What is the Money Market and Capital Market?

A financial market implies a marketplace where the exchange or trading of capital and equity takes place. There can be various types of economic markets encompassing money, forex, bond markets, stock, etc. These markets may encompass assets or securities that are either registered or listed on standard trade exchanges or OTC (over-the-counter).

The financial growth of all the countries is heavily based and dependent on the financial markets of the respective country. If the market somehow declines, it can also transpire in unemployment and recession. The Financial Market in our country can be discerned as a niche where monetary services and products are purchased and retailed on a daily basis. It accords the investment and exchange of various kinds of financial services, loans, stakes, etc. 

Purpose of Financial Market 

Like any other kind of market, the financial market also comprises trading, purchasing and selling of financial services and commodities, as we have previously mentioned. The market and stock of financial instruments are strenuous as the monetary instruments discern their rates.

The country’s financial markets help to cross the gap between lenders and borrowers. They concurrently bring people who have extra funds and people who are in need of these funds that help in the transfer of accounts between them easily. The transfer of these accounts or funds takes place with the help of varied types of monetary instruments functioning in the financial markets.

Structure of Financial Market 

The economic or financial market in our country can be mainly distributed into two broad elements, that are:

  • Money market  
  • Capital market. 

These two broad components comprise the entire financial system of not only India but also the worldwide financial system.

What is the Money Market?

Money markets are disorganized markets in which money dealers, financial establishments, brokers, and banks trade or deal in financial instruments rapidly or let’s say, in a short time. For instance, they deal in debt instruments on a short-term basis, such as commercial paper, certificate of deposit, T bills, trade credit, etc. They are typically highly liquid and can be reclaimed in less than one year. 

The borrowing or lending in these markets on a short period where the investments or purchases are sometimes held for less than one year. They can retain a direct or indirect influence on equity. The money market prevails so that businesses or companies and governments that require money to administer can get it promptly at an adequate cost and so that the industries or enterprises that have surplus money than what they require for their business to operate can put it to smart and decent use.

In simple terms, borrowers often use this market to obtain the money they require to function on a day-to-day basis, and on the other hand, lenders use this market to put the spare money they own to work. The instruments utilized in the money markets mainly encompass collateral loans, acceptances, bills of exchange, and deposits, and the Institutions that operate in these markets primarily encompass commercial banks, acceptance houses, and the Federal Reserve.

The major reason behind a government, business, or company issuing these short-term debts is to cover their routine operating expenditures or supply operating capital instead of using them for functions like large-scale projects or capital developments. As a result, the returns in the money market might be modest but provide low risk. Therefore, the money market is deemed less risky than the capital market. 

Liquidity of Money Market

Since these money markets provide short-term debts, it plays a very crucial part in assuring that companies, banks, along with governments can adequately retain the appropriate degree of liquidity on an everyday basis, therefore making sure that they do not fall short or need an expensive loan without falling short and needing a more expensive loan and without accumulating extra money that isn’t reaping interest.

Individuals or groups of investors can use the money markets to capitalize or save their money in a secure and accessible spot. Many choices are available, encompassing municipal funds, U.S. Treasury funds, and mutual funds focusing on state capital market funds.

What is the Capital Market?

The capital market is a marketplace where bonds and shares are exchanged or traded. The movements of these markets from hour to hour are frequently regulated and evaluated for indications as to the temperament of the economy, the state of all the industries in it, and the agreement for the short-term prospect.

Capital markets encompass the debt market and the equity market. They are used for long-term securities.

The prime motive of the companies, and institutions that join the capital markets is to raise capital for their business’s long-term objectives, which generally descends to expanding or broadening their businesses and boosting their annual incomes. They prefer to achieve this by allocating stock shares or retailing corporate bonds. The capital market is considered more rewarding in comparison to the money market.

Primary and Secondary Markets

The capital market is further divided into two components: the primary market and the secondary market. 

A primary market is a market where a new securities subject is proposed to the public. In these markets, equity-based, other asset-based, and debt-based securities are developed, composed, and sold to investors. Here, the new securities are acquired by the investors directly from the issuer right after they are created.

A secondary market is a market where securities are marketed between the investors. It provides a place for investors to easily purchase or retail securities after it is issued by the authorised issuer, such as a corporation, administrative entity, or bank.


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