Classification of Financial Markets — Money Market and Capital Market

A financial market is not a single, undifferentiated place — different users need funds for very different lengths of time, and a market that serves an overnight cash shortfall cannot sensibly be the same market that finances a ten-year factory expansion. The financial market is therefore classified, on the basis of the maturity period of the instruments traded in it, into two broad segments: the money market and the capital market.

The money market is the segment of the financial market that deals in short-term funds — funds required, and supplied, for a period not exceeding one year. It caters mainly to the working-capital needs of banks, financial institutions and large companies, and to the government's own short-term borrowing requirement, and it deals in instruments that are close substitutes for money itself — highly liquid, low-risk, and readily convertible back into cash.

The capital market is the segment of the financial market that deals in medium- and long-term funds — funds required, and supplied, for a period exceeding one year, and often for periods that run into many years or that carry no fixed repayment date at all, such as equity share capital. It is this segment that companies use to raise the funds studied in the earlier chapters of this syllabus — shares, debentures, and bonds — and it is this segment that finances the fixed-capital needs of industry: land, buildings, plant and machinery, and long-term expansion. …