Money Markets and Capital Markets both play an extremely important role in any economy and are responsible for liquidity in the country’s financial ecosystem. However, the instruments through which this liquidity is achieved are quite different for money markets as well as capital markets.
Before we delve into the differences between money market and capital markets, let us first understand the basics about these two markets and what role do they play.
Money market is the market where borrowing and lending is done for a shorter duration by the country’s financial institutions such as banks, money dealers, non banking financial institutions etc. on a relatively informal basis. These markets are considered somewhat informal and disorganized as the holdings and tenure of borrowing does not exceed one year.
Capital Markets on the other hand are a place for creating and trading long term securities with the aim of generating capital to sustain companies and government institutions in need of capital to grow their business operations. The capital markets segment is the place where people trade shares, commodities, forex instruments etc., and through this, money flows from those who have it to those who need it.
1. On the basis of Nature of Market
Money markets are quite unorganized and informal as compared to capital markets. The rules regarding interest payments, defaults a requite lax in money markets as compared to capital markets, primarily because the money markets are a place for investment for shorter time durations.
2. Purpose of the market
There is a major different between the purpose of these two markets. Money Market serves the purpose of giving companies the liquidity needed to run their operations. They issue these informal securities to get cash quickly to run their operations. Whereas the purpose of Capital Markets is to raise money for a bigger goal and gather this money from the investors who will partake in the company’s venture and will stand to earn as the venture succeeds.
3. Institutions involved in the markets
The institutions which are involved in money market are both organized as well as unorganized. For example, among unorganized sector, institutions like chit funds, unregulated NBFCs, money lenders, individual bankers etc. and on the organized side, the participants involved are RBI, private and government banks, cooperative sector LIC etc.
As for the Capital Markets, only formally recognized companies and bodies can issue the shares. It is mandatory for the institution issuing the shares to be transparent and reveal all the financial details of their company on a quarterly basis.
4. The financial instrument traded in the markets
The financial instruments traded in the money markets are treasury bills, commercial papers, certificates of deposits, commercial bills, repurchase agreements, money market mutual funds etc.
On the other hand, instruments traded in Capital Markets are often for long term such as shares, bonds, debentures, derivatives etc.
5. Risk factor involved in the investments
The risk factor involved in the money markets is quite low since those instruments are equivalents of cash and they are used for short term liquidity management.
The capital markets on the other hand have a higher risk, since the money is being used by the companies invested in for larger projects and greater purpose than just to meet liquidity crunch and hence, the chances of its failure are also present, which pose an inherent market risk.
6. Liquidity of investments made
In the Money Markets, the liquidity is much higher only on account of the duration of investments being short. Investing money through money markets is more like lending the same to a company or the issuer which you can claim back anytime. You might not earn the interest on a premature withdrawal, but the principal amount definitely gets returned back.
On the other hand, capital markets pose a higher risk, because the money is not being ‘lent out’, rather it is being ‘invested’ in companies which may or may not use it for the best possible purposes. When this happens, you can lose your money as the share prices collapse and the value of your share in the company’s ownership decreases.
7. Time horizon of investments
When it comes to money markets, the time duration at maximum can be 365 days or one year.
However, if we talk about capital markets, there is no ‘maximum’ limit on the time horizon for which money can be kept invested in the markets. On the lower side, the digitization of the market place has made it possible to invest money in the market for fraction of seconds as well and reap benefits of the ever changing prices of financial instruments.
8. Return on investment
Money market investments or rather we can say ‘lendings’ do not offer a very high rate of return. Also, in most cases the rate of return is fixed at the time of investments and you can calculate your returns in advance.
However, the rate of return in the stock markets are unpredictable and can vary from negative to being multiplied many times the principal amount. This aspect makes capital market much more lucrative to investors and has also made many investors wealthy and famous.
9. Sub market categories
Money Markets in India have a lot of sub market categories for different investment instruments. These are Call Money market, treasury bill market, certificate of deposits market, commercial bill market, repurchase agreement market etc. These all are run quite informally and are not completely digitized or easily accessible.
On the other hand, Capital markets have clearly defined two market categories – primary market and secondary market. Primary market is the platform used by companies to issue shares for the first time, whereas secondary markets are used for the trading of shares between investors.
10. Market Regulators
The Money markets, though largely unregulated, come under the purview of both Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
Capital markets on the other hand come completely under the regulations set by te Securities and Exchange Board of India (SEBI).
Conclusion:
It can be clearly seen from the above points that while money market is quite safe place to invest, it is actually the capital markets which give the opportunity of greater earnings and wealth generation. Hence, if you are looking at growing your wealth in the long term, you should definitely choose to invest money in Capital markets as per your risk appetite. For helping you with your first steps into the world of capital investments, you can take help of an investment advisor, who can guide and support you through your investment journey.
