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Difference Between Money Market and Capital Market

capital vs money marketThe financial market is a marketplace where investors deal in financial instruments. It provides a vehicle for allocation of savings to investment. It can be grouped as money market and capital market. Both the markets are very important in the financial sector. In the money market, extremely liquid financial instruments are traded, i.e. monetary instruments of short-term nature are dealt. On the contrary, the capital market is for long term securities. It is a market for those securities which have direct or indirect claims to capital.

Capital Market plays a crucial role in the development of the economy because it provides channels for mobilization of funds. On the other hand, money market possesses a range of operational features. The article presented to you explains the difference between money market and capital market in tabular form.

Content: Money Market Vs Capital Market

  1. Comparison Chart
  2. Definition
  3. Key Differences
  4. Video
  5. Conclusion

Comparison Chart

Basis for ComparisonMoney MarketCapital Market
MeaningA segment of the financial market where lending and borrowing of short term securities are done.A section of financial market where long term securities are issued and traded.
Nature of MarketInformalFormal
Financial instrumentsTreasury Bills, Commercial Papers, Certificate of Deposit, Trade Credit etc.Shares, Debentures, Bonds, Retained Earnings, Asset Securitization, Euro Issues etc.
InstitutionsCentral bank, Commercial bank, non-financial institutions, bill brokers, acceptance houses, and so on.Commercial banks, Stock exchange, non-banking institutions like insurance companies etc.
Risk FactorLowComparatively High
LiquidityHighLow
PurposeTo fulfill short term credit needs of the business.To fulfill long term credit needs of the business.
Time HorizonWithin a yearMore than a year
MeritIncreases liquidity of funds in the economy.Mobilization of Savings in the economy.
Return on InvestmentLessComparatively High

Definition of Money Market

An unorganised arena of banks, financial institutions, bill brokers, money dealers, etc. wherein trading on short-term financial instruments is being concluded is known as Money Market. These markets are also known by the name wholesale market.

Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills are some examples of the short-term debt instruments. They are highly liquid (cash equivalents) in nature, and that is why their redemption period is limited to one year. They provide a low return on investment, but they are quite safe trading instruments.

Money Market is an unsystematic market, and so the trading is done off the exchange, i.e. Over The Counter (OTC) between two parties by using phones, email, fax, online, etc. It plays a major role in the circulation of short-term funds in the economy. It helps the industries to fulfil their working capital requirement.

Definition of Capital Market

A type of financial market where the government or company securities are created and traded for the purpose of raising long-term finance to meet the capital requirement is known as Capital Market.

The securities which are traded include stocks, bonds, debentures, euro issues, etc. whose maturity period is not limited up to one year or sometimes the securities are irredeemable (no maturity). The market plays a revolutionary role in circulating the capital in the economy between the suppliers of money and the users. The Capital Market works under full control of Securities and Exchange Board to protect the interest of the investors.

The Capital Market includes both dealer market and auction market. It is broadly divided into two major categories: Primary Market and Secondary Market.

  • Primary Market: A market where fresh securities are offered to the public for subscription is known as Primary Market.
  • Secondary Market: A market where already issued securities are traded among investors is known as Secondary Market.

Key Differences Between Money Market and Capital Market

The following points are substantial, as far as the difference between money market and capital market is concerned:

  1. The place where short-term marketable securities are traded is known as Money Market. Unlike Capital Market, where long-term securities are created and traded is known as Capital Market.
  2. Capital Market is well organised which Money Market lacks.
  3. The instruments traded in money market carry low risk, hence, they are safer investments, but capital market instruments carry high risk.
  4. The liquidity is high in the money market, but in the case of the capital market, liquidity is comparatively less.
  5. The major institutions that work in money market are the central bank, commercial bank, non-financial institutions and acceptance houses. On the contrary, the major institutions which operate in the capital market are a stock exchange, commercial bank, non-banking institutions etc.
  6. Money market fulfils short-term credit requirements of the companies such as providing working capital to them. As against this, the capital market tends to fulfil long-term credit requirements of the companies, like providing fixed capital to purchase land, building or machinery.
  7. Capital Market Instruments give higher returns as compared to money market instruments.
  8. Redemption of Money Market instruments is done within a year, but Capital Market instruments have a life of more than a year as well as some of them are perpetual in nature.

Video: Capital Vs Money Market

Conclusion

The main aim of the financial market is to channelize the money between parties in which Money Market and Capital Market help by taking surplus money from the lenders and giving them to the borrower who needs it. Millions of transactions take place around the world on a daily basis.

Both of them work for the betterment of the global economy. They fulfil the long term and short term capital requirements of the individual, firms, corporate and government. They provide good returns which encourage investments.

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Comments

  1. SHAHABAZ AHAMED KHAN says

    September 30, 2015 at 9:36 am

    nice

    Reply
    • stanley kamau says

      July 14, 2017 at 10:33 am

      Nice and easy to understand summary. Very informative indeed

      Reply
  2. Fred says

    November 13, 2016 at 8:11 pm

    Good summary. I like the site.

    Reply
  3. Muhammad Afzal says

    July 17, 2017 at 10:49 am

    Excellent one. A very informative & brief description of Financial Market.

    Reply
    • Surbhi S says

      July 17, 2017 at 12:45 pm

      Thanks to all the readers, for appreciatng the articles, it means a lot to us, keep reading.

      Reply
  4. HARDIK NAVIN MISTRY says

    September 10, 2017 at 2:29 pm

    Brilliantly explained, keep it up.

    Reply
  5. DJA says

    December 24, 2017 at 8:43 pm

    well explained, hope no hidden details.

    Reply
  6. Nene says

    February 21, 2018 at 12:07 am

    Hello,

    Thanks for the in-depth analysis. I’ll appreciate if I get a copy of the above material and all other related materials for a dummy like me. Thank you.

    Reply
  7. Prince says

    July 12, 2018 at 8:32 pm

    The detail and analytic academic resource that is assisting for better understanding of the desired topic in different perspective of the learning.

    Reply
  8. Teju says

    August 19, 2018 at 8:27 pm

    It is good and easy to understand but we want more than 8 difference to write for 14 marks

    Reply
  9. Julie says

    November 1, 2018 at 3:45 pm

    Good and easy to understand summary .I like it.

    Reply
  10. karthik raja s says

    November 16, 2018 at 10:20 am

    this answer please send to my email id in pdf model

    super comparison and explanation

    thanking you

    Reply
  11. Mamuda Isa Jibril says

    July 7, 2019 at 5:11 pm

    Thanks very well and understandable summary

    Reply
  12. Zumya Sultana says

    January 31, 2023 at 8:37 am

    Thanks for sharing this summary. It is a very well easily this description and a good summary. Easily understanding.

    Reply

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