Investment, Mutual Funds, Stock Market

Capital Markets Vs Money Markets


Capital Markets and Money Markets are the two ends of a stick. They are polar opposites with perhaps, the fact that they’re both financial markets being a unifying factor. To begin with, a financial market is a marketplace where investors, buyers, sellers and traders come to deal in financial instruments such as stocks, currencies, commodities and bonds. The financial market not only allows for easy trade but also helps transfer liquidity and risk and raise capital, amongst other things. Given the broad horizons of the financial market, it is grouped into smaller components, two of them being: Capital Markets and Money Markets.

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Capital Markets are the sector of the financial market where the long-term commodities and securities come into play while being traded and issued. It is a formal sector of the market and is a trading place for both bank and non- bank institutions like insurance and mortgage companies. This market usually involves raising capital for long-term causes including but not limited to mergers, acquisition or other capital projects. The stock of this market is very carefully monitored. The risk factor of Capital Markets also runs high while the liquidity of assets run low as most trades are long-term contracts. Most of these last much longer than a year and account for the mobilisation of savings in the economy. However, to balance the high risk factor of this market, the return of investment is also noted to be high, making it a prominent market that investors and brokers are interested in. Furthermore, due to the long-term stretch nature of the Capital market, it is essential for the market to be well organised. Due to the need of organisation, it is further divided into a Primary and Secondary market. The primary market allows for new securities and trade opportunities, whereas the secondary market operates on the already issued securities which are still traded amongst investors, check loans now.

On the other hand, Money Markets, when compared to Capital Markets, undertake projects of much lower risks and function for a duration that is much smaller. It is often accessible alongside the Capital Markets. However, while Capital Market is full of higher risk and returns, Money Markets are an excellent way to utilise funds for a shorter duration and goals. This market allows for higher rates of liquidity of assets and funds and is known for covering expenses of operation on working capital for companies and governments and not for large scale, long-term capital projects. The Money Market is also critical in allowing companies and governments to maintain an assuring amount o liquidity on a daily basis without needing to expedite an enormous loan or hold out excess funding. It is a much more informal type of market that deals in treasury bills, trade credit and commercial papers. All institutions such as the central bank, commercial banks, brokers etc. are a part of this market. Since the risk factor is deficient and liquefication of assets is so much easier, the time invested in deals and trades averages below a year.

Hence, the primary motive of the financial market is to create a flow of money between different traders, government and companies which can then participate in the Capital Market and Money Market. These two markets are the base of millions of transactions, both big and small, all around the world, every day. The prime goal of them is to increase the economy, globally. They allow the companies, governments and even well planned individuals to meet their short term and long term goals and encourage investments. However, traders have different reasons to approach each of the markets. While some might be looking for safer assets, others might be there for higher risk investments which would also lead to probable higher returns. While both these markets are considered efficient in the more extended run, smaller, short term inefficiencies allow investors and traders to capitalize on fluctuations and anomalies. This creates a further need for investing and trading giving more fuel to the markets.


CA Rachit Jain

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