A Money Market is where trading of underlying asset that deals in short term borrowing, lending, buying and selling. Here the short term can vary from 1 hour to 1 year. The instrument traded in this market are highly liquid in nature which results in less return on investment. But these are comparatively safer due to its short-term nature. The instruments traded in this money market are done over-the-counter(OTC). Examples of such instruments are Treasury Bills, Certificates of Deposit, Commercial Paper, Federal Funds, Trade Credit, Bills of Exchange, Bankers Acceptances, Repurchase Agreements, Collateral Loans etc. Banks and Companies with higher credit ratings generally participate in money market trading. Due to short term borrowing time, interest rate in money market is quite high.
A Capital Market is where long term trading of Debt and Equities Securities happens. Here the long term can vary from more than 1 year to 30 years. The instruments traded in this market are shares, stocks, equities, debentures, bonds and securities. Due to long term nature of the contracts, Capital Markets are risky markets. For example, in bond market, interest rate changes due to change in monetary policy of the country. Some of the preferred reason for companies to invest in Capital Market is to raise capital for merger and acquisitions, major long term infrastructure projects and for expanding other new business lines. Capital Markets are divided into Primary Markets and Secondary Markets. New Issues of Stocks are done in the Primary markets and previously issued stocks are exchanged in Secondary Markets.
Difference between Money Market and Capital Market
Some of the key parameters where the Money Market and Capital Market differ are as follows:
- Basic Role: – Money Market basic role is for liquidity adjustment whereas Capital Market role is for giving capital for some work.
- Credit Instruments: – Money Market uses Treasury Bills, Money Funds, Federal Funds, Certificate of Deposit, Bills of Exchange, Call Money, FOREX Swaps whereas Capital Market uses shares, stocks, debentures, bonds and government securities.
- Institutions: – Institutions participating in Money Market are Central Banks, Commercial Banks, Acceptance Houses, Bill Brokers whereas Capital Market participants are Stock Exchanges, Mortgage Banks, Insurance Agencies etc.
- Maturity Period: – Money Market has maturity period from 1hr to 1 year whereas Capital Market has a maturity period of 1 year to 30 years or life time of a company.
- Market Regulation: – Money Market participants such as Commercial Banks are regulated by Central Bank of the country like RBI, Federal Bank whereas Capital Market participants are regulated by SEBI, SEC etc.
- Risk: – Money Market has low risk due to short term contract whereas Capital Market has high risk due to long term contracts