Difference Between Money Market and Capital Market

By REPAKA PAVAN ADITYA

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Updated on: May 27th, 2025

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4 min read

The Indian financial system has two major components: the money market and the capital market. The money market fulfils short-term liquidity needs, while the capital market offers a platform 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? 

money market is a market for short-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 for long-term and short 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:

Parameters 

Money Market 

Capital Market 

Function 

Short-term credit facilities Long-term credit facilities 

Market Type 

Informal Regulated/ formal 

Purpose 

For working capital requirementsTo turn into a part of the asset base of the organisation 

Categories 

None Primary and Secondary 

Transaction Type 

Over the counter Exchange 

Instruments 

CDs, T-Bills, Commercial Papers, etc. Stocks and bonds 

Liquidity 

More liquid than the capital market Less liquid than the money market 

Maturity Tenure 

Between 1 day and 1 year No particular time period

Risk 

Low High 

Duration of Investment 

Short term Long term 

Participants 

Banks and similar financial institutions Underwriters, insurance companies, mutual funds, retail investors, stockbrokers, stock exchanges, etc. 

Returns 

Consistent Market-linked 

Examples of Money Market Instruments

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.

Related Articles:
1. Difference Between Wages and Salary 
2. Difference Between Trade Discount and Cash Discount
3. Difference Between Void and Voidable Contract 
4. Difference Between Money Market and Capital Market

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Frequently Asked Questions

What is the difference between money markets and capital markets?

The key differences between money markets and capital markets include their duration of investment and risk levels. 

What are some examples of money market instruments?

Some examples of money market instruments include certificate deposits, treasury bills, repurchase agreements, banker’s acceptance, etc. 

What are some examples of capital market securities?

Some examples of capital market securities include foreign exchange instruments, equities, derivatives, debt securities, and exchange-traded funds. 

How can I invest in money market instruments and capital market securities?

You can invest in money market instruments over the counter via aggregators. However, transactions for capital market securities happen at exchanges.  

What are some of the risks associated with investing in money market instruments and capital market securities?

Credit risk, interest risk, and liquidity risk are the most common for money market instruments. Whereas, inflation risk, interest rate risk, exchange rate risk, and sovereign date default risk are mostly associated with capital market instruments. 

What are the types of Primary Market?

The primary market is where securities are created and sold directly to investors. Key types include IPOs, private placements, rights issues, and preferential allotments.

What are the types of Capital Market?

Capital markets are divided into primary and secondary markets. Primary markets issue new securities, while secondary markets trade existing ones.

What are the types of Money Market?

The money market deals with short-term debt instruments. Key types include treasury bills, commercial paper, certificates of deposit, and repurchase agreements.

About the Author
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REPAKA PAVAN ADITYA

Stocks and Mutual Funds Research Analyst
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I manifest my zeal in financial quantitative & quantitative research and have been instrumental in creating a robust process for the evaluation and monitoring of mutual funds. I’m responsible for Equity and Mutual Funds Research while creating instrumental mathematical models for portfolio construction after evaluating funds, and I play an integral role in analyzing changes in mutual funds, micro, and macro-economic indicators, and equity market events and trends. My views on asset classes which are integral in creating an investment strategy for any profile. Read more

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