Updated November 16, 2023
Difference Between Money Market vs Capital Market
Capital Markets are financial markets for the buying and selling 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 trading securities. A Market Market is where short-term financial assets that can be turned over quickly at a low cost are traded. In this context, we may construe a short-term financial asset as any financial asset that can be rapidly converted into money within one year with minimum transaction cost.
Capital Market
Securities traded in the 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).
Two major categories split the Capital Market.
- Primary Market: The Primary Market, or the IPO Market, is where the public subscribes to newly issued securities. It also encompasses the issuance of additional capital by companies whose shares are already listed on stock exchanges. Different types of intermediaries operate in this market to assist in completing transactions. Some of the critical intermediaries are Merchant Bankers, Brokers, Debenture trustees, Bankers, Portfolio Managers, Registrar to Issue, Share Transfer Agents, etc. SEBI regulates all of these intermediaries.
- 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 after the original issuance in the primary market.
Money Market
Trade Credit, Commercial Paper, Certificates of Deposit, and Treasury Bills are some examples of short-term debt instruments. Money Market securities are very liquid; their redemption period is restricted to one year. Although the return on investment in Capital Market securities is higher than in Money Market securities, Money Market securities are comparatively safer than Capital Market securities. Trading in the Money Market occurs off the exchange, i.e., Over-the-counter (OTC) between two parties.
Two segments characterize the Money Market:
- 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 participants in organized money markets are Banks, NBCs, Co-operative Societies, etc.
- Unorganized Segment: Unorganised Segment is primarily used by borrowers who need help getting credit from the organized money market. The unorganized Money Market has comparatively flexible terms, informal procedures, higher interest rates for borrowers, etc. Some unorganized money market participants 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 the Money Market vs Capital Market are popular choices in the market; let us discuss some of the major Differences Between the Money Market and Capital Market:
- Short-term securities are traded in the Money Market, whereas the Capital Market is where long-term securities are created and traded.
- Compared to the Money Market, the Capital Market is more formal.
- Because they involve lower volatility and are issued for a shorter period, Money Market securities are less risky than Capital Market securities.
- Money Markets are highly liquid compared to Capital Markets.
- The money market helps meet the companies’ short-term credit requirements, such as working capital. However, the Capital Market helps meet the companies’ long-term credit requirements, like providing fixed capital to purchase land, building machinery, etc.
- Capital Market securities involve higher risk than Money Market securities, so the Return on Investment is higher in the Capital Market than in the Money Market.
- The redemption timeframe of Money Market securities is less than one year, while Capital Market securities get due after one year or even remain 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 |
The section of the financial market where short-term securities are traded and issued is known as the money market. |
The section of the market where long-term securities are traded and issued is known as the primary market. |
| 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. | It 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 Increase the liquidity of funds in the economy | Helps in the Mobilisation of savings in the economy |
| Nature of Market | Informal | Formal |
| Classification | There is no subdivision in the Money Market as it exists in the Capital Market. | Capital Market is classified between Primary Market and Secondary Market |
| Linkage with Central Bank of Country` | The money market is directly and closely linked with the Central Bank of the Country. | The Central Bank’s policies and decisions influence the Capital Market, but there is no direct linkage with the Central Bank of Country. |
Conclusion
Financial Markets enable money channelization between two or more parties. Money Market vs Capital Market helps channel 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, corporations, firms, and government. They make funds available based on tenure, risk appetite, purpose, etc.
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This has been a guide to the top difference between the Money Market vs Capital Market. Here, we also discuss the Money Market vs Capital Market key differences with infographics and a comparison table. You may also have a look at the following articles to learn more.
