Commerce · Ch 5 — Capital Market
Distinction Between Capital Market and Money Market
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Distinction Between Capital Market and Money Market
Both the capital market and the money market are segments of the wider financial market, and both perform the same broad function of channelling funds from those who have surplus money to those who need it — but they differ sharply in the duration, purpose and nature of the funds they deal in.
| Basis of difference | Capital Market | Money Market |
|---|---|---|
| Maturity period | Long-term — generally more than one year (equity has no fixed maturity at all) | Short-term — generally up to one year |
| Instruments dealt in | Equity shares, preference shares, debentures/bonds, government securities | Treasury bills, commercial paper, call money, certificates of deposit, commercial bills |
| Purpose of funds raised | Fixed capital and long-term working-capital needs (expansion, new projects, modernisation) | Short-term working-capital and temporary cash/liquidity needs |
| Main participants | Companies, governments, individual and institutional investors, merchant bankers, stock exchanges | Commercial banks, the Reserve Bank of India, financial institutions, large corporates |
| Liquidity of individual instruments | Comparatively lower for any single instrument, though the market as a whole (via the secondary market) provides liquidity | Very high — money-market instruments are designed to be readily convertible into cash |
| Risk and return | Relatively higher risk, and correspondingly the potential for higher return | Relatively lower risk, and correspondingly lower return |