Capital Market and Money Market

Before understanding the difference between capital market and money market, we need to understand the basics of capital market and money market.

Capital market

A capital market is a financial market where long term securities are bought by investors and sold by private companies.

It is of two types: primary and secondary market. The primary market is primarily different from the secondary market in the fact that newly established companies issue securities, and the investment directly goes to the company. It is generally the primary capital that is necessary for building the company and settling it down. Coming to the secondary market, there is no direct interaction between the company and the investor, but the interaction is between the investors. The investors engage in trading the shares for gaining profits and evading losses. 

The capital market uses many instruments like bonds, shares and debentures.

Money market

It is a short-term financial market. In this model, the money is shifted from people with money to spare and individuals in need of money. They are short-term and reach maturity within a year. This market is divided into organised and unorganised markets. Unorganised markets are the money markets not recognized by the government that are present for a very long period. In contrast, organised markets are the ones regulated by the government. The organised money market uses short term securities for trading money. They are commercial paper, treasury bills and mortgage and asset-based. The cash flow of the money market is very high. 

Together with the capital market and money market form the financial market. They contribute to our economy and help in the mobilisation of cash.

Participants

In the capital market, the Participants are financial institutions, banks, private companies,  foreign investors and ordinary retail investors. However, when we come to the money market, everyone except foreign investors and ordinary retail investors is included.

Duration

The Capital market and money market generally differ the most in their duration. At the same time, the capital market deals with long term maturities and securities, while the money market deals with short term maturities with a tenure of less than 1 year.

Instruments

Instruments of capital market and money market differ by a lot. At the same time, the capital market has bonds, shares and debentures. The money market deals with commercial paper, treasury bills, trade bills, certificates of deposit and mortgages and is asset-based.

Investment 

The investment in the capital market is less as the company divides the shares into a large number of shares that are bought by many investors, whereas the investment in the money market is generally expensive due to its limited and small number of participants. 

Liquidity

The capital market is generally liquid if you consider it individually, but when you start comparing it to the money market, it falls short. The money market has a very high liquidity status.

Security

The security of the capital market is generally considered to be riskier. As the dividend generally depends on how well the company is doing, it may go into a loss very easily. It is very long term making it even less secure, while the money market is considered highly secure due to its high liquidity and lesser amount of time.

Expected return

Expected money return is higher in the capital market due to its longer duration of time. With careful investments, it is also possible to get gains easily when compared to the money market. Its shorter duration does not favour expected returns.

Type of capital 

The capital market generally is used for fixed capital requirements, while the money market is generally approached for a working capital requirement.

Type of investors

The investors in the money market are mostly short-term investors, while the Capital market is dominated by risk-tolerant long term investors. Short term investors are individuals who are looking for quick returns and require the money shortly for their personal purposes. At the same time, long term investors are the ones who are willing to take risks and who require money shortly. They are generally looking for high returns.

Conclusion

In conclusion, it is important to understand that financial markets are divided into long term capital markets and short term money markets. While capital markets take a longer duration and are less secure, they yield higher benefits. On the contrary, money markets take shorter duration with higher security, but they yield lower benefits. The structure of both capital and money markets is vast. The money market and capital market are further divided. The instruments used in the money market and capital market also differ. To understand these things in greater detail, please refer to the individual notes of the capital market and money market.