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 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.
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.
It's a common misconception but they are demonstrably not the same thing. A quick definition from an academic website put it this way: “Capital comprises the physical and non-physical assets (such as education and skills) used in making goods and services.Money is primarily a means of exchanging one good for another.
The financial market is where all trades involving financial assets happen.The capital market is where companies and governments go to raise long-term capital. The stock market is where people buy and sell equity in listed corporations. The bond market is where people buy and sell bonds.
A money market is a component of financial market where short-term borrowing can be issued. This market includes assets that deal with short-term borrowing, lending, buying and selling. A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities.
The money market is defined as dealing in debt of less than one year. It is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit. The capital market is dedicated to the sale and purchase of long-term debt and equity instruments.
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.
At its core, capital is money. However, for financial and business purposes, capital is typically viewed from the perspective of current operations and investments in the future. Capital usually comes with a cost. For debt capital, this is the cost of interest required in repayment.
Capital markets are composed of primary and secondary markets. The most common capital markets are the stock market and the bond market. They seek to improve transactional efficiencies by bringing suppliers together with those seeking capital and providing a place where they can exchange securities.
Money markets are where securities with less than one year to maturity are traded, while capital markets are where securities with more than one year are traded. Commercial paper and Treasury bills are some of the most common money market instruments.
One of the most significant benefits of capital markets is its potential to reduce unemployment. By providing businesses with the necessary capital to expand their operations, capital markets allow businesses to create new job opportunities for the workforce.
Similar to a high yield savings account, a money market account offers the security of a federally insured deposit account paired with a competitive interest rate. But unlike traditional savings accounts, money market accounts make it easier to pay for big-ticket purchases directly from your account.
Similarities between the money market and capital market are as follows: Both are important components of the international finance market. Both markets permit investors to purchase debt securities. Businesses and governments depend on both the markets for raising money for operations.
The Money Market is highly liquid, as the instruments can be easily converted into cash within a short period. At the same time, the Capital Market is less liquid, as the instruments have a longer maturity period and may not be easily sold in the market.
Similarities between the money market and capital market are as follows: Both are important components of the international finance market. Both markets permit investors to purchase debt securities. Businesses and governments depend on both the markets for raising money for operations.
What are capital markets? Capital markets are a way to bring together individuals or institutions with money (also known as capital) they wish to invest, and various entities that seek money to underwrite costs to meet specific purposes.
The money market provides financing to local and international traders who are in urgent need of short-term funds. It provides a facility to discount bills of exchange, and this provides immediate financing to pay for goods and services. International traders benefit from the acceptance houses and discount markets.
Foreign exchange markets allow for the trading of foreign currencies, using instruments such as spot transactions, futures, forwards, and swaps. Money markets link international lenders of short-term funds with borrowers using instruments such as Eurocurrencies and Eurobonds.
Introduction: My name is Mrs. Angelic Larkin, I am a cute, charming, funny, determined, inexpensive, joyous, cheerful person who loves writing and wants to share my knowledge and understanding with you.
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