Difference Between Money Market and Capital Market

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? 

A 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:

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.

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