In the financial market, buyers and sellers of various financial instruments interact. It’s a method for channeling money into productive investments. The money and stock markets are two broad categories that describe this area.
When comparing the two financial sectors, both markets are crucial. Speculative transactions in highly liquid financial instruments (i.e., those with a very short maturity) take place in the money market. Instead, short-term instruments have no place in the stock market.
It is a trading venue for financial instruments that hold claims on capital, either directly or indirectly. Money Market and Capital Market are two different types of commercial markets where businesses create long-term securities, with the Money Market being used for short-term lending or borrowing.
Stock, debentures, and other similar securities are exchanged on the Capital Market. Capital Market securities either have a maturity duration of more than one year or are irredeemable (i.e., without maturity).
1. Primary Market:
There are two primary types of investments in the capital market:
The public subscribes to newly issued securities on the primary market. The IPO market is another name for it. Additional capital issued by corporations whose shares are already traded on stock exchanges is also considered part of the Primary Market.
To facilitate trade, many sorts of intermediaries have emerged in this market. Merchant Bankers, Brokers, Debenture Trustees, Banks, Portfolio Managers, Registrars to Issue, Share Transfer Agents, etc., all play an essential role as intermediates. In this context, SEBI refers to all of these middlemen.
2. Secondary Market
An exchange where investors buy and sell securities that have already been issued. After the initial security issuance in the primary market, there is a secondary market in which investors can buy that asset from one another rather than directly from the issuer.
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Some standard short-term debt instruments include trade credit, commercial paper, certificates of deposit, and treasury bills. Because of the high liquidity of Money Market assets, there is a one-year time limit on when they can be redeemed.
Money market securities have a lower rate of return than Capital Market securities, but they are a safer investment option. Money market transactions are conducted directly between buyers and sellers rather than through an intermediary trading platform, thus the term “Over the Counter” (OTC).
There are essentially two types of participants in the money market:
1. Organized Segment
The Reserve Bank of India exerts strict oversight over the country’s organized money market. Banks, NBCs, Co-Operative Societies, and other financial institutions are all involved in the regulated money markets. They operate by a set of rules that are both complicated and rigorous.
2. Unorganized Segment
Borrowers who do not qualify for loans in the traditional money market sometimes turn to the Unorganized Segment. Comparatively looser conditions, more informal processes, and higher interest rates for borrowers characterize the unregulated Money Market. Money Lenders, Nidhi Companies, Chit Fund Companies, etc., are some casual money industry players.
Money vs. Capital Markets
Here are some critical distinctions between the money market and the stock market:
- The money market refers to the demand for liquid, short-term securities. The Capital Market, on the other hand, is the place where long-term securities are developed and exchanged.
- Unlike the disorganized Money Market, the Capital Market has a solid infrastructure.
- Investments in money market products are less risky than those in capital market instruments.
- Unlike the capital market, where liquidity is quite strong, the money market is relatively low.
- The central bank, commercial bank, non-financial institutions, and acceptance houses are the primary institutions involved in the money market. However, the capital market is run by influential organizations such as stock exchanges, commercial banks, non-banking institutions, etc.
- Businesses can get the operating capital they need and satisfy other short-term credit needs through the money market. As a counterpoint, the capital market is typically used to meet the long-term credit needs of businesses, such as the provision of fixed capital for acquiring real estate, construction equipment, or machinery.
- Comparatively speaking, the returns on capital market products are greater than those on money market instruments.
- While Money Market instruments are typically redeemed within a year, Capital Market instruments often have a more extended maturity period and even some eternal redemption terms.
|Basis for Comparison
|This subset of the financial market facilitates transactions with maturities of one year or less.
|The capital market is a subset of the international financial market in which loans and borrowings are transacted for maturities of three years or longer.
|Classification of Instruments
|Promissory notes, bills of exchange, commercial paper, T bills, call money, etc., are the currency of the money markets.
|The capital market facilitates the buying and selling securities such as stocks, bonds, preferred stock, and debentures.
|The term “money market” describes the collection of financial institutions such as banks, chit funds, central banks, commercial banks, financial firms, and chit funds.
|This industry includes stock exchanges, commercial banks, mutual funds, underwriters, investors, insurance firms, and stockbrokers.
|Condition of the Market
|The financial markets are primarily unregulated and unofficial.
|The capital market is more regulated nowadays.
|Strength of the market’s liquidity
|Liquidity exists in the money markets.
|The Liquidity of the Capital Markets is Low
|Time of full maturity
|Money instruments typically have a maturity of up to a year.
|Capital market instruments have a longer maturity and no set expiration date.
|The level of risk is minimal since the market is active and the maturity is less than a year.
|The risk is higher than average since these bonds have a longer maturity and are less liquid.
|The market meets the company’s immediate demand for credit.
|The company turns to the capital market to meet its long-term financing requirements.
|The money markets boost the liquidity of funds in the economy.
|Long-term savings contribute to the stability of the capital market, which in turn benefits the economy.
|Most investors avoid the money market because of its low returns.
|As duration increases, investment returns in the capital markets rise.
- Both are typical features of the monetary system. The financial markets’ primary function is to facilitate the flow of capital and profit creation. The money supply is kept steady thanks to the lending and borrowing mechanisms of the financial markets.
- Both are necessary for economic growth because they provide firms’ and industries’ long- and short-term financing demands. People are urged to put their money to work in the markets so that they might reap the benefits of doing so.
- Investors may take advantage of each market as it best suits their goals. Money markets are very liquid but give lower returns, whereas capital markets are less liquid but provide significant returns at higher risk. The money markets are also a haven for investors looking for security.
- Although money market investments are often secure, negative returns are not uncommon. Nonetheless, the market mentioned above oddities and inefficiencies may not be permanent. Because of these discrepancies, investors are constantly looking for arbitrage possibilities; before deciding where to place their money, whether for the short or long term, investors should weigh the benefits and drawbacks of various financial instruments and assess the state of the financial market.