Difference between money market and capital market

Difference and demarcation between money market and capital market is made on the basis of maturity period of instruments and claims. short-term instruments maturing within a period of one year are traded in money market whereas the capital market deals with longer maturity financial assets and claims. Though both types of markets facilitate the transfer of funds from savers to deficit-users, still the difference between the two is maintained with reference to the time-period covered by the transactions. Capital market includes trading in securities, mutual fund units and government debt instruments. On the other hand’ money market facilitates dealings in short-term financial instruments such as inter-corporate deposits, certificate of deposits, treasury bonds, commercial papers, commercial bills, etc. Money market and capital market can be differentiated as follows :

• 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 occur 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.

Categories: Finance / Accounting