The Indian financial system has two major components: themoney market and the capital market. Themoney market fulfils short-term liquidity needs, while thecapital market offers aplatform for long-term investing. Money market instruments are more liquid than capital market instruments, and the money market is less risky than the capital market. There are more such differences.
Explore the difference between capital market and money market and more in this article.
What is a Money Market?
Amoney market is a market forshort-term, highly liquid securities. It caters to immediate cash requirements of the economy and helps mobilise funds across different sectors. Money market interest rates serve as a benchmark for other debt securities and are used by RBI and the government to frame monetary policy.
Major players in the money market include the Reserve Bank of India (RBI), banks, NBFCs, acceptance houses, mutual fund houses and All India Financial Institutions (AIFI). Individuals, firms, companies and other institutions may invest in treasury bills and other money market instruments.
What is a Capital Market?
Capital market is a market forlong-term investments that helps businesses raise funds for long-term projects. It also helps to mobilise savings to investments and enables faster valuation of financial securities that are listed on the stock exchange. Capital markets in India are highly regulated and organised and have the potential to give good returns in the long run.
Key Differences Between Money Market and Capital Market
The following table lays down the key differences between capital and money markets:
Here are some examples of money market instruments:
Treasury Bills (T-Bills): Short-term government bonds issued by the Reserve Bank of India.
Certificate of Deposits (CDs): Negotiable term deposits issued by corporates, scheduled commercial banks, trusts, and individuals.
Repurchase Agreements (Repos): A legal agreement between two parties where one party sells a security to another with a promise of purchasing it back at a later date.
Bills of Exchange or Commercial Bills: Short-term promissory notes issued by businesses to meet their short-term money requirements.
Commercial Papers (CPs): Short-term unsecured debt instruments issued by large businesses and corporations.
Call and Notice Money: Short-term unsecured loans borrowed and lent by cooperative banks and commercial banks for periods of one day and 14 days, respectively.
Banker's Acceptance: A financial instrument guaranteed by a commercial bank that obligates the issuer to pay a specific sum on a specific date.
Examples of Capital Market Securities
Here are some examples of capital market securities:
Equities: Shares of ownership in a company.
Debt Securities: Loans to companies or governments.
Exchange-Traded Funds: Baskets of securities that can be traded on an exchange.
Derivatives: Financial contracts whose value is derived from the value of an underlying asset.
Foreign Exchange Instruments: Contracts to exchange one currency for another.
Alternatives to Money Markets and Capital Markets
Apart from money market and capital market instruments, there are other places to invest. Here are some alternatives to them:
Commodities such as gold, other precious metals, gas, oil, etc.
Real estate.
Collectables such as wine, coins, artworks, etc.
Investment in private companies or start-ups.
Conclusion
When it comes to choosing, you should consider the difference between the money market and the capital market. The choice should be based on your financial and investment goals and risk tolerance level. You might also consider other alternatives to diversify your portfolio.
Money market is for short-term liquidity, while the capital market is for long-term investments. Money market instruments are highly liquid but less risky compared to capital market instruments. Key differences include duration, liquidity, risk, and participants.
Capital markets are markets in which money is lent for periods longer than a year, while money markets are markets in which money is lent for periods of less than a year.
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
Capital markets consist of money market, bond market, mortgage markets, stock market, spot or cash markets, derivatives markets, foreign exchange and interbank markets.
Treasury bills, or T-bills, are the most marketable money market securities. Governments issue them to borrow money for a short period. T-bills are issued with maturities that range from 1 month to 1 year.
The Money Market provides a low return on investment, as the instruments have a low interest rate and a low profit margin. In contrast, the Capital Market provides a high return on investment, as the instruments have a high interest rate and a high profit margin.
Money market accounts are a type of savings account. They pay interest, but some issuers offer account holders limited rights to occasionally withdraw money or write checks against the account. (Withdrawals are limited by federal regulations. If they are exceeded, the bank promptly converts it to a checking account.)
Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
U.S. Securities and Exchange Commission (SEC) regulations define 3 categories of money market funds based on investments of the fund—government, prime, and municipal. SEC rules further classify prime and municipal funds as either retail or institutional based on investors in the fund.
Money market funds invest in low-risk assets like Treasury bonds, CDs, or short-term, high-quality corporate bonds with maturities of less than a year. Unlike stock or bond funds, they have a fixed price of $1 per share2 —and money market funds aim to maintain their Net asset value (NAV).
Capital markets are used to sell different financial instruments, including equities and debt securities. These markets are divided into two categories: primary and secondary markets. The best-known capital markets include the stock market and the bond markets.
Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.
Both the capital and money market trade in a period of debt of financial things or capital. The trade-in money market has a constant flow of capital between corporations, governments, financial institutions, and banks by lending and borrowing money. The trade is done in both stocks and bonds in the capital market.
The types of markets for financial capital are the loans markets, bond markets, and stock markets. The firms can speculate in these markets for raising funds for fulfilling their capital requirements.
An investor can invest in any categories of funds in accordance with his requirements and risk index. For example, those who want to earn high returns over a longer period can invest in Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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