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Difference Between Money Market and Capital Market

Check the key differences between money market and capital market, their instruments, participants, and roles of money market and capital market in the financial system.
authorImageMuskan Verma26 Nov, 2024
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money market and capital market

The financial system of an economy relies on its markets to channel funds effectively between lenders and borrowers. Two crucial segments of this system are the money market and capital market, which serve different purposes but work together to ensure economic stability and growth. Understanding money market and capital market is essential for commerce students to build a strong foundation in financial concepts.

What Is Money Market?

The money market deals with the borrowing and lending of short-term funds, typically with a maturity of less than one year. It is a platform for trading highly liquid financial instruments that provide businesses and governments with immediate funding for temporary needs.

Key Aspects of Money Market

Below mentioned are some key aspects of the money market: Short-Term Financing : Caters to temporary cash shortages for businesses and governments. Liquidity : Instruments traded here are highly liquid and easily converted into cash. Risk : The market is generally low-risk due to the short maturity period. Instruments : Treasury bills, commercial papers, certificates of deposit, and call money. Participants : Central banks, commercial banks, and large financial institutions.

Examples of Money Market

For the better understanding of the money market, we’ve mentioned some examples of the money market: Treasury Bills (T-Bills) : Short-term government-issued securities to manage fiscal needs. Commercial Papers : Unsecured promissory notes issued by companies for working capital. Certificates of Deposit (CDs) : Fixed-term deposit instruments issued by banks. Call Money : Very short-term loans, usually overnight, between banks.

What Is Capital Market?

The capital market deals with securities that have a maturity length longer than a year, with an emphasis on long-term financing. It helps businesses and governments raise funds for long-term investments, such as infrastructure development and business expansion.

Key Aspects of Capital Market

Below mentioned are some key aspects of the money market: Long-Term Financing : Provides funding for large-scale, long-term projects. Risk and Returns : Higher risk due to longer maturity, but offers higher potential returns. Instruments : Stocks, bonds, debentures, and equity shares. Participants : Retail investors, institutional investors, and corporations. Regulation : Overseen by market authorities like SEBI in India.

Examples of Capital Market

For the better understanding of the capital market, we’ve mentioned some examples of the capital market: Equity Shares : Companies raise funds by selling ownership stakes to investors. Corporate Bonds : Long-term debt instruments issued by companies to finance projects. Initial Public Offerings (IPOs) : Companies offer new shares to the public to raise capital. Government Bonds : Long-term securities issued by governments for development projects.

Difference Between Money Market and Capital Market

Below mentioned are the difference between money market and capital market:
Difference Between money market and capital market
Aspect Money Market Capital Market
Definition Facilitates short-term borrowing and lending. Facilitates long-term borrowing and investments.
Duration Short-term (less than one year). Long-term (more than one year).
Instruments Treasury bills, commercial papers, etc. Stocks, bonds, debentures, etc.
Risk Low risk due to short maturity. Higher risk with greater return potential.
Liquidity Highly liquid instruments. Relatively less liquid.
Participants Central banks, commercial banks, institutions. Retail and institutional investors, companies.
Purpose Ensures liquidity and working capital. Supports capital formation and economic growth.
Regulation Managed by central banks (RBI in India). Regulated by SEBI and other authorities.
Market Type Over-the-counter (OTC). Includes primary and secondary markets.

Functions of Money Market and Capital Market

Let's understand the functions of money market and capital market:

Money Market

Below mentioned are some functions of the functions of money market: Maintains Liquidity : Ensures a smooth flow of cash in the economy for short-term needs. Short-Term Financing : Assists businesses and governments in managing temporary cash shortages. Monetary Policy Implementation : Acts as a tool for central banks to control inflation and interest rates.

Capital Market

Below mentioned are some functions of the capital market: Long-Term Funding : Provides businesses and governments with resources for long-term projects. Wealth Generation : Offers investment opportunities for individuals and institutions. Economic Growth : Mobilizes savings into productive investments, fostering growth. The money market and capital market play indispensable roles in the financial system, complementing each other to ensure economic stability and growth. While the money market ensures liquidity and short-term stability, the capital market drives long-term investments and wealth creation. A solid understanding of these markets equips commerce students to make informed decisions in their academic and professional journeys. Prepare confidently for your Class 12 board exams with PW Commerce Courses. Our expert-guided classes, comprehensive study materials, and interactive mock tests are designed to help you achieve top scores. Don't miss the chance to excel, enroll today and take the first step towards a bright future!
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Difference Between Money Market and Capital Market FAQs

What is the primary difference between money market and capital market?

The money market deals with short-term funds (less than one year), while the capital market handles long-term investments (more than one year).

What are examples of instruments in the money market?

Treasury bills, commercial papers, certificates of deposit, and call money are common money market instruments.

How does the capital market support economic growth?

The capital market facilitates long-term financing for businesses and governments, driving investments in infrastructure and development.

Who are the main participants in the money and capital markets?

The money market involves central banks, commercial banks, and institutions, while the capital market includes retail investors, corporations, and institutional investors.

What is the role of regulation in these markets?

The money market is regulated by central banks like the RBI in India, while the capital market is overseen by SEBI and similar market authorities.
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