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Understanding the capital market and money market concepts is essential in business studies. They will help you know which kind of market you should be borrowing money from according to your needs and risks. A capital market is a long-term market meaning the maturity period of the borrowed fund is more than a year, and the money market is a short-term market meaning the maturity period of the borrowed fund is less than a year. There are instruments in this market that let you borrow funds; these are called capital market instruments and money market instruments. It is also essential to learn the difference between these two.
Capital Market
A capital market is a financial market where money is borrowed or invested for a long-term meaning more than a year. Some prominent participants of this market are banks, financial institutions, corporate bodies, foreign institutional investors, retail investors, etc. Due to the long term nature, the returns and gains are also high. Some capital market instruments are equity, preference share, debenture, bonds, etc. The capital market is further divided into primary market and secondary market.
Money Market
A money market is a financial market where money is borrowed or invested for a short-term, meaning less than a year. This short-term fund is not bound to a fixed geographical location due to globalization. It includes institutions like The Reserve Bank of India, commercial banks, life insurance corporations (LIC), etc. Due to the short-term nature of this financial market, it is not risky, and the returns and gains are low. Some money market instruments are treasury bills, commercial bills, commercial paper, cal money, certificate of deposit, etc.
Difference Between Capital Market and Money Market
Capital Market Instruments
Equities: Refers to buying a company’s equity stock and becoming a shareholder of that organization.
Debt securities: Financial assets that entitle the owner to continuous interest payments
Derivatives: The values of these financial instruments are determined by underlying assets like currency, bonds, stock, etc.
Exchange-traded funds: A pool of financial resources of many investors which are used to buy different capital market instruments
Foreign exchange instruments: mainly consists of currency agreements and derivatives and are represented on a foreign market.
Money Market Instruments
Treasury bills carry zero risk, and the central bank issues them.
Certificate of deposits: it functions as a receipt for money deposited at a financial organization or bank.
Commercial paper promises higher returns; it is an unsecured promissory note issued by high-rated companies.
Repurchase agreements: loans of short duration to sell and repurchase.
Banker’s acceptance: similar to a treasury bill, it is a document promising guaranteed payments in the future by commercial banks.
Conclusion
After going through this, you must have understood the concepts and complexities of the two types of financial market- capital market and money market. The capital market is where securities are traded for long-term (more than a year), and the money market is traded for short-term (less than a year). Understanding the differences between the capital and money market made us know the features of both markets. The instruments of both the markets are tools of the market through which securities are traded. This whole concept of capital and money market, their instruments and differences are an essential part of your business studies.
