, foreign exchange and interbank markets.
Short-term securities are traded in money markets, whereas long-term securities are traded in capital markets. Capital markets are well organized, whereas money markets are not that organized. Liquidity is high in the money market, whereas liquidity is comparatively low in capital markets.
The money market is defined as dealing in debt of less than one year. It is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit. The capital market is dedicated to the sale and purchase of long-term debt and equity instruments.
Capital markets are used to sell different financial instruments, including equities and debt securities. These markets are divided into two categories: primary and secondary markets. The best-known capital markets include the stock market and the bond markets.
Money market accounts work like other deposit accounts, such as savings accounts. As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly.
Those targeting to save their excess funds should look for Money Market Funds. These are best suited for short-term investment, from a month to a year. These are stable and offer decent returns before being reinvested. Money Market Funds tend to attract investors interested in low-risk, regular, short-term income.
Money market funds invest in very-low-risk assets like Treasury bonds, CDs, or short-term, high-quality corporate bonds with maturities of less than a year.
Example. Anna has $190,000, set aside for emergencies. Therefore, she decides to deposit the sum in a money market account—she can withdraw the amount whenever she needs it. In addition, she would receive higher interest (compared to a savings account).
The Money Market is less risky, as the instruments have a low default risk and a low interest rate risk, while the Capital Market is riskier, as the instruments have a high default risk and a high interest rate risk.
The money market deals in securities of short-term with a maximum tenure of one year. The capital market deals in securities of medium and long term. Some of the common instruments of money market are Call Money, Commercial Bills, T. Bills, Commercial Paper, Certificate of Deposits, etc.
5This theoretical distinction, which is the basis of the difference between money and capital, asserts that the latter generates a real return, while the former generates only a liquidity feature, barely if at all remunerated.
A money market is a component of financial market where short-term borrowing can be issued. This market includes assets that deal with short-term borrowing, lending, buying and selling. A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities.
Similarities between the money market and capital market are as follows: Both are important components of the international finance market. Both markets permit investors to purchase debt securities. Businesses and governments depend on both the markets for raising money for operations.
Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.
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