Both capital market and money market are two essential components of the financial system. Both play crucial roles for a well functioning economy.
The money market ensures liquidity and stability in the short term. On the other hand, the capital market supports growth and investments over the long term.
In this article, we will discuss what is the capital market and money market. At the end, we will look into the difference between the money market and capital market.
What is the money market?
Money market is a place where short term borrowing and lending takes place. Money market helps to manage liquidity and funding needs of governments, financial institutions and corporations.
Major participants in the money market include banks, mutual funds, government entities and corporations. Demand and supply for short term funds has a very big impact on the interest rates.
Common instruments traded in the money market include government securities, commercial papers, time deposits and other short term loans.
Money market is regulated by the central bank of the country. In India, The Reserve Bank of India (RBI) plays a crucial role in regulating and overseeing the money market.
What is the capital market?
Capital market is a place where long term securities are bought and sold. This means, the capital market helps to raise long term funds for businesses to finance their expansions and operations.
Common instruments include stocks and bonds. Capital market participants include retail investors, traders, domestic institutional investors (DIIs), foreign institutional investors (FIIs), governments and corporations.
Capital market is divided into primary and secondary markets.
Primary market is a place where new securities are issued. Secondary market is where existing securities are traded on a day to day basis.
Capital market is regulated by government agencies to protect the interest of investors. In India, Securities Exchange Board of India (SEBI) regulates the capital market.
Similarly in other countries they have their own government agencies to regulate the capital market.
In the US, the capital market is regulated by the Securities and Exchange Commission (SEC).
Capital market facilitates the buying and selling of long term securities such as stocks and bonds.
Money market vs. capital market: What is the difference?
Here are the major difference between money market and capital market:
| Particulars | Money market | Capital Market |
| Purpose | To facilitate short term borrowing and lending of funds | To facilitate long term investment and financing. |
| Maturity period | One year or less | Longer than one year |
| Type of instruments traded | Government securities, time deposits, commercial papers | Stocks and bonds |
| Participants | Banks, financial institutions, corporations and the government. | Retail investors, institutional investors, corporations and governments |
| Risk and Return | Lower risk and low return | High risk and higher return |
| liquidity | high | high |
Both money market and capital market facilitate efficient capital allocation and economic development of a country.
