Money Market v/s Capital Market

                            Difference between Money Market and Capital Market

The relationship between the money market and capital market helps explain the basic framework of the financial system. Under this framework, businesses and government agencies access sources of short-term and long-term funds to generate immediate cash flow or finance long-term projects. Both markets have a particular role in how money flows from savers to businesses and government to finance operations and investment. As a result, both markets provide investors with opportunities to generate earnings and premiums from risky ventures. 

Money Market::

 The money market is a financial market that provides investors access to short term debt instruments, which include treasury bills, certificates of deposit, banker’s acceptances, commercial papers and repo agreements. These instruments are usually issued by financial institutions such as banks and investment companies, large corporations such as multinational firms as well as governments through the use of treasury securities. The financial instruments issued by such corporations possess a high rating with lower levels of risk and high liquidity. However, the lower risk of such securities means that the interest paid for holders of money market securities is lower.

Capital Market:

 Capital markets provide access to longer term finance through the use of debt capital and equity capital such as stocks, bonds, options and futures. Capital markets comprise of organized platforms for exchanges and over the counter markets, and the market is divided into two segments known as primary markets and secondary markets. The primary market is where securities are issued for the first time, and secondary market is where securities, which have been already issued, are traded among investors. The capital markets are under stringent regulations of the Securities and Exchange Commission, to ensure that securities traded are of good credit ratings so that no fraud may occur.

Best examples are:

 Maturity

In general, these two markets are separated on the basis of the maturity of the credit instruments related to these markets. The maturity of the instruments of money market is one year or less than one year. On the other hand, the maturity of the instruments of capital market is more than one year.

Risks

The risks are less in money market. Because, there is less possibility of default of the credit of less than one year maturity. Likewise, the risk of interest rate is also low in the money market. On the other hand, the credit of the capital market is of long term nature. Due to this risks are more and are of varied nature in capital market.

 Instruments

The main instruments of money market are -treasury bills, commercial papers, certificate of deposit which are of short-term nature. On the other hand, the main instruments of the capital market are -debentures, equities or shares and government securities which are of long-term nature.

Institutions

 The different financial institutions related to short-term credit participate in the money market. But there is predominance of commercial banks. In fact, the commercial bank is an institution related to the money market. On the other hand, different kinds of financial intermediaries participate in the capital market. The main participants of the capital market are -development bank, finance company, provident fund, insurance company, Investment Company and so on. The service institutions are also involved in the capital market such as investment banking, commission brokers association, investment consultancy etc. In recent clays, the commercial banks also provide long-term loans to some extent. So they may also be included among the participants of the capital market.

 
Finance

 The money market deals in only short-term funds. It receives short term deposits and also provides the short-term credit. On the other hand, the capital market receives long-term deposits and also grants long term loan and equity capital to the business and the government.

 Relation with the Central Bank

 The money market has close and direct relationship with the central bank. The central bank implements its monetary policy through this market. The central bank directly regulates the commercial banks in the money market. On the other hand, the central bank has influence over the capital market only indirectly through money market. Similarly, the institutions of the capital market are less regulated by the central bank.