MEANING OF FINANCIAL MARKET
A market is where buyers meet the sellers for the purpose of trading. A financial market is a market is where the traders carry out trade in financial instruments like stocks, bonds, commodities, currencies, and derivatives. Since there is involvement of money, the chances of frauds will be higher. Therefore, Governments took up the charge and established regulators who have divided the financial markets into two categories for the ease of operations. The first category of the financial market is called the Money Market where trading of extremely liquid financial instruments takes place. The second one is called the Capital Market where the buying and selling of financial assets take place to raise long-term funds for the organisation.
MEANING OF MONEY MARKET
The money market is the market where very short term highly liquid financial instruments are traded. The most common money market assets are certificates of deposit (CDs), bankers acceptances, treasury bills, commercial papers, and repurchase agreements (repo s).
MEANING OF CAPITAL MARKET
Capital markets are markets for the trading of equity and debt instruments. Capital markets are important for the functioning of a country’s economy because capital is a critical component for generating economic outputs. Capital markets include primary markets for the trading of new stocks and bonds and secondary markets, where trading of existing securities takes place.
DIFFERENCES BETWEEN MONEY MARKET AND CAPITAL MARKET
The major differences between Money Market and Capital Market are listed below.
1) Short-term marketable financial assets are traded in the Money Market, whereas long-term financial instruments are traded in the Capital Market.
2) The instruments which are traded in Money Market are less risky and are thus safer investments. The financial instruments which are traded in the Capital Market carry higher risk.
3) Money Market instruments are redeemed within a year, but Capital Market instruments have a life of more than a year.
4) Returns given by the Money Market instruments are lower as compared to Capital Market instruments.
5) The nature of market of the Money Market is informal whereas that of Capital Market is formal.
6) The Money Market is directly linked with the central bank of the nation. The Capital Market is influenced by the central bank but indirectly through the Money Market.
7) The Money Market adheres to the short-term credit requirements of business. It provides the business houses with working capital to run their businesses. The Capital Market caters the long-term credit requirements of the business concerns and provides them with fixed capital.
8) The major financial securities associated with the Money Market are call money, certificate of deposits, treasury bills, commercial papers, bills of exchange, etc. Whereas, the major financial assets used in the Capital Market are stocks, debentures, bonds, government securities, etc.
The main objective of the financial markets is to act as a channel to transfer money from one party to another. Money Market and Capital market take surplus money from the lenders and give them to the borrowers who need them. Both of them work for the growth of the world economy. They fulfil the capital requirements of the individuals, firms, corporates and the government.