Money vs capital market
Money markets and capital markets are both essential for the global economy in terms of offering financing for firms and organisations to carry out operations and expand business activities. Both markets trade in large denominations of currency daily and both markets do not have physical presence; trade is carried out through cyber platforms with computerized systems. Money market is mainly accessible for large corporations and financial institutions, whereas, capital markets are accessible to small individual investors. The maturity period of a money market instrument is very short; up to less than one year, as opposed to the maturity period for capital market instruments, which are for more than one year up to about 20 to 30 years. The money market usually caters to the short term working capital needs of firms, and the long term financial needs and funds for expansion are usually obtained from capital markets.
In general, these two markets are separated on the basis of the maturity of the credit instruments related to these markets. The maturity of the instruments of money market is one year or less than one year. On the other hand, the maturity of the instruments of capital market is more than one year.
The risks are less in money market. Because, there is less possibility of default of the credit of less than one year maturity. Likewise, the risk of interest rate is also low in the money market. On the other hand, the credit of the capital market is of long term nature. Due to this risks are more and are of varied nature in capital market.
The main instruments of money market are -treasury bills, commercial papers, certificate of deposit which are of short-term nature. On the other hand, the main instruments of the capital market are -debentures, equities or shares and government securities which are of long-term nature.
The different financial institutions related to short-term credit participate in the money market. But there is predominance of commercial banks. In fact, the commercial bank is an institution related to the money market. On the other hand, different kinds of financial intermediaries participate in the capital market. The main participants of the capital market are -development bank, finance company, provident fund, insurance company, Investment Company and so on. The service institutions are also involved in the capital market such as investment banking, commission brokers association, investment consultancy etc. In recent clays, the commercial banks also provide long-term loans to some extent. So they may also be included among the participants of the capital market.
The money market deals in only short-term funds. It receives short term deposits and also provides the short-term credit. On the other hand, the capital market receives long-term deposits and also grants long term loan and equity capital to the business and the government.
6. Relation with the Central Bank
The money market has close and direct relationship with the central bank. The central bank implements its monetary policy through this market. The central bank directly regulates the commercial banks in the money market. On the other hand, the central bank has influence over the capital market only indirectly through money market. Similarly, the institutions of the capital market are less regulated by the central bank.
2. Credit Instruments:
The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government.
3. Nature of Credit Instruments:
The credit instruments dealt with in the capital market are more heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors.
5. Purpose of Loan:
The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc
9. Market Regulation:
In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.
7. Basic Role:
The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment.
** The subject matter of capital market is long-term financial instruments having maturity of more than one year. On the other hand, the thrust of MM is on short-term instruments only.
** Money market is a wholesale market and the participants in money market are large institutional investors, commercial banks, mutual funds, and corporate bodies. However, in case of capital market even a small individual investor can deal by sale/purchase of shares, debentures or mutual fund units.
**In capital market, the two common segments are primary market and secondary market. Both these segments are interrelated. Securities emerge in primary segment and their subsequent dealings take place in secondary market. However, in case of money market, there is no such sub-division in general. In efficient money market, secondary market transactions may also take place.
**Total volume of trade occurs per day in money market is many fold that of the volume per day taking place in capital market.
**In capital market, the financial instruments being dealt with are shares (equity as well as preference), debentures (a large variety), public sector bonds and units of mutual funds. On the other hand, money market has different financial instruments such as treasury bills, commercial papers, call money, certificate of deposits, etc.
1. Money market is a place where banks deal in short term loans in the form of commercial bills and treasury bills. But capital market is a place where brokers deal in long term debt and equity capital in the form of debenture, shares and public deposits.
2. In money market maturity date of repayment may after one hour to 90 days. But in capital market, loans are given for 5 to 20 years and if issue of shares by co. , its amount will repay at winding of company . But investors have right to sell it to other investors if they need the money.
3. Rate of interest in money market is controlled by RBI or central bank of any country.
But capital market’s interest and dividend rate depends on demand and supply of securities and stock market’s sense conditions. Stock market regulator is in the hand of SEBI.
4. Main dealer of money market s are commercial banks like SBI, ICICI Bank, UTI and LIC and other financial institutions. Main dealers are all the public and private ltd. Co. and more than 30 million investors. It is increasing trend due to opening of online capital market.
5. In USA, money market is famous with dealing of money fund and bankers acceptance instruments. But capital market in USA is famous with New York stock exchange and stock regulator is Security exchange commission (SEC)
** Money markets and capital markets provide investors access to finance which are used for growth and further expansion, and both markets trade on computerized exchanges.
** The main difference between the two markets is the maturity periods of the securities traded in them. Money markets are for short term lending and borrowing, and capital markets are for longer periods.
** The forms of securities traded under both markets are different; in money markets, the instruments include treasury bills, certificates of deposit, banker’s acceptances, commercial papers and repo agreements. In capital markets, instruments include stocks and bonds.
** As an individual investor, the best place to invest your money would be in the capital markets, either the primary market or secondary market. In the perspective of a large financial institution or corporation looking for larger funding requirements, the money market would be ideal.