The financial market of a country is the backbone of its economy. In general, a market is a place where buying and selling take place. If we talk about financial markets, there are two parties. One who needs money and the other being who has surplus money and wants to invest somewhere. When these two parties meet on one platform to fulfil each other’s demand, then that platform is called Financial Market. They are broadly of two types, i.e, money market and capital market. If you too are planning to invest your money, first you need to understand the difference between the two.
What is the money market?
It is a financial market in which financial transactions take place for a short period of time. This short period is less than 365 days. In simple words, a place where you lend to someone or take a loan for business for less than 365 days, is called a money market.
Money market transactions take place through Treasury bills, Cash Management Bills, Savings Certificates, Commercial Papers, Commercial Bills, Mutual Funds etc.
Further, it is divided into two parts.
- Unorganized Money Market: In this money market lender decides the interest rate at his discretion. There is no interest controlling body in this type of market.
- Organized money market: An organized money market is a money market that has a recognized body to regulate it. Like there is RBI in India. If you take a loan from the bank, then RBI will decide what percentage of interest that bank can charge. If taken more than that, then action can be taken against the bank.
What is capital market?
It is a financial market where financial needs are met for a longer period of time. Here long means for a period of more than 1 year. Any person who wants to raise capital for a period of more than a year will have to raise money from the capital market itself.
In simple words, such a financial market where Debt or Equity backed securities are bought or sold for a year or more, then it is called a capital market.
A capital market is a place that brings together those who own capital and those who demand capital together. Therefore, such a place where you can exchange securities is called capital market.
Examples of capital markets are the bond market and the stock market. Although, stocks are tradable in the short term the company releases them to meet the long term needs. In the stock market, the company’s shares are sold to raise money from the market for a long time.
Difference between these two markets
There are several differences between the money and capital markets.
- The majority of the transactions in the money market takes place through RBI, financial institutions like SIDBI, NABARD etc. Whereas, transactions in the capital market are done by financial institutions, banks, public or private limited companies, foreign investors and retail investors.
- Instruments used in the money market are Treasury bills, commercial bills, certificates of deposit, Call money etc. Whereas shares, bonds, debentures are used in the capital market.
- To invest in Money a slightly higher amount is required, whereas you can invest in capital market with very less amount.
- Money can be raised from the money market for a period of 1 day to 364 days. Whereas the tenure of money raised from the capital market is for a period of one year or more.
- The money market is a short term regulated market, so here returns remain low but guaranteed. On the other hand, good returns can be found in the capital market. But the risk is also high in this.