The capital market and money market are the two main components of the financial system. The capital market refers to the system for long-term investments while the money market meets the short-term liquidity requirements. Instruments of the capital market have a maturity period of over one year while the money market instruments’ maturity period is of less than one year. Here is a comparative analysis between the capital and money market.
What is the money market?
Some of the instruments of the money market include treasury bills, deposit certificates, banker’s acceptances, etc. The basic function of the money market is to cater to the instant cash or liquidity requirements of the Indian economy. Such markets also assist in mobilising funds across distinct market sectors. When investors hold excess funds in the short term, they invest in the money market. Owing to the enhanced liquidity of the money market investments, channelising savings to investments becomes easier.
Interest rates of money market investments serve as benchmarks for other debt securities. Also, the government and the Reserve Bank of India (RBI) utilise money market rates to frame their future monetary policy. Major money market players are banks, RBI, Non-Banking Financial Companies (NBFCs), and acceptance houses.
What is the capital market?
The capital market is a long-term investment market. The capital market industry players deal in instruments such as bonds, shares, debentures, Exchange Traded Funds (ETFs), future derivatives, swaps, and options. Note that the stock market is a category of the capital market that trades shares of corporations. The stock market today is extensively used by companies as a medium to raise capital. And which stocks to buy or which stocks to invest in primarily depends on the investor’s preference, risk appetite, financial goals, etc.
The capital market helps mobilise savings to investments. In India, the capital market is highly organised and regulated. While it is riskier as compared to the money market, the capital market holds the potential for higher returns over the long term. Intermediaries of the capital market include stock exchanges such as the National Stock Exchange (NSE), banks, brokers, commodity exchanges such as the Multi Commodity Exchange (MCX), insurance companies, and others. It is via such intermediaries that the capital market mobilises savings. Most investors invest in the capital market to meet their long-term financial goals of building a retirement corpus, funding their child’s higher education, etc.
Comparative analysis of the capital market and money market
| Capital market | Money market |
| Meaning | |
| The capital market is a financial market where long-term equity or debt securities are purchased and sold. | The money market is where short-term debt instruments are purchased and sold. |
| Market nature | |
| Formal in nature | Informal in nature |
| Instruments included | |
| Debentures, bonds, shares, retained earnings, etc. | Treasury certificate of deposit, commercial papers, trade credit, etc. |
| Market liquidity | |
| Less liquid | Highly liquid |
| Risk involved | |
| Riskier as compared to money markets | Contains less risk |
Conclusion
The distinction between capital and money markets is simple. Money markets make transactions in financial securities having a maturity of less than one year. Treasury notes, commercial papers, bills of exchange, and promissory notes are a few of the commonly traded instruments of the money market. Thus, it can be stated that money markets are utilised to borrow money for the short term.
On the contrary, securities sold in the capital market have a maturity period of more than a year. Bond, debentures, and gilts are common financial instruments transacted in the capital market. Also, equity stocks are sold in the capital market wherein equities do not hold any definite maturity. Thus, it can be fair to state that the capital market is a better choice to raise funds for the long term.
