Difference between Money Market and Capital Market

This article will help you to learn about the difference between money market and capital market.

Difference between Money Market and Capital Market

Difference between Money Market and Capital Market:

Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:

1. Maturity Period:

The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).

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.

4. Institutions:

Important institutions operating in the money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc.

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.

6. Risk:

The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market.

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.

8. Relation with Central Bank:

The money market is closely and directly linked with central bank of the country. The capital market feels central bank’s influence, but mainly indirectly and through the money market.

9. Market Regulation:

In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.

Similarities between Money Market and Capital Market:

In spite of the differences, the money market and the capital market have certain similarities and interrelations:

1. Complementary:

The money market and the capital market are complementary to each other and are not competitive. The difference between the two is only of degree rather than of kind. Any type of financial planning must integrate the short-term and long-term programmes of economic development through a proper coordination between short-term and long-term funds.

2. Same Institutions:

Certain institutions operate in money as well as capital markets. Commercial banks, for example, which traditionally specialise in short-term funds, have started giving long-term loans in recent times. This is because of the growth of time deposits and higher rate of return on long-term loans.

3. Interdependence:

Money and capital markets are inter- dependent. The activities and policies of one market have their impact on those of the other. For example, the increased demand for funds in the capital market also raises the demand and interest rates in the money market. Similarly, the monetary policy also influences the activities of the capital market.