Difference Between Money Market And Capital Market

A financial market is a place where buyers and sellers meet to trade in financial assets like shares, securities, derivatives, currencies, and commodities. A financial market’s primary objective is to stabilize world exchange rates, raise wealth, and shift risk and liquidity. Money Market is a short-term financial asset market that can be rapidly switched over at a low cost. In this context, a short-term financial asset can be construed as any financial asset that can be turned rapidly into money with minimal transaction costs within a span of one year.

Capital markets are financial markets where long-term debt or equity-backed securities are purchased and sold. The stock market’s primary function is to collect long-term funds for governments, banks, and companies while also offering a bond trading forum. Thought that the financial market has different components, the money market, and the stock market are the two most significant components. Only short-term liquid finance securities are traded in the money market. Whereas only long-term securities are traded in the stock market.

Money Market: Money markets are chaotic business sectors where banks, monetary establishments, cash vendors, and agents exchange money related instruments for a brief timeframe. In numerous nations currency markets serve a basic goal of giving fluid money to borrowers and reserve suppliers for a little timeframe, while keeping harmony between the flexibly and request transient term reserves.

Money market securities are very liquid in nature, and thus, their term of redemption is limited to one year. Although the return on investment in money market securities is poor relative to Stock Market securities, they are comparatively safer than securities on the capital market. Money-market trading takes place off the exchange, i.e. For two sides, over the counter (OTC). It helps the industries by circulating short-term funds in the economy to meet their demand for working capital.

Capital Market: A sort of budgetary market where the organization or government protections are produced and disparaged for the expectation of setting up long haul money to match the capital fundamental is called as Capital Market. It is a kind of monetary market where budgetary items like stocks, securities, debentures are exchanged for a long length of time. The development time of protections in Capital Market is over one year or irredeemable (for example without development).

The stock market is both a dealer and an auction market and comprises two categories: primary and secondary. The purchasers use funds in this market for longer-term investment. Capital market character is volatile markets; hence, it is not used for investment in short-term funds. Most investors are getting the capital markets for education or retirement protection.

Key differences between Money Market and Capital Market:

Money Market –

  • Money market is a segment of the stock system where securities are issued and exchanged at short notice.
  • It is a random system of financial institutions, bill brokers, money traders, banks, etc., in which dealing with short-term financial instruments is called the Money Market.
  • In the short term, money markets are needed to meet the capital needs, in particular the requirements for working capital.
  • Money market resources included Commercial Papers, Treasury Deposit Certificates, Bills, Trade Credit, etc.
  • There is no subdivision in Money Market like it exists in Capital Market.
  • Money Market is directly and closely linked with the Central Bank of the Country.
  • Money markets have low risk, and its Instruments mature within a year.
  • Money markets increase the economic liquidity of the capital, and the return on money markets is typically low.

Capital Market –

  • The stock market is a segment of the market where the issuing and selling of long-term securities.
  • It is a kind of financial market where the enterprise or government securities are produced and patronized for the purpose of establishing long-term finance to comply with the capital needed is called the stock market.
  • Capital markets are necessary to provide long-term funding and fixed capital to buy land, buildings, equipment, construction, etc.
  • Capital market instruments included notes, debentures, shares, securitization of assets, retained earnings, issues relating to the euro’s, etc.
  • The capital Market is classified between Primary Market and Secondary Market.
  • The capital market is affected by policies and decisions of the central bank but there is no direct correlation with the country’s central bank.
  • Capital markets are more risky in comparison to money markets, and its instruments take a longer time.
  • Because of long-term investment, the stock market stabilizes the economy, and because of the longer length, returns on capital markets are high.

Both the money market and the capital market are the two unique sorts of the monetary business sectors wherein the currency market is utilized with the end goal of transient acquiring and loaning while the capital market is utilized for the drawn-out resources i.e., the advantages which have the development of over one year.


Information Sources:

  1. educba.com
  2. byjus.com
  3. wallstreetmojo.com