Money Market vs Capital Market
These are different types of financial markets that serve different investing purposes for investors. The fundamental difference between these markets is the timeline of maturity of the instruments traded in both markets.
The Capital Market
In the capital market, participants trade in long-term financing instruments. It serves the purpose of long-term capital requirements of firms and the types of instruments traded in the market are equity shares, bonds, debentures, preference shares, etc. with a maturity period of more than 1-year. It involves stockbrokers, mutual funds, individual investors, commercial banks, stock exchanges, and many more. Liquidity element in this market is comparatively low and thus, risk is comparatively high. As the risk is high, the rewarding return is also high in capital market.
Capital markets are further classified into two types:
- Primary market – Fresh issue/Initial issue of securities are offered in the public domain. IPO and FPO are examples of initial issues.
- Secondary market – An organised exchange where the securities of different companies are traded between the investors. NSE and BSE are the organised exchanges in India where secondary trade happens.
The Money Market
It is the market where banks, individuals, financial institutions, money dealers, and brokers trade in short-term debt instruments that can be redeemed within a period of 1-year. These debt instruments include Certificate of Deposits (CDs), Treasury Bills, Commercial Papers (CPs), Trade Credit, etc. The primary reason for the existence of this market is to ensure there is enough cash flow between institutions like corporations and governments. Borrowing and lending in this market mainly focus on either financing for day-to-day operations of a business or investing the extra cash that businesses have for a short span of time. It essentially helps in the working capital requirements of businesses.
Trading is mostly done through over-the-counter, i.e. there is negligible involvement of exchanges. It is important to note that as this market provides highly liquid debt instruments, the risk related to liquidity or default is very low compared to capital market instruments.