Economy Simplified: Difference Between Money Market and Capital Market

Money Market:  Lending and Borrowing takes place for a short term up to one year. 
Capital Market:  Lending and borrowing takes place for the medium term and long term (Usually more than 365 days)
Money MarketCapital Market
Definition It is the part of the financial market where lending and borrowing takes place for a short term upto one year. Capital market is part of the financial market where lending and borrowing takes place for medium-term and long-term.
Types of instruments involvedTreasury bills, Call money, Commercial papers, Commercial bills.Equity shares, debentures, bonds etc.
Institutions involved/Type of InvestorsCommercial Banks, Central Banks, Chit Funds etcStock brokers,underwriters,mutual funds,individual investors,financial institutions
Regulated By RBISEBI
Nature of MarketInformalFormal 
Liquid of the marketThey are liquid. They are relatively less liquid. 
Maturity PeriodGenerally upto one yearThese instruments have longer periods with maturity more than one year.
Risk factor Since the market is liquid and the maturity is less than one year, risk involved is low.Due to less liquid nature and long maturity, the risk is comparatively high 
PurposeThe market fulfills the short term credit needs of the businessThe market fulfills long term credit needs of the business
Functional MeritThe money market increases the liquidity of funds in the economy.The capital market stabilizes the economy due to long term savings.
Return on Investment The returns in the money market are usually low. The returns in capital markets are high because of higher duration. 

Leave a Comment

Your email address will not be published. Required fields are marked *