Difference between Money market and Capital market
In this blog let us Understand What is Money Market ? And What is Capital Market ? And what is the difference between money market and capital market ?
An economy has to rely on these financial markets for its economic development. They save their money to which they channel investments and allow money to flow across different sectors of the economy. In India, the financial market is broadly categorized into two segments: both the Money Market and Capital Market . However each serves a different purpose, playing different instruments, catering to different time horizons and types of participants. It is important at the same time to understand the differences between these markets for investors, policymakers and businesses.
What is Money Market ?
Short-term funds in the Money Market are borrowed and lent. In the highly liquid and low risk arena of financial instruments with maturities up to one year, it trades. Liquidity in the economy relies on the money market to see that businesses and governments get the short-term funds they require.
Key Features Of Money Market
Short-term Nature: The instruments traded in the money market have maturities of supposedly overnight to one year’.
High Liquidity: Money market instruments are very liquid, and are therefore employed by us to manage temporary surplus (short fall) of cash available within the day.
Low Risk: These instruments have low risk attributable to their short duration and the high creditworthiness of the issuer.
Participants: The cad flora is provided by banks, financial institutions, mutual funds, corporations, and the Reserve Bank of India (RBI).
Regulatory Oversight: The RBI controls the money market to keep it solid and liquid in the financial system.
Common Instruments in the Money Market :
Treasury Bills (T-Bills): Money market instruments with maturity of up to one year hence 91 days, 182 days and 364 days paper.
Certificates of Deposit (CDs): Interest earning obligations with negotiated tenors offered by banks and other similar companies.
Commercial Papers (CPs): Short term corporate obligations in form of unsecured promissory notes.
Call Money and Notice Money: Overnight or one day loans between banks also referred to as call money, loans for a maximum period of 14 days .
Repo and Reverse Repo Agreements: Temporary overdraft and discounting operations for which Government securities are pledged as security.
What is Capital Market ?
The Capital Market is one of the subsections of the financial market through which capital is raised from the public through the flotation of securities such as equity, bonds and other hybrids. This market is very important in unlocking savings for investment in productive capital assets for growth and development.
Key Features Of Capital Market
Long-term Nature: The instruments that are exchanged in the capital market have a maturity period of more than one-year.
Investment Focus: They help in capital formation and offer investment avenues for long term asset creation.
Higher Risk and Return: Securities in the capital market share better risks compared to those in the money market but superior yields.
Diverse Participants: It includes individual consumers, institutional consumers, companies, mutual funds, FPIs, and government investors.
Regulatory Oversight: SEBI is the regulatory authority to monitor the capital market so that investors and other stakeholders get proper treatment by certain good commercial directions.
Common Instruments in the Capital Market :
Equities (Shares): Act on behalf of shareholders and provide their share of earnings through dividends on stock and capital gains.
Bonds: Bonds of governments or corporations and municipal organizations that are given for a longer time to borrow money.
Debentures: The long-term liabilities that arise from the sale of bonds by organizations without offering securities to back up the obligations.
Mutual Funds: Companies through which people with money invest it in securities in a diversified basis forming a pool of investment.
Derivatives: It is an agreement in which trading of financial instruments, which provide the value of the contract, based on commodities, stock, bonds and other similar instruments.
Difference Between Money Market and Capital Market
Aspect | Money Market | Capital Market |
Purpose | Provides short-term liquidity | Facilitates long-term capital formation |
Time Horizon | Deals in instruments with maturities of less than one year | Deals in instruments with maturities of more than one year |
Risk Level | Low risk due to short duration and high creditworthiness | Higher risk due to market fluctuations and longer duration |
Liquidity | High liquidity | Moderate to low liquidity, depending on the instrument |
Instruments | Treasury bills, commercial papers, call money, etc. | Equities, bonds, debentures, derivatives, etc. |
Participants | Banks, RBI, mutual funds, corporations | Retail and institutional investors, FPIs, corporations |
Regulation | Regulated by the Reserve Bank of India (RBI) | Regulated by the Securities and Exchange Board of India (SEBI) |
Returns | Lower returns due to low risk | Higher returns due to higher risk |
Primary Objective | Ensures liquidity and meets short-term funding needs | Mobilizes savings for long-term investment |
Market Structure | Over-the-counter (OTC) market | Includes primary and secondary markets |
Role of Money Market and Capital Market in Indian Economy
Importance of the Money Market :
Liquidity Management: Assists in meeting the money demand and supports appropriate business operations in the banking industry.
Monetary Policy Implementation: Money market instruments are utilized by the RBI to control Money supply and as instruments of Monetary policy.
Short-term Funding: Offers working capital facilities that meet business and governments’ immediate access to cash to help them reconcile their cash flow gap.
Efficient Allocation of Resources: Funds are disbursed to sectors which require financial resources to be channeled immediately.
Importance of Capital Market :
Economic Growth: Supports the financing of assets and structures like infrastructure, industries and undertake other long term development projects which help in the enhancement of the economy.
Wealth Creation: Entails possibility of making huge profits by either capital gain or through receiving dividends.
Corporate Financing: Facilitates different corporations to obtain funds of a long-term nature for their expansion, création, and functioning.
Investment Opportunities: Investment service to people and companies and act as an intermediary to help everyone invest based on his/her capability.
Challenges in the Money Market :
Limited Participation: Exclusive to either banks and financial institutions with restricted involvement from other parties.
Regulatory Constraints: This is because while the regulations are usually tight, this may actually work against flexibility.
Liquidity Risks: This conclusion means that rare discrepancies in the relative densities of these markets may interfere with their efficiency.
Challenges in the Capital Market :
Volatility: This is because market changes scare the retail investors..
Corporate Governance Issues: In most cases, tools in companies such as fraud and management can have a negative impact on investors.
Limited Awareness: Some of the barriers include Limited financial literacy among the population, acting as a limitation to participating in contract markets.
Recent Developments in Money Market and Capital Market
Digitalization: Electronic commerce and other forms of cyber trading have extended the access to markets.
Foreign Investments: The enhanced operations of capital markets by foreign investors with a view to inject more capital.
Regulatory Reforms: Ironed out measures by the RBI and SEBI on investors’ interest and markets’ stability.
Introduction of New Instruments: New products such as ETFs and the new generation of green bonds are emerging.
Conclusion
The money market and capital market are two parts of the financial system of India though both are functionally different and have different roles to play. While the money market provides for the liquidity and intermediates for short term funding needs the capital market offers means for long-term funds and wealth accumulation. Both of them are helpful to making the economy stable and also enhancing its growth.
Specifically, for eg, the liable individuals/organizations which are operating in these markets are required to get informed about the profound variation between these markets in order to undertake sound financial decisions. Local and global leaders and policy makers hence require to further work hard and even cause more policy interventions so that these markets are continuously developed and maintained especially throughout existing dynamic economic shocks.
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FAQ'S
What is a money market ?
Short-term funds in the Money Market are borrowed and lent. In the highly liquid and low risk arena of financial instruments with maturities up to one year, it trades. Liquidity in the economy relies on the money market to see that businesses and governments get the short-term funds they require.
What is a capital market ?
The Capital Market is one of the subsections of the financial market through which capital is raised from the public through the flotation of securities such as equity, bonds and other hybrids. This market is very important in unlocking savings for investment in productive capital assets for growth and development.
What is the difference between money market and capital market ?
The money market deals with short-term instruments (maturity under one year), while the capital market focuses on long-term instruments (maturity over one year).
Which market is riskier money market or captial market ?
Capital Market is riskier when compared to Money Market. Capital Market is more volatile than the money market but it is also true that average return is higher in capital market than money market.
