Money Market v/s Capital Market
Both the money market and the capital market are the two separate types of financial markets where the money market is used for short-term borrowing and lending purposes, while the capital market is used for long-term investments, i.e. assets with maturities exceeding one year.
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Money Market v/s Capital Market
| Basis for Comparison | Money Market | Capital Market | ||
| Definition | It is the part of the financial market where loans and borrowing take place for up to a year in the short term | Capital market is part of the financial market where lending and borrowing takes place over the medium-term and long-term | ||
| Types of instruments involved | In general, money markets deal in promissory notes, exchange bills, commercial paper, T bills, call money, etc. | Capital market operates in equity, debentures, bonds, preferred shares, etc. | ||
| Institutions involved/types of investors | The money market comprises finance banks, central banks, commercial banks, financial companies, chit funds, etc. | It includes stockbrokers, mutual funds, underwriters, individual investors, commercial banks, stock exchanges, Insurance Companies | ||
| Nature of Market | Money markets are informal | Capital markets are more formalized | ||
| Liquidity of the market | Money markets are highly liquid | Comparatively; Capital Markets are less liquid | ||
| Maturity period | The financial instruments usually have a maturity of up to 1 year | Capital market instruments have the maturity and have no timeline is specified. | ||
| Risk factor | As the market is liquid and the maturity is less than one year, the risk involved is low | The risk is comparatively high due to the less liquid nature and long maturity | ||
| Purpose | The market meets the company’s short-term financing needs | The capital market addresses the company’s long-term funding needs | ||
| Functional merit | Money markets enhance the funds’ liquidity in the economy | Because of long-term savings, the capital market stabilizes the economy | ||
| Return on investment | Money market returns are relatively low | Capital market returns are high because of the longer duration |
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Conclusion:
- Both are a part of the financial markets. Financial markets have the key goal of channelizing capital and producing returns. The financial markets balance the money supply by lending borrowing process i.e. the lenders provide the surplus funds to borrowers.
- Both are needed to boost the economy as they meet business and industry’s long-term and short-term capital needs. The markets encourage people to spend money to obtain good returns.
- Depending on their need’s investors can tap into each of the markets. Capital markets are typically less liquid but at higher risk have decent returns, whereas money markets are extremely liquid but offer lower returns. Money markets are also seen as secure assets.
- However, due to market fluctuations and inefficiency due to any of the above aberrations does not hold. Because of such discrepancies, investors are trying to search for arbitrage opportunities to get higher returns. Money markets are considered secure but often they produce negative returns.
- Investors should also review the pros and cons of each financial instrument and the financial market conditions before investing their money for the short or long term.
Author: Kinjal Chheda
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