The major difference between the money market and capital market is that the money market is focused on short-term debt securities such as Treasury bills, Commercial papers, etc., while capital markets deal with both short & long-term securities such as stocks, bonds, and other investment products.
What is Money Market?
Money market is a part of the financial market where short-term financial instruments such as treasury bills, commercial papers, certificates of deposit, and repurchase agreements are traded. The maturity period of these financial instruments ranges from one day to one year. The money market is a critical component of the financial system as it provides liquidity to the market and serves as a source of short-term funds for businesses and governments.
Some features of the money market include:
- Short-term maturity: The financial instruments traded in the money market have a maturity period of less than one year.
- Low risk: Money market instruments are considered low-risk investments as highly-rated entities issue them.
- High liquidity: Since the maturity period of these instruments is short, they are highly liquid and can be easily converted into cash.
- Regulated by the RBI: The Reserve Bank of India (RBI) regulates the money market in India.
Capital Market Meaning
Capital market is the part of the financial market where long-term securities such as stocks, bonds, and other investment products are traded. Capital market deals in both long-term investment opportunities.
The capital market in India can be further divided into two segments – primary market and secondary market. The primary market is where companies issue new securities to raise funds, while the secondary market is where existing securities are traded between investors.
Some features of the capital market include:
- Long-term maturity: The securities traded in the capital market have a maturity period of more than one year.
- Higher risk: Capital market investments are considered to be higher risk compared to money market investments, as the returns are uncertain and can vary based on market conditions.
- Less liquidity: Compared to money market instruments, securities in the capital market are less liquid and may take longer to sell.
- Regulated by SEBI: The Securities and Exchange Board of India (SEBI) is the regulator of the capital market in India.
Difference Between Money Market And Capital Market
The primary difference between the money market and capital market is that the money market helps trade liquid instruments such as treasury bills, commercial papers, certificates of deposit, repurchase agreements, etc. The capital market helps trade long-term instruments such as equity shares, debentures, bonds, mutual funds, etc.
| Criteria | Money Market | Capital Market |
| Investors Involved | Banks, financial institutions, mutual funds, individuals | Banks, insurance companies, pension funds, mutual funds, individuals |
| Structure of Market | Wholesale market, opaque, regulated | Retail market, transparent, accessible, regulated |
| Liquidity Offered | Highly liquid, short-term, Rs. 6.97 lakh crore (avg. daily turnover, 2020-21) | Varies, some securities highly liquid, others may have lower liquidity, Rs. 57,526 crore (avg. daily turnover, 2020-21) |
| Maturity Period of the Instruments | Short-term, 1 day to 1-year | Short term, Long-term, exceeding 1 year |
| Risk Level | Low risk due to short maturity | High risk due to the market conditions |
Quick Summary
- A money market is a place where short-term instruments are traded such as treasury bills, commercial papers, and certificates of deposit.
- A capital market is a place where both short & long-term instruments are traded which include stocks, bonds, and debentures.
- The primary distinction between the money market and the capital market is that the money market centers around trading short-term debt instruments like Treasury bills and commercial papers, while the capital market deals with a range of securities encompassing both short and long-term investments, including stocks, bonds, and various other investment assets.
Frequently Asked Questions
The key distinction between the money market and the capital market is that the money market handles short-term, liquid financial instruments like treasury bills and commercial papers. On the other hand, the capital market facilitates the trading of both short & long-term securities such as stocks, bonds, mutual funds, and debentures.
Yes, money market is a part of the capital market. However, capital market is a broader term that includes both primary market and secondary market, whereas the money market deals only with short-term lending and borrowing of funds.
In India, the capital market is bigger than the money market in terms of size and volume of transactions. According to the Reserve Bank of India, as of March 2021, the size of the money market was Rs. 34.11 lakh crore while the size of the capital market was Rs. 2,10,32,400 crore.
The stock market is an example of a capital market. The stock market provides a platform for companies to raise funds by issuing stocks or shares to the public, while investors can buy these stocks and become part owners of the company.
India’s money market is structured and regulated by the RBI. Other participants include banks, mutual funds, NBFCs, and corporates, trading instruments such as Treasury bills, certificates of deposit, commercial paper, and call money.
