The Indian financial system has two major components: themoney market and the capital market. Themoney market fulfils short-term liquidity needs, while thecapital market offers aplatform for long-term investing. Money market instruments are more liquid than capital market instruments, and the money market is less risky than the capital market. There are more such differences.
Explore the difference between capital market and money market and more in this article.
What is a Money Market?
Amoney market is a market forshort-term, highly liquid securities. It caters to immediate cash requirements of the economy and helps mobilise funds across different sectors. Money market interest rates serve as a benchmark for other debt securities and are used by RBI and the government to frame monetary policy.
Major players in the money market include the Reserve Bank of India (RBI), banks, NBFCs, acceptance houses, mutual fund houses and All India Financial Institutions (AIFI). Individuals, firms, companies and other institutions may invest in treasury bills and other money market instruments.
What is a Capital Market?
Capital market is a market forlong-term investments that helps businesses raise funds for long-term projects. It also helps to mobilise savings to investments and enables faster valuation of financial securities that are listed on the stock exchange. Capital markets in India are highly regulated and organised and have the potential to give good returns in the long run.
Key Differences Between Money Market and Capital Market
The following table lays down the key differences between capital and money markets:
Here are some examples of money market instruments:
Treasury Bills (T-Bills): Short-term government bonds issued by the Reserve Bank of India.
Certificate of Deposits (CDs): Negotiable term deposits issued by corporates, scheduled commercial banks, trusts, and individuals.
Repurchase Agreements (Repos): A legal agreement between two parties where one party sells a security to another with a promise of purchasing it back at a later date.
Bills of Exchange or Commercial Bills: Short-term promissory notes issued by businesses to meet their short-term money requirements.
Commercial Papers (CPs): Short-term unsecured debt instruments issued by large businesses and corporations.
Call and Notice Money: Short-term unsecured loans borrowed and lent by cooperative banks and commercial banks for periods of one day and 14 days, respectively.
Banker's Acceptance: A financial instrument guaranteed by a commercial bank that obligates the issuer to pay a specific sum on a specific date.
Examples of Capital Market Securities
Here are some examples of capital market securities:
Equities: Shares of ownership in a company.
Debt Securities: Loans to companies or governments.
Exchange-Traded Funds: Baskets of securities that can be traded on an exchange.
Derivatives: Financial contracts whose value is derived from the value of an underlying asset.
Foreign Exchange Instruments: Contracts to exchange one currency for another.
Alternatives to Money Markets and Capital Markets
Apart from money market and capital market instruments, there are other places to invest. Here are some alternatives to them:
Commodities such as gold, other precious metals, gas, oil, etc.
Real estate.
Collectables such as wine, coins, artworks, etc.
Investment in private companies or start-ups.
Conclusion
When it comes to choosing, you should consider the difference between the money market and the capital market. The choice should be based on your financial and investment goals and risk tolerance level. You might also consider other alternatives to diversify your portfolio.
The money market deals in short-term debt instruments, typically on a timeline of one year or less. It's where governments, banks, and large corporations go to manage their immediate cash needs. Meanwhile, the capital markets involve long-term securities, such as stocks and bonds, that mature in more than one year.
Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.
Financial markets encompass a broad range of venues where people and organizations exchange assets, securities, and contracts with each other. They're often secondary markets. Capital markets are used primarily to raise funding to be used in operations or for growth, usually for a firm.
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.
1. Definition. A money market is a short-term lending system that allows businesses to raise working capital for day-to-day operations. A capital market is geared towards long-term investment, where companies issue stocks and bonds to raise capital and expand their businesses.
The money market is defined as dealing in debt of less than one year. It's used primarily by governments and corporations to keep their cash flows steady and by investors to make a modest profit. The capital market is dedicated to the sale and purchase of long-term debt and equity instruments.
Capital is a much broader term that includes all aspects of a business that can be used to generate revenue and income, i.e., the company's people, investments, patents, trademarks, and other resources. Money is what's used to complete the purchase or sale of assets that the company employs to increase its value.
The money market is a crucial financial market segment where short-term borrowing and lending of funds occur. It facilitates the smooth functioning of the economy by providing a platform for participants to meet their immediate cash needs and manage liquidity.
Capital is a broad term for anything that gives its owner value or advantage, like a factory and its equipment, intellectual property like patents, or a company's or person's financial assets. Even though money itself can be called capital, the word is usually used to describe money used to make things or invest.
Taxable money market funds, also known as prime money market funds, usually offer higher yields than tax-exempt funds, but any income is subject to taxes. Prime funds invest in corporate and bank debt issued by U.S. and international entities.
These are best suited for short-term investment, from a month to a year. These are stable and offer decent returns before being reinvested. Money Market Funds tend to attract investors interested in low-risk, regular, short-term income.
The 4 types of financial markets are currency markets, money markets, derivative markets, and capital markets. Capital markets are used to sell equities (stocks), debt securities.
Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions. Capital market trades mostly in long-term securities.
The purpose of capital goods is to help produce other products. They are meant to be used for production, while consumer goods are bought for personal and final consumption. Businesses, companies, and manufacturers buy capital goods. Consumer goods are bought by consumers.
The equity capital market is a subset of the broader capital market, where financial institutions and companies interact to trade financial instruments and raise capital for companies. Equity capital markets are riskier than debt markets and, thus, also provide potentially higher returns.
The money market offers short-term liquidity with instruments like Treasury bills, certificates of deposit, repurchase agreements, and commercial papers. On the other hand, the capital market provides long-term investment avenues through bonds, debentures, and stocks.
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