Last Updated : 25 Jul, 2023
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A market that serves as a link between the savers and borrowers by transferring the capital or money from those who have a surplus amount of money to those who are in need of money or investment is known as Financial Market. In general, the investors are known as the surplus units and business enterprises are known as the deficit units. Hence, a financial market acts as a link between surplus units and deficit units and brings the borrowers and lenders together. The four basic functions of a financial market are the facilitation of price discovery, mobilisation of savings and channelising them into the most productive use, provision of liquidity to financial assets, and reduction of cost of the transaction. Financial Markets are of two types; namely, Money Market and Capital Market.
What is Money Market?
A market for short-term funds that is meant to use for a period of up to one year is known as Money Market. In the general case, the money market is the source of funds or finance for working capital. The transactions held in the money market involve lending and borrowing of cash for a short term, and also consist of the sale and purchase of securities with one year term or securities, which get paid back (redeemed) within one year. Some of the common instruments of the money market are Call Money, Commercial Bills, T. Bills, Commercial Paper, Certificates of Deposits, etc.
What is Capital Market?
A marketer including all institutions, organisations, and instruments providing medium and long-term funds is known as a Capital Market. A capital market does not include institutions and instruments providing finance for a short term; i.e., up to one year. Some of the common instruments of a capital market are debentures, shares, bonds, public deposits, mutual funds, etc. A capital market is of two types; namely, Primary Market and Secondary Market.
Difference between Money Market and Capital Market
Basis | Money Market | Capital Market |
|---|---|---|
Meaning | A market for short-term funds that is meant to use for a period of upto one year is known as Money Market. | A marketer including all institutions, organisations, and instruments providing medium and long-term funds is known as a Capital Market. |
Participants | The participants of money market are banks, financial institutions, foreign investors, and public and private companies. However, ordinary retail investors from public do not participate in this market. | The participants of capital market are banks, financial institutions, foreign investors, ordinary retail investors from public, and public and private companies. |
Duration | The money market deals in securities of short-term with a maximum tenure of one year. | The capital market deals in securities of medium and long term. |
Instruments | Some of the common instruments of money market are Call Money, Commercial Bills, T. Bills, Commercial Paper, Certificate of Deposits, etc. | Some of the common instruments of a capital market are debentures, equity shares, bonds, preference shares, and other innovative securities. |
Investment Outlay | The instruments of the money market are quite expensive; therefore, the financial investment requirement of this market is huge. | As the value of securities in the capital market is generally low (of about ₹10 to ₹100), the investment in this market does not require a huge financial investment. |
Liquidity | Money market securities are highly liquid. | The securities that comes under the capital market are considered liquid. It is because of the stock exchange. However, these securities are less liquid as compared to the instruments of money market. |
Safety | The instruments of a money market are less risky or safe as they are used for a short period of time and also because of the soundness of the issuers. | The instruments of a capital market are riskier. The investors may face the risk in return as well as principal repayment, as the companies issuing the securities may fail. |
Expected Return | The duration of the money market is short; therefore, the expected return here is less. | The expected return of a capital market is higher. It is because along with regular interest or dividend, the investors have chances of capital gain. |
Type of Capital | Companies approach money market when they need working capital. | Companies approach capital market when they need fixed capital. |
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