The money and capital markets are both parts of the financial market, where financial instruments are dealt with. The financial market is where buyers and sellers trade in various long and short-term financial instruments, including stocks, bonds, commodities, derivatives, currencies, etc. Together, these two markets are instrumental in raising short-term and long-term funds and are essential pillars for the economic development of a country.
Money market vs. capital market – Know the difference
Several features distinguish the two markets and help us understand the differences between the money and capital markets. These are in terms of the instruments used, the time horizon, the institutions involved, and so on.
The instruments in the money market are used in lending and borrowing for short-term financial arrangements. On the other hand, capital market instruments are traded to raise finances for the long term.
Instruments in use
Money market instruments include bills of exchange, collateral loans, commercial papers, treasury deposits, etc. Tools used in the capital market include stocks, government securities, bonds, debentures, retained earnings, etc.
Central banks, commercial banks, non-banking financial institutions, chit funds, bill brokers, and acceptance houses are the institutions that typically participate in the money market. Participants in the capital market include stock market exchanges, insurance companies, mortgage banks, building societies, underwriters, commercial banks, etc.
Nature of market
Due to various informal players like chit funds, money lenders, and bill brokers, the money market has the presence of an unorganized sector. The capital market is more formal due to the fact of regulated parties.
Instruments in the money market have a short maturity, making the market more liquid. It is, therefore, ideal to meet the short-term liquidity requirement of borrowers. The capital market is less liquid as the trades made in it have a long-term maturity.
Examples of money and capital markets
Call money is a type of money market instrument like a short-term loan. Its maturity may range between one to fourteen days and is repaid on demand. The Treasury bill is one of the oldest and most popular money market instruments. It is issued by the government and carries no interest. It is, however, given at a discounted rate.
One of the most dynamic activities in the capital market is looking for stocks to buy today. Traded in the stock market, equity trading is a fully organized activity with the Securities and Exchange Board of India (SEBI) and depositories like Central Depository Services Limited and National Securities Depository Limited. Shares are traded at the prevailing real-time rate through broker platforms.
Today’s stock market is a composite mix of listed shares and commodities, as well as instruments like exchange-traded funds. You can invest in stocks, ETFs, and investment options like NPS, mutual funds, and deposits as an investor. You could also reach a financial expert to guide your mutual fund investment decisions or get advice on share trading.