Difference Between Capital Market and Money Market

Capital Market and Money Market

I’m sure that most of you guys have already watched the latest web series “Scam 1992” based on the life story of Harshad Mehta, if you haven’t watched yet take out time and watch it today.

Let’s come to the point, if you have already watched this series then I’m sure that you must have heard the term “Money Market“.

So, what is this money market, it is like a sabzi market or what! Joking.

What is the capital market? What is the difference between the capital market and the money market? How to invest in these?

We will discuss all these questions, which have just come to your mind. So let’s get started.

Difference between Capital Market and Money Market

What is a Captial Market and Money Market?

The Capital Market and Money Market are parts of the global financial market. The capital market basically deals in two securities i.e, stocks, and bonds.  The capital market is open for all, and any individual can take part in it.

Apart from the Capital Market, in the money market, only reputed people and institutional investors take part.

The money market is best used by companies and the government during their financial difficulties by borrowing through short term debt instruments. The money market gives opportunities for businesses to fulfill their short-term capital requirement.

How to Take Part in these Markets as an Investor?

The capital market is for long-term investors. The capital market is for the ones who want to take much risk. Here you need to invest for a longer time than in the money market, and returns are greater than the money market.

Also, the money market is for short term debt. If you want to invest some money for less time, as if for a few weeks or months, in such cases money market shows up. You can invest in the Money Market via Mutual Funds.

Companies that are out of funds borrow funds from the one who has extras. So it is a daily cash flow from one bank to another, from one institution to another, and also government to other institutions or banks. Here you being an individual can’t do much directly I said earlier, but anybody can invest in the Money Market via Mutual Funds.

The capital market is an open ground for us to take part directly with the help of a Stocks Broker.

What does the Money Market consist of?

The money market is regulated by the RBI. Here only the institutions, government, business ideals can take part.

The instrument can vary from commercial papers, treasury papers, certificate of deposit, trade credit. It is not all systematic, there are direct transactions taking place between two persons.

The communication method is through calls, emails, fax and many more. Here the returns are low in comparison with the capital market.

What does the capital market consist of? 

The capital market is monitored by SEBI (Securities and Exchange Board of India). You can trade in stocks, bonds, assets, debentures, etc. the risk is more, so the returns.

You might be thinking, in the Capital market investors invest for the long-term i.e. years, but stocks can be sold the next day.

This is because the stocks are rotated among the buyers and sellers themselves. In the capital market, the stocks never get mature.

Which one is more important?

The capital market and money market has the same importance in the financial markets. The capital market maintains the savings in the economy whereas, the money market maintains the liquidity of the funds. If one of them is out of order, the whole economy could go drown. Any irregularities affect the nations to a great extent.

Primary and Secondary Market in the Capital Market

The capital market is divided into two parts, primary and secondary market.

The primary market contains the fresh securities called IPO (Initial Public Offering) and, the secondary has the listed securities.

Whenever a company issues its stock for the first time, the stocks enter the primary market to be traded by the investors.

The secondary market can also be called the Stock Market and the stocks-exchange involves in it.

How to take Part into the Captial Market?

You can take part in both types of Capital Markets. In such a case, you need to go with the low pricing. Also, at times the secondary market is better because we have stockbrokers to trade in there. Stockbrokers do play a good role in the secondary market. The traders get ease to buy and sell stocks from mobiles and laptops nowadays with brokers’ online platform and mobile apps.

Instruments for the money market

Money Market instruments can be divided into –

RBI and banks

  1. MSF ( Marginal Standing Facility): Here time is for a day or overnight.

For Example- If PNB wants money from RBI for a day then, PNB needs to pay accordingly.

  1. Repo rate: Here the time is for 90 days.

For Example- If SBI wants money from RBI for 90 days then in such a case, SBI has to pay according to the repo rate.

  1. Bank rate: Here period is around 90 days-1 year.

For Example- If ICICI bank wants money from RBI for 120 days then, it needs to pay accordingly.

These 3 rates are discussed when RBI offers money to banks. The rates fluctuate after every 2 months, so better search for the current rates.

Bank to bank

When some bank has borrowed money from the RBI, but still in need of more. In such a case, the bank visits another bank and in return, the lending bank charges the rates below.

  1. Notice money- for a time of 2-14 days
  2. Call money- for one day
  3. Term money- last up to 1 year from 15 days.

These rates are always changing and are directly related to FIMMDA.

Corporates to bank

When a bank has borrowed money from RBI and their bank and still needs more money now, the bank approaches the corporates and industrialists. In return, the borrowing bank issues a CD.

  1. CD (Certificate of Deposits): the time from 7 days- 1 year for the bank. Period 1 year – 3 years.

Bank to corporates

Also, when corporates require funds, they issue a commercial paper against money borrowed.

CP (Commercial Paper): At times corporates happen to be out of funds and borrow funds from other corporates. In this case, the commercial bank acts as a broker between the two corporates.

The bank issues a CP for the corporate that has money and the corporate gives money to the bank. The bank now sends the same money to the needy corporates and charges commission for their service.

When the government borrows money

In this case, the government borrows money from RBI.

  1. WMA (Way and mean advances)- Period lasts up to 90 days.
  2. T-bill (Treasure Bill)- maturity- 91/182/364 days.
  3. CMB (Cash Management Bill)- Period less than 91 days.

 

Instruments in capital market

1. Bonds

The capital market has bonds as an instrument to trade. The companies use bonds to raise the funds and grow more.

You can get them as an investor be a part of the capital market. The government also issues bonds to raise funds for their projects.

You can easily invest in bonds via Mutual funds. The company can raise funds through the money market but prefer the capital market because they get cheaper rates compared to banks and institutions.

2. Stocks

People do like the stock market because of its higher returns. You can invest in stocks through various mobile apps, web applications.

In the stock market, you have an option, to trade-in, which means you can buy and sell the stocks frequently therefore many speculators take part in it.

Related;

 

In the age of technology, mobile applications make this easier for the person doing investing. You can choose an app for yourself wisely. Don’t forget to check the charges and services while starting investing.

Final Thoughts

So, you have a brief idea about all the concepts and working of the money market and the capital market. We cannot do much in the money market, but still, we need to know about it. The capital market is our ground and has gained lots of individuals these days.

We hope you got all the necessary information that you were fetching and have a healthy and successful financial life in this field.