Both money market and capital market are important in the financial market. The capital market actually consists of two markets. The first market is the primary market and it is where new issues are distributed to investors, and the secondary market where existing securities are traded. Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions. Transactions of money and financial assets are occurred in both two markets. 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 Several differences are visible between these two markets. Distinctions between money market and capital market are mentioned and discussed below:
Difference between Money Market and Capital Market
- Definition: The market where transactions of money and financial assets are accomplished for short time is called money market. On the other end, capital market is meant that market where transactions of money and financial assets are occurred for a long period.
- Institutions: Important institutions operating in the’ money market are central banks, commercial banks, acceptance houses, non bank financial institutions, bill brokers. Important institutions of the capital market are stock exchanges, commercial banks and non bank institutions, such as insurance companies, mortgage banks, building societies.
- Transactions Period: In money market transactions are accomplished for one or less than one year. While capital market transactions are for long time.
- 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.
- Risks: Since investment of this market is for a short-term, the risk of money is low. In capital market the risk of money and loan defaulters are high.
- Instruments: Cash dollar, treasury bills, commercial papers are used as the instrument in money market. On the other end, Shares, debentures, long-term bonds are the instruments of capital market.
- Transaction Procedures: Since fewer formalities are required in money market therefore, transactions cost is also minimum. While, many formalities are required in making capital market transaction successful and therefore its transaction cost is little bit higher than the money market.
- Relation with Government Agency: The money market is closely and directly linked with central bank of the country. The capital market feels Securities and Exchange Commission (SEC) as well as central bank’s influence, but mainly indirectly and through the money market.