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Major Differences between Money Market and Capital Market | Money Market Vs Capital Market

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India is a developing country, and we need money daily to expand our businesses or to establish new ones. To meet these financial needs, we have capital markets and money markets. Both had their importance within the economy; the money market is for short-term funds, while the capital market is for long-term funds; as we progress, we will have a better understanding of each idea and its differences.

The money market and the capital market are two separate sorts of financial markets; the money market is used for short-term borrowing and lending, while the capital market is used for long-term borrowing and lending. The capital market, on the other hand, is utilized for long-term assets, or those with a maturity of more than one year.

Features of Money Market and Capital Market

Capital Market

  • Entrepreneurial borrowers and savers are brought together.
  • It is concerned with long-term Borrowing.
  • It is necessary to hire agents in the capital market.
  • It is governed by laws and regulations enacted by the government.
  • Commercial and non-commercial securities are dealt with.
  • Investors from other countries are also interested.

Money Market

  • The maturity amount is less than one year.
  • Deals with short-term borrowing.
  • No need to hire a broker or agent for transactions.
  • All the transactions can be done by phone, email, etc.
  • The return on investment is comparatively lower than the capital market.
  • It is mainly needed for running a business as working capital.

Money Market Vs Capital Market

Nature of Classification Money Market  Capital Market 
MEANING Money markets are those in which money is provided for a short period Capital markets are those in which securities and money are issued for a longer length of time
TIME DURATION Assets have a redemption period of less than one year. It is the best alternative for long-term borrowing with a redemption period of more than one year.
RETURN ON INVESTMENT -Because the money market is for a limited period, the return on investment is often lower than the capital market. Money is placed for a long time, So the capital market often has a high return on investment.
CREDIBILITY Companies’ short-term credit needs, such as working capital, are met through the money market. The capital market assists enterprises in satisfying their long-term credit needs, such as supplying fixed capital for the purchase of land, buildings, and machinery, among other things.
FURTHER CLASSIFICATION There is no further classification in the money market. The capital market is divided into two decisions such as primary and secondary markets.
THE OBJECTIVE OF DIFFERENT MARKETS The primary goal of the securities we issue from the money market is to preserve wealth. We should use the security and money we get from the capital market to improve our Wealth,It is also used in expansion of business.
INSTRUMENTS INVOLVED / EXAMPLES Commercial Papers, Treasury Certificate of Deposit, Bills, Trade Credit, etc. Bonds, Debentures, Shares, Asset, Retained Earnings, Euro Issues, etc.
FUNCTIONS INVOLVED Increasing the amount of money available in the economy. The capital market helps to stabilize the economy by increasing savings.
LIQUIDITY The money market is critical in ensuring that banks, other businesses, and governments have adequate liquidity daily, without running out and needing to take out a more expensive loan, or hoarding cash that isn’t paying interest. Individual investors can put their money in the money markets to invest in a secure and convenient location. There are many options, including state money market funds, municipal funds, and U.S. Treasury funds. Many government funds are exempt from paying taxes. Most banks will let you open a money-market fund. Liquidity refers to the ease with which an asset, or security, can be converted into cash without affecting its market price.  Because it is a long-term investment or loan, capital market liquidity is lower than money market liquidity.

Key Differences between Money and Capital Markets

  • Money markets trade short-term securities, whilst capital markets deal long-term securities.
  • Money markets are disorganized, but capital markets are well organized.
  • The money market has a high level of liquidity, whereas capital markets have a low level of liquidity.
  • Money market instruments have a low risk due to their high liquidity and short maturity term, whereas capital market products have a higher risk.
  • Money markets are primarily dominated by the central bank, commercial banks, and non-financial institutions, whereas capital markets are dominated by stock exchanges, commercial banks, and non-banking institutions.
  • Money markets are needed to provide short-term cash requirements, particularly working capital demands.
  • Long-term finance and fixed capital are necessary for the purchase of land, property, machinery, and buildings, among other things, and capital markets are required.

Do Refer: Reasons for Your Business Loan Application Getting Rejected

FAQs on Differentiate between Money Market and Capital Market

1. What is the difference between the capital market and the money market in terms of time duration?
In the capital market money and security are issued for more than one year whereas In the money market the securities are issued for less than 1 year.

2. If we have to raise money for our regular working capital then which type of market is the most suitable one?
In this case, the firm or an individual should go for the money market because it provides securities for less than 1 year and doesn’t have a high risk.

3. If we want to expand our business or we are looking for something new then which kind of market will be the best one?
In this case, the individual should prefer the capital market because it provides higher funds and the redemption period is also more than 1 year.

Conclusion

We wish we have demonstrated both the money market and the capital market have advantages and disadvantages. In the post, we explored several themes related to the type of market we need to target for our company. The money market is a market where we issue securities and money for a short period, whereas the capital market issues securities for a long period.

When it comes to return on investment, the money market offers lower returns than the capital market. This was the fundamental distinction between the money and capital markets. Go through our article on Business Ideas You Can Start Online.

 

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