Q 4. Differentiate between money market and capital market.

Ans:

Money market and Capital market are types of financial markets. Money markets are
used for short-term lending or borrowing usually the assets are held for one year or
less whereas, Capital Markets are used for long-term securities they have a direct or
indirect impact on the capital. Capital markets include the equity market and the
debt market.

Money Market:-
Money markets are unorganized markets where banks, financial institutions,
money dealers and brokers trade in financial instruments for a short period of time.
They trade in short-term debt instruments like trade credit, commercial
paper, certificate of deposit, T bills, etc. which are highly liquid and can be
redeemed in the period less than 1.

Capital Market:-
The capital market is a type of financial market where financial products like stocks,
bonds, debentures are traded for a long duration of time. They serve the purpose
of long-term financing and long-term capital requirement. The Capital market is a
dealer and an auction market and consists of two categories:

 Primary market: A primary market where the fresh issue of securities are offered
to the public
 Secondary market: A secondary market where issued securities are traded
between the investors.
Comparative Table
Basis for Comparison Money Market Capital Market

It is the part of financial market where Capital market is part of the financial market where
Definition lending and borrowing takes place for short- lending and borrowing takes place for the medium-
term up to one year term and long-term

Types of instruments Money markets generally deal

Capital market deals in equity shares, debentures,
involved in promissory notes, bills of exchange,
bonds, preference shares, etc.
commercial paper, T bills, call money, etc.

Institutions The money market contains financial banks, It involves stockbrokers, mutual funds,
involved/types of the central bank, commercial banks, underwriters, individual investors, commercial
investors financial companies, chit funds, etc. banks, stock exchanges, Insurance Companies

Nature of Market Money markets are informal Capital markets are more formal

Liquidity of the
Money markets are liquid Capital Markets are comparatively less liquid
market

The maturity of financial instruments is The maturity of capital markets instruments is

Maturity period
generally up to 1 year longer and they do not have stipulated time frame

Since the market is liquid and the maturity Due to less liquid nature and long maturity, the risk
Risk factor
is less than one year, Risk involved is low is comparatively high

The market fulfills the short-term credit The capital market fulfills the long-term credit
Purpose
needs of the business needs of the business

The money markets increase the liquidity of The capital market stabilizes the economy due to
Functional merit
funds in the economy long-term savings

The return in money markets are usually The returns in capital markets are high because of
Return on investment
low higher duration
 Conclusion
 Both are part of the financial markets. The main aim of the financial markets is to
channelize funds and to generate returns. The financial markets stabilize the money
supply by lending borrowing mechanism i.e. surplus funds are provided to
borrowers by the lenders.
 Both are required for the betterment of the economy as they fulfill the long-term
and short-term capital needs of the business and industry. The markets encourage
individuals to invest money to gain good returns.
 Investors can tap into each of the markets depending on their needs. Capital
markets are generally less liquid but provide good returns at higher risk whereas
money markets are highly liquid but provide lower returns. Money markets are also
considered safe assets.