What is Money market?
Money markets are an unorganized avenue of various financial institutions like banks, bill brokers, money dealers, etc. where trading is done on short-term financial instruments like commercial papers, trade credit, treasury bills and certificate of deposit. These instruments are highly liquid in nature standing almost equivalent to cash. Due to high liquidity, their redemption period is capped at one year. These are favorable for people who are risk averse providing low risk and comparatively lower returns.
Being an unsystematic and unorganized setup, money market trading is done off the record or in investments jargon terms, over the counter (OTC). The two parties involved in trading communicate through email, phone, fax or online portals, etc.
Money market instruments are very helpful in the circulation of short-term funds and introducing working capital in the company.
What is the capital market?
Capital market is a type of market which generates capital by creating government and company securities for the purpose of raising long-term capital in order to meet the requirements. These securities include bonds, stocks, euro issues, debentures, etc. The maturity period of these securities is not limited to one year. Capital market plays the role of money circulator between money suppliers and end users. The capital market is regulated by the SEBI in order to protect the investor’s interest.
There are two parts of the capital market- Dealer market and Auction market under the two broad categories: Primary market and Secondary market.
Primary market: The primary market is one where fresh or new securities are offered to the public to subscribe to.
Secondary market: The secondary market is one where already issued securities are traded and offered to the public to subscribe to.
Comparing the money market and capital market
|Principal component||Money market||Capital market|
|Definition||A market segment which deals with short-term securities trading||A market segment which deals with long-term securities trading|
|Mode of operation||Informal||Formal|
|Instruments used||Commercial papers, treasury bills, trade credit, certificate of deposit||Debentures, shares, retained earnings, bonds, asset securitization, Euro Issues|
|Institutions||Commercial banks, the central bank, non-financial institutions, acceptance houses, bill brokers, etc.||Stock exchange, commercial brokers, non-banking institutions, insurance companies, etc.|
|Risk factor||Low||On the higher side|
|Purpose||To accomplish short-term credit needs||To accomplish long-term credit needs|
|Maturity||Less than one year||More than one year|
|Benefit||Increased liquidity||Savings mobilization|
|ROI||Low to moderate||Higher|
Key differences between money market and capital market from an investor’s perspective:
- Returns are higher in the case of capital markets as compared to money market
- Money market deals with trading of short-term securities where are capital market caters long-term securities
- Capital market is a well-organized and systematic portal which the money market lacks
- The money market is for risk-averse investors carrying low risk, the capital market carries a higher risk
- Money market offers high liquidity whereas the capital market falls short of cash and equivalents
- Money market being unorganized works on institutions like acceptance houses, non-financial institutions. The central bank, commercial banks also support money markets. As far as capital markets are concerned, stock exchange, commercial banks are major players.
- Money markets cater to short-term needs of companies and establishments whereas capital markets take care of long-term money requirements like buying land, building or any other type of growth.
Financial markets are functional upon the main objective of channelizing money in different markets. The money market and capital markets are drivers which circulate money in a lender-borrower cycle. The number of transactions in these markets goes up to millions per day.
Both markets have the main objective of uplifting the global economy. Each transaction is in done in order to fulfill the short- and long-term requirements of establishments like companies, financial institutions, corporate, government and individuals. Good track record and returns boost further investments.