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.
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. |