Difference Between Money Market and Capital Market

Money Market vs Capital Market

Both the money market and the capital market are the two different types of the financial markets where in the money market is used for the purpose of short term borrowing and lending whereas the capital market is used for the long term assets i.e., the assets which have the maturity of more than one year.

Money marketMoney MarketThe money market is a market where institutions and traders trade short-term and open-ended funds. It enables borrowers to readily meet finance requirements through any financial asset that can be readily converted into money, providing an organization with a high level of liquidity and transferability.read more and Capital market are types of financial markets. Money markets are used for short-term lending or borrowing usually the assets are held for one year or less whereas, Capital Markets are used for long-term securities they have a direct or indirect impact on the capital. Capital markets include the equity market and the debt market.

What is the Money Market?

Money markets are unorganized markets where banks, financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, money dealers and brokers trade in financial instruments for a short period of time. They trade in short-term debt instruments like trade credit, commercial paper, certificate of depositCertificate Of DepositCertificate of deposit (CD) is a money market instrument issued by a bank to raise funds from the secondary money market. It is issued for a specific period for a fixed amount of money with a fixed rate of interest. It is an arrangement between the depositor of money and the bank.read more, T bills, etc. which are highly liquid and can be redeemed in the period less than 1.

Trading in the money market is done mostly through over the counterOver The CounterOver the counter (OTC) is the process of stock trading for the companies that don't hold a place on formal exchange listings. The broker-dealer network facilitates such decentralized trading of derivatives, equity and debt instruments.read more (OTC) i.e. no or little use of exchanges. They provide businesses with short-term credit and play a major role in providing liquidity in the economy over the short term. It helps the business and industries with working capital requirements.

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What is Capital Market?

The capital marketCapital MarketA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more is a type of financial market where financial products like stocks, bonds, debentures are traded for a long duration of time. They serve the purpose of long-term financingLong-term FinancingLong term financing means financing by loan or borrowing for a term of more than one year by way of issuing equity shares, by the form of debt financing, by long term loans, leases or bonds, done for usually extensive projects financing and expansion of the company.read more and long-term capital requirement. The Capital market is a dealer and an auction marketAn Auction MarketAuction Market is a marketplace where the buyers and sellers trade stock by bidding. The price is calculated based on the highest amount a buyer is ready to pay and the lowest amount a seller is ready to accept. read more and consists of two categories:

Money Market vs Capital Market Infographics

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Key Differences

Comparative Table

Basis for ComparisonMoney MarketCapital Market
DefinitionIt is the part of financial market where lending and borrowing takes place for short-term up to one yearCapital market is part of the financial market where lending and borrowing takes place for the medium-term and long-term
Types of instruments involvedMoney markets generally deal in promissory notesPromissory NotesA promissory note is a negotiable instrument that represents the debtor's or the writer's (the maker's) written consent to pay a promised sum to the creditor (the payee) on a specified date.read morebills of exchangeBills Of ExchangeBills of exchange are negotiable instruments that contain an order to pay a certain amount to a particular person within a stipulated period of time. The bill of exchange is issued by the creditor to the debtor when the debtor owes money for goods or services.read more, commercial paper, T bills, call money, etc.Capital market deals in equity shares, debentures, bonds, preference shares, etc.
Institutions involved/types of investorsThe money market contains financial banks, the central bank, commercial banks, financial companies, chit funds, etc.It involves stockbrokers, mutual funds, underwriters, individual investors, commercial banks, stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read moreStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read moreStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more, Insurance Companies
Nature of MarketMoney markets are informalCapital markets are more formal
Liquidity of the marketMoney markets are liquidCapital Markets are comparatively less liquid
Maturity periodThe maturity of financial instruments is generally up to 1 yearThe maturity of capital markets instruments is longer and they do not have stipulated time frame
Risk factorSince the market is liquid and the maturity is less than one year, Risk involved is lowDue to less liquid nature and long maturity, the risk is comparatively high
PurposeThe market fulfills the short-term credit needs of the businessThe capital market fulfills the long-term credit needs of the business
Functional meritThe money markets increase the liquidity of funds in the economyThe capital market stabilizes the economy due to long-term savings
Return on investmentThe return in money markets are usually lowThe returns in capital markets are high because of higher duration

Conclusion

  • Both are part of the financial markets. The main aim of the financial markets is to channelize funds and to generate returns. The financial markets stabilize the money supply by lending borrowing mechanism i.e. surplus funds are provided to borrowers by the lenders.
  • Both are required for the betterment of the economy as they fulfill the long-term and short-term capital needs of the business and industry. The markets encourage individuals to invest money to gain good returns.
  • Investors can tap into each of the markets depending on their needs. Capital markets are generally less liquid but provide good returns at higher risk whereas money markets are highly liquid but provide lower returns. Money markets are also considered safe assets.
  • However, due to market anomalies and inefficiency due to some aberrations above may not hold. Investors try to look for arbitrage opportunities due to such anomalies to get higher returns. Money markets are considered safe but they sometimes give negative returns. Thus, investors should study the pros and cons of each financial instrument and the condition of the financial market before putting their money for the short term or long term.

Money Market vs Capital Market Video

This has been a guide to Money Market vs Capital Market. Here we discuss the top differences between the money market and the capital market with infographics and comparison table. You may also have a look at the following articles –

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  1. Peculiar obi says

    Wow really competitive

  2. ibrahim says

    thank you so much for your detail description!!!

  3. Nur Sadia says

    This website is very helpful for students

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