Difference Between Money Market and Capital Market

In order to understand what the differences between things are you first need to understand what each of the items is. In this case before you can understand the difference between money market and capital market you are going to need to understand what money market is and what capital markets is. Once  you understand the two  items are it will  be easier to see what the difference or differences are between the two markets.

What is Money Market?

Basically the money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The average amount of time that companies borrow money in a money market is about thirteen months or lower. Some of the more common  types  of  things  used  in  the  money  market  are  certificates  of  deposits,  bankers’  acceptance,  repurchase  agreements and  commercial paper to name a few. Basically what the money market consists of is banks that borrow and lend to  each  other, but  other  types  of  finance  companies are  involved  in  the money  market.  What  usually  happens  is  the  finance  companies  fund themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of eligible assets into an asset backed commercial paper  conduit.  Your  most  common  examples  of  these  are  auto  loans, mortgage loans, and credit card receivables.

What is Capital Market?

Basically the capital market is a type of financial market, it includes the stocks and bonds market as well. But in general the capital market is the market for securities where either companies or the government can raise long term funds. One way that the companies or the government raise these long term funds is  through issuing bonds, which is  where a person buys  the bond for a set price and allows the government or company to borrow their money for a certain time period but they are promised a higher return for allowing  them  to  borrow  the  money,  the  higher  return  is  paid  through interest  that  accrues  on  the  money  that  the  government  or  company borrows. Another way that the companies or government can raise money in the capital market is through the stock market, most of the time you don’t see the government as a part of the stock market, but it can actually happen so we  need  to  include  them.  But  how  the  stock  market  works  is  that  the companies decide to sell shares of their stock, which is basically ownership in the company, to ordinary people and other companies, as a way to raise money. The people who buy the stock are usually given dividends each year, if the company has agreed to pay out dividends, so that is another possible return on their investment.The capital market actually consists of two markets. The first market is the primary market and it is where new issues are distributed to investors, and the secondary market where existing securities are traded. Both of these markets are regulated so that fraud does not occur and in India the Securities and Exchange Board of India (SEBI) is in charge of regulating the capital market.

Difference Between Money Market and Capital Market

Basically the difference between the money market and capital market is that money markets are more of a short  term  borrowing  or  lending  market  where  banks  borrow  and  lend between each other, as well as finance companies and everything that is borrowed is usually paid back within thirteen months. Whereas  capital markets are for long term investments, companies are selling stocks and bonds in order to borrow money from their investors to improve their company or to purchase assets. Another difference between the two markets is what is being used to do the borrowing or lending. In the  money  markets  the  most  common things used are commercial paper and certificates of deposits,  whereas with the capital markets the most common thing used is stocks  and  bonds. Money  market  is  distinguished  from  capital  market  on  the  basis  of  the maturity period, credit instruments and the institutions:

  1. Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment.
  2. Maturity Period: The money market deals in the lending and borrowing of short-term finance(i.e., for one year or  less), while the capital market deals in  the lending and borrowing of long-term finance (i.e., for more than one year).
  3. Credit Instruments: The main credit instruments of the money market are call money, collateral loans,  acceptances,  bills  of  exchange.  On  the  other  hand,  the  main instruments  used  in  the  capital  market  are  stocks,  shares,  debentures,bonds, securities of the government.
  4. Nature of Credit Instruments: The  credit  instruments  dealt  with  in  the  capital  market  are  more heterogeneous than those in money market. Some homogeneity of credit instruments  is  needed  for the  operation  of  financial  markets.  Too much diversity creates problems for the investors.
  5. Institutions: Important institutions operating in the money market are central banks, commercial  banks, acceptance houses,  non bank  financial  institutions,  bill brokers,  etc.  Important  institutions  of  the  capital  market  are  stock exchanges, commercial banks and non bank institutions, such as insurance companies, mortgage banks, building societies, etc.
  6. Purpose of Loan: The  money  market  meets  the  short term  credit  needs  of  business;  it provides  working  capital  to  the  industrialists.  The  capital  market,  on  the other  hand,  caters  the  long-term  credit  needs  of  the  industrialists  and provides fixed capital to buy land, machinery, etc.
  7. Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimized. Risk varies both in degree and nature throughout the capital market.
  8. Relation with Central Bank: The money market is closely and directly linked with central bank of the country.  The  capital  market  feels  central  banks  influence,  but  mainly indirectly and through the money market.
  9. Market Regulation: In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.

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