Introduction – Money Market vs Capital Market
An exchange where buyers and sellers meet to trade financial assets such as bonds, stocks, derivatives, currencies, and commodities is known as a financial market. A financial market’s primary goals are to increase capital, transfer risk and liquidity, and establish prices for international trade. Maintaining and expanding your wealth are the two approaches to managing it. Making the right decision might be challenging. Additionally, recent claims of growing inflation are unsettling investors and they get to do a lot of research before investing anywhere in the market.
It comes down to the two financial market segments: the money market and the capital market when deciding where to invest your money. The two main areas of the international financial market, the money market and the capital market, are where investments are made to borrow and lend money for either short or long-term.
Let’s discuss the two markets in detail in the rest of the column and learn the technicality of the topic as a whole.
What is Money Market?
The market that deals in securities with a maturity of less than a year is known as a money market. The securities in the money market are highly liquid and of short duration. Treasury bills, certificates of deposit CODs, and banker’s acceptances are examples of money market instruments.
The money market’s primary goal is to combat the urgent financial needs of the economy. Changing the cash positions of various market participants is a common way to do this. In other words, the money market satisfies the needs of the economy for liquidity.
The money market also helps to mobilize funds in a number of market areas. When investors have extra cash in hand in the near future, they invest it in money markets. These funds are used by other market players to cover their immediate financial needs. All other debt securities use the interest rates of the money market instrument as a benchmark. Additionally, to determine future monetary policy, the government and RBI consider interest rates of money market instruments.
What is Capital Market?
The phrase “capital market” refers to a category of financial market where government or corporate securities are produced and exchanged with the aim of obtaining long-term financing to meet the capital demand in the economy.
The securities that are traded in the capital market include stocks, bonds, debentures, euro issues, and other instruments with a maturity of more than a year or sometimes no maturity (non-redeemable). The market has a revolutionary impact on how money is transferred within the economy between lenders and borrowers. The Securities and Exchange Board (SEBI) has complete supervision over the capital market, which operates to safeguard investors’ interests.
Savings are transformed into capital market investments. They also assist businesses in providing long-term project funding. These markets facilitate quicker valuation of financial instruments listed on the stock exchange. India has well-organized and controlled capital markets. While riskier than the money markets, capital markets have the ability to offer favorable long-term returns.
Capital market intermediaries include stock exchanges like the BSE, NSE, and MCX (Commodity Exchange), as well as banks, brokers, insurance companies, and other financial institutions which help them to mobilize funds into investments.
Difference between Money Market & Capital Market
| Basis of Difference | Money Market | Capital Market |
| Definition | Money market is a method of short-term lending. It is used by borrowers to get the funds they require for daily operations. | Capital market is a method of long-term investment and deals in both stocks & bonds. FIs, brokers, etc are part of this mechanism. |
| Market Nature | Money markets are informal in nature. | Capital markets are formal in nature. |
| Instruments involved | Commercial Papers, Treasury certificates of Deposit, Bills, Trade Credit, etc. | Bonds, Debentures, Shares, Euro Issues, etc. |
| Investor Types | Commercial banks, non-financial institutions, central banks, chit funds, etc. | Stockbrokers, insurance companies, Commercial banks, underwriters, etc. |
| Market Liquidity | Money markets are highly liquid. | Capital markets are comparatively less liquid. |
| Risk Involved | Money markets have low risk. | Capital markets are highly risky in comparison to money markets. |
| Maturity of Instruments | Instruments matures within a year. | Instruments mature after a year or more |
| Purpose served | To attain short-term credit requirements of the trade. | To attain long-term trade credit requirements. |
| Functions served | Increasing liquidity of funds in the economy | Stabilizing the economy by an increase in savings |
| ROI | ROI is low | ROI is comparatively high |
Types of Money Market
- Treasury Bills (T-Bills): The Reserve Bank of India issues Treasury Bills (T-Bills) on the government’s behalf in order to raise money. T-bills are the short-term financial instruments of the money market with a maximum maturity of one year. T-bills come with terms of 14, 91, and 364 days. When they mature, they are paid back at face value after being sold at a discount.
- Commercial bills or bills of exchange: Companies utilize bills of exchange to cover their immediate financial demands. The creditor’s bill of exchange may be discounted by a broker or a bank. These liquid instruments can be transferred from one person to another.
- Commercial Papers (CPs): To raise money for immediate commercial demands, significant businesses/companies issue commercial papers (CPs). These companies’ outstanding credit standing serves as collateral for unsecured commercial papers. Being a money market instrument, CPs have a fixed maturity period of 7 to 270 days. A secondary market is a place where investors can trade CPs.
- Certificates of Deposit (CD): CDs are negotiable term deposits that can be acquired by individuals, trusts, scheduled commercial banks, and businesses. They work like promissory notes and are accepted by commercial banks. The lifespan of a CD might range from three months to one year. On the other hand, financial institution CDs have a longer term, typically between one and three years.
Types of Capital Market
- Primary market: This is the market for newly issued stocks that firms issue via initial public offerings (IPOs). When the IPO is a success, the company’s shares are listed on the stock exchange. Prospectuses, rights offerings, and private placements are various methods of raising capital in the primary market. The money will be used to help the company develop and thrive in the economy as a whole.
- Secondary market: This market allows for the trading of listed securities and shares. A stock exchange is a marketplace where securities can be bought and sold. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), which account for the majority of equity trading and investment, are India’s two main stock exchanges.
Conclusion
The financial markets’ primary goals are to distribute money and produce returns and they control the amount of money in circulation by using a lending-borrowing mechanism, in which lenders lend out excess cash to borrowers. This is the basic walk-through of both the money & capital market. Both are essential for the health of the economy because they meet the short- and long-term capital requirements of businesses and industries.
The markets encourage people to invest money in order to make profits and parallelly help the big corporates/government bodies to operate successfully. Depending on their needs, investors can access any of the markets. Money markets are extremely liquid but offer lower returns, whereas capital markets often have less liquidity but offer good returns at higher risk.
Money markets are likewise viewed as secure investments. Market abnormalities and inefficiencies brought on by some of the foregoing aberrations, however, might not persist. Investors search for arbitrage possibilities to increase returns because of these abnormalities. Although money markets are regarded as secure, they occasionally offer negative returns. Therefore, before investing money for the short term or long term, investors should weigh the advantages and disadvantages of each financial instrument as well as the state of the financial market.
Also Read –
NSE IFSC – Debt to equity ratio
Scalping Trading: What is Scalp Trading & How Does It Work?
NSE IFSC – HOW TO INVEST IN US STOCKS FROM INDIA
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